Koss’ PPP loan forgiveness, work from home trend fueled best quarter in years and stock rally

Koss Corp. headquarters at 4129 North Port Washington Ave. in Milwaukee.

Last updated on February 2nd, 2021 at 10:08 am

Sometimes, timing is everything. For Milwaukee-based Koss Corp., the timing of its PPP loan forgiveness helped push it to its best quarter in years and reignited a rally in the company’s stock price.

Koss headphones
Koss makes high-fidelity headphones.

Koss, a maker and distributor of headphones, reported fiscal 2021 second quarter net income of $508,890 on Thursday, its best quarterly result since its third quarter in fiscal 2016. In its 2020 second quarter, the company lost $215,713.

The timing of the nearly $725,000 swing in profitability lined up almost perfectly with a wild week in the stock market that has seen Koss be swept up among a group of stocks boosted by retail investors targeting short sellers and Wall Street hedge funds.

Koss stock has spent much of the last decade trading for $2 or $3 per share. Before this week, it hadn’t gone above $5 since the early part of the last decade.

There was good reason for this. The company’s revenues have been sliding in recent years, from $26 million in fiscal 2016 to $18.3 million in fiscal 2020. Koss’ results over those five years combine for a $3 million net loss.

The low stock price changed this week as Koss became one of a handful of stocks targeted by traders on the subreddit r/WallStreetBets. The highest-profile of these stocks has been GameStop, but Koss also saw its share price skyrocket over the course of the week.

On Monday and Tuesday, it climbed to around $10 per share before vaulting to more than $60 per share on Wednesday.

The stock went even higher on Thursday, reaching a peak of more than $127 per share before coming down to around $40 when trading platforms limited activity in the stock.

Then Thursday afternoon Koss released its earnings, showing a swing to profitability from the previous year and an 18.4% increase in sales, and the stock started rising again, reaching nearly $100 per share on Friday morning as some trading limits were eased.

The sales increase for the three months ending on Dec. 31 amounted to a $767,130 increase compared to the same period in 2019. Koss generated a little more than $4.9 million in revenue for the quarter with about 74% coming from the U.S.

“The increase in net sales for the quarter and first six months has been across several markets with U.S. distributors, European distributors and domestic direct to consumer sales leading the way,” Michael J. Koss, chairman and chief executive officer of Koss, said. “We continue to see sales driven by people studying and working from home. Sales through domestic retail were down for the quarter and year-to-date periods.”

However, the company also noted in its quarterly filings that increased interest in “specific communication headphones” has caused shortages of certain products that would take a couple of months to replenish. Koss also said its supply chain, primarily located in southern China, has been disrupted and it is experiencing extended lead times because of shortages of key components.

Koss said its supply chain teams are monitoring the situation and have modified business plans to increase inventory investment, assist suppliers with acquiring parts and using other sources or air freight.

While the work from home trend benefited the company’s top line, the improved net income was primarily the result of a forgiven Paycheck Protection Program loan, which was recorded as $506,700 in other income.

Gross profit margins were unchanged at 32.8% and selling, general and administrative expenses as a percentage of sales did fall from 38.1% to 32.8%. All told, Koss made $2,072 in income from operations.

Still, Koss’ more than $500,000 net income is its best performance since the third quarter of fiscal 2016, when the company reported net income of almost $870,000.

At that time, the company was being represented by Michael Avenatti in a lawsuit against Park Bank. Koss had also reached a settlement that quarter with American Express over the credit card company’s role in allowing a Koss finance executive to embezzle millions over several years.

Recording nearly $1.4 million in recoveries from that deal helped push the company’s quarterly results from a loss to an $870,000 profit.

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Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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