Koss Corporation Form 10-Q Summary
Reporting period: Quarterly period ended March 31, 2022; fiscal 2022 third quarter and nine months year-to-date. The filing metadata identifies “2021 Q3,” but the filing itself reports March 31, 2022. Financial statements are unaudited and prepared under U.S. GAAP. Koss operates as one segment focused on headphones and related audio products.
Financial Results and Position
- Quarterly net sales: $4.635 million, up 16.2% from $3.987 million. Domestic sales increased to $3.735 million from $2.693 million, while export sales declined to $899,000 from $1.294 million.
- Nine-month net sales: $13.416 million, down 5.0% from $14.126 million, primarily because distributor sales and mass-retail sales declined.
- Gross profit: Quarterly gross profit was $1.963 million, or 42.4% of sales, versus $1.418 million, or 35.6%. Nine-month gross profit was $5.095 million, or 38.0%, versus $4.672 million, or 33.1%.
- Operating income: Quarterly operating income was $397,000 versus an operating loss of $854,000. Nine-month operating income was $518,000 versus an operating loss of $722,000.
- Net income: Quarterly net income was $403,000, or $0.04 diluted earnings per share, versus a $474,000 net loss, or $(0.06) per share. Nine-month net income was $883,000, or $0.09 diluted earnings per share, versus $162,000, or $0.02 per share.
- SG&A: Quarterly expense decreased 31.0% to $1.566 million; nine-month expense decreased 15.1% to $4.577 million. Lower employer taxes on stock-option exercises and a $473,000 deferred-compensation reversal contributed to the reduction.
- Cash flow: Nine-month operating cash flow was negative $673,000 versus negative $435,000. Inventory investment used $1.849 million of cash. Investing activities provided $1.820 million, principally from $2.014 million of life-insurance proceeds. Financing activities provided $1.390 million from stock-option exercises.
- Liquidity: Cash and cash equivalents were $9.488 million at March 31, 2022, compared with $6.950 million at June 30, 2021. The company had $5.0 million of available revolving credit and no borrowings outstanding.
- Balance sheet: Inventories increased to $7.751 million from $5.902 million. Total assets were $28.957 million and stockholders’ equity was $22.230 million at March 31, 2022.
- Debt and covenants: The secured revolving facility expires October 31, 2022, bears interest at Wall Street Journal Prime less 1.50%, and includes a $1.0 million letter-of-credit sublimit. The company was in material compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Quarterly sales improved because of better-than-expected direct-to-consumer and distributor sales, although nine-month sales remained below the prior year.
- Margins improved primarily because of a more favorable product and channel mix, including higher-margin direct-to-consumer sales and the loss of lower-margin mass-retail business.
- Export sales declined due to weaker European distributor sales in the quarter and continued weakness in Asian distributors year to date.
- The prior-year period benefited from a $507,000 PPP loan-forgiveness gain and $379,000 of director disgorgement income. Current-year other income included approximately $262,000 of life-insurance proceeds and a $100,000 patent-license fee.
- Common shares outstanding increased to 9.148 million from 8.609 million at June 30, 2021, reflecting 539,089 stock-option exercises during the first nine months.
Outlook, Risks, and Unusual Items
- Management expects COVID-19 effects, inflation, supply-chain disruption, higher transportation costs, and the Russia-Ukraine conflict to continue affecting fiscal 2022 performance, although the magnitude remains uncertain.
- The company is increasing inventory, monitoring component shortages, assisting suppliers, using alternative sources, and considering air freight to mitigate supply-chain disruption. Rising freight and commodity costs may pressure future margins.
- Russia and Ukraine represented less than 5% of quarterly net sales combined. Sales into Russia were suspended in April 2022, and sales to Ukraine were affected.
- Stock-option exercises generated approximately $8.0 million of tax-deductible compensation expense. Management expects an estimated federal tax-loss carryforward of approximately $39.0 million; realization of the related deferred tax asset, estimated at $11.8 million before a full valuation allowance, remains uncertain.
- The company is pursuing patent-infringement claims against several headphone manufacturers, including Apple, Bose, JLab, Plantronics/Polycom, and Skullcandy. The Apple trial was scheduled for July 25, 2022. Potential recoveries may be shared with third parties, and outcomes are uncertain.
- A related-party facility lease requires annual rent of $380,000 and runs through June 30, 2023, with a renewal option through June 30, 2028.
- Management stated that cash, operating resources, and available borrowing capacity should provide adequate liquidity for the next twelve months and the foreseeable future. No material changes to previously disclosed risk factors were reported.
Investor Verification Items
- Verify whether quarterly sales momentum and the favorable sales mix continue after March 31, 2022.
- Monitor inventory levels, obsolescence reserves, freight costs, supplier disruptions, and the effect of inflation on gross margins.
- Confirm the renewal or replacement of the $5.0 million credit facility before its October 31, 2022 expiration.
- Assess the sustainability of cash generation, given negative year-to-date operating cash flow and reliance on life-insurance proceeds and option exercises to increase cash.
- Track the realization of tax-loss carryforwards and the valuation allowance against deferred tax assets.
- Review developments in the patent litigation and any resulting licensing income, costs, or payments to third parties.
- Consider customer concentration: the two largest accounts represented approximately 28% and 18% of trade accounts receivable at March 31, 2022.