KOSS CORPORATION The purpose of this discussion and analysis is to enhance the understanding and
evaluation of the financial position, results of operations, cash flows,
indebtedness and other key financial information of the Company for fiscal years
2022 and 2021. Our MD&A should be read in conjunction with the Consolidated
Financial Statements and related Notes included in Item 8, Financial Statements
and Supplementary Data, of this Annual Report on Form 10-
Overview
The Company initially developed stereo headphones in 1958 and has been a leader in the industry ever since. We market a complete line of high-fidelity headphones, wireless Bluetooth® headphones, wireless Bluetooth® speakers, computer headsets, telecommunications headsets, and active noise canceling headphones. Koss operates as one business segment, as its only business line is the design, manufacture and sale of stereo headphones and related accessories.
The Company's products are sold domestically and internationally through a variety of retailers and distributors, as well as directly to other manufacturers for including with their own products. Changes in sales volume are driven primarily by the addition or loss of customers, a customer adding or removing a product from its inventory, or changes in economic conditions. They are relatively less impacted by seasonality or the traditional holiday shopping season.
Although certain of the Company's products could be viewed as essential by consumers for use with mobile phones and other portable electronic devices, other products are more of a discretionary spend. The results of the Company's operations are therefore susceptible to consumer confidence and macroeconomic factors.
Fiscal Year 2022 Summary
?Net sales declined 9.9% to
?Gross profit as a percent of sales increased 3.2% to 37.6%. The increase was
primarily due to a change in the mix of sales by channel as higher margin
direct-to-consumer ("DTC") sales grew while we discontinued the sale of a lower
margin product to a
?Selling, general and administrative expense declined mainly as a result of
income related to the Company's deferred compensation agreements. The deferred
compensation liability related to the founder was released upon his passing in
?Tax expense for the year ended
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Consolidated Results
The following table presents selected consolidated financial data for each of the past two fiscal years:
Consolidated Performance Summary 2022 2021 Net sales$ 17,607,267 $ 19,546,008 Net sales (decrease) increase % (9.9)% 6.7% Gross profit$ 6,617,378 $ 6,732,135 Gross profit as % of net sales 37.6% 34.4% Selling, general and administrative expenses$ 5,715,355 $ 7,122,627 Selling, general and administrative expenses as % of 32.5% 36.4% net sales Interest income$ 11,513 $ 2,706 Other income$ 362,390 $ 885,505 Income before income tax provision$ 1,275,926 $ 497,719 Income before income tax provision as % of net sales 7.2% 2.5% Income tax provision$ 7,517 $ 4,125 Income tax provision as % of income before taxes 0.6% 0.8% 2022 Results of Operations Compared with 2021
Net sales for 2022 decreased behind reduced sales to
For the year ended
Export net sales lost momentum in the current fiscal year, decreasing
Gross profit increased to 37.6% for the year ended
Selling, general and administrative expenses for the year ended
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As previously reported, the Company maintains a program focused on enforcing its
intellectual property and, in particular, certain of its patent portfolio. The
Company has enforced its intellectual property by filing complaints against
certain parties alleging infringement on the Company's patents relating to its
wireless headphone technology. The Company has recovered certain of the fees and
costs that were involved with the underlying efforts to enforce this portfolio,
as further described in the notes to the financial statements included in this
Annual Report on Form 10-
Income tax expense for the year ended
The Company has closely monitored the impact of COVID-19 (including the
continuing emergence of variants) in order to protect the health and safety of
its employees and customers. Business plans are being continuously updated and
executed to maintain supply of the Company's products to our customers
throughout the world. While the impacts of COVID-19 on our business have
moderated, there still remains uncertainty around the pandemic. As a result of
the COVID-19 pandemic, uncertainty with respect to its economic effects has
impacted not only our operating results but also the global economy. The extent
and nature of government actions to ease restrictions are varied based upon the
current extent and severity of the COVID-19 pandemic within their respective
countries and localities. The Company saw a surge in the sale of specific
communication headsets in the year ended
The ultimate magnitude of the COVID-19 pandemic, including the extent of its impact on the Company's business, financial position, results of operations and 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, impact of the variants, its geographic spread, further business disruptions and the overall impact on the global economy.
During fiscal 2022, inflationary cost increases have impacted our commodities, packaging materials and transportation costs. Pricing actions implemented in the third quarter of the current fiscal year partially mitigated these increases and working with a dedicated freight forwarding partner has helped to minimize freight rate increases.
To protect the safety, health and well-being of employees, customers, and suppliers, the Company implemented several preventive measures while also meeting the needs of global customers. They included 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.
The Company's supply chain is primarily in southern
The invasion of
The Company had
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Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities for each of the past two fiscal years:
Total cash provided by (used in): 2022 2021 Operating activities$ (942,530) $ 348,740 Investing activities 1,810,139 (704,206) Financing activities 1,390,346 3,306,272
Net increase in cash and cash equivalents
Operating Activities
Cash used by the Company in operations was
Investing Activities
Cash provided by investing activities was
Financing Activities
The cash generated from financing activities in the years ended
There were no purchases of common stock in 2022 or 2021 under the stock
repurchase program. In the year ended
Short Term Liquidity
The Company anticipates funding its normal recurring trade payables, accrued expenses, ongoing R&D costs and any potential interest payments, if it utilizes its line of credit facility, through existing working capital and funds provided by operating activities. The majority of the Company's purchase obligations are pursuant to funded contractual arrangements with its customers. The Company believes its existing cash, cash equivalents, cash provided by operating activities and borrowings under its credit facility will be sufficient to meet its anticipated working capital, and capital expenditure requirements during the next twelve months. There can be no assurance, however, that the Company's business will continue to generate cash flow at current levels. If the Company is unable to generate sufficient cash flow from operations, then it may be required to sell assets, reduce capital expenditures or draw on its credit facilities. The Company anticipates that existing sources of liquidity, credit facilities, and cash flows from operations will be sufficient to satisfy its cash needs for the foreseeable future. Management is focused on increasing sales, especially in DTC and the export markets, increasing new product introductions, increasing the generation of cash from operations, and improving the Company's overall earnings to help improve the Company's liquidity. 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.
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Long Term Liquidity
The Company's future capital requirements, to a certain extent, are also subject to general conditions in or affecting the electronics industry and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond its control. Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from its credit facilities are insufficient to fund its future activities, the Company may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in the Credit Agreement (as defined below). In addition, the Company may also need to seek additional equity funding or debt financing if it becomes a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services or technologies.
Credit Facility
On
Stock Repurchase Program
In
There were no stock repurchases under the program in fiscal year 2022 or 2021.
As such, as of
Contractual Obligation
The Company leases the 126,000 square foot facility from
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Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations is
based upon our Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in
The extent to which COVID-19 impacts the Company's business and financial
results will depend on numerous evolving factors including, but not limited to:
the magnitude and duration of COVID-19, the impact of COVID-19 variants, the
extent to which it will impact worldwide macroeconomic conditions, the speed of
the anticipated recovery, access to capital markets, and governmental and
business reactions to the pandemic. The Company assessed certain accounting
matters that generally require consideration of forecasted financial information
in context with the information reasonably available to the Company and the
unknown future impacts of COVID-19 as of
Despite the Company's efforts to evaluate the extent to which COVID-19 will continue to impact the Company's business and financial results, the ultimate impact of COVID-19 depends on factors beyond the Company's knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects. As a result, the Company is unable to estimate the full extent to which COVID-19 will negatively impact its financial results or liquidity.
Revenue Recognition
Revenues from product sales are recognized when the customer obtains control of the product, which typically occurs upon shipment from the Company's facility. There are a very limited number of customers for which control does not pass until they have received the products at their facility. Revenue from product sales is adjusted for estimated warranty obligations and variable consideration, which are detailed below. The Company uses a five-step analysis to determine how revenue is recognized. The underlying principle is to recognize revenue when promised goods or services transfer to the customer. The amount of revenue recognized is to reflect the consideration expected to be received for those goods or services. See Note 3 to the Consolidated Financial Statements for additional information on revenue recognition.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by the review of the customer's current credit information. The Company continuously monitors collections and payments from customers and maintains an allowance for estimated credit losses. Accounts receivable are stated net of an allowance for doubtful accounts. The allowance is calculated based upon the Company's evaluation of specific customer accounts where the Company has information that the customer may have an inability to meet its financial obligations. In these cases, management uses its judgment, based on the best available facts and circumstances, and records a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are re-evaluated and adjusted as additional information is received that impacts the amount reserved. However, the ultimate collectability of the unsecured receivable is dependent upon the financial condition of an individual customer, which could change rapidly and without warning.
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Table of Contents Inventories
The Company values its inventories using standard cost which approximates the lower of first in first out ("FIFO") cost or net realizable value. Valuing inventories at the lower of cost or net realizable value requires the use of estimates and judgment. The Company continues to use the same techniques to value inventories that it has in the past. Our customers may cancel their orders or change purchase volumes. This, or certain additional actions or market developments, could create excess inventory levels, which would impact the valuation of our inventories. Any actions taken by our customers or market developments that could impact the value of our inventory are considered when determining the lower of cost or net realizable value valuations. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on historical and projected usage and production requirements. If the Company is not able to achieve its expectations of the net realizable value of the inventory at its current value, the Company would have to adjust its reserves accordingly. When a reserve is established, it creates a new cost basis, which is not increased in the future.
Product Warranty Obligations
The Company offers a lifetime warranty to consumers in
Deferred Compensation
The Company's deferred compensation liability is for a current officer and is calculated based on various assumptions that may include compensation, years of service, expected retirement date, discount rates and mortality tables. The related expense is calculated using the net present value of the expected payments and is included in selling, general and administrative expenses in the Consolidated Statements of Operations. Management makes estimates of life expectancy and discount rates using information available from several sources. In addition, management estimates the expected retirement date for the current officer as that impacts the timing for expected future payments.
The Company had a deferred compensation liability for a former office and in
Stock-Based Compensation
The Company has a stock-based employee compensation plan, which is described more fully in Note 11. The Company accounts for stock-based compensation in accordance with ASC 718 "Compensation-- Stock Compensation". Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. The expected term of the options and volatility are estimated using historical experience for the options by vesting period. The risk-free interest rate is calculated based on the expected life of the options. The Company does not estimate forfeitures as they are recognized when they occur.
Income Taxes
We estimate a provision for income taxes based on the effective tax rate expected to be applicable for the fiscal year. If the actual results are different from these estimates, adjustments to the effective tax rate may be required in the period such determination is made. Additionally, discrete items are treated separately from the effective rate analysis and are recorded separately as an income tax provision or benefit at the time they are recognized.
Deferred income taxes are accounted for under the asset and liability method whereby deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using statutory tax rates. Deferred income tax provisions are based on changes in the deferred tax assets and liabilities from period to period. Additionally, we analyze our ability to recognize the net deferred income tax assets created in each jurisdiction in which we operate to determine if valuation allowances are necessary based on the "more likely than not" criteria.
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Table of Contents New Accounting Pronouncements
Applicable new accounting pronouncements are set forth under Item 15 of this annual report and are incorporated herein by reference.
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