Koss Corporation Form 10-Q Summary
Business context and reporting period
Koss Corporation designs, manufactures and sells high-fidelity headphones, wireless Bluetooth headphones and speakers, computer and telecommunications headsets, active noise-canceling headphones and related accessories. The company operates as one business segment.
This unaudited Form 10-Q covers the quarter and nine months ended March 31, 2023, within fiscal 2023. The filing was signed May 12, 2023. Financial statements were prepared under U.S. GAAP and have not been audited.
Key financial metrics
| Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Nine months ended March 31, 2023 | Nine months ended March 31, 2022 |
|---|---|---|---|---|
| Net sales | $3.37 million | $4.63 million | $10.00 million | $13.42 million |
| Gross profit | $1.29 million | $1.96 million | $3.61 million | $5.09 million |
| Gross margin | 38.4% | 42.4% | 36.1% | 38.0% |
| SG&A expense | $1.75 million | $1.57 million | $27.89 million | $4.58 million |
| Income from operations | $(0.45) million | $0.40 million | $(24.29) million | $0.52 million |
| Other income | — | $0.01 million | $33.00 million | $0.36 million |
| Net income | $(0.23) million | $0.40 million | $8.57 million | $0.88 million |
| Diluted earnings per share | $(0.03) | $0.04 | $0.87 | $0.09 |
For the nine months, operating cash flow was $10.62 million, compared with cash used in operations of $0.67 million in the prior-year period. Investing activities used $17.04 million, primarily for purchases of U.S. Treasury securities. Financing activities provided $0.14 million from stock-option exercises. Cash and cash equivalents decreased by $6.29 million to $2.92 million.
At March 31, 2023, total assets were $38.70 million, including $12.05 million of short-term investments and $4.95 million of long-term investments. Inventory was $7.08 million, down from $8.63 million at June 30, 2022. Total liabilities were $7.06 million and stockholders’ equity was $31.64 million.
The company had no outstanding borrowings under its $5.0 million secured revolving credit facility and was in compliance with all covenants. Management stated that cash from operations, cash reserves and available borrowings should provide adequate liquidity for at least the next twelve months and the foreseeable future.
Material changes versus the prior comparable period
- Quarterly sales declined 27.3%; nine-month sales declined 25.5%. Domestic sales fell 22.4% for the nine-month period, while export sales fell 33.8%.
- Management attributed the sales decline primarily to weaker consumer demand, elevated distributor inventory, reduced domestic distributor and online-retailer orders, lower European and Asian sales, and the suspension of sales to Russia and Ukraine.
- Direct-to-consumer sales increased by approximately $214,000, or 8.7%, during the nine months, partially offsetting distributor weakness.
- Nine-month gross margin declined to 36.1% from 38.0%, primarily because of the sale of inventory acquired at higher freight costs and fixed manufacturing expenses that did not decline with volume.
- Nine-month SG&A increased by approximately $23.31 million, principally due to $22.26 million of legal fees and expenses related to the company’s patent enforcement program.
- Nine-month results included $33.0 million of licensing proceeds in other income, compared with $0.10 million of licensing proceeds in the prior-year period. This unusual item drove most of the increase in net income.
- Interest income increased to $314,000 for the nine months from $8,000, reflecting higher cash and investment balances and interest rates.
- The company issued 69,000 shares through stock-option exercises during the nine months, compared with 539,089 shares in the prior-year period. No shares were repurchased during the quarter.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management expects continued uncertainty from inflationary costs, supply-chain disruption, COVID-19, transportation labor risks, the Russia-Ukraine conflict and changing consumer demand. The company expects freight rates to remain relatively stable but continues to monitor possible UPS and railroad labor disruptions.
Sales to Russia and Ukraine were suspended. The company stated that these markets represented approximately $600,000, or 4% of prior-year nine-month sales, and that the ongoing conflict will continue to affect regional sales, although the ultimate impact is uncertain.
The company is pursuing patent-infringement claims involving wireless headphone technology. Patent-related legal fees totaled $22.26 million for the nine months. Pending cases remain against Bose, PEAG/JLab, Plantronics, Polycom and Skullcandy; the Apple litigation was dismissed in July 2022 following resolution. Any monetary awards may be payable in whole or in part to third parties, and additional legal costs and outcomes remain uncertain.
The company recorded a $31,000 state income-tax benefit for the quarter and $464,000 of income-tax expense for the nine months. Federal and state net operating loss carryforwards reduced taxable income, but realization of remaining tax assets remains uncertain. Management expects approximately $32.6 million of federal tax-loss carryforwards at fiscal year-end and maintains a full valuation allowance against deferred tax assets.
The company leases its 126,000-square-foot facility from a related entity controlled by trusts benefiting the former chairman’s beneficiaries. The lease runs through June 30, 2028 at annual rent of $380,000, with a renewal option at $397,000 annually. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether sales declines and elevated distributor inventories persist into the fourth quarter and subsequent fiscal periods.
- The sustainability of results excluding the $33.0 million licensing proceeds and related patent-litigation costs.
- The status, expected cost and potential recoveries from the pending patent litigation, including amounts potentially payable to third parties.
- Whether gross margins recover as higher-cost inventory is sold and supply-chain and freight conditions normalize.
- The company’s cash needs after converting $17.0 million of cash into held-to-maturity Treasury securities, and the availability and covenant terms of the $5.0 million credit facility.
- The realizability of federal and state net operating loss carryforwards and the continued full valuation allowance.
- Customer concentration: the four largest accounts represented approximately 32%, 11%, 11% and 8% of trade accounts receivable at March 31, 2023.