UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended December 31, 2022September 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-3295
KOSS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE |
| 39-1168275 |
(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
incorporation or organization) |
|
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4129 North Port Washington Avenue, Milwaukee, Wisconsin |
| 53212 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (414) 964-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.005 per share | KOSS | Nasdaq Capital Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
| Accelerated filer ☐ |
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|
Non-accelerated filer ☑ |
| Smaller reporting company ☑ |
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| |
|
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes ☐ No ☑
At JanuaryOctober 23, 2023, there were 9,189,7959,234,795 shares outstanding of the registrant’s common stock.
KOSS CORPORATION
FORM 10-Q
December 31, 2022September 30, 2023
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| Management's Discussion and Analysis of Financial Condition and Results of Operations |
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
KOSS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
December 31, 2022 | June 30, 2022 | September 30, 2023 | June 30, 2023 | |||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 4,812,277 | $ | 9,208,170 | $ | 1,984,279 | $ | 3,091,062 | ||
Short term investments, net of unamortized discounts | 5,010,628 | — | ||||||||
Accounts receivable, less allowance for doubtful accounts of $10,500 and $2,027, respectively | 1,280,089 | 1,846,620 | ||||||||
Inventories, net | 7,829,596 | 8,631,362 | ||||||||
Short term investments | 17,183,653 | 17,064,274 | ||||||||
Accounts receivable, less allowance for credit losses of $1,922 and $6,027, respectively | 1,331,124 | 1,379,517 | ||||||||
Inventories | 5,778,872 | 6,423,441 | ||||||||
Prepaid expenses and other current assets | 341,646 | 188,478 | 462,663 | 284,622 | ||||||
Interest receivable | 128,030 | — | 56,393 | 51,150 | ||||||
Income taxes receivable | 127,363 | 86,901 | ||||||||
Total current assets | 19,402,266 | 19,874,630 | 26,924,347 | 28,380,967 | ||||||
Equipment and leasehold improvements, net | 1,002,594 | 1,088,017 | 1,221,007 | 953,903 | ||||||
Other assets: | ||||||||||
Long term investments, net of unamortized discounts | 9,890,533 | — | ||||||||
Operating lease right-of-use asset | 3,133,274 | 3,247,725 | 2,942,900 | 3,015,887 | ||||||
Cash surrender value of life insurance | 5,976,410 | 5,744,724 | 6,250,849 | 6,020,048 | ||||||
Total other assets | 19,000,217 | 8,992,449 | 9,193,749 | 9,035,935 | ||||||
Total assets | $ | 39,405,077 | $ | 29,955,096 | $ | 37,339,103 | $ | 38,370,805 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
Current liabilities: | ||||||||||
Accounts payable | $ | 285,482 | $ | 796,163 | $ | 228,545 | $ | 267,513 | ||
Accrued liabilities | 1,287,181 | 560,356 | 498,183 | 970,530 | ||||||
Deferred revenue | 419,043 | 543,891 | 352,731 | 450,312 | ||||||
Operating lease liability | 230,121 | 223,530 | 230,454 | 236,225 | ||||||
Income taxes payable | 497,872 | 3,033 | 1,879 | 87,237 | ||||||
Total current liabilities | 2,719,699 | 2,126,973 | 1,311,792 | 2,011,817 | ||||||
Long-term liabilities: | ||||||||||
Deferred compensation | 1,891,154 | 1,937,229 | 1,937,185 | 1,997,120 | ||||||
Deferred revenue | 135,594 | 169,210 | 117,377 | 113,003 | ||||||
Operating lease liability | 2,907,629 | 3,024,195 | 2,722,671 | 2,787,970 | ||||||
Total long-term liabilities | 4,934,377 | 5,130,634 | 4,777,233 | 4,898,093 | ||||||
Total liabilities | 7,654,076 | 7,257,607 | 6,089,025 | 6,909,910 | ||||||
Stockholders' equity: | ||||||||||
Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 9,189,795 and 9,147,795, respectively | 45,949 | 45,739 | ||||||||
Common stock, $0.005 par value, authorized 20,000,000 shares; issued and outstanding 9,234,795 | 46,174 | 46,174 | ||||||||
Paid in capital | 12,908,840 | 12,653,402 | 13,160,785 | 13,113,993 | ||||||
Retained earnings | 18,796,212 | 9,998,348 | 18,043,119 | 18,300,728 | ||||||
Total stockholders' equity | 31,751,001 | 22,697,489 | 31,250,078 | 31,460,895 | ||||||
Total liabilities and stockholders' equity | $ | 39,405,077 | $ | 29,955,096 | $ | 37,339,103 | $ | 38,370,805 | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOSS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||
December 31 | December 31 | September 30 | ||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||
Net sales | $ | 3,271,931 | $ | 4,415,886 | $ | 6,626,460 | $ | 8,780,953 | $ | 3,373,938 | $ | 3,364,129 | ||||
Cost of goods sold | 2,145,769 | 2,866,193 | 4,314,074 | 5,649,423 | 2,306,248 | 2,168,305 | ||||||||||
Gross profit | 1,126,162 | 1,549,693 | 2,312,386 | 3,131,530 | 1,067,690 | 1,195,824 | ||||||||||
Selling, general and administrative expenses | 2,473,975 | 1,229,294 | 26,144,571 | 3,010,091 | 1,536,279 | 23,680,196 | ||||||||||
(Loss) income from operations | (1,347,813) | 320,399 | (23,832,185) | 121,439 | ||||||||||||
(Loss) from operations | (468,589) | (22,484,372) | ||||||||||||||
Other income | — | 255,975 | 33,000,000 | 355,975 | — | 33,000,000 | ||||||||||
Interest income | 97,832 | 3,626 | 124,888 | 4,258 | 212,859 | 27,056 | ||||||||||
(Loss) income before income tax provision | (1,249,981) | 580,000 | 9,292,703 | 481,672 | (255,730) | 10,542,684 | ||||||||||
Income tax (benefit) provision | (103,102) | 1,031 | 494,839 | 2,062 | ||||||||||||
Income tax provision | 1,879 | 597,941 | ||||||||||||||
Net (loss) income | $ | (1,146,879) | $ | 578,969 | $ | 8,797,864 | $ | 479,610 | $ | (257,609) | $ | 9,944,743 | ||||
(Loss) income per common share: | ||||||||||||||||
Basic | $ | (0.12) | $ | 0.06 | $ | 0.96 | $ | 0.05 | $ | (0.03) | $ | 1.09 | ||||
Diluted | $ | (0.12) | $ | 0.06 | $ | 0.90 | $ | 0.05 | $ | (0.03) | $ | 1.01 | ||||
Weighted-average number of shares: | ||||||||||||||||
Basic | 9,186,208 | 9,144,099 | 9,171,746 | 8,994,023 | 9,234,795 | 9,157,284 | ||||||||||
Diluted | 9,186,208 | 10,064,713 | 9,817,398 | 10,062,915 | 9,234,795 | 9,849,043 | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOSS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended | Three Months Ended | |||||||||
December 31 | September 30 | |||||||||
2022 | 2021 | 2023 | 2022 | |||||||
Operating activities: | ||||||||||
Net income | $ | 8,797,864 | $ | 479,610 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||
Provision for (recovery of) doubtful accounts of accounts receivable | 8,473 | (35,764) | ||||||||
Net (loss) income | $ | (257,609) | $ | 9,944,743 | ||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | ||||||||||
(Recovery of) Provision for credit losses | (4,105) | 7,469 | ||||||||
Depreciation of equipment and leasehold improvements | 135,915 | 161,095 | 45,614 | 67,610 | ||||||
Amortization of discount on treasury securities | (16,232) | — | ||||||||
Accretion of discount on treasury securities | (120,305) | — | ||||||||
Noncash operating lease expense | 4,476 | — | 1,917 | 2,556 | ||||||
Stock-based compensation expense | 166,708 | 262,785 | 46,792 | 88,035 | ||||||
Change in cash surrender value of life insurance | (143,691) | (168,756) | (149,057) | (140,298) | ||||||
(Benefit) provision for deferred compensation | (46,075) | 167,560 | ||||||||
Deferred compensation paid | — | (71,250) | ||||||||
Deferred compensation relieved | — | (472,883) | ||||||||
Other income - Net gain from life insurance benefits | — | (255,975) | ||||||||
(Benefit) Provision for deferred compensation | (59,935) | 42,301 | ||||||||
Net changes in operating assets and liabilities: | ||||||||||
Accounts receivable | 558,058 | 818,483 | 52,498 | 66,019 | ||||||
Inventories | 801,766 | (1,844,937) | 644,569 | 732,866 | ||||||
Prepaid expenses and other current assets | (153,168) | (14,557) | (178,041) | (209,989) | ||||||
Interest receivable | (128,030) | — | (5,243) | — | ||||||
Income taxes receivable | (40,462) | — | ||||||||
Income taxes payable | 494,839 | 2,062 | (85,358) | 597,941 | ||||||
Accounts payable | (510,681) | 467,762 | (38,968) | (274,746) | ||||||
Accrued liabilities | 726,825 | 236,076 | (472,347) | 954,343 | ||||||
Deferred revenue | (158,464) | (112,025) | (93,207) | (186,736) | ||||||
Net cash provided by (used in) operating activities | 10,538,583 | (380,714) | ||||||||
Net cash (used in) provided by operating activities | (713,247) | 11,692,114 | ||||||||
Investing activities: | ||||||||||
Purchase of equipment and leasehold improvements | (50,492) | (75,155) | (312,718) | (11,773) | ||||||
Life insurance premiums paid | (87,995) | (95,888) | (81,744) | (87,994) | ||||||
Purchases of investments | (14,884,929) | — | ||||||||
Net cash (used in) investing activities | (15,023,416) | (171,043) | ||||||||
Proceeds from the maturity of treasury securities | 2,000,000 | — | ||||||||
Purchases of treasury securities | (1,999,074) | — | ||||||||
Net cash used in investing activities | (393,536) | (99,767) | ||||||||
Financing activities: | ||||||||||
Proceeds from exercise of stock options | 88,940 | 1,390,346 | — | 70,440 | ||||||
Net cash provided by financing activities | 88,940 | 1,390,346 | — | 70,440 | ||||||
Net (decrease) increase in cash and cash equivalents | (4,395,893) | 838,589 | (1,106,783) | 11,662,787 | ||||||
Cash and cash equivalents at beginning of period | 9,208,170 | 6,950,215 | 3,091,062 | 9,208,170 | ||||||
Cash and cash equivalents at end of period | $ | 4,812,277 | $ | 7,788,804 | $ | 1,984,279 | $ | 20,870,957 | ||
Non-cash financing and investing activity: | ||||||||||
Reclassification of cash surrender value of life insurance to life insurance receivable | $ | — | $ | 1,751,794 | ||||||
Supplemental cash flow information: | ||||||||||
Cash paid for income taxes | $ | 127,700 | $ | — | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOSS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
Six Months Ended December 31, 2022 | |||||||||||||
Common Stock | Paid in | Retained | |||||||||||
Shares | Amount | Capital | Earnings | Total | |||||||||
Balance, June 30, 2022 | 9,147,795 | $ | 45,739 | $ | 12,653,402 | $ | 9,998,348 | $ | 22,697,489 | ||||
Net income | — | — | — | 8,797,864 | 8,797,864 | ||||||||
Stock-based compensation expense | — | — | 166,708 | — | 166,708 | ||||||||
Stock option exercises | 42,000 | 210 | 88,730 | — | 88,940 | ||||||||
Balance, December 31, 2022 | 9,189,795 | $ | 45,949 | $ | 12,908,840 | $ | 18,796,212 | $ | 31,751,001 | ||||
Three Months Ended September 30, 2023 | |||||||||||||
Common Stock | Paid in | Retained | |||||||||||
Shares | Amount | Capital | Earnings | Total | |||||||||
Balance, June 30, 2023 | 9,234,795 | $ | 46,174 | $ | 13,113,993 | $ | 18,300,728 | $ | 31,460,895 | ||||
Net (loss) | — | — | — | (257,609) | (257,609) | ||||||||
Stock-based compensation expense | — | — | 46,792 | — | 46,792 | ||||||||
Balance, September 30, 2023 | 9,234,795 | $ | 46,174 | $ | 13,160,785 | $ | 18,043,119 | $ | 31,250,078 | ||||
Six Months Ended December 31, 2021 | |||||||||||||
Common Stock | Paid in | Retained | |||||||||||
Shares | Amount | Capital | Earnings | Total | |||||||||
Balance, June 30, 2021 | 8,608,706 | $ | 43,044 | $ | 10,802,118 | $ | 8,729,939 | $ | 19,575,101 | ||||
Net income | — | — | — | 479,610 | 479,610 | ||||||||
Stock-based compensation expense | — | — | 262,785 | — | 262,785 | ||||||||
Stock option exercises | 539,089 | 2,695 | 1,387,651 | — | 1,390,346 | ||||||||
Balance, December 31, 2021 | 9,147,795 | $ | 45,739 | $ | 12,452,554 | $ | 9,209,549 | $ | 21,707,842 | ||||
Three Months Ended December 31, 2022 | |||||||||||||
Common Stock | Paid in | Retained | |||||||||||
Shares | Amount | Capital | Earnings | Total | |||||||||
Balance, September 30, 2022 | 9,179,795 | $ | 45,899 | $ | 12,811,717 | $ | 19,943,091 | $ | 32,800,707 | ||||
Net (loss) | — | — | — | (1,146,879) | (1,146,879) | ||||||||
Stock-based compensation expense | — | — | 78,673 | — | 78,673 | ||||||||
Stock option exercises | 10,000 | 50 | 18,450 | — | 18,500 | ||||||||
Balance, December 31, 2022 | 9,189,795 | $ | 45,949 | $ | 12,908,840 | $ | 18,796,212 | $ | 31,751,001 | ||||
Three Months Ended December 31, 2021 | Three Months Ended September 30, 2022 | |||||||||||||||||||||||||
Common Stock | Paid in | Retained | Common Stock | Paid in | Retained | |||||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | Shares | Amount | Capital | Earnings | Total | |||||||||||||||||
Balance, September 30, 2021 | 9,137,795 | $ | 45,689 | $ | 12,302,395 | $ | 8,630,580 | $ | 20,978,664 | |||||||||||||||||
Balance, June 30, 2022 | 9,147,795 | $ | 45,739 | $ | 12,653,402 | $ | 9,998,348 | $ | 22,697,489 | |||||||||||||||||
Net income | — | — | — | 578,969 | 578,969 | — | — | — | 9,944,743 | 9,944,743 | ||||||||||||||||
Stock-based compensation expense | — | — | 123,909 | — | 123,909 | — | — | 88,035 | — | 88,035 | ||||||||||||||||
Stock option exercises | 10,000 | 50 | 26,250 | — | 26,300 | 32,000 | 160 | 70,280 | — | 70,440 | ||||||||||||||||
Balance, December 31, 2021 | 9,147,795 | $ | 45,739 | $ | 12,452,554 | $ | 9,209,549 | $ | 21,707,842 | |||||||||||||||||
Balance, September 30, 2022 | 9,179,795 | $ | 45,899 | $ | 12,811,717 | $ | 19,943,091 | $ | 32,800,707 | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
KOSS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022September 30, 2023
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION
The condensed consolidated balance sheets as of December 31, 2022September 30, 2023 and June 30, 2022,2023, the condensed consolidated statements of operations for the three and six months ended December 31,September 30, 2023 and 2022, and 2021, the condensed consolidated statements of cash flows for the sixthree months ended December 31,September 30, 2023 and 2022, and 2021, and the condensed consolidated statements of stockholders' equity for the three and six months ended December 31,September 30, 2023 and 2022, and 2021, have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and have not been audited. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The operating results for any interim period are not necessarily indicative of the operating results that may be experienced for the full fiscal year.
Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022.2023.
The preparation of financial statements in conformity with U.S. GAAP requires the companyCompany to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, allowances for doubtful accounts,credit losses, reserves for excess and obsolete inventories, long-lived and intangible assets, income tax valuation allowance, stock-based compensation and deferred compensation. Actual results could differ from the Company's estimates.
B) INVESTMENTS
Debt securities are classified as held-to-maturity as the Company has the positive intent and ability to hold them to maturity. The securities are carried at amortized cost as current or noncurrent based upon maturity date and unrealized gains and losses are recognized when realized. The amortized cost of debt securities is adjusted for amortization of premium and accretion of discounts to maturity. Such amortization or accretion is included in interest income, along with other interest on cash and cash equivalents.
C) INCOME TAXES
We estimate a provision for income taxes based on the effective tax rate expected to be applicable for the fiscal year. If the actual results are different from these estimates, adjustments to the effective tax rate may be required in the period such determination is made. Additionally, discrete items are treated separately from the effective rate analysis and are recorded separately as an income tax provision or benefit at the time they are recognized.
During the quarter ended December 31, 2022,September 30, 2023, a state income tax provision of $1,879 was recorded for the minimum tax payments expected given the taxable net loss for the quarter. No federal tax benefit of $74,389 and a state tax benefit of $28,713 wereor provision was recorded based on a taxable loss. While declining sales contributed to the taxable loss, the main drivers were a payment made to the Company’s external patent litigation counsel and legal expenses paid related to the Company’s program focused on the enforcement of its intellectual property. For the six months ended December 31, 2022, as a result of additional income generated by licensing fees, offset by related legal fees and expenses, taxable income for the period was generated. On December 22, 2017, thequarter. The Tax Cuts and Jobs Act (TCJA) was enacted which changed the rules for deducting net operating losses (NOLs). beginning with the 2018 tax year. Before 2017,2018, NOLs were fully deductible and could be carried back two years and carried forward 20 years. For NOLs arising in tax years beginning after December 31, 2017, the TCJA limits the NOL deduction to 80 percent of taxable income. As such, the utilization of the Company’s net operating loss carryforwards from fiscal years after 2018 were limited to 80 percent of the resulting taxable income. The Company’s NOL carryforwards from fiscal 2017For the three months ended September 30, 2022, due to additional income generated by licensing fees, partially offset by related legal fees and 2018 could be utilized to offsetexpenses, taxable income at 100 percent.resulted. The utilization of net operating loss carryforwards significantly reduced the taxable income, resulting in federal and state tax provisions of $374,714$449,103 and $120,125, respectively. For the three and six months ended December 31, 2021, a state tax provision of $1,031 and $2,062,$148,838, respectively, was recorded. The federal income tax expense was zero for the three and six monthsthree-month period ended December 31, 2021.September 30, 2022.
The effective tax rate was 5.3% in the six months ended December 31, 2022 and less than 1% infor the sixthree months ended December 31, 2021.September 30, 2023 and 5.7% for the three months ended September 30, 2022. It is anticipated that the effective rate in the current year and future years will be reduced by utilization of a portion or all of the federal and state net operating loss carryforwards that existed as of June 30, 2022.2023. The Company's remaining tax loss carryforward will be approximately $32,500,000. Given the taxable loss generated during the quarter ended December 31, 2022,September 30, 2023 increased the expectedtax loss carryforward as of September 30, 2023 to approximately $32,100,000. Given the taxable loss for the current quarter, the expectation for utilization of the estimated tax loss carryforward decreased, which increased the deferred tax asset to approximately $9,600,000is lessened, and as of December 31, 2022, andsuch, the future realization of this continues to be uncertain. The valuation allowance also increasedwas adjusted to continue to fully offset the net deferred tax asset as there is sufficient negative evidence to support a full valuation allowance.
Temporary differences which give rise to deferred income tax assets and liabilities at December 31, 2022September 30, 2023 and June 30, 20222023 include:
December 31, 2022 | June 30, 2022 | September 30, 2023 | June 30, 2023 | |||||||
Deferred income tax assets: | ||||||||||
Deferred compensation | $ | 474,734 | $ | 479,340 | $ | 492,317 | $ | 491,608 | ||
Stock-based compensation | 112,858 | 107,499 | 77,530 | 117,607 | ||||||
Accrued expenses and reserves | 612,678 | 551,562 | 517,015 | 571,719 | ||||||
Deferred revenue | 156,269 | 176,447 | 115,721 | 138,665 | ||||||
Federal and state net operating loss carryforwards | 7,861,442 | 9,942,511 | 8,288,733 | 8,216,671 | ||||||
IRC Section 174 research and development costs | 113,521 | 63,855 | ||||||||
Credit carryforwards | 309,623 | 292,155 | 188,893 | 169,552 | ||||||
Equipment and leasehold improvements | 116,184 | 122,764 | 116,709 | 136,294 | ||||||
Lease liability | 775,285 | 803,603 | 684,671 | 744,431 | ||||||
Valuation allowance | (9,643,452) | (11,671,606) | (9,864,479) | (9,906,018) | ||||||
Total deferred income tax assets | 775,621 | 804,275 | 730,631 | 744,384 | ||||||
Deferred income tax liabilities: | ||||||||||
ROU asset | (775,285) | (803,603) | (680,738) | (742,386) | ||||||
Other | (336) | (672) | (49,893) | (1,998) | ||||||
Net deferred income tax assets | $ | - | $ | - | $ | - | $ | - | ||
D) LEGAL COSTS
All legal costs related to litigation for which the Company is liable, are charged to operations as incurred, except settlements, which are expensed when a claim is probable and can be reasonably estimated. Recoveries ofcontingent legal costs are recorded when the amount and items to be paid are confirmed by the third party.fees as described below. Proceeds from the settlement of legal disputes are recorded in other income when the amounts are determinable, and the collection is certain. Related license proceeds are considered functional and as such are recorded at a point in time, based on the underlying agreement. Related contingent legal fees and expenses are recorded in selling, general and administrative expense at that time. The contingent legal fee expenses could have a material effect on the results of operations, however, timing and impact is uncertain and is dependent on the resolution of related litigation.
E) OTHER INCOME
In the sixthree months ending December 31,September 30, 2022, and 2021, the Company received licensing proceeds of $33,000,000, and $100,000, respectively, which werewas recorded as other income. In December 2021, the Company also recognized approximately $256,000 ofNo other income related towas received in the proceeds from company-owned life insurance policies on its founder, who passed away on December 21, 2021.three months ended September 30, 2023.
Other income is shown as a separate line on the condensed consolidated statements of operations.
F) DEFERRED COMPENSATION
The Company’s deferred compensation liability is for a current officer and is calculated based on various assumptions which include compensation, years of service and compensation, along with various assumptions related to expected retirement date, discount rates, and mortality tables. The related expense is calculated using the net present value of the expected payments and is included in selling, general and administrative expenses in the condensed consolidated statements of operations. The deferred compensation liability recorded at December 31, 2022September 30, 2023 and June 30, 20222023 is $1,891,154$1,937,185 and $1,937,229,$1,997,120, respectively. The decrease in the deferred compensation liability for the current officer during the sixthree months ended December 31, 2022September 30, 2023 resulted in a reduction of compensation expenseincome under this arrangement of $46,075. In December 2021, the Company’s founder and former officer passed away. The Company had a total deferred compensation liability of $472,883 recorded at June 30, 2021 related to the former officer, which at his death was relieved.$59,935. Deferred compensation incomeexpense of $472,883$42,301 was recognized in selling, general and administrative expenses as a result. Payments of $71,250 made under this arrangement during the sixthree months ended December 31, 2021 were expensed as paid.
G) RECENTRECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2016,Effective July 1, 2023, the Financial Accounting Standards Board (FASB) issuedCompany adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including trade receivables and held-to-maturity debt securities. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets,, including accounts and notes receivables. receivable.
The new guidance represents significant changes to accountingCompany adopted ASU 2016-13 effective July 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost.
Allowance for Credit Losses – Accounts Receivable: The allowance for credit losses.losses is deducted from the cost basis of the receivable to present the net amount expected to be collected on the accounts. The current incurred loss impairment model that recognizes losses when a probable threshold is met will be replaced with the expected credit loss impairment method without recognition threshold. TheCompany measures expected credit losses for accounts receivable using the aging method whereby expected credit losses are determined on the basis of how long a receivable has been outstanding. Historical loss data is utilized to estimate will be based upon historical information,expected losses as the risk characteristics of the customer base and the Company’s credit practices have not changed significantly over time. The estimates are then adjusted for current conditions, such as level of inflation and the potential change in credit availability given rising interest rates, as well as supportable and reasonable and supportable forecasts. On November 15, 2019, forecasts indicating whether these conditions will continue into the FASB delayed the effective date of FASB ASC Topic 326 for certain smaller public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022 for SEC filersfuture or new ones will arise that are eligibleneed to be smaller reporting companies under the SEC’s definition. As such, ASC Topic 326 will be effective for the Company for the fiscal year ending June 30, 2024. Management is currently assessingconsidered.
Upon evaluation of the impact of this ASU, the Company concluded that minimal reserves were necessary as historical losses were immaterial, and, based on the qualitative and quantitative analysis performed in accordance with Topic 326 requirements, the Company determined there was no reasonable expectation of significant credit losses associated with the Company’s accounts receivable in the foreseeable future.
Allowance for Credit Losses - Held-to Maturity Debt Securities: The Company did not record an allowance for credit losses on held-to-maturity U.S. Treasury securities of $17,183,653 as these securities have the following characteristics that support a zero loss expectation: they are explicitly guaranteed by the U.S. government, are consistently highly rated by major rating agencies and have a long history of no credit losses.
The adoption of this standardASU 2016-13 did not have a material impact on the Company’s condensed consolidated financial statements. Results for reporting periods beginning after July 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not, or are not expected by management to have a material impact on the Company’s present or future consolidated financial statements.
2. INVESTMENTS
The following table summarizestables summarize the unrealized positions for the held-to-maturity debt securities as of December 31, 2022:September 30, 2023 and June 30, 2023:
Amortized cost basis | Gross unrealized gains | Gross unrealized losses | Fair Value | September 30, 2023 | ||||||||||||||||||
US treasury securities | $ | 14,901,161 | $ | — | $ | 38,950 | $ | 14,862,211 | ||||||||||||||
Amortized cost basis | Gross unrealized gains | Gross unrealized losses | Fair Value | |||||||||||||||||||
US Treasury securities | $ | 17,183,653 | $ | — | $ | (65,219) | $ | 17,118,434 | ||||||||||||||
Total | $ | 14,901,161 | $ | — | $ | 38,950 | $ | 14,862,211 | $ | 17,183,653 | $ | — | $ | (65,219) | $ | 17,118,434 | ||||||
June 30, 2023 | |||||||||||
Amortized cost basis | Gross unrealized gains | Gross unrealized losses | Fair Value | ||||||||
US Treasury securities | $ | 17,064,274 | $ | — | $ | (93,740) | $ | 16,970,534 | |||
Total | $ | 17,064,274 | $ | — | $ | (93,740) | $ | 16,970,534 | |||
The following table summarizestables summarize the fair value and amortized cost basis of the held-to-maturity debt securities by contractual maturity as of December 31, 2022:September 30, 2023 and June 30, 2023:
September 30, 2023 | ||||||||||
Amortized Cost Basis | Fair value | Amortized Cost Basis | Fair value | |||||||
Due within one year | $ | 5,010,628 | $ | 5,003,216 | $ | 17,183,653 | $ | 17,118,434 | ||
Due after one year through five years | 9,890,533 | 9,858,995 | ||||||||
Total | $ | 14,901,161 | $ | 14,862,211 | $ | 17,183,653 | $ | 17,118,434 | ||
June 30, 2023 | |||||
Amortized Cost Basis | Fair value | ||||
Due within one year | $ | 17,064,274 | $ | 16,970,534 | |
Total | $ | 17,064,274 | $ | 16,970,534 | |
3. INVENTORIES
The components of inventories were as follows:
December 31, 2022 | June 30, 2022 | September 30, 2023 | June 30, 2023 | |||||||
Raw materials | $ | 2,171,305 | $ | 2,217,621 | $ | 2,077,546 | $ | 2,071,360 | ||
Finished goods | 7,566,200 | 8,302,546 | 5,558,559 | 6,178,186 | ||||||
Inventories, gross | 9,737,505 | 10,520,167 | 7,636,105 | 8,249,546 | ||||||
Reserve for obsolete inventory | (1,907,909) | (1,888,805) | (1,857,233) | (1,826,105) | ||||||
Inventories, net | $ | 7,829,596 | $ | 8,631,362 | $ | 5,778,872 | $ | 6,423,441 | ||
4. CREDIT FACILITY
On May 14, 2019, the Company entered into a secured credit facility “Credit(“Credit Agreement”) with Town Bank (“Lender”). The Credit Agreement provides for a $5,000,000 revolving secured credit facility 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. On January 28, 2021, the Credit Agreement was amended to extend the expiration to October 31, 2022, and to change the interest rate to Wall Street Journal Prime less 1.50%. A Third Amendment to the Credit Agreement effective October 30, 2022 extends the maturity date to October 31, 2024. The Company and the Lender also entered into a General Business Security Agreement dated May 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. As of December 31, 2022,September 30, 2023, the Company was in compliance with all covenants related to the Credit Agreement. As of December 31, 2022,September 30, 2023 and June 30, 2022,2023, there were no outstanding borrowings on the facility.
5. REVENUE RECOGNITION
The Company disaggregates its net sales by geographical location as it believes it best depicts how the nature, timing and uncertainty of net sales and cash flows are affected by economic factors. The following table summarizes net sales by geographical location:
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||
December 31, | December 31, | September 30, | ||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||
United States | $ | 2,146,474 | $ | 3,191,867 | $ | 4,873,307 | $ | 6,003,559 | $ | 2,603,158 | $ | 2,722,351 | ||||
Export | 1,125,457 | 1,224,019 | 1,753,153 | 2,777,394 | 770,780 | 641,778 | ||||||||||
Net Sales | $ | 3,271,931 | $ | 4,415,886 | $ | 6,626,460 | $ | 8,780,953 | $ | 3,373,938 | $ | 3,364,129 | ||||
Deferred revenue relates primarily to consumer and customer warranties. These constitute future performance obligations, and the Company defers revenue related to these future performance obligations. Effective July 1, 2022,2023, the Company decreasedincreased its deferral rates from 3%2.4% to 2.4%3% for domestic sales and decreased its deferral rate from 14%10% to 10%8% for export sales to reflect recent warranty experience. In the sixthree months ended December 31,September 30, 2023 and 2022, and 2021, the Company recognized revenue which was included in the deferred revenue liability at the beginning of the periods of $210,236$107,205 and $335,578$167,939 respectively, for performance obligations related to consumer and customer warranties. The deferred revenue liability was $713,101 and $883,564, respectively, as of June 30, 2022 and 2021. The Company estimates that the deferred revenue performance obligations are satisfied within one year to three years and therefore uses that same time frame for recognition of the deferred revenue.
6. (LOSS) INCOME PER COMMON AND COMMON STOCK EQUIVALENT SHARE
Basic (loss) income per share is computed based on the weighted-average number of common shares outstanding. Diluted (loss) income per common share is calculated assuming the exercise of stock options except where the result would be anti-dilutive. The following table reconciles the numerator and denominator used to calculate basic and diluted (loss) income per share:
Three Months Ended December 31, | Six Months Ended December 31, | Three Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | ||||||||||||
Numerator | |||||||||||||||||
Net (loss) income | $ | (1,146,879) | $ | 578,969 | $ | 8,797,864 | $ | 479,610 | $ | (257,609) | $ | 9,944,743 | |||||
Denominator | |||||||||||||||||
Weighted average shares, basic | 9,186,208 | 9,144,099 | 9,171,746 | 8,994,023 | 9,234,795 | 9,157,284 | |||||||||||
Dilutive effect of stock compensation awards (1) | — | 920,614 | 645,652 | 1,068,892 | — | 691,759 | |||||||||||
Diluted shares | 9,186,208 | 10,064,713 | 9,817,398 | 10,062,915 | 9,234,795 | 9,849,043 | |||||||||||
Net (loss) income attributable to common shareholders per share: | |||||||||||||||||
Basic | $ | (0.12) | $ | 0.06 | $ | 0.96 | $ | 0.05 | $ | (0.03) | $ | 1.09 | |||||
Diluted | $ | (0.12) | $ | 0.06 | $ | 0.90 | $ | 0.05 | $ | (0.03) | $ | 1.01 | |||||
(1) Excludes approximately 590,046773,085 weighted average stock options during the three months ended December 31, 2022,September 30, 2023, as the impact of such awards was anti-dilutive. For the three months ended December 31, 2021, as well as the six months ended December 31,September 30, 2022, and 2021, no stock options were anti-dilutive.
7. RELATED PARTY TRANSACTIONS
The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is controlled by five equal ownership interests in trusts held by the five beneficiaries of a former chairman’s revocable trust.trust and includes current stockholders of the Company. On May 24, 2022, the lease was renewed for a period of five years, ending June 30, 2028, and is being accounted for as an operating lease. The lease extension maintained the rent at a fixed rate of $380,000 per year and included an option to renew at an increased rate of $397,000 for an additional five years ending June 30, 2033. The negotiated increase in rent slated for 2028 will be the first increase in rent since 1996. The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership.
During the sixthree months ended December 31,September 30, 2022, the Company made a charitable contribution of $79,000 to the Koss Foundation (the “Foundation”), a 501(c)(3) charitable organization for which Michael J. Koss and John C. Koss Jr., executive officers of the Company, serve as officers. Neither officer receives fees or compensation from the Foundation for holding these positions. There were no charitable contributions made to the Foundation during the three months ended December 31, 2022 nor the three and six months ended December 31, 2021.September 30, 2023.
8. ACCOUNTS RECEIVABLE CONCENTRATIONS
As of December 31, 2022,September 30, 2023, the Company’s top fourthree accounts receivable customers represented approximately 20%30%, 14%, 13%,18% and 12% of trade accounts receivables. These samereceivable. The top three accounts receivable customers as of June 30, 2023 represented approximately 0%24%, 19%, 18%,14% and 3% of trade accounts receivable at June 30, 2022.
13%.
9. EMPLOYEE STOCK OWNERSHIP PLAN
The Company amended and restated its Koss Employee Stock Ownership Trust (“KESOT”) effective July 1, 2023 and received approval from the Board of Directors on July 26, 2023. Substantially all domestic employees are participants in the KESOT under which an annual contribution in either cash or common stock may be made at the discretion of the Board of Directors. All contributions to date have been fully allocated to employees’ company contribution accounts. No contributions were made for the three months ended September 30, 2023 or 2022, respectively.
10. LEGAL MATTERS
As of December 31, 2022,September 30, 2023, the Company is involved in the matters described below:
• The Company maintains a program focused on enforcing its intellectual property and, in particular, certain patents in its patent portfolio. As part of this program, the Company filed complaints in United States District Court against certain parties alleging infringement on the Company’s patents relating to its wireless audio technology. In the event that a monetary award or judgment is received by the Company in connection with these complaints, all or portions of such amounts, such as contingent legal fees, will be due to third parties. The Company may incur additional fees and costs related to these lawsuits, however, timing and impact on its condensed financial statements is uncertain. Depending on the response to and the underlying results of the enforcement program, the Company may continue to litigate or settle its claims, enter into licensing arrangements or reach some other outcome.outcome potentially advantageous to its competitive position. On August 4, 2023, the Company’s lawsuit against Plantrontrics, Inc. and Polycom, Inc. was dismissed following resolution of the litigation between the parties, which had no impact on the Company’s condensed consolidated financial statements. During the quarterthree months ended December 31,September 30, 2022, in connection with its intellectual property enforcement program, the Company madegranted a paymentlicense covering certain of $950,000 to its external patent litigation teampatents and incurred an additional $175,000recognized gross proceeds of related legal expense. The amounts became estimable during the second quarter, thus the expense$33,000,000, which was recorded in the second quarter as a change in estimate.other income. Total legal fees and related expenses of $1,139,568$21,016,408 offset these proceeds and $22,196,428, respectively, were recorded as selling, general and administrative expense during the three and six months ended December 31, 2022 in connection with its program focused on enforcing its intellectual property. During the three and six-month periods ended December 31, 2021, $30,583 and $56,950, respectively, of legal fees and related expenses were recorded.expense.
• In July 2019, theThe Company was notified by One-E-Way, Inc. that some of the Company's wireless products may infringe on certain One-E-Way patents. No lawsuits involving these allegations have yet been filed and served on the Company. The Company is currently investigating whether these allegations have any merit. Depending on the results of the investigation and the defense of these allegations, the ultimate resolution of this matter may have a material effect on the Company's condensed consolidated financial statements. The Company estimates that this matter will ultimately be resolved at a cost of approximately $41,000 whichand has accrued this amount was accrued as of December 31, 2022September 30, 2023 and June 30, 2022.2023.
The ultimate resolution of these matters is not determinable unless otherwise noted.
The Company is also subject to a variety of other claims and suits that arise from time to time in the ordinary course of its business. Although management currently believes that resolving these claims against the Company, individually or in the aggregate, will not have a material adverse impact on its condensed consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
11. SUBSEQUENT EVENT
At the Company’s Annual Meeting on October 18, 2023, the shareholders approved the Koss Corporation 2023 Equity Incentive Plan (the “2023 Plan”). Concurrently with the adoption of the new plan, the Koss Corporation 2012 Omnibus Incentive Plan (the “2012 Plan”) was terminated.
The 2023 Plan will be administered by the Compensation Committee of the Board of Directors and provides for the granting of various stock-based incentive awards to eligible participants, primarily officers and certain key employees of the Company. The 2023 Plan has available for issuance 2,000,000 shares of common stock thereunder, plus any shares subject to awards remaining outstanding under the 2012 Plan that expired or are otherwise forfeited, canceled, or terminated. The Company’s Board of Directors will determine the terms and conditions under which an option will become exercisable but expects that stock options granted under the 2023 Plan will vest over a three-to-five-year period from the date of grant. An option will expire no more than ten years from its grant date, with the exception of incentive stock options held by a 10% stockholder, which will expire no more than five years from the grant date. As with the 2012 Plan, pursuant to the 2023 Plan new shares will be issued upon exercise of stock options.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (the “Act”) (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities Exchange Commission, press releases, or otherwise. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Act. Forward-looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, anticipated financing needs, compliance with financial covenants in loan agreements, plans for acquisitions or sales of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events, the effects of pending and possible litigation and assumptions relating to the foregoing. In addition, when used in this Form 10-Q, the words “aims,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “thinks,” “may,” “will,” “shall,” “should,” “could,” “would,” “forecasts,” “predicts,” “potential,” “continue” and variations thereof and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements contained in this Form 10-Q, or in other Company filings, press releases, or otherwise. In addition to the factors discussed in this Form 10-Q, other factors that could contribute to or cause such differences include, but are not limited to, developments in any one or more of the following areas: future fluctuations in economic conditions, increase in prices for raw materials, labor, and fuel caused by rising inflation, the receptivity of consumers to new consumer electronics technologies, the rate and consumer acceptance of new product introductions, competition, pricing, the number and nature of customers and their product orders, production by third party vendors, foreign manufacturing, sourcing, and sales (including foreign government regulation, trade and importation concerns), the effects of the COVID-19 pandemicor other pandemics on the economy, the impact of the Russian-Ukrainian conflict or other disruptive geopolitical events on the Company’s operations, borrowing costs and interest rates, changes in tax rates, pending or threatened litigation and investigations and their outcomes, and other risk factors described in the Risk Factors and in Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 20222023 and subsequently filed Quarterly Reports on Form 10-Q
Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect new information.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis supplements our management’s discussion and analysis for the year ended June 30, 20222023 as contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on August 26, 2022,25, 2023, and presumes that readers have read or have access to such discussion and analysis. The following discussion and analysis should also be read together with the unaudited consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that reflect our plans and strategy for our business and involve risks and uncertainties. You should review the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022,2023, as updated by subsequent filings with the Securities and Exchange Commission, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read “Cautionary Statement Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.
Overview
The Company initially developed stereo headphones in 1958 and has been recognized as a leader in the industry ever since. 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, as its principal business line is the design, manufacture and sale of stereo headphones and related accessories.
Financial Results
The following table presents selected financial data for the three and six months ended December 31, 2022,September 30, 2023 and 2021:2022:
Three Months Ended | Six Months Ended | Three Months Ended | |||||||||||||||
December 31 | December 31 | September 30 | |||||||||||||||
Financial Performance Summary | 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||
Net sales | $ | 3,271,931 | $ | 4,415,886 | $ | 6,626,460 | $ | 8,780,953 | $ | 3,373,938 | $ | 3,364,129 | |||||
Net sales (decrease) % from prior year period | (25.9)% | (10.4)% | (24.5)% | (13.4)% | |||||||||||||
Net sales increase (decrease) % from prior year period | 0.3% | (22.9)% | |||||||||||||||
Gross profit | $ | 1,126,162 | $ | 1,549,693 | $ | 2,312,386 | $ | 3,131,530 | $ | 1,067,690 | $ | 1,195,824 | |||||
Gross profit as % of net sales | 34.4% | 35.1% | 34.9% | 35.7% | 31.6% | 35.5% | |||||||||||
Selling, general and administrative expenses | $ | 2,473,975 | $ | 1,229,294 | $ | 26,144,571 | $ | 3,010,091 | $ | 1,536,279 | $ | 23,680,196 | |||||
Selling, general and administrative expenses as % of net sales | 75.6% | 27.8% | 394.5% | 34.3% | 45.5% | 703.9% | |||||||||||
Interest income | $ | 97,832 | $ | 3,626 | $ | 124,888 | $ | 4,258 | $ | 212,859 | $ | 27,056 | |||||
Other income | $ | — | $ | 255,975 | $ | 33,000,000 | $ | 355,975 | $ | — | $ | 33,000,000 | |||||
(Loss) income before income tax (benefit) provision | $ | (1,249,981) | $ | 580,000 | $ | 9,292,703 | $ | 481,672 | |||||||||
(Loss) income before income tax provision | $ | (255,730) | $ | 10,542,684 | |||||||||||||
(Loss) income before income tax as % of net sales | (38.2)% | 13.1% | 140.2% | 5.5% | (7.6)% | 313.4% | |||||||||||
Income tax (benefit) provision | $ | (103,102) | $ | 1,031 | $ | 494,839 | $ | 2,062 | |||||||||
Income tax (benefit) provision as % of (loss) income before income tax | 8.2% | 0.2% | 5.3% | 0.4% | |||||||||||||
Income tax provision | $ | 1,879 | $ | 597,941 | |||||||||||||
Income tax provision as % of (loss) income before income tax | (0.7)% | 5.7% | |||||||||||||||
Fiscal 2023 Period Results Compared with Fiscal 2022 Period
(comments refer to the three and six-monththree-month periods ended December 31September 30 unless otherwise noted)
Net sales of $3,374,000 for the quarter ended December 31, 2022 decreased by $1,144,000, or 25.9%, primarily due to reducedSeptember 30, 2023 were fairly consistent with sales for the same quarter in the prior year, an increase of $10,000. A reduction in direct-to-consumer (DTC) sales and sales to certain of our distributors in the domestic market and lowerwere offset by an increase in sales to the AsianEuropean markets. For the six-month period ended December 31, 2022, net sales decreased by $2,154,000, or 24.5%, due mainly to a decline in the European and Asian markets, and a slowdown in certain of our domestic distributor sales. Growth in direct-to-consumer (DTC) sales of approximately $331,000, or 20.7%, partially offset the declines.
Net sales in the domestic market were approximately $2,146,000 in the three months ended December 31, 2022, compared to approximately $3,192,000 in the prior year period, a decrease of $1,046,000, or 32.8%. Domestic net sales for the six months ended December 31, 2022 decreased from $6,004,000 in the prior year period to $4,873,000, a decline of $1,131,000, or 18.8%. Net sales to certain of our domestic distributors decreased 62% from the prior year driven by weaker demand which appears to be due to over-stocked shelves as a result of the bullwhip effect triggered by the pandemic. Net sales to the education market also decreased by over 50% mainly as a result of a delay in repeat orders. The declines were partially offset by growth in DTC sales during the six months ended December 31, 2022 over the same period in the prior year.
Export net sales for the three months ended December 31, 2022 decreasedSeptember 30, 2023 increased by $99,000,$129,000, or 8.1%20.1%, compared to the three months ended December 31, 2021, behindSeptember 30, 2022, related to an order from a decreasedistributor in Eastern Europe. A $66,000, or 41.7%, reduction in sales to our Asian distributors due todistributor slightly dampened the delayoverall increase. Given the perpetuation of the conflict in recovery after the pandemic. Export net sales were down $1,024,000, or 36.9%, in the six months ended December 31, 2022 versus the same prior year period. The decrease was attributable to a 31.8% reduction in sales to European distributors, which reflects the lack of sales to Russia or Ukraine due to the ongoing conflict between the two countries, as well as a 39.3% decline inEastern Europe and related export restrictions, sales to our Asian distributors for the six-month period.Russian distributor have not resumed and there have been no sales to that country since April 2022.
During the three months ended September 30, 2023, net sales to the domestic market declined by $119,000, or 4.4%, offsetting much of the increase in export sales. Net sales in the domestic market were approximately $2,603,000 compared to $2,722,000 in the three months ended September 30, 2022. A notable sale to a new customer did not outweigh the 28.6% drop in DTC sales as a general reduction in consumer confidence slowed spending. A 12.6% decline in net sales to certain of our domestic distributors, resulting from continued overstocked inventory levels of non-Koss items at these distributors, also contributed to the overall decline.
Gross profit margin decreased slightly to 34.9%31.6% for the sixthree months ended December 31, 2022,September 30, 2023, compared to 35.7%35.5% for the sixthree months ended December 31, 2021. Margins were impacted by aSeptember 30, 2022. A less favorable marketcustomer mix asof sales, with a lower volume of higher margin DTC and distributor sales, to certaincoupled with the continued sell through of our distributors, including custom headphones to healthcare and specialty customers, duringCompany inventory received from suppliers with higher freight rates, adversely impacted the current six-month period declined by over 60%. Growth of 23.3% in gross DTC sales, which generally bear a higher margin, for the six-month period helped to partially offset the aforementioned negative impacts on gross margin. Margins wereAn increase in inventory obsolescence also negatively impacted bydrove the reduction in margins. Favorability in fixed manufacturing expenses that do not flex with sales volume.during the three months ended September 30, 2023 as a result of cost savings initiatives provided some positive impact compared to the same period in the prior year.
The Company continued to benefit from lower freightFreight rates duringedged up slightly through the quarter ended December 31, 2022 driven by general reduced container demandSeptember 30, 2023 and are expected to continue a slow rise during the next quarter. Given the current labor landscape and the recent settlement of threatened carrier strikes and labor disputes, along with rising energy prices, the Company is anticipating an increase in transportation costs. The Company’s partnership with a dedicated freight forwarder.forwarder will help to stabilize contract rates to limit the impact. While the recent announcement by Yellow freight lines that it has declared bankruptcy may impact carrier availability and increase freight costs, the Company has had no material direct exposure to Yellow.
Selling, general and administrative expenses declined by $22,144,000, or 93.5%, from $23,680,000 for the three months ended December 31,September 30, 2022 were $2,474,000, approximately double that ofto $1,536,000 for the same periodthree months in the prior year. The increase was driven mainly by a payment of $950,000 made to the Company’s external patent litigation team, and another $175,000 of legal expenses related to patent defense litigation resolved in the prior quarter, which were recorded as a change in estimate in the quarter ended December 31, 2022. The year-over-year increase is also partly attributable to the prior year second quarter including the reversal of the deferred compensation liability for the Company’s founder who passed away in that quarter, resulting in an approximately $300,000 reduction to net expense for the prior quarter. For the six months ended December 31, 2022, selling, general and administrative expenses increased by approximately $23,134,000 to $26,145,000 compared to the prior yearcurrent period. The increasedecrease was predominantly driven by approximately $22,196,000 inthe $21,016,000 of legal fees and related expenses incurred during the first quarter in the prior year in support of the Company’s patent defense litigation. Also, expenses related to bonus and profit-sharing accruals of $381,000 and $576,000, respectively, were recorded during the quarter ended September 30, 2022 as a result of the patent defense litigation referenced above. A total of approximately $955,000 in bonus accruals and profit-sharing expense was recorded related to the increased net income before income taxes fordue mainly to the first six months of fiscal year 2022 due to licensing proceeds received during thethat quarter, ended September 30, 2022, partially offset by the aforementioned legal fees and expenses. A decrease of $116,000 in employer taxes on stock option exercises slightly offsetfees. Lastly, the significant increase in the discount rates used to calculate the deferred compensation liability resulted in a decrease in the liability with a corresponding decrease to expense forduring the current six-month period.quarter.
No other income was recorded for the three months ended September 30, 2023. Other income for the sixsame three months ended December 31, 2022in the prior period consisted entirely of $33,000,000 in licensing proceeds received in the first quarter. The Company received licensing proceeds of $100,000 in the prior year six-month period which was also recorded as other income. In December 2021, the Company recognized other income on the proceeds from a company-owned life insurance policy on its founder, who passed away December 21, 2021. Total other income for the three and six months ended December 31, 2021 was $256,000 and $356,000, respectively.received.
IncomeGiven the taxable loss for the first quarter of fiscal year 2024, no federal income tax expense forwas recorded. State income tax expense of approximately $1,900 was recorded reflecting the sixminimum required tax due. For the three months ended December 31,September 30, 2022, was approximately $495,000 and was comprised of the U.S. federal statutory rate of 21% and the blended state income tax rate of approximately 3.7%, offset by an adjustment to the valuation allowance for deferred tax assets. The utilization of net operating loss carryforwards significantly reduced the taxable income resulting ingenerated by the net licensing proceeds and income tax expense of $598,000, consisting of federal and state tax provisions of $374,714$449,000 and $120,125, respectively. For the three and six months ended December 31, 2021, a state tax provision of $1,031 and $2,062,$149,000, respectively, was recorded. The federal income tax expense was zero for the three and six months ended December 31, 2021. The effective tax rate was 5.3% in the six months ended December 31, 2022 and less than 1% in the sixthree months ended December 31, 2021.September 30, 2023 and 5.7% in the three months ended September 30, 2022. It is anticipated that the effective rate in the current year and future years will be reduced by utilization of a portion or all of the federal net operating loss carryforwards that existed as of June 30, 2022.
In the six months ended December 31, 2022, stock option exercises resulted in tax deductible compensation expense of approximately $208,000 and will offset some of the taxable income generated by the net licensing proceeds. Net operating loss carryforwards were utilized to reduce the taxable income and, as such, thThe Company’se remaining expected federal tax loss carryforward is expected to approximate $32,500,000$32,100,000 by the end of the fiscal year. The quarterly adjustment totaxable loss for the estimated taxquarter increased the net operating loss carryforward decreased the deferred tax asset to approximately $9,600,000$8,300,000 as of December 31, 2022,September 30, 2023, and the future realization of this continues to be uncertain. The valuation allowance was also increased to fully offset the net deferred tax asset as there is sufficient negative evidence to support the maintaining of a full valuation allowance as, excluding unusual, infrequent items, a three-year cumulative nettax loss is expected.occurred.
TheAs previously mentioned, the Company maintains a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio. The Company has enforced its intellectual property by filing complaints against certain parties alleging infringement on the Company’s patents relating to its wireless headphone technology. If efforts are successful, the Company may
receive royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position from time to time; however,time. However, there is no guarantee of a positive outcome from these efforts in the future, which could ultimately be time consumingtime-consuming and unsuccessful. Additionally, the Company may owe all or portionsa portion of monetary awards or judgments received byany future proceeds arising from the Company in connection with these complaints, will be dueenforcement program to third parties.
The Company believes that its financial position remains strong. The Company had $4.8$2.0 million of cash and cash equivalents, $5.0$17.2 million of short-term investments and available credit facilities of $5.0 million on December 31, 2022.September 30, 2023.
Recent Events
Recent events continuingand ongoing macroeconomic and geopolitical conditions have impacted, and will continue to impact, our businessbusiness. These include, COVID-19, the inflationary cost environment, reduced consumer confidence, disruption in our supply chain and trade tensions with China, the ongoing crisis in Eastern Europe, and the threatened rail strikecrises in the Mideast, the possibility of a government shutdown in the U.S. As more fully described below, we expect eachand increased risk of these factors will impact our fiscal 2023 performance.cyberattacks.
While the impact of these factors on our fiscal 2024 performance remains uncertain, we will continue to evaluate the extent to which these factors will impact our business, financial condition, or results of operations. These and other uncertainties with respect to these recent events could result in changes to our current expectations.
COVID-19:Inflationary Cost Environment and Reduced Consumer Confidence - The Company continues to closely monitorexperience inflationary cost increases in our commodities, packaging materials, wages and higher energy and transportation costs, potentially impacting our ability to meet customer demand.These increases have been partially mitigated by pricing actions implemented in the impact of COVID-19 (including the emergence of variants) to protect the health and safety of its employees and customers. Business plans are being continuously updated and executed to maintain supplythird quarter of the Company’sprior fiscal year, as well as working with a dedicated freight forwarding partner to minimize freight rate increases. Inflation may impact customer demand for our products resulting from a slowdown in consumer spending as disposable income decreases due to our customers throughoutrising interest rates, the world. While we expectprice of essential items and dwindling savings. Other risk factors further exacerbated by inflation include supply chain disruptions, rising oil and energy costs, risks of international operations and the impactsrecruitment and retention of COVID-19talent.
Supply Chain Disruption and Trade Tensions with China - The Company relies on our businessthird-party supply chain and distribution networks and the availability of necessary components to moderate, there still remains uncertainty around the pandemic. Asproduce a resultsignificant number of our products. A reduction or interruption in supply, including interruptions due to a reoccurrence of the COVID-19 pandemic, uncertainty with respectgeopolitical unrest, labor shortages or strikes, or a failure to its economic effects has impacted not only our operating results but also the global economy. The extent and nature of government actionsprocure adequate components, may lead to ease restrictions are varied based upon the current extent and severity of the COVID-19 pandemic within their respective countries and localities. The recent easing of the strict zero-COVID policies that China has maintained for the past three years has resulteddelays in a surge of COVID infections, with another spike expected during the upcoming Lunar New Year. This potential increased spread of the virus could impact sales if it resultsmanufacturing or increases in disruptions of inventory replenishment. The Company expects the negative sales impacts caused by governmental responses to COVID-19, and the disruption in certain retail businesses to continue so long as new variants of the virus continue to emerge and spread.
The ultimate magnitude of the COVID-19 pandemic, including the extent of its impact on the Company’s business, financial position, results of operations or liquidity, cannot be reasonably estimated at this time due to the rapid development and fluidity of the situation. The Company's future results will be determined by the effectiveness of vaccines, rollout of vaccine boosters, the duration of governmental pandemic restrictions, the impact of variants, geographic spread, further business disruptions and the overall impact on the economy throughout the world.
To protect the safety, health and well-being of employees, customers, and suppliers, the Company continues to maintain several preventive measures while also meeting the needs of global customers. These measures include increased frequency of cleaning and disinfecting of facilities, and may also include, as necessary, social distancing practices, some remote working, restrictions on business travel, continuing to hold certain events virtually and limitations on visitor access to facilities.costs.
The Company is committeduses contract manufacturing facilities in the People’s Republic of China and Taiwan to executing these plansproduce a significant amount of our products. There has been increasing geopolitical tension between China and will remainTaiwan that may affect future shipments from Taiwan and China-based suppliers. Any other adverse changes in close contactthe social, political, regulatory or economic conditions in the countries could materially increase the cost of the products we buy or delay shipments. There has also been increasing geopolitical tension between China and the United States. Sustained uncertainty about, or worsening of, economic relations and further escalation of trade tensions between the United States and China, or any other country in which the Company conducts business, could result in retaliatory trade restrictions that restrict our ability to source products from China or continue business in such other country. Any alterations to our business strategy or operations made in order to adapt to or comply with any such changes would be time-consuming and expensive, and the Company may not be able to pass along most increases in tariffs and freight charges to the Company’s customers, which would also directly affect profits.
Our dependence on foreign suppliers for our products necessitates ordering products further in advance than we would if manufactured domestically, thus increasing investments in inventory. Delays in receiving and shipping products due to interruptions in its supply chain would pose a risk of lower sales to the Company and the potential for price volatility, negatively impacting profits. Recovery of a single facility through replacement of a supplier in the event of a disaster or suspension of supply could take an estimated six to twelve months.
On July 25, 2023, United Parcel Service (UPS) and the International Brotherhood of Teamsters Union reached a tentative five-year contract deal that averted a nationwide strike. Also, since December 2022, when the U.S. government abated a threatened railroad strike and implemented a labor agreement that prohibited the workers from striking, there has been movement by some of the leading railroad companies to grant paid sick leave with continued negotiations between union leaders and railroad executives of each of the remaining railroads. In addition, Yellow freight lines recently announced their insolvency, however, the Company had no material direct exposure to Yellow in the current fiscal year. The Company continues to monitor future possible implications, especially on production facilities.these situations as the changes in the current labor landscape, the settlement of recent labor disputes, coupled with rising energy prices, could potentially exacerbate disruptions in the supply chain, delay product shipments and increase transportation costs.
Russia’s Invasion of Ukraine - Financial and credit markets around the world experienced volatility following the invasion of Ukraine by Russia in February 2022. In response to the invasion, the United States, United Kingdom, and European Union, along with others,
Inflationary Cost Environmentimposed significant sanctions and Supply Chain Disruption – The first half of fiscal 2022 brought continued inflationary cost increases in our commodities, packaging materials, wagesexport controls against Russia, Russian banks and transportation costs. Higher energy costs caused inflation to risecertain Russian individuals and may implement additional sanctions or take further punitive actions in the back half of the prior fiscal year and has continued into the current fiscal year. These increases have been partially mitigated by pricing actions implemented by the Company in the third quarter of the prior fiscal year, with another increase slated for the third quarter of the current fiscal year. The Company is also working with a dedicated freight forwarding partner to minimize freight rate increases.
The Company’s supply chain is primarily in southern China. Delays throughout the supply chain continue as a result of the persistence of COVID-19 in all parts of the world, however, the Company does not believe that these continuing delays will be material to the Company as the cadence of specific customers’ bookings have become more consistent. The Company is aware that with the recent easing of COVID-19 restrictions in China, manufacturing operations and major ports may be impacted by an increase in COVID-19 illness, which could result in supply chain delays. As such, the Company continues to monitor the situation closely, and the supply chain team has modified business plans, which include, but are not limited to: (1) being alert to potential short supply situations; (2) assisting suppliers with acquisition of critical components; and (3) utilizing alternative sources and/or air freight.
In December 2022, the U.S. government intervened in the rail strike that began in the prior month and implemented a labor agreement that prohibited the workers from striking. Despite the U.S. government’s intervention, the threat of a strike that could shut down a vital link in the nation’s supply chain continues to be a concern. The Company continues to monitor the situation as a rail strike in the U.S. could potentially exacerbate the existing disruption in the supply chain and impact product shipments from suppliers and to customers, resulting in increased operating costs and delays in product shipments.
Russia’s Invasion of Ukraine: The ongoing Russia-Ukraine conflict and the sanctions imposed in response to this conflict have increased global economic and political uncertainty.future. In accordance with the Executive Order declared14071 signed on April 6, 2022, the Company suspended sales intoto Russia. Also, given the continued humanitarian crisis in Ukraine as a result of the conflict,humanitarian crisis in Ukraine created by the war and the population seeking refuge in other countries, sales to Ukraine have also ceased. Neither Russia nor Ukraine constitutes a significant portion of the business, combining for less than 5% of net sales forbeen impacted. During the three months ended March 31,September 30, 2023 and 2022, there were no sales to Russia.
Cyberattacks - Cyberattacks are a growing geopolitical risk, becoming larger, more frequent, more intricate and more relentless. They are a significant threat to individual organizations and national security. We rely on accounting, financial, and operational management information systems to conduct our operations. Any disruption in these systems could adversely affect our ability to conduct our business. Furthermore, as part of our normal business activities, we collect and store common confidential information about customers, employees, vendors, and suppliers. This information is entitled to protection under a number of regulatory regimes. Any failure to maintain the last quarter priorsecurity of the data, including the penetration of our network security and the misappropriation of confidential and personal information, could result in business disruption, damage to the Executive Order. As aour reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also result there was notin deterioration in customers confidence in us and other competitive disadvantages, and thus could have a material adverse impact on sales in the current quarter. We are uncertain, however, of the impact it will have on our financial condition and results of operations inoperations. While we devote resources to security measures to protect our systems and data, these measures cannot provide absolute security and the future if the conflict continues.insurance coverage we maintain may be inadequate to cover claims, costs, and liabilities relating to cybersecurity incidents.
Liquidity and Capital Resources
Cash Flows
The following table summarizes cash flows from operating, investing and financing activities for the sixthree months ended December 31, 2022September 30, 2023 and 2021:2022:
Total cash provided by (used in): | 2022 | 2021 | ||||||||
Total cash (used in) provided by: | 2023 | 2022 | ||||||||
Operating activities | $ | 10,538,583 | $ | (380,714) | $ | (713,247) | $ | 11,692,114 | ||
Investing activities | (15,023,416) | (171,043) | (393,536) | (99,767) | ||||||
Financing activities | 88,940 | 1,390,346 | — | 70,440 | ||||||
Net (decrease) increase in cash and cash equivalents | $ | (4,395,893) | $ | 838,589 | $ | (1,106,783) | $ | 11,662,787 | ||
Operating Activities
A significant portionThe cash used in operating activities during the three-month period ending September 30, 2023, was primarily payment of bonuses earned in the prior year, renewal of the annual general insurance policies and state income tax payments. The Company’s strict management of its inventory investment helped to retain cash in the first quarter. During the three months ended September 30, 2022, the majority of the cash provided by operating activities during the six months ended December 31, 2022 is the result ofresulted from the licensing proceeds received, partially offset by the payment of related legal fees and expenses and profit sharing.expenses. The impact of the licensing fees was coupled with a reduction in inventory as the Company’s investment in inventory levels off, and a decline in accounts receivable resulting from lower sales. Cash usedalso contributed to the cash provided by operating activities related to the decrease in accounts payable resulting from lower freight costs and fewer inventory purchases. The driving factor for the use of cash in the same six-month period in the prior year was the investment in inventory made to ensure availability and to provide better inventory positions on key products to mitigate the continued impacts of supply chain disruptions, offset by a decline in accounts receivable.during that period.
Investing Activities
Cash used by investing activities for the sixthree months ended December 31, 2022September 30, 2023 was almost entirely related to fixed asset expenditures, predominantly the purchasereplacement of $15,300,000a roof section of the building for approximately $300,000. The Company also paid the premiums on the company-owned life insurance policies on two of its executives. This is consistent with the investing activities for the three months ended September 30, 2022. During the first quarter of the current fiscal year, proceeds of $2,000,000 from the maturity of U.S. Treasury securities at a discount.were received and were fully utilized to purchase another similar security. The Company believes that its cash flow from operations and available cash and its credit facility is sufficient to fund any necessary tooling, leasehold improvement and capital expenditures.
Financing Activities
CashAs there were no stock option exercises during the first quarter of the current fiscal year, there was no impact on cash due to financing activities. In the same quarter in the prior year, cash provided by financing activities iswas due entirely to stock option exercises. In the six months ended December 31, 2022, anAn aggregate of 42,00032,000 shares of common stock were issued as a result of employee stock option exercises under the Company’s 2012 Omnibus Incentive Plan. ThePlan and the cash provided from these stock option exercises was approximately $89,000. During the six months ended December 31, 2021, an aggregate of 539,089 shares of common stock were issued as a result of employee stock option exercises under the Company’s 2012 Omnibus Incentive Plan. The cash provided from these stock option exercises was approximately $1,390,000.$70,000.
As of December 31, 2022,September 30, 2023, the Company had no outstanding borrowings on its bank line of credit facility.
There were no purchases of common stock in the three months ended December 31,September 30, 2023 or September 30, 2022 or December 31, 2021 under the stock repurchase program.
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 thatits existing cash generated from operations, together with healthyand cash reservesequivalents, investments in short-term U.S. Treasury securities, cash provided by operating activities and available borrowings provide it with adequate liquidityunder its credit facility, if any, will be sufficient to meet operatingits anticipated working capital, and capital expenditure requirements debt service requirements and planned or necessary tooling, leasehold and other capital expenditures forduring the next twelve months followingmonths. There can be no assurance, however, that the date of this Quarterly ReportCompany’s business will continue to generate cash flow at current levels. If the Company is unable to generate sufficient cash flow from operations, then it may be required to sell assets, reduce capital expenditures, or draw on Form 10-Q and thereafter for the foreseeable future.its credit facilities. 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
On May 14, 2019, the Company entered into a secured credit facility (“Credit Agreement”) with Town Bank (“Lender”). The Credit Agreement provides for a $5,000,000 revolving secured credit facility 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. On January 28, 2021, the Credit Agreement was amended to extend the expiration date to October 31, 2022, and to change the interest rate to Wall Street Journal Prime less 1.50%. A Third Amendment to the Credit Agreement effective October 30, 2022 extended the expiration date to October 31, 2024. The Company and the Lender also entered into a General Business Security Agreement dated May 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. As of December 31, 2022,September 30, 2023, the Company was in compliance with all covenants related to the Credit Agreement. As of December 31, 2022September 30, 2023 and June 30, 2022,2023, there were no outstanding borrowings on the facility.
Contractual Obligation
The Company leases theits 126,000 square foot facility from Koss Holdings, LLC, which is controlled by five equal ownership interests in trusts held by the five beneficiaries of a former chairman’s revocable trust.trust and includes current stockholders of the Company. On May 24, 2022, the lease was renewed for a period of five years, ending June 30, 2028, and is being accounted for as an operating lease. The lease extension maintained the rent at a fixed rate of $380,000 per year. The Company has the option to renew the lease for an additional five years beginning July 1, 2028 and ending June 30, 2033 under the same terms and conditions except that the annual rent will increase to $397,000. The negotiated increase in rent slated for 2028 will be the first increase in rent since 1996. The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership. The facility is in good repair and, in the opinion of management, is suitable and adequate for the Company’s business purposes.
Off-Balance Sheet Transactions
At December 31, 2022,September 30, 2023, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are designed to ensure that: (1) information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (2) such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2022.September 30, 2023. The Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures as of December 31, 2022September 30, 2023 were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As part of its intellectual property enforcement program, on July 22, 2020 the Company brought patent infringement suits against each of Apple Inc.,certain parties, including Bose Corporation, PEAG, LLC d/b/a jLab Audio, Plantronics, Inc. and Polycom, Inc., and Skullcandy, Inc., alleging infringement of the Company’s patents relating to its wireless headphone technology and seeking monetary relief and attorneys’ fees. The lawsuit against Apple,Plantronics, Inc. filed in the U.S. District Court in the Western District of Texas on July 22, 2020and Polycom, Inc. was dismissed on July 23, 2022August 4, 2023 following resolution of the litigation between parties. The remaining lawsuits are pending in U.S. District Courts in the District of Massachusetts (Bose Corporation), the Southern District of California (PEAG, LLC), the Northern District of California (Plantronics, Inc. and Polycom, Inc.), and the District of Utah (Skullcandy, Inc.).
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1. Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022,2023, as filed with the Securities and Exchange Commission on August 28, 2022.25, 2023. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by any forward-looking statements contained in this report. There have been no material changes to the risk factors described under “Risk Factors,” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to purchases of common stock of the Company made during the sixthree months ended December 31, 2022,September 30, 2023, by the Company.
COMPANY REPURCHASES OF EQUITY SECURITIES
Total # of | Average | Total Number of Shares Purchased as | Approximate Dollar Value of | |||||||
October 1 - October 31, 2022 | — | $ | — | — | $ | 2,139,753 | ||||
November 1 - November 30, 2022 | — | $ | — | — | $ | 2,139,753 | ||||
December 1 - December 31, 2022 | — | $ | — | — | $ | 2,139,753 | ||||
Total # of | Average | Total Number of Shares Purchased as | Approximate Dollar Value of | |||||||
July 1 - July 31, 2023 | — | $ | — | — | $ | 2,139,753 | ||||
August 1 - August 31, 2023 | — | $ | — | — | $ | 2,139,753 | ||||
September 1 - September 30, 2023 | — | $ | — | — | $ | 2,139,753 | ||||
(1)In April of 1995, the Board of Directors approved a stock repurchase program authorizing the Company to purchase from time to time up to $2,000,000 of its common stock for its own account. Subsequently, the Board of Directors periodically has approved increases in the stock repurchase program. The most recent increase was for an additional $2,000,000 in October 2006, for a maximum of $45,500,000 of which $43,360,247 had been expended through December 31, 2022.September 30, 2023.
Item 6. Exhibits
Exhibit No. | Exhibit Description |
3.1 | |
3.2 | |
3.3 | |
3.4 | |
10.1 | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer * |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer * |
32.1 | |
32.2 | |
101 | The following financial information from Koss Corporation's Quarterly Report on Form 10-Q for the quarter ended |
__________________________
* Filed herewith
** Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KOSS CORPORATION |
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/s/ Michael J. Koss |
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Michael J. Koss |
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Chairman |
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Chief Executive Officer |
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/s/ Kim M. Schulte |
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Kim M. Schulte |
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Chief Financial Officer |
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Principal Accounting Officer |
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