Koss(KOSS) - 2021 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Koss Corporation's unaudited condensed consolidated financial statements and explanatory notes Condensed Consolidated Balance Sheets | Metric | March 31, 2021 ($) | June 30, 2020 ($) | | :-------------------------------- | :------------- | :------------ | | Cash and cash equivalents | $6,028,952 | $3,999,409 | | Total current assets | $15,338,510 | $12,137,536 | | Total assets | $26,172,295 | $22,580,406 | | Total current liabilities | $2,615,395 | $2,615,090 | | Total liabilities | $7,275,057 | $7,424,308 | | Total stockholders' equity | $18,897,238 | $15,156,098 | - Total assets increased by approximately $3.59 million from June 30, 2020, to March 31, 2021, primarily driven by an increase in cash and cash equivalents and inventories[8] - Total stockholders' equity increased by approximately $3.74 million, reflecting net income and proceeds from stock option exercises[8] Condensed Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2021 ($) | Three Months Ended March 31, 2020 ($) | Nine Months Ended March 31, 2021 ($) | Nine Months Ended March 31, 2020 ($) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net sales | $3,987,452 | $4,789,441 | $14,125,537 | $14,362,862 | | Gross profit | $1,417,552 | $1,589,776 | $4,671,677 | $4,301,318 | | (Loss) income from operations | $(854,063) | $(97,900) | $(721,534) | $(637,665) | | Other income | $378,805 | — | $885,505 | — | | Net (loss) income | $(474,168) | $(97,373) | $161,651 | $(623,835) | | Basic (Loss) Income Per Share | $(0.06) | $(0.01) | $0.02 | $(0.08) | | Diluted (Loss) Income Per Share | $(0.06) | $(0.01) | $0.02 | $(0.08) | - Net sales decreased by 16.7% for the three months ended March 31, 2021, and by 1.7% for the nine months ended March 31, 2021, compared to the prior year periods[9] - The company reported a net loss of $(474) thousand for the three months ended March 31, 2021, but a net income of $162 thousand for the nine months ended March 31, 2021, a significant improvement from a net loss of $(624) thousand in the prior nine-month period[9] Condensed Consolidated Statements of Cash Flows | Activity | Nine Months Ended March 31, 2021 ($) | Nine Months Ended March 31, 2020 ($) | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net cash (used in) provided by operating activities | $(435,359) | $339,788 | | Net cash (used in) investing activities | $(650,555) | $(504,107) | | Net cash provided by financing activities | $3,115,457 | — | | Net increase (decrease) in cash and cash equivalents | $2,029,543 | $(164,319) | | Cash and cash equivalents at end of period | $6,028,952 | $2,063,963 | - Cash and cash equivalents significantly increased by $2.03 million for the nine months ended March 31, 2021, primarily due to $3.12 million from financing activities (stock option exercises)[11] - Operating activities used cash of $(435) thousand in the current nine-month period, a reversal from cash provided in the prior year, mainly due to increased inventory investment[11][59] Condensed Consolidated Statements of Stockholders' Equity | Metric | March 31, 2021 ($) | June 30, 2020 ($) | | :-------------------------------- | :------------- | :------------ | | Total Stockholders' Equity | $18,897,238 | $15,156,098 | | Common Stock Shares Outstanding | 8,516,823 | 7,404,831 | | Paid in Capital | $10,456,658 | $6,882,729 | | Retained Earnings | $8,397,996 | $8,236,345 | - Stockholders' equity increased by $3.74 million from June 30, 2020, to March 31, 2021, primarily due to $3.12 million from stock option exercises and $162 thousand in net income[13] - 1.11 million shares of common stock were issued from stock option exercises during the nine months ended March 31, 2021[13] Notes to Condensed Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Financial statements are prepared in accordance with U.S. GAAP, with management making estimates and assumptions affecting reported amounts[15][17] - A state tax provision was recorded for states without net operating loss carryforwards; federal income tax expense was zero for the periods presented[18] - Stock option exercises in Q3 2021 resulted in a $29.3 million tax deductible compensation expense, creating a deferred tax asset of approximately $7.4 million, fully offset by a valuation allowance due to uncertainty of realization[19] - Other income includes $507 thousand from SBA loan forgiveness (PPP) in Q2 2021 and $379 thousand from a director's short sale settlement in Q3 2021[20] 2. INVENTORIES | Component | March 31, 2021 ($) | June 30, 2020 ($) | | :-------------------- | :------------- | :------------ | | Raw materials | $1,947,044 | $1,953,031 | | Finished goods | $6,547,993 | $5,149,200 | | Inventories, gross | $8,495,037 | $7,102,231 | | Reserve for obsolete inventory | $(1,637,866) | $(1,563,437) | | Inventories, net | $6,857,171 | $5,538,794 | - Net inventories increased by $1.32 million from June 30, 2020, to March 31, 2021, primarily due to an increase in finished goods[21] 3. CREDIT FACILITY AND SBA LOAN - The $5.0 million revolving secured credit facility with Town Bank was amended on January 28, 2021, extending its expiration to October 31, 2022, and changing the interest rate to Wall Street Journal Prime less 1.50%[22] - The Company was notified on November 3, 2020, that the full $507 thousand SBA Paycheck Protection Program loan was forgiven and recorded as other income[23] - As of March 31, 2021, there were no outstanding borrowings on the credit facility, and the Company was in compliance with all covenants[22] 4. REVENUE RECOGNITION | Geographical Location | Three Months Ended March 31, 2021 ($) | Three Months Ended March 31, 2020 ($) | Nine Months Ended March 31, 2021 ($) | Nine Months Ended March 31, 2020 ($) | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | United States | $2,693,041 | $4,227,492 | $10,291,957 | $11,869,459 | | Export | $1,294,411 | $561,949 | $3,833,580 | $2,493,403 | | Net Sales | $3,987,452 | $4,789,441 | $14,125,537 | $14,362,862 | - U.S. net sales decreased significantly, while export net sales more than doubled for the three months ended March 31, 2021, and increased substantially for the nine-month period[24] - Deferred revenue, primarily related to consumer and customer warranties, was $568 thousand (current) and $176 thousand (long-term) as of March 31, 2021, with recognition typically occurring within one to three years[8][24] 5. (LOSS) INCOME PER COMMON AND COMMON STOCK EQUIVALENT SHARE | Metric | Three Months Ended March 31, 2021 ($) | Three Months Ended March 31, 2020 ($) | Nine Months Ended March 31, 2021 ($) | Nine Months Ended March 31, 2020 ($) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net (loss) income | $(474,168) | $(97,373) | $161,651 | $(623,835) | | Weighted average shares, basic | 8,100,730 | 7,404,831 | 7,633,722 | 7,404,831 | | Diluted shares | 8,100,730 | 7,404,831 | 9,188,002 | 7,404,831 | | Basic (loss) income per share | $(0.06) | $(0.01) | $0.02 | $(0.08) | | Diluted (loss) income per share | $(0.06) | $(0.01) | $0.02 | $(0.08) | - Diluted shares for the nine months ended March 31, 2021, included 1.55 million dilutive stock compensation awards, which were anti-dilutive in other periods[25] 6. LEASES - The Company leases its Milwaukee facility from Koss Holdings, LLC under an operating lease renewed until June 30, 2023, with an option to renew for an additional five years[26] - The fixed annual rent is $380 thousand, and the Company is responsible for all property maintenance, insurance, and taxes[26] 7. LEGAL MATTERS - In July 2020, the Company filed patent infringement complaints against Apple Inc., Bose Corporation, JLab Audio, Plantronics, Inc. and Polycom, Inc., and Skullcandy, Inc. related to wireless audio technology[27] - Potential monetary awards from these lawsuits may be due in part to third parties, and the Company does not expect material financial impact from related fees and costs[27] - The Company was also notified by One E-Way, Inc. of potential infringement on their patents by some wireless products, though no lawsuits have been filed[28] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Koss Corporation's financial performance, COVID-19 impact, and liquidity Overview - Koss Corporation operates as a single business segment, focusing on the design, manufacture, and sale of high-fidelity headphones, wireless Bluetooth® headphones and speakers, and various headsets[34] Financial Results | Financial Performance Summary | Three Months Ended March 31, 2021 ($) | Three Months Ended March 31, 2020 ($) | Nine Months Ended March 31, 2021 ($) | Nine Months Ended March 31, 2020 ($) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net sales | $3,987,452 | $4,789,441 | $14,125,537 | $14,362,862 | | Net sales (decrease) % | (16.7)% | (1.5)% | (1.7)% | (10.5)% | | Gross profit | $1,417,552 | $1,589,776 | $4,671,677 | $4,301,318 | | Gross profit as % of net sales | 35.6% | 33.2% | 33.1% | 29.9% | | Selling, general and administrative expenses | $2,271,615 | $1,687,676 | $5,393,211 | $4,938,983 | | Selling, general and administrative expenses as % of net sales | 57.0% | 35.2% | 38.2% | 34.4% | | (Loss) income before income tax provision | $(474,119) | $(91,269) | $165,719 | $(617,710) | | (Loss) income before income tax as % of net sales | (11.9)% | (1.9)% | 1.2% | (4.3)% | 2021 Results Compared with 2020 - Net sales decreased by 16.7% for the three months and 1.7% for the nine months ended March 31, 2021, primarily due to decreased sales to US mass retail customers, partially offset by improved export sales[38] - Domestic net sales declined due to reduced product placement with mass retailers, the absence of a large back-to-school promotion from the prior year, and decreased sales in educational markets and online retailers (as the company shifts to Amazon Seller Central)[39][40] - Export net sales more than doubled for the three months and increased significantly for the nine months ended March 31, 2021, driven by distributors in Europe and new product introductions, especially headphones for remote work/study[41] - Gross profit margin increased to 33.1% for the nine months ended March 31, 2021, from 29.9% in the prior year, attributed to a more favorable mix of markets and products and the absence of low-margin promotional sales[42] - Selling, general and administrative expenses increased by 34.6% for the three months and 9.2% for the nine months ended March 31, 2021, mainly due to employer taxes on stock option exercises ($544 thousand) and increased deferred compensation expenses, partially offset by lower legal expenses and reduced 401k company match[43] - The Company is enforcing its intellectual property through patent infringement complaints, aiming for royalties or other advantageous remedies, though outcomes are not guaranteed and portions of any monetary awards may be due to third parties[47] COVID-19 Impact - The Company experienced strong demand for communication headphones due to remote work and online study, but overall retail business declined, especially in European markets, with online retail being an exception[52] - Supply chain disruptions, particularly in southern China, have led to issues with container availability, routing, and increased costs for new product introductions[54] - Mitigation efforts include increasing inventory investment, monitoring potential short supplies, assisting suppliers, and utilizing alternative sources or air freight[54] - The ultimate financial impact of the pandemic remains uncertain, dependent on vaccine rollout, duration, and global economic effects[53] Liquidity and Capital Resources Cash Flows | Activity | Nine Months Ended March 31, 2021 ($) | Nine Months Ended March 31, 2020 ($) | | :-------------------------------- | :------------------------------- | :------------------------------- | | Operating activities | $(435,359) | $339,788 | | Investing activities | $(650,555) | $(504,107) | | Financing activities | $3,115,457 | — | | Net increase (decrease) in cash and cash equivalents | $2,029,543 | $(164,319) | Operating Activities - Cash used in operating activities for the nine months ended March 31, 2021, was $(435) thousand, primarily driven by an increased investment in inventories to ensure availability of communication headphones and mitigate supply chain disruptions[59] Investing Activities - Cash used in investing activities increased to $(651) thousand for the nine months ended March 31, 2021, due to higher expenditures for a new operating system, leasehold improvements, and tooling for new product introductions[60] - Total capital expenditures for the fiscal year ending June 30, 2021, are anticipated to be approximately $700 thousand[60] Financing Activities - Financing activities provided $3.12 million in cash for the nine months ended March 31, 2021, entirely from the exercise of 1.11 million employee stock options[61] - No stock options were exercised in the prior year period, and there were no outstanding borrowings on the bank line of credit facility as of March 31, 2021[61][62] Liquidity - The Company believes its cash generated from operations, cash reserves ($6.0 million at March 31, 2021), and available borrowings ($5.0 million credit facility) provide adequate liquidity for operating requirements, debt service, and planned capital expenditures for the foreseeable future[48][63] Credit Facility - The $5.0 million revolving secured credit facility with Town Bank was extended to October 31, 2022, and the interest rate was changed to Wall Street Journal Prime less 1.50%[64] - The Company granted the Lender a security interest in substantially all of its assets and was in compliance with all credit agreement covenants as of March 31, 2021, with no outstanding borrowings[64] Contractual Obligation - The Company's facility lease with Koss Holdings, LLC (related party) is an operating lease with fixed annual rent of $380 thousand, expiring June 30, 2023, and an option to renew for five additional years[65] Off-Balance Sheet Transactions - As of March 31, 2021, the Company did not have any off-balance sheet arrangements[67] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section confirms no applicable quantitative and qualitative disclosures about market risk for the Company - This item is not applicable to the Company[69] Item 4. Controls and Procedures This section details the Company's disclosure controls and procedures and internal control over financial reporting Disclosure Controls and Procedures - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2021[71] Changes in Internal Control Over Financial Reporting - There have been no material changes in the Company's internal control over financial reporting during the most recent fiscal quarter[72] PART II OTHER INFORMATION Item 1. Legal Proceedings This section reports no material changes to legal proceedings since the prior fiscal year's Annual Report on Form 10-K - No material changes to legal proceedings were reported during the period covered by this report compared to the Annual Report on Form 10-K[74] Item 1A. Risk Factors This section highlights risks related to extreme stock price volatility, potential 'short squeeze,' and future insider sales Risks Related to Our Common Stock - The Company's stock price has experienced extreme volatility, with significant fluctuations unrelated to operating performance, such as a jump from $3.34 to $64.00 per share in January 2021[77] - A 'short squeeze' has led to, and may continue to lead to, extreme price volatility disconnected from the Company's underlying value, potentially causing substantial losses for investors who purchase during such events[79] - Future sales of a substantial amount of common stock by insiders, or the perception of such sales, could cause the market price of the common stock to decline[80] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's common stock repurchase program, noting no repurchases in the recent quarter | Period | Total of Shares Purchased | Average Price Paid per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plan | Approximate Dollar Value of Shares Available under Repurchase Plan ($) | | :------------------------- | :-------------------------- | :--------------------------- | :---------------------------------------------------------------- | :--------------------------------------------------------------- | | January 1 - March 31, 2021 | — | — | — | $2,139,753 | - No common stock was repurchased by the Company during the three months ended March 31, 2021[82] - As of March 31, 2021, approximately $2.14 million remained available under the Company's stock repurchase program, which has a maximum authorization of $45.5 million[82] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents and certifications - Key exhibits include amendments to the Certificate of Incorporation and By-Laws, the First Amendment to Revolving Credit Agreement, and Rule 13a-14(a)/15d-14(a) and Section 1350 Certifications[83] - XBRL formatted financial information for the quarter ended March 31, 2021, is also included as an exhibit[83] SIGNATURES This section contains the duly authorized signatures for the Form 10-Q filing by Koss Corporation's executive officers - The report was signed by Michael J. Koss, Chairman and Chief Executive Officer, and David D. Smith, Chief Financial Officer and Principal Accounting Officer, on May 13, 2021[87]