Koss Corporation Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended March 31, 2018. Although the request metadata identifies “2017 Q3,” the filing is Koss Corporation’s fiscal third-quarter 2018 Form 10-Q. Koss designs and markets headphones, speakers, headsets and related products and operates as one business segment.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $4.33 million, down 9.4% | $16.28 million, down 8.6% |
| Gross profit | $0.96 million | $4.52 million |
| Gross margin | 22.3%, versus 19.9% | 27.8%, versus 28.6% |
| SG&A expense | $1.77 million | $5.22 million |
| Loss before income taxes | $(0.81) million | $(0.68) million |
| Income tax provision | $5,126 | $3.05 million |
| Net loss | $(0.81) million | $(3.73) million |
| Basic and diluted loss per share | $(0.11) | $(0.51) |
- Year-to-date operating cash flow was $1.52 million, compared with $0.52 million in the prior-year period. Investing cash outflow was $0.38 million, resulting in a $1.14 million increase in cash.
- Cash and cash equivalents were $1.57 million at March 31, 2018, compared with $0.43 million at June 30, 2017.
- Total assets were $18.90 million and stockholders’ equity was $14.09 million at March 31, 2018. Total liabilities were $4.81 million.
- Inventory declined to $6.36 million from $8.35 million at June 30, 2017; the inventory obsolescence allowance increased to $2.67 million from $2.45 million.
- The company had no borrowings under its secured $4.0 million revolving credit facility at March 31, 2018. The facility was subsequently extended through July 31, 2019 and is secured by substantially all company assets.
Material changes versus the prior comparable period
- Sales declined primarily because of lower export distributor sales and reduced sales to an OEM customer in Asia. Domestic sales increased, driven largely by mass retail, prison distributors and an education customer.
- Third-quarter gross margin improved because the prior-year period included an inventory write-down that was not repeated. Year-to-date gross margin declined because of changes in product, customer and sales-channel mix.
- SG&A declined due mainly to lower sales commissions, incentive compensation, marketing and travel expenses.
- The year-to-date net loss increased substantially because of a $3.05 million tax provision. This included a $713,826 deferred-tax write-down following the Tax Cuts and Jobs Act and a $2.43 million valuation allowance against deferred tax assets.
- Unauthorized-transaction-related items changed from $39,663 of costs in the prior-year quarter and $73,759 year to date to recoveries of $1,265 and $17,445, respectively, in 2018.
Outlook, risks, contingencies and unusual items
- Management expects operating cash flow, cash reserves and available credit to provide adequate liquidity for operating needs, debt service and planned capital expenditures for the next twelve months and the foreseeable future.
- Capital expenditures are primarily for tooling. Management expects fiscal-year 2018 tooling, leasehold-improvement and other capital expenditures to be similar to the prior fiscal year.
- The company identifies risks involving 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 and litigation.
- Koss leases its Milwaukee facility from Koss Holdings, LLC, which is wholly owned by the former Chairman. The lease runs through June 30, 2023 at fixed annual rent of $380,000; the company also bears maintenance, insurance and property-tax costs.
- The company’s lawsuit against Park Bank concerning previously reported unauthorized transactions remains pending before the Wisconsin Supreme Court after the court granted review on March 14, 2018. The ultimate resolution is not determinable.
- The company expects an immaterial effect on the financial statements from adopting the new revenue-recognition standard in fiscal 2019. Adoption of the new lease standard is expected to have an immaterial income-statement effect but a material balance-sheet effect from recording right-of-use assets and lease liabilities.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2018, and reported no material changes in internal control over financial reporting.
Facts investors should verify
- Whether export demand, particularly from the Asian OEM customer and European and Asian distributors, stabilizes or continues to pressure sales.
- The composition and realizability of the $2.67 million inventory obsolescence allowance and the company’s ability to reduce inventory without further write-downs.
- The recoverability of deferred tax assets, given the full valuation allowance and the $3.05 million year-to-date tax provision.
- The status and potential financial impact of the Park Bank litigation and any remaining unauthorized-transaction-related matters.
- The company’s liquidity after planned tooling and capital expenditures and any future use of the secured revolving facility.
- The effect of fiscal 2019 adoption of the revenue and lease accounting standards, particularly the expected material increase in reported lease assets and liabilities.