Overview

The Company developed stereo headphones in 1958 and has been recognized as a leader in the industry ever since. Koss markets a complete line of high-fidelity headphones, wireless Bluetooth® headphones, wireless Bluetooth® speakers, computer headsets, telecommunications headsets, and active noise canceling headphones. The Company operates as one business segment, as its principal business line is the design, manufacture and sale of stereo headphones and related accessories.









                               Financial Results

The following table presents selected financial data for the three and six months ended December 31, 2020 and 2019:









                                    Three Months Ended              Six Months Ended
                                        December 31                   December 31
Financial Performance Summary       2020           2019           2020            2019
Net sales                       $ 4,929,789    $ 4,162,659    $ 10,138,084    $ 9,573,421
Net sales increase (decrease) %       18.4%         (23.1)%           5.9%         (14.5)%
Gross profit                    $ 1,617,897    $ 1,364,087    $  3,254,124    $ 2,711,541
Gross profit as % of net sales        32.8%          32.8%           32.1%          28.3%
Selling, general and
administrative expenses         $ 1,615,824    $ 1,586,705    $  3,121,595    $ 3,251,305
Selling, general and
administrative expenses as % of
net sales                             32.8%          38.1%           30.8%          34.0%
Interest income                 $     2,660    $     6,927    $        609    $    13,324
Other income                    $   506,700               -        506,700               -
Income (loss) before income tax
provision                       $   511,433    $  (215,691)   $    639,838    $  (526,440)
Income (loss) before income tax
as % of net sales                     10.4%          (5.2)%           6.3%          (5.5)%
Income tax provision            $     2,543    $        22    $      4,019    $        22
Income tax provision as % of
income (loss) before income tax        0.5%          (0.0)%           0.6%          (0.0)%






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                        2020 Results Compared with 2019

(comments refer to both the three and six month periods ended December 31unless


                                otherwise noted)

For the three and six months ended December 31, 2020, net sales increased 18.4% and 5.9%, respectively. This improvement in net sales was driven by increased sales to certain US distributors, acceleration of online sales and increased sales in Europe.

Net sales in the domestic market were approximately $3,652,000 in the three months ended December 31, 2020, compared to approximately $3,102,000 in the prior year period. Domestic net sales were approximately $7,599,000 in the six months ended December 31, 2020 compared to $7,642,000 in the prior year period. Growth in the online sales channels and certain US-based distributors increased while sales in the mass retail and educational channels declined. Sales through online channels increased by approximately 2.5 times compared to the prior year three month and six month periods. The online sales activity was driven by COVID-19 directives, which have caused many people to work and study remotely and have resulted in sales of communication headsets to facilitate that work and study. Certain domestic distributors had higher sales due to COVID-19 related customer demand. Sales to mass retail customers decreased due to reduced product placement. In addition, mass retail net sales included a large back-to-school promotion in the six months ended December 31, 2019 that did not take place in 2020. Net sales in the educational markets, which primarily are driven by the need for headphones in testing services, declined as a result of timing of shipments. There were large shipments at the end of our fiscal year ended June 30, 2020.

Export net sales increased 20.4% to approximately $1,277,000 for the three months ended December 31, 2020, compared to approximately $1,061,000 for the same period last year. Net sales to export markets were approximately $2,539,000 in the six months ended December 31, 2020 compared to $1,931,000 in the prior year period. Sales to distributors in Europe were the primary drivers for the increase. A significant portion of the increase was related to introduction of new products as well as increased sales of headphones used for working and studying remotely.

Gross profit increased to 32.1% for the six months ended December 31, 2020, compared to 28.3% for the six months ended December 31, 2019. Sales in the current year reflected a much more favorable mix by markets and products. The higher gross profit in the current year was partially due to the promotional back-to-school sale to a domestic mass retail customer at very low margin in the six months ended December 31, 2019.

Selling, general and administrative expenses for the three months ended December 31, 2020, increased approximately $29,000 or 1.8% compared to the prior year period. The primary factors were an increase in employee compensation costs, deferred compensation expenses and general insurance. These costs were partially offset by lower legal expenses.

For the six months ended December 31, 2020, selling, general and administrative expenses decreased 4% or approximately $129,000 compared to the same period last year. Lower legal expenses were partially offset by higher general insurance premiums.

Income tax expense for the three and six months ended December 31, 2020, was comprised of the U.S. federal statutory rate of 21% and the effect of state income taxes offset by an adjustment to the valuation allowance for deferred tax assets. The effective tax rate was less than 1% in the three and six months ended December 31, 2020 and 2019. It is anticipated that the effective rate in the current year and future years will be reduced by utilization of a portion or all of the approximately $897,000 of federal net operating loss carryforwards.

As previously reported, the Company has launched a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio. The Company has continued to enforce its intellectual property by filing complaints against certain parties alleging infringement on the Company's patents relating to its wireless headphone technology. If the program is successful, the Company may receive royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position? however, there is no guarantee of a positive outcome from these efforts, which could ultimately be time consuming and unsuccessful.

Additionally, in the event that a monetary award or judgment is received by the Company in connection with these complaints, all or portions of such amounts may be due to third parties.

The Company believes that its financial position remains strong. The Company had $4.3 million of cash and available credit facilities of $5.0 million on December 31, 2020.



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                                COVID-19 Impact

The Company has been closely monitoring the COVID-19 situation to protect the health and safety of its employees and customers. Business plans are being executed to maintain supply of the Company's products to our customers throughout the world.

The Company's financial results for the quarter ended December 31, 2020 were positively impacted by the demand for specific communication headphones as more people were working from home and studying online due to COVID-19 related directives. The increased domestic sales for these specific products in the quarter ended December 31, 2020 resulted in shortages of certain products, which will take a couple months to replenish. However, certain retail businesses throughout the Company's markets have seen continued disruption. This has resulted in a decline in business across our markets with the exception of online retail. The Company expects these negative sales impacts to continue until markets re-open and consumer spending returns to normal.

The ultimate magnitude of the COVID-19 pandemic, including the extent of its impact on the Company's business, financial position, results of operations or liquidity, cannot be reasonably estimated at this time due to the rapid development and fluidity of the situation. The Company's future results will be heavily determined by the duration of the pandemic, its geographic spread, further business disruptions and the overall impact on the global economy.

The Company's supply chain is primarily in southern China. This portion of the Company's supply chain was disrupted early in the quarter ended March 31, 2020. Until recently, these disruptions had little on-going impact. In the most recent quarter, the Company began experiencing extended lead times caused by shortages of ceratin key components. There have also been impacts to the movement of new product introductions and costs. The Company is monitoring the situation closely and the supply chain team has modified business plans, which include, but are not limited to: (1) increasing the investment in inventory; (2) being alert to potential short supply situations; (3) assisting suppliers with acquisition of critical components; and (4) utilizing alternative sources and/or air freight.

To protect the safety, health and well-being of employees, customers, and suppliers the Company continues to implement several preventive measures while also meeting the needs of global customers. They include increased frequency of cleaning and disinfecting of facilities, social distancing practices, remote working when possible, restrictions on business travel, holding certain events virtually and limitations on visitor access to facilities.

The Company is committed to continuing to execute these plans and will remain in close contact with its supply chain to monitor future possible implications, especially on production facilities.







                        Liquidity and Capital Resources



Cash Flows

The following table summarizes cash flows from operating, investing and financing activities for the six months ended December 31, 2020 and 2019:




Total cash provided by (used in):            2020          2019
Operating activities                      $  784,680    $  352,988
Investing activities                        (478,288)     (352,186)
Financing activities                          88,918              -

Net increase in cash and cash equivalents $ 395,310 $ 802








Operating Activities

The increase in income from operations was the driving factor for the increase in cash provided by operating activities during the six months ended December 31, 2020. The impact of the increased income from operations was partially offset by a decrease in the net changes in operating assets and liabilities.





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Investing Activities

Cash used in investing activities was higher for the six months ended December 31, 2020, as the Company had increased expenditures for leasehold improvements and for tooling related to new product introductions. During the fiscal year ending June 30, 2021, the Company anticipates it will incur total expenditures for tooling, leasehold improvements and capital expenditures of approximately $600,000. The Company expects to generate sufficient cash flow through operations or through the use of its available cash and its credit facility to fund these expenditures.





Financing Activities

As of December 31, 2020, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stock in the quarters ended December 31, 2020 or 2019 under the stock repurchase program. Cash provided in 2020 was from stock options exercised which resulted in the issuance of 42,658 shares of common stock. No stock options were exercised in 2019.





Liquidity

The Company's capital expenditures are primarily for leasehold improvements and tooling. In addition, it has interest payments on its borrowings when it uses its line of credit facility. The Company believes that cash generated from operations, together with cash reserves and available borrowings, provide it with adequate liquidity to meet operating requirements, debt service requirements and planned capital expenditures for the next twelve months and thereafter for the foreseeable future. The Company regularly evaluates new product offerings, inventory levels and capital expenditures to ensure that it is effectively allocating resources in line with current market conditions.





Credit Facility

On May 14, 2019, the Company entered into a secured credit facility ("Credit Agreement") with Town Bank ("Lender") for a two-year term expiring on May 14, 2021. The Credit Agreement provides for a $5,000,000 revolving secured credit facility with an interest rate of 1.50% over LIBOR. The Credit Agreement also provides for letters of credit for the benefit of the Company of up to a sublimit of $1,000,000. There are no unused line fees in the credit facility. On January 28, 2021, the Credit Agreement was amended to extend the expiration to October 31, 2022, and to change the interest rate to Wall Street Journal Prime less 1.50%. The Company and the Lender also entered into a General Business Security Agreement dated May 14, 2019 under which the Company granted the Lender a security interest in substantially all of the Company's assets in connection with the Company's obligations under the Credit Agreement. The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type. The negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, disposition of assets, mergers and liquidations, among other restrictions. The Company is currently in compliance with all covenants related to the Credit Agreement. As of December 31, 2020, and June 30, 2020, there were no outstanding borrowings on the facility.





Contractual Obligation

The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is wholly-owned by the former Chairman. On January 5, 2017, the lease was renewed for a period of five years, ending June 30, 2023, and is being accounted for as an operating lease. The lease extension maintained the rent at a fixed rate of $380,000 per year and included an option to renew at the same rate for an additional five years ending June 30, 2028. The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership.







                         Off-Balance Sheet Transactions

At December 31, 2020, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.





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