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 2021 and 2020. 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-K.
Overview
The Company 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 2021 Summary
?Net sales increased 6.7% to
?Gross profit as a percent of sales increased 3.5% to 34.4%. The increase was primarily due to a US mass retailer dropping a lower margin product as well as a change in the mix of sales by product and by channel.
?Selling, general and administrative expense was higher as a result of employer taxes on stock option exercises and deferred compensation expense.
?Tax expense for the year ended
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Table of Contents Consolidated Results
The following table presents selected consolidated financial data for each of the past two fiscal years:
Consolidated Performance Summary 2021 2020 Net sales$ 19,546,008 $ 18,311,830 Net sales increase (decrease) % 6.7% (16.2)% Gross profit$ 6,732,135 $ 5,662,608 Gross profit as % of net sales 34.4% 30.9% Selling, general and administrative expenses$ 7,122,627 $ 6,146,650 Selling, general and administrative expenses as % of 36.4% 33.6% net sales Interest income$ 2,706 $ 20,185 Other income$ 885,505 $ -
Income (loss) before income tax provision (benefit)
2.5% (2.5)% net sales Income tax provision$ 4,125 $ 1,740 Income tax provision as % of income (loss) before 0.8% (0.4)% taxes 2021 Results of Operations Compared with 2020
Net sales for 2021 increased primarily due to increased sales in the Company's export markets. Domestic sales reflected mixed results among markets but, overall, declined 5.7% compared to 2020.
Export net sales increased by
For the year ended
Gross profit increased to 34.4% for the year ended
Selling, general and administrative expenses for the year ended
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 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-
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Income tax expense for the year ended
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 continuously updated and executed to maintain supply of the Company's products to our customers throughout the world.
The Company continued to see strong demand 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 timely rollout of the vaccines, effectiveness of
the vaccines, the duration of the pandemic, impact of the variants, its
geographic spread, further business disruptions and the overall impact on the
global economy. Many European countries continued to have lockdowns in the year
ended
The Company's supply chain is primarily in southern
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.
The Company had
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): 2021 2020 Operating activities$ 348,740 $ 1,801,702 Investing activities (704,206) (537,275) Financing activities 3,306,272 506,700
Net increase in cash and cash equivalents
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Table of Contents Operating Activities
The Company generated less cash from operations despite having an improvement in
net income of
Investing Activities
Cash used in investing activities was higher for 2021 as the Company increased
spending on leasehold improvements and the implementation of a new ERP system.
The Company is planning approximately
Financing Activities
The cash generated from financing activities in the year ended
There were no purchases of common stock in 2021 or 2020 under the stock
repurchase program. In the year ended
Liquidity
In addition to capital expenditures, the Company has interest payments when it uses its line of credit facility. The Company believes that cash generated from operations, together with borrowings available under its credit facility, should provide it with adequate liquidity to meet operating requirements, debt service requirements, and capital expenditures. Management is focusing on increasing sales, especially in 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.
Credit Facility
On
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Table of Contents Stock Repurchase Program
In
There were no stock repurchases under the program in fiscal year 2021 or 2020.
As of
Contractual Obligation
The Company leases the 126,000 square foot facility from
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 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 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 adopted the
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Table of Contents 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 collectibility of the unsecured receivable is dependent upon the financial condition of an individual customer, which could change rapidly and without warning.
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 market 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 market 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 liabilities are for a current and former officer and are calculated based on compensation, years of service, 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. See Note 9 for additional information on deferred compensation.
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.
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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.
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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