KOSS CORPORATION Overview
The Company developed stereo headphones in 1958 and has been a leader in the
industry. Koss markets a complete line of high-fidelity headphones, wireless
Bluetooth® headphones, wireless Bluetooth® speakers, computer headsets,
telecommunications headsets, and active noise canceling headphones. The Company
operates as one business segment.
Results of Operations Summary
• Net sales for the quarter ended December 31, 2019 ,
decreased
For the six months ended
lower sales to European distributors caused the decreased sales.
• Gross profit as a percent of net sales increased for the three months ended
ended
Gross profit fluctuations were primarily driven by a change in the mix of
business by product, customer and sales channel. A significant factor in the
six month decrease was the large back-to-school sale to a domestic retailer at
low margin.
• Selling, general and administrative expenses for the three and six months
ended
• Tax expense for the three and six months ended
due to an offsetting change in the valuation allowance for deferred tax
assets. The Company is not recording a tax benefit on the pretax loss because
of the uncertainty in realizing the benefits of deferred tax assets.
Financial Results
The following table presents selected financial data for the three and six
months ended
Three Months Ended Six Months Ended
December 31 December 31
Financial Performance Summary 2019 2018* 2019 2018*
Net sales $ 4,162,659 $ 5,411,227 $ 9,573,421 $ 11,196,066
Net sales (decrease) % (23.1 )% (8.1 )% (14.5 )% (6.5 )%
Gross profit $ 1,364,087 $ 1,662,495 $ 2,711,541 $ 3,493,679
Gross profit as % of net sales 32.8 % 30.7 % 28.3 % 31.2 %
Selling, general and administrative
expenses $ 1,586,705 $ 1,559,346 $ 3,251,305 $ 3,348,935
Selling, general and administrative
expenses as % of net sales 38.1 % 28.8 % 34.0 % 29.9 %
Interest income $ 6,927 $ - $ 13,324 $ -
(Loss) income before income tax
provision $ (215,691 ) $ 103,149 $ (526,440 ) $ 144,744
(Loss) income before income tax as %
of net sales (5.2 )% 1.9 % (5.5 )% 1.3 %
Income tax provision $ 22 $ - $ 22 $ 25
Income tax provision as % of income
before income tax 0 % 0 % 0 % 0 %
*As adjusted for change in accounting principle (Note 2)
2019 Results Compared with 2018(comments refer to both the three and six month periods unless otherwise noted)
For the three and six months ended
Net sales in the domestic market were approximately$3,082,000 in the three months endedDecember 31, 2019 , compared to last year's approximately$3,172,000 . For the six months endedDecember 31, 2019 , domestic net sales increased from approximately$7,006,000 to approximately$7,585,000 . Sales to mass retail customers increased in the six months endedDecember 31, 2019 but declined in the last three months compared to last year. Mass retail net sales included a large back-to-school promotion in the early part of the six months endedDecember 31, 2019 . Sales of these promotional products slowed in the last three months. Education related customers showed strong sales increases both year to date and in the current quarter. Certain domestic distributors and consumer direct customers had lower sales. Management believes this was due to inventory reduction efforts at those customers. Export net sales decreased 51.7% to approximately$1,081,000 for the three months endedDecember 31, 2019 , compared to approximately$2,239,000 for the three months endedDecember 31, 2018 . For the six months endedDecember 31, 2019 , sales decreased 52.6% to approximately$1,988,000 from$4,190,000 last year. Sales to an export OEM customer, for which the contract ended inDecember 2018 , were approximately$416,000 and$973,000 in the three and six months endedDecember 31, 2018 and accounted for a significant portion of the decrease in net sales. Sales to distributors inEurope were the primary drivers for the remainder of the decrease. Management believes these declines were due to timing of sales related to introduction of new products. Gross profit decreased to 28.3% for the six months endedDecember 31, 2019 , compared to 31.2% for the six months endedDecember 31, 2018 . The lower gross profit in the current year was largely due to the promotional back-to-school sale to a domestic mass retail customer at very low margin. For the three months endedDecember 31, 2019 , gross profit increased to 32.8% from 30.7% due to more favorable mix of sales by market and product. Selling, general and administrative expenses for the three months endedDecember 31, 2019 , increased approximately$28,000 or 1.8% compared to the prior year. For the six months endedDecember 31, 2019 , there was a decrease of approximately$98,000 or 2.9% in selling general and administrative expenses. For the three months endedDecember 31, 2019 , the primary factors were an increase in legal and professional fees of approximately$36,000 , an increase in employee benefit costs of approximately$24,000 and a decrease in deferred compensation expense of approximately$44,000 . An increase of approximately$120,000 cash surrender value income was the most significant factor causing the decrease in the six months endedDecember 31, 2019 . For the six months endedDecember 31, 2019 , deferred compensation expense declined by approximately$51,000 compared to the prior year. Bad debt expense declined by approximately$44,000 this year compared to last year when the bad debt for a domestic mass retail customer was recorded as a result of a Chapter 11 filing. Legal and professional fees increased by approximately$49,000 compared to the prior year. 11
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Table of Contents Income tax provision for the three and six months endedDecember 31, 2019 was comprised of theU.S. federal statutory rate of 21% and the effect of state income taxes fully offset by an adjustment to the valuation allowance for deferred tax assets. The Company is not recording a tax benefit on the pretax loss because of the uncertainty in realizing the benefits of deferred tax assets. The Company has launched a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio. The Company has incurred costs and will continue to incur costs related to enforcing this program. These costs primarily relate to legal fees and other costs involved with the underlying efforts to enforce this portfolio. Depending on the response to and the underlying results of the enforcement program, the Company may enter into licensing arrangements or initiate lawsuits as part of the Company's efforts to enforce this program. If successful, the Company may receive royalties, offers to purchase its intellectual property, or other proceeds in amounts that could have a material effect on its financial statements. Liquidity and Capital Resources Cash Flows
The following table summarizes cash flows from operating, investing and
financing activities for the six months ended
Total cash provided by (used in): 2019 2018 Operating activities$ 352,988 $ 1,354,067 Investing activities (352,186 ) (235,514 ) Financing activities - 46,677
Net increase in cash and cash equivalents
Operating Activities The decrease in accounts payable and the loss from operations were the driving factors for the decrease in cash provided by operating activities during the six months endedDecember 31, 2019 . There was significant inventory inbound to theU.S. fromChina as ofJune 30, 2019 that was paid for during the quarter endedSeptember 30, 2019 . The impact of these factors was partially offset by a decrease in accounts receivable. Investing Activities Cash used in investing activities was higher for the six months endedDecember 31, 2019 , as the Company had increased expenditures for leasehold improvements and for tooling related to new product introductions. During the fiscal year endingJune 30, 2020 , the Company anticipates it will incur total expenditures for tooling, leasehold improvements and capital expenditures of approximately$500,000 to$700,000 . The Company expects to generate sufficient cash flow through operations or through the use of its available cash and its credit facility to fund these expenditures. Financing Activities
As of
There were no purchases of common stock in 2019 or 2018 under the stock repurchase program. Cash provided in 2018 was from stock options exercised which resulted in the issuance of 22,125 shares of common stock. No stock options were exercised in 2019.
Liquidity The Company's capital expenditures are primarily for leasehold improvements and tooling. In addition, it has interest payments on its borrowings when it uses its line of credit facility. The Company believes that cash generated from operations, together with cash reserves and borrowings available under its credit facility, provide it with adequate liquidity to meet operating requirements, debt service requirements and planned capital expenditures for the next twelve months and thereafter for the foreseeable future. The Company regularly evaluates new product offerings, inventory levels and capital expenditures to ensure that it is effectively allocating resources in line with current market conditions. Credit Facility OnMay 14, 2019 , the Company entered into a secured credit facility ("Credit Agreement") withTown Bank ("Lender") for a two-year term expiring onMay 14, 2021 . The Credit Agreement provides for an$5,000,000 revolving secured credit facility with interest rates of 1.50% over LIBOR. The Credit Agreement also provides for letters of credit for the benefit of the Company of up to a sublimit of$1,000,000 . There are no unused line fees in the credit facility. The Company and the Lender also entered into a General Business Security Agreement datedMay 14, 2019 under which the Company granted the Lender a security interest in substantially all of the Company's assets in connection with the Company's obligations under the Credit Agreement. The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type. The negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, disposition of assets, mergers and liquidations, among other restrictions. The Company is currently in compliance with all covenants related to the Credit Agreement. As ofDecember 31, 2019 , andJune 30, 2019 , there were no outstanding borrowings on the facility. 12
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