Koss Corporation Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2020, compared with fiscal year ended June 30, 2019. The request metadata identifies “2019 Q4,” but the supplied filing is an annual Form 10-K for fiscal 2020.
Business Context
Koss designs, manufactures and sells stereo headphones and related accessories through retailers, distributors, e-commerce, direct-to-consumer channels and OEM customers. The Company operates as one reporting segment. Approximately 75% of fiscal 2020 sales came from music-listening headphones, with the balance from communications, education, metal-detector, OEM and related applications.
- Net sales were generated primarily in the United States, which represented approximately $15.2 million of fiscal 2020 sales.
- International sales were $3.2 million, down from $6.6 million in fiscal 2019.
- Wal-Mart represented approximately 18% of sales and Amazon approximately 11% in fiscal 2020; the five largest customers represented approximately 48%.
Financial Performance and Liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $18.312 million | $21.842 million | Down 16.2% |
| Gross profit | $5.663 million | $6.820 million | Down $1.157 million |
| Gross margin | 30.9% | 31.2% | Down 0.3 percentage points |
| SG&A expense | $6.147 million | $6.544 million | Down $397 thousand |
| Operating income (loss) | $(484) thousand | $276 thousand | Declined $760 thousand |
| Net income (loss) | $(466) thousand | $306 thousand | Declined $772 thousand |
| Basic and diluted EPS | $(0.06) | $0.04 | Lower |
| Operating cash flow | $1.802 million | $1.411 million | Up $391 thousand |
Cash and cash equivalents were $3.999 million at June 30, 2020, compared with $2.228 million at June 30, 2019. Current assets were $12.138 million and current liabilities were $2.615 million. Inventory declined to $5.539 million from $6.851 million, while accounts receivable declined to $2.317 million from $3.655 million.
Investing cash outflows were $537 thousand, including $424 thousand for equipment and leasehold improvements. Financing cash inflows were $507 thousand, consisting of the Paycheck Protection Program loan. Management expects approximately $600 thousand of fiscal 2021 spending for tooling, software implementation and leasehold improvements.
The Company had no borrowings under its $5.0 million secured revolving credit facility at June 30, 2020 and was in compliance with its covenants. It had a $506,700 unsecured SBA loan at 1% interest, for which it applied for full forgiveness after year-end. No dividends were declared and no shares were repurchased during fiscal 2020 or 2019.
Material Changes Versus Fiscal 2019
- Sales fell 16.2%, primarily because export markets weakened, currency devaluations reduced distributor margins, COVID-19 disrupted retail activity, and an Asian OEM contract ended. Domestic sales declined approximately 1%.
- European distributor sales declined by more than 50%, particularly during the final months of the fiscal year.
- Direct-to-consumer sales increased to approximately $1.191 million from approximately $594 thousand, partially offsetting declines in mass retail and other online channels.
- Gross margin decreased because of lower volume, product and channel mix changes, and weaker overhead absorption.
- SG&A decreased due primarily to lower legal expense, lower deferred compensation expense and a greater increase in the cash surrender value of life insurance.
- The Company reported a net loss instead of net income. The tax provision was minimal because of changes in the valuation allowance for deferred tax assets.
- A change in stock-based compensation accounting was applied retrospectively, reducing reported fiscal 2019 net income from $434 thousand to $306 thousand.
Guidance, Outlook, Risks and Unusual Items
The Company did not provide quantified revenue or earnings guidance. Management expects fiscal 2021 research and development spending for new Bluetooth and wired products and plans approximately $600 thousand of capital expenditures. Management believes cash from operations and available credit should fund operations, debt service and planned capital spending beyond the next twelve months.
- COVID-19: Retail closures, reduced store hours, supply-chain delays, travel restrictions and weaker consumer demand adversely affected fiscal 2020 results. Management stated that the full future impact on sales, financial condition and liquidity could not be reasonably estimated.
- Supply chain: Contract manufacturing is concentrated in China, Taiwan and South Korea; one vendor represented approximately 70% of manufacturing costs. Tariffs, freight increases, disease, natural disasters or supplier interruptions could materially reduce margins or limit product availability.
- Customer concentration: The Company has no long-term customer contracts. Loss or reduced purchasing by Wal-Mart, Amazon or other major customers could materially affect results.
- Competition and product risk: The Company competes with larger, better-capitalized brands and must continually introduce products that gain consumer acceptance while managing pricing and margin pressure.
- Legal matters: The Company recovered approximately $385 thousand of patent-enforcement fees and costs during fiscal 2020. In July 2020, it filed patent infringement suits against Apple, Bose, JLab, Plantronics/Poly, and Skullcandy. One-E-Way alleged potential infringement by certain Koss wireless products; Koss accrued $20 thousand against an estimated resolution cost of $20 thousand to $200 thousand.
- Related-party lease: The Milwaukee facility is leased from an entity owned by the former chairman at $380 thousand annually; the lease runs through June 30, 2023, with a renewal option.
- Deferred compensation: Total deferred compensation liabilities were approximately $2.48 million, including obligations to a former and a current officer.
Investor Verification Priorities
- Verify the fiscal 2020 annual period and the retrospective stock-based compensation adjustment to fiscal 2019.
- Assess whether international sales, particularly in Europe, recovered after the COVID-19 disruptions.
- Monitor the status and forgiveness of the $506,700 SBA loan and the expiration of the $5.0 million credit facility in May 2021.
- Review customer concentration, especially Wal-Mart and Amazon, and the financial condition of major retailers and distributors.
- Evaluate dependence on the principal Chinese manufacturing vendor and exposure to tariffs, freight costs and supply interruptions.
- Follow the patent litigation, the One-E-Way allegations and any related recoveries, royalties, settlements or legal costs.
- Confirm future capital spending, product launches and the Company’s ability to sustain positive operating cash flow despite reported fiscal 2020 losses.