Koss Corporation Form 10-Q Summary
Reporting period: The filing is for the three and nine months ended March 31, 2017, comparing results with the same periods ended March 31, 2016. Although the request metadata references “2016 Q3,” the filing itself identifies the period as fiscal 2017 third quarter.
Business Context and Reporting Period
Koss Corporation operates as one business segment and markets high-fidelity, wireless Bluetooth, computer, telecommunications, active noise-canceling and other headphones, speakers and related products. The interim financial statements are unaudited and prepared under U.S. GAAP. Management stated that nine-month results are not necessarily indicative of full-year results.
Financial Performance and Position
| Metric | Three months ended March 31, 2017 | Three months ended March 31, 2016 | Nine months ended March 31, 2017 | Nine months ended March 31, 2016 |
|---|---|---|---|---|
| Net sales | $4.8 million | $6.0 million | $17.8 million | $18.8 million |
| Gross profit | $950,302 | $2.1 million | $5.1 million | $6.4 million |
| Gross margin | 19.9% | 35.2% | 28.6% | 34.2% |
| SG&A expense | $2.0 million | $2.1 million | $5.7 million | $5.9 million |
| Net income (loss) | $(1.1) million | $869,686 | $(893,259) | $1.2 million |
| Diluted EPS | $(0.15) | $0.12 | $(0.12) | $0.16 |
- Cash flow: Nine-month operating cash flow was $517,612, compared with $339,451 in the prior year. Investing cash outflow was $498,848, primarily for equipment, leasehold improvements and tooling. Net cash increased $18,764 to $754,157.
- Liquidity: March 31, 2017 cash and current assets were $754,157 and $12.1 million, respectively, versus $735,393 and $13.7 million at June 30, 2016. Current liabilities were $2.7 million, compared with $3.6 million at fiscal year-end.
- Debt: No borrowings were outstanding under the secured $5.0 million revolving credit facility. The facility expires July 31, 2018, and the company reported compliance with all covenants. Letters of credit may be issued subject to a $2.0 million sublimit and other limitations.
- Inventory: Inventory was $8.0 million, including a $2.8 million obsolescence allowance, compared with $8.6 million at June 30, 2016.
- Balance sheet: Total assets were $22.6 million and stockholders’ equity was $17.6 million at March 31, 2017.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 20.5%, primarily due to lower distributor sales in Scandinavia and Africa and declines among some domestic distributors. Nine-month sales declined 5.1%.
- Domestic sales declined to approximately $3.1 million in the quarter and $11.1 million for the nine months. Export sales declined to approximately $1.7 million and $6.7 million, respectively.
- Gross margin decreased substantially, primarily because of an inventory write-down of a product to net realizable value. Management stated that the product was sold in the following quarter.
- SG&A declined year over year due in part to lower stock-based and incentive compensation, partly offset by higher testing costs for new products and higher 401(k) matching expense.
- Results benefited in the prior-year periods from approximately $1.4 million of net recoveries related to a settled unauthorized-transaction lawsuit. The current period recorded $39,663 and $73,759 of net related costs for the quarter and nine months, respectively.
- The company increased its deferred-tax-asset valuation allowance by $444,000 because of indications that the related tax benefits may not be fully realizable.
- Stockholders’ equity decreased $627,691 during the nine months, reflecting the net loss partly offset by $265,568 of stock-based compensation expense.
Outlook, Risks, Contingencies and Unusual Items
- Management expects a fiscal-year effective tax rate of approximately 38% to 40%, excluding the valuation-allowance change.
- Fiscal 2017 capital expenditures for tooling, leasehold improvements and other capital items are expected to total approximately $500,000 to $600,000. Management expects operating cash flow or the credit facility to fund these expenditures.
- Management believes operating cash flow, cash reserves and available credit provide adequate liquidity for operating needs, debt service and planned capital expenditures for the next twelve months and the foreseeable future.
- The company renewed its related-party Milwaukee facility lease for five years through June 30, 2023, at fixed annual rent of $380,000. Koss Holdings, LLC, the landlord, is wholly owned by the former Chairman.
- The company’s lawsuit against Park Bank relating to previously reported unauthorized transactions remained on appeal. The ultimate resolution was not determinable as of March 31, 2017.
- Identified risks include economic conditions, consumer acceptance of new technologies and products, competition, customer orders, third-party manufacturing, foreign sourcing and sales, trade and importation matters, borrowing costs, tax changes, litigation and investigations.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2017, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the sharp gross-margin decline was temporary and whether the written-down product was fully sold without additional discounting or write-downs.
- The sustainability and concentration of distributor and OEM sales, particularly in Scandinavia, Africa, Asia and the Czech Republic.
- Actual full-year sales, profitability and tax rate relative to management’s commentary and the stated tax expectation.
- The status and potential financial impact of the Park Bank appeal and any continuing unauthorized-transaction legal costs or recoveries.
- Inventory aging, the adequacy of the $2.8 million obsolescence allowance and future working-capital requirements.
- Compliance with the credit facility’s borrowing-base and financial covenants and the availability of unused capacity.
- Terms and governance implications of the related-party facility lease through June 30, 2023.