Koss Corporation Form 10-Q Summary
Business context and reporting period
This filing is a quarterly report for the period ended March 31, 2020, covering Koss Corporation’s third fiscal quarter and first nine months of fiscal 2020. The supplied request labels the period “2019 Q3,” but the filing itself reports 2020 results. Koss operates as one business segment, marketing high-fidelity, Bluetooth, computer, telecommunications, and active noise-canceling headphones and speakers.
Financial performance and liquidity
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Nine months ended March 31, 2020 | Nine months ended March 31, 2019 |
|---|---|---|---|---|
| Net sales | $4.789 million | $4.860 million | $14.363 million | $16.056 million |
| Gross profit | $1.590 million | $1.655 million | $4.301 million | $5.149 million |
| Gross margin | 33.2% | 34.1% | 29.9% | 32.1% |
| SG&A | $1.688 million | $1.540 million | $4.939 million | $4.889 million |
| Net income (loss) | $(97,373) | $137,880 | $(623,835) | $282,599 |
| Basic and diluted EPS | $(0.01) | $0.02 | $(0.08) | $0.04 |
For the nine months, operating cash flow was $339,788 versus $1.836 million in the prior-year period. Investing cash flow was $(504,107), primarily reflecting equipment, leasehold improvement, tooling, and life-insurance expenditures. Net cash decreased by $164,319, leaving cash and cash equivalents of $2.064 million at March 31, 2020.
At March 31, 2020, total assets were $21.519 million, total liabilities were $6.643 million, and stockholders’ equity was $14.876 million. Inventory declined to $4.992 million from $6.851 million at June 30, 2019. The company had no borrowings under its $5.0 million secured revolving credit facility, which expires May 14, 2021, and was in compliance with its covenants. The facility also permits letters of credit of up to $1.0 million.
Material changes versus the prior comparable period
- Third-quarter sales decreased 1.5%; nine-month sales decreased 10.5%.
- Domestic sales increased 16.3% in the quarter and 10.6% year to date, while export sales declined 52.8% and 52.3%, respectively.
- Export sales were affected by the completion of an OEM project in December 2018, lower European distributor sales, inventory optimization, currency effects, and new-product timing.
- Gross margin declined 90 basis points in the quarter and 220 basis points year to date. Management attributed the year-to-date decline largely to a low-margin back-to-school promotion for a domestic mass retailer and the quarterly decline to product, customer, and channel mix.
- Third-quarter SG&A increased 9.6%, primarily due to higher legal and professional fees, employee benefits, and new-product testing. Nine-month SG&A increased 1.0%.
- The company adopted a new stock-based compensation accounting method retrospectively. The change increased prior-year SG&A and reduced prior-year reported net income by $34,426 for the quarter and $91,239 for the nine months.
Guidance, outlook, risks, contingencies, and unusual items
- Management did not provide formal revenue or earnings guidance. It anticipated approximately $600,000 to $800,000 of fiscal-2020 expenditures for tooling, leasehold improvements, and capital expenditures.
- COVID-19 increased demand for communication headsets used for remote work and online study, particularly through online channels, but retail closures and reduced hours adversely affected broader demand. Management expected negative sales effects to continue until markets reopened and consumer spending normalized.
- The pandemic’s ultimate effect on operations, financial position, results, and liquidity could be material but could not be reasonably estimated as of the filing date.
- The supply chain, primarily located in southern China, experienced early-quarter disruption. Management reported limited ongoing disruption but cited risks involving new-product timing, costs, short supplies, and production interruptions. One contract manufacturer represents approximately 75% of manufacturing costs.
- Koss incurred increased legal costs under a program to enforce its intellectual-property portfolio. Potential licensing, litigation, royalty, or intellectual-property sale proceeds are uncertain and could materially affect future results.
- On April 14, 2020, after quarter-end, Koss received a $506,700 unsecured Paycheck Protection Program loan at 1.0% interest, maturing April 14, 2022. Portions may be forgiven subject to program requirements.
- The company leases its Milwaukee facility from Koss Holdings, LLC, which is wholly owned by the former Chairman. The lease requires fixed annual rent of $380,000 through June 30, 2023, with an option to renew through June 30, 2028.
- Management stated that ordinary-course legal claims were not expected to have a material adverse effect, but acknowledged inherent uncertainties. Disclosure controls were deemed effective, and no significant internal-control changes were reported.
Important facts for investors to verify
- Confirm the applicable reporting period: the filing is for the quarter ended March 31, 2020, not 2019 Q3.
- Assess whether COVID-19-related online demand offset continuing retail, export, and supply-chain weakness in subsequent periods.
- Monitor gross-margin recovery after the low-margin domestic promotion and changes in product and channel mix.
- Review liquidity after the reported $2.064 million of cash, unused $5.0 million revolver, planned capital spending, and subsequent $506,700 PPP loan.
- Evaluate dependence on the principal Chinese manufacturing vendor and the potential effect of interruptions or increased supplier costs.
- Track legal spending and outcomes from the intellectual-property enforcement program, including any licensing or litigation proceeds.