Koss Corporation Form 10-Q Summary
Business Context and Reporting Period
Koss Corporation designs and markets high-fidelity, wireless Bluetooth, computer, telecommunications, noise-canceling and other headphones and related products. The company operates as one business segment. This unaudited filing covers the three months ended September 30, 2017, the first quarter of fiscal 2018, compared with the three months ended September 30, 2016.
Financial Performance and Position
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $6.067 million | $6.349 million | Down 4.4% |
| Gross profit | $1.674 million | $1.942 million | Down 13.8% |
| Gross margin | 27.6% | 30.6% | Down 3.0 percentage points |
| SG&A expense | $1.648 million | $1.776 million | Down 7.2% |
| Income before taxes | $37,965 | $128,142 | Down 70.4% |
| Net income | $17,500 | $84,211 | Down 79.2% |
| Operating cash flow | $96,843 | $62,445 | Up 55.1% |
| Capital expenditures | $157,242 | $206,309 | Down 23.8% |
Net income was approximately $0.002 per basic and diluted share, reported as less than $0.01 per share. The effective tax rate was 53.9%, compared with 34.3% in the prior-year quarter.
At September 30, 2017, cash and cash equivalents were $241,148, compared with $432,283 at June 30, 2017. Total current assets were $12.979 million and current liabilities were $3.589 million. Inventories were $8.372 million, including a $2.457 million allowance for obsolete inventory. Stockholders’ equity was $17.673 million.
The company had no borrowings under its secured revolving credit facility at quarter-end. The facility was reduced from $8.0 million to $4.0 million in June 2017, expires July 31, 2018, and is secured by substantially all company assets. The facility also provides for letters of credit up to a $2.0 million sublimit. Management stated that the company was in compliance with applicable covenants.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of lower sales to export distributors and an OEM customer in Asia. Domestic sales increased to approximately $4.280 million from $3.872 million, while export sales declined to approximately $1.787 million from $2.477 million.
- Gross margin contracted because certain products were sold at lower margins after burden previously capitalized in inventory was released through cost of goods sold.
- SG&A decreased primarily due to lower employment-related, incentive compensation, travel, salary and 401(k) match expenses.
- Unauthorized-transaction-related activity shifted from $37,500 of legal costs in the prior-year quarter to a $14,409 recovery from asset forfeitures.
- Interest expense increased to $2,692 from $846 because the company borrowed for longer periods during timing differences between cash provided and cash used by operations, although no borrowings remained outstanding at quarter-end.
- Cash used in investing activities improved to $287,978 from $337,917, primarily because of lower tooling expenditures for new product introductions.
Guidance, Outlook, Risks and Unusual Items
Management expects fiscal 2018 capital expenditures for tooling, leasehold improvements and other capital items to be similar to the prior fiscal year and expects operating cash flow or the credit facility to fund these expenditures. Management believes cash, operating cash generation and available borrowing capacity provide adequate liquidity for the next twelve months and the foreseeable future.
Management anticipates an effective tax rate of approximately 50% to 54% for the fiscal year ending June 30, 2018. The company expects adoption of ASC 606, Revenue from Contracts with Customers, in fiscal 2019 using the retrospective method and preliminarily expects no material impact, subject to completion of its assessment.
Risks include fluctuating economic conditions, consumer acceptance of new technologies and products, competition and pricing pressure, customer orders, third-party manufacturing, foreign sourcing and sales, trade and importation matters, borrowing costs, tax-rate changes, and pending litigation. The company remains involved in an appeal concerning unauthorized transactions and Park Bank; the ultimate resolution is not determinable.
The company renewed its related-party facility lease through June 30, 2023, at fixed annual rent of $380,000. The facility is leased from Koss Holdings, LLC, which is wholly owned by the former chairman.
Important Facts for Investors to Verify
- Whether the decline in export and Asian OEM sales persists and whether domestic growth offsets it.
- Whether gross-margin pressure from inventory burden normalization continues.
- Cash needs relative to the $4.0 million secured credit facility and its July 31, 2018 expiration.
- Inventory composition, including the $2.457 million obsolete-inventory allowance and high finished-goods balance.
- The unusually high projected effective tax rate of 50% to 54%.
- The status and potential financial impact of the Park Bank litigation appeal.
- The company’s progress toward ASC 606 adoption and whether its preliminary assessment changes.