Koss Corporation Form 10-Q Summary
Reporting period: Three and nine months ended March 31, 2016, compared with the corresponding 2015 periods. The filing is for fiscal 2016 third quarter, despite the request metadata identifying “2015 Q3.” Koss markets headphones, wireless speakers, computer and telecommunications headsets, noise-canceling products, and related audio products as one business segment.
Financial Performance and Position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $6.00 million in 2016 versus $6.00 million in 2015 | $18.76 million versus $18.51 million, up 1.4% |
| Gross profit | $2.11 million versus $2.12 million | $6.42 million versus $6.37 million |
| Gross margin | 35.2% versus 35.2% | 34.2% versus 34.4% |
| SG&A expense | $2.11 million versus $2.00 million | $5.86 million versus $6.01 million |
| Net income | $869,686 versus $57,218 | $1.16 million versus $127,806 |
| Diluted earnings per share | $0.12 versus $0.01 | $0.16 versus $0.02 |
| Operating cash flow | Not separately provided | $339,451 provided versus $359,478 used |
Reported earnings benefited materially from a $3.0 million gross settlement recovery related to prior unauthorized transactions, partly offset by $1.64 million of legal fees and related costs. Net unauthorized-transaction recoveries were $1.36 million for the quarter and $1.29 million for the nine months.
Non-GAAP EBITDA from operations was $243,290, or 4.1% of sales, for the quarter, compared with $381,436, or 6.4%, in the prior-year quarter. Nine-month EBITDA was $1.29 million, or 6.9% of sales, compared with $1.27 million, or 6.9%.
At March 31, 2016, cash and cash equivalents were $918,303, compared with $1.00 million at June 30, 2015. Total current assets were $14.88 million and current liabilities were $3.63 million. Inventory was $7.91 million, up from $7.18 million, while accounts receivable increased to $3.54 million from $2.82 million.
Total assets were $23.77 million and stockholders’ equity was $17.88 million. Total liabilities were $5.89 million. The company had no borrowings under its $5.0 million secured revolving credit facility and was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Quarterly sales were essentially flat; nine-month sales increased 1.4%.
- Domestic sales declined because of lost or reduced sales through a drug-store chain, an online retailer, and certain distributors. These declines were partly offset by increased mass-retailer sales and new customers.
- Export sales increased due to new distributors and an Asian OEM customer, while sales declined in Russia, Ukraine, Japan, and Canada.
- Quarterly SG&A increased because of higher incentive compensation. Nine-month SG&A declined because reduced headcount and lower stock-based compensation more than offset higher incentives.
- Operating cash flow improved to $339,451 from a use of $359,478, partly because the prior year included approximately $1.3 million of product-return payments and the current year included approximately $311,000 of customer advance payments.
- Net cash decreased by $81,963 during the nine months, compared with a $854,833 decrease in the prior-year period.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects a fiscal-year effective tax rate of approximately 38% to 40%.
- Planned fiscal 2016 spending for tooling, leasehold improvements, and capital expenditures is approximately $500,000 to $600,000. Management expects operating cash flow and available credit to fund these needs.
- Management believes cash from operations, cash reserves, and the credit facility provide adequate liquidity for operating requirements, debt service, and planned capital expenditures for the next twelve months and the foreseeable future.
- The credit facility expires July 31, 2016, provides for a $5.0 million revolving line subject to borrowing-base limitations, and includes a $2.0 million letter-of-credit sublimit. Substantially all company assets secure the facility.
- The company appealed a March 2016 summary judgment dismissing its case against Park Bank. The ultimate resolution of the legal matter was not determinable.
- The Milwaukee facility is leased from Koss Holdings, LLC, which is wholly owned by the former Chairman. The lease runs through June 30, 2018 at fixed annual rent of $380,000.
- Key operating risks include consumer acceptance of new audio technologies, competition, pricing, customer concentration and orders, third-party manufacturing, foreign sourcing and sales, economic conditions, trade restrictions, taxes, and pending litigation.
- Management stated that disclosure controls were effective as of March 31, 2016, with no material changes in internal control over financial reporting.
Investor Verification Checklist
- Separate recurring operating performance from the $3.0 million litigation settlement and related legal costs.
- Assess inventory growth, including the $4.01 million obsolete-inventory allowance, and accounts-receivable growth relative to sales.
- Confirm renewal or replacement of the secured credit facility before its July 31, 2016 expiration.
- Monitor the Park Bank appeal and any additional legal costs or recoveries related to the unauthorized transactions.
- Evaluate the sustainability of export growth against weakness in domestic channels and challenged markets such as Russia and Ukraine.
- Verify the assumptions supporting the projected 38% to 40% tax rate and $500,000 to $600,000 capital-spending plan.