Koss Corp. (NASDAQ:KOSS) management and family members recently sold shares they owned at the peak of the spike. This is unfortunate, as management could have done a secondary offering of Koss stock in the market that would have benefited all shareholders.
Koss makes headphones. They just posted a small profit for their Q4 ended Dec. 31. But the company was tone-deaf on what would be best for the company as a whole during the spike in its shares in the past two weeks.
Secondary Offering Would Have Helped All
For example, if they had done a secondary offering of shares at or near the peak, the company would have been able to bring in a large amount of cash. That would have benefited all shareholders as the stock would now have an asset base to help maintain the higher stock price.
That is the whole purpose of the stock market.
Instead, CNBC reported that the Koss family and executives “cashed in $44 million during the short squeeze frenzy.” On Jan. 21, Koss stock was at $3,34 per share. Within one week it had shot up to $64 at the peak.
CNBC says that members of the Koss family, who own about 75% of the headphone maker, sold $31 million of stock, according to SEC filings. Moreover, this is a significant number:
“The $31 million in sales is larger than the entire market value of the company – at about $26 million – before its share surge.“
Therefore, Koss could have sold $26 million in shares at an average price of say $20. On Feb. 6 it was at $19.52, with a $152 million market cap.
This would be in addition to the $4.3 million which the company has on its balance sheet, giving it a total of $30 million. As it has 7.447 million shares outstanding, that would work out to $4.03 per share in cash per share.
Moreover, the business generated $10.1 million in sales last year. Even at 5 times sales, that could value the business at $50 million. This would give the total company an $80 million valuation, or $10.75 per share.
Although this value is below today’s stock, the problem is there is nothing preventing Koss stock from now falling back to $3.50 or so. By doing a share offering, the underlying value would be cemented at a higher price.
What to Do Now With Koss Stock
In other words, management could have sacrificed their own personal gain. This would have benefited all other shareholders by increasing the fundamentals supporting the company. It would also lead shareholders to believe that management was shareholder-friendly and this could have beneficial effects on Koss stock.
This shows that their actions were particularly self-serving. Even if the company was not able to do a public offering, they might have been able to do a private offering of shares.
Or they could have offered convertible debt to a lender, then taken the cash and used that to benefit the company. The reason I suggest this is because I suspect management might argue there wasn’t enough time to arrange a regulatory sale of capital. I highly doubt that.
It also goes to show that it makes sense for many companies to have on file an at-the-market offering of shares approved by the SEC. That way, when the market acts wildly like this, especially if their shares are heavily shorted, they can quickly take advantage of this opportunity.
I am not sure whether investors will see this move by management and family owners of Koss as a reason to keep the stock at a high level anymore. I suspect not.
Expect to see Koss stock now fall below where it used to trade, as investors realize that members of management is solely out for themselves.
On the date of publication, Mark R. Hake did not hold a long or short position (either directly or indirectly) in any of the stocks in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
