Koss Corporation: FY2021 Form 10-K Summary
Business context and reporting period
The filing is Koss Corporation’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021, filed August 20, 2021. Although the request metadata references “2020 Q4,” the source document reports full-year fiscal 2021 and comparative fiscal 2020 results. Koss designs, manufactures and sells wired and Bluetooth headphones, headsets, speakers and related accessories as one reporting segment.
Products are sold through distributors, retailers, e-commerce, direct-to-consumer channels and OEM customers. Approximately 70% of fiscal 2021 sales were from music-listening headphones and approximately 30% from communications, education, metal-detection and OEM applications.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $19.546 million | $18.312 million |
| Sales growth | 6.7% | (16.2)% |
| Gross profit | $6.732 million | $5.663 million |
| Gross margin | 34.4% | 30.9% |
| SG&A expense | $7.123 million | $6.147 million |
| Operating loss | $390,492 | $484,042 |
| Other income | $885,505 | — |
| Net income (loss) | $493,594 | $(465,597) |
| Basic diluted EPS | $0.06 / $0.05 | $(0.06) / $(0.06) |
| Cash flow from operations | $348,740 | $1.802 million |
| Capital expenditures and other investing cash flow | $(704,206) | $(537,275) |
| Cash flow from financing | $3.306 million | $506,700 |
| Cash and cash equivalents | $6.950 million | $3.999 million |
Export sales increased 66.6% to $5.248 million, while U.S. sales declined 5.7% to $14.298 million. Ingram Micro represented approximately 18% of FY2021 sales, Amazon approximately 10%, and the five largest customers approximately 48%.
At June 30, 2021, total assets were $26.324 million, current assets were $15.549 million, total liabilities were $6.749 million and stockholders’ equity was $19.575 million. Inventory increased to $5.902 million from $5.539 million, including a $1.787 million obsolete-inventory reserve. The Company had no borrowings outstanding under its $5.0 million secured revolving credit facility and was in compliance with its covenants.
Material changes versus the prior comparable period
- Sales returned to growth, primarily because of stronger export, distributor and direct-to-consumer activity. A U.S. mass retailer discontinued certain Koss-branded products, reducing domestic sales but improving the sales mix.
- Gross margin improved by 350 basis points, primarily from the loss of a lower-margin mass-retail product and a more favorable product and channel mix.
- SG&A rose 15.9%, driven principally by approximately $571,000 of employer taxes on stock-option exercises and approximately $244,000 of additional deferred-compensation expense. Lower 401(k) matching costs partially offset the increase.
- Net income improved by approximately $959,000, but the Company remained loss-making at the operating level. FY2021 other income included forgiveness of the $506,700 Paycheck Protection Program loan and $378,805 received from a director in settlement of a short sale under Rule 144.
- Operating cash flow declined substantially because working-capital changes used $500,565, including increased inventory and other operating-asset needs. Financing cash flow increased because employees exercised 1,203,875 stock options, generating $3.306 million.
- Shares outstanding increased to 8,608,706 at June 30, 2021 from 7,404,831, primarily due to option exercises.
Outlook, risks, contingencies and unusual items
Management stated that cash on hand and available credit facilities were expected to fund operations beyond the next twelve months. The Company planned approximately $600,000 of tooling and leasehold-improvement expenditures for fiscal 2022 and expected higher freight costs to continue pressuring margins.
COVID-19 continued to create uncertainty around demand, retail activity, manufacturing, logistics, product launches and European operations. Supply-chain disruptions included container shortages, routing delays, increased air freight and higher shipping costs. The Company sources substantially from Asia; one contract manufacturer represented approximately 52% of manufacturing costs in FY2021.
Key customer concentration remains material, and customers generally purchase under purchase orders without long-term contracts. The Company also faces competition from larger brands, product-acceptance risk, pricing pressure, foreign-exchange and trade-policy exposure, cybersecurity risk and potential customer credit losses.
Koss filed patent-infringement lawsuits against Apple, Bose, JLab, Plantronics/Polycom and Skullcandy concerning wireless-headphone technology. Outcomes are uncertain. The Company also was investigating allegations from One-E-Way that certain wireless products may infringe its patents and had accrued approximately $41,000, while estimating ultimate resolution costs of approximately $41,000 to $140,000.
In July 2021, after year-end, Koss entered into a license agreement with another headphone manufacturer for certain intellectual property and received a one-time license fee. The filing does not state the amount of that fee.
The Company reported approximately $31.310 million of federal net operating loss carryforwards that may be carried forward indefinitely, but maintained a full valuation allowance against its net deferred tax assets. No dividends were declared, and management did not anticipate cash dividends in the foreseeable future.
The Milwaukee facility is leased from an entity wholly owned by the Company’s former chairman at $380,000 annually; the lease runs through June 30, 2023, with an extension option.
Important facts for investors to verify
- Confirm that the applicable period is FY2021 rather than the “2020 Q4” period stated in the request metadata.
- Separate recurring operating performance from FY2021 net income, which benefited from $885,505 of other income, including PPP loan forgiveness and a short-sale settlement.
- Monitor whether export growth can offset the loss of mass-retail distribution and whether higher freight and supply-chain costs reduce the improved gross margin.
- Review customer and supplier concentration, particularly Ingram Micro, Amazon and the leading Asian contract manufacturer.
- Assess the cash requirements of planned capital expenditures, inventory investment, lease obligations and deferred compensation.
- Review the status and potential financial impact of the patent litigation and the One-E-Way allegations.
- Consider dilution from outstanding stock options and the effect of extreme KOSS share-price volatility and concentrated insider ownership.