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Table of Contents
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
March 31, 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)
DE 39-1168275
LAWARE
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4129 North Port Washington Avenue 53212
,
Milwaukee
,
Wisconsin
(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 ((s) 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
Non-accelerated filer Smaller reporting company
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 May 8, 2023, there were
9,216,795
shares outstanding of the registrant's common stock.
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Table of Contents
KOSS CORPORATION
FORM 10-Q
March 31, 2023
INDEX
Page
PART I FINANCIAL INFORMATION 3
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets 3
as of March 31, 2023 and June 30, 2022
Condensed Consolidated Statements of Operations for the 4
Three and Nine Months Ended March 31, 2023 and 2022
Condensed Consolidated Statements of Cash Flows 5
for the Nine Months Ended March 31, 2023 and 2022
Condensed Consolidated Statements of Stockholders' Equity 6
for the Three and Nine Months Ended March 31, 2023 and 2022
Notes to Condensed Consolidated 7
Financial Statements
Item 2. Management's Discussion and Analysis of 14
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative 19
Disclosures About Market Risk
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION 19
Item 1. Legal Proceedings 19
Item 1A. Risk Factors 19
Item 2. Unregistered Sales of Equity 19
Securities and Use of Proceeds
Item 6. Exhibits 21
2
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Table of Contents
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
KOSS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2023 June 30, 2022
ASSETS
Current assets:
Cash and cash equivalents $ 2,921,632 $ 9,208,170
Short term investments, amortized cost basis 12,045,520 -
Accounts receivable, less allowance for doubtful accounts of $ 1,235,411 1,846,620
36,262
and $
2,027
, respectively
Inventories, net 7,079,259 8,631,362
Prepaid expenses and other current assets 394,188 188,478
Interest receivable 56,014 -
Total current assets 23,732,024 19,874,630
Equipment and leasehold improvements, net 967,828 1,088,017
Other assets:
Long term investments, amortized cost basis 4,949,470 -
Operating lease right-of-use asset 3,074,952 3,247,725
Cash surrender value of life insurance 5,979,730 5,744,724
Total other assets 14,004,152 8,992,449
Total assets $ 38,704,004 $ 29,955,096
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 353,313 $ 796,163
Accrued liabilities 870,822 560,356
Deferred revenue 379,061 543,891
Operating lease liability 233,152 223,530
Income taxes payable 250,203 3,033
Total current liabilities 2,086,551 2,126,973
Long-term liabilities:
Deferred compensation 2,000,012 1,937,229
Deferred revenue 125,732 169,210
Operating lease liability 2,848,191 3,024,195
Total long-term liabilities 4,973,935 5,130,634
Total liabilities 7,060,486 7,257,607
Stockholders' equity:
Common stock, $ 46,084 45,739
0.005
par value, authorized
20,000,000
shares; issued and outstanding
9,216,795
and
9,147,795
, respectively
Paid in capital 13,034,075 12,653,402
Retained earnings 18,563,359 9,998,348
Total stockholders' equity 31,643,518 22,697,489
Total liabilities and stockholders' equity $ 38,704,004 $ 29,955,096
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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Table of Contents
KOSS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
2023 2022 2023 2022
Net sales $ 3,369,160 $ 4,634,552 $ 9,995,620 $ 13,415,506
Cost of goods sold 2,076,482 2,671,336 6,390,557 8,320,759
Gross profit 1,292,678 1,963,216 3,605,063 5,094,747
Selling, general and administrative expenses 1,746,034 1,566,430 27,890,606 4,576,521
(Loss) income from operations ( 396,786 ( 518,226
453,356 24,285,543
) )
Other income - 6,415 33,000,000 362,389
Interest income 189,593 3,578 314,482 7,837
(Loss) income before income tax provision ( 406,779 9,028,939 888,452
263,763
)
Income tax (benefit) provision ( 3,575 463,928 5,638
30,910
)
Net (loss) income $ ( $ 403,204 $ 8,565,011 $ 882,814
232,853
)
(Loss) income per common share:
Basic $ ( $ 0.04 $ 0.93 $ 0.10
0.03
)
Diluted $ ( $ 0.04 $ 0.87 $ 0.09
0.03
)
Weighted-average number of shares:
Basic 9,206,135 9,147,795 9,183,042 9,044,532
Diluted 9,206,135 9,888,083 9,791,627 10,024,473
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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Table of Contents
KOSS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
March 31
2023 2022
Operating activities:
Net income $ 8,565,011 $ 882,814
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for (recovery of) doubtful accounts of accounts receivable 40,277 (
35,216
)
Depreciation of equipment and leasehold improvements 186,168 225,130
Amortization of discount on treasury securities ( -
110,632
)
Noncash operating lease expense 6,391 -
Stock-based compensation expense 243,688 382,010
Change in cash surrender value of life insurance ( (
147,012 171,688
) )
Provision for deferred compensation 62,783 187,560
Deferred compensation paid - (
71,250
)
Deferred compensation relieved - (
472,883
)
Other income - Net gain from life insurance benefits - (
262,391
)
Loss on disposal of fixed assets 2,263 7,856
Net changes in operating assets and liabilities:
Accounts receivable 570,932 (
40,328
)
Inventories 1,552,103 (
1,849,288
)
Prepaid expenses and other current assets ( (
205,710 4,945
) )
Interest receivable ( -
56,014
)
Income taxes payable 247,170 (
163
)
Accounts payable ( 376,050
442,850
)
Accrued liabilities 310,466 290,977
Deferred revenue ( (
208,308 117,140
) )
Net cash provided by (used in) operating activities 10,616,726 (
672,895
)
Investing activities:
Purchase of equipment and leasehold improvements ( (
68,242 98,028
) )
Life insurance premiums paid ( (
87,994 95,887
) )
Proceeds from life insurance policy - 2,014,184
Purchases of investments ( -
16,884,358
)
Net cash (used in) provided by investing activities ( 1,820,269
17,040,594
)
Financing activities:
Proceeds from exercise of stock options 137,330 1,390,346
Net cash provided by financing activities 137,330 1,390,346
Net (decrease) increase in cash and cash equivalents ( 2,537,720
6,286,538
)
Cash and cash equivalents at beginning of period 9,208,170 6,950,215
Cash and cash equivalents at end of period $ 2,921,632 $ 9,487,935
Supplemental cash flow information:
Cash paid for income taxes $ 216,759 $ -
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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Table of Contents
KOSS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
Nine Months Ended March 31, 2023
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 - - - 8,565,011 8,565,011
Stock-based compensation expense - - 243,688 - 243,688
Stock option exercises 69,000 345 136,985 - 137,330
Balance, March 31, 2023 9,216,795 $ 46,084 $ 13,034,075 $ 18,563,359 $ 31,643,518
Nine Months Ended March 31, 2022
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 - - - 882,814 882,814
Stock-based compensation expense - - 382,010 - 382,010
Stock option exercises 539,089 2,695 1,387,651 - 1,390,346
Balance, March 31, 2022 9,147,795 $ 45,739 $ 12,571,779 $ 9,612,753 $ 22,230,271
Three Months Ended March 31, 2023
Common Stock Paid in Retained
Shares Amount Capital Earnings Total
Balance, December 31, 2022 9,189,795 $ 45,949 $ 12,908,840 $ 18,796,212 $ 31,751,001
Net (loss) - - - ( (
232,853 232,853
) )
Stock-based compensation expense - - 76,980 - 76,980
Stock option exercises 27,000 135 48,255 - 48,390
Balance, March 31, 2023 9,216,795 $ 46,084 $ 13,034,075 $ 18,563,359 $ 31,643,518
Three Months Ended March 31, 2022
Common Stock Paid in Retained
Shares Amount Capital Earnings Total
Balance, December 31, 2021 9,147,795 $ 45,739 $ 12,452,554 $ 9,209,549 $ 21,707,842
Net income - - - 403,204 403,204
Stock-based compensation expense - - 119,225 - 119,225
Stock option exercises - - - - -
Balance, March 31, 2022 9,147,795 $ 45,739 $ 12,571,779 $ 9,612,753 $ 22,230,271
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
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Table of Contents
KOSS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION
The condensed consolidated balance sheets as of March 31, 2023 and
June 30
, 2022, the condensed consolidated statements of operations for the three and
nine months ended March 31, 2023 and 2022, the condensed consolidated
statements of cash flows for the nine months ended March 31, 2023 and 2022,
and the condensed consolidated statements of stockholders' equity for the
three and nine months ended March 31, 2023 and 2022, 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.
The preparation of financial statements in conformity with U.S. GAAP requires
the company 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, 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 discounts to maturity.
Such amortization 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 March 31, 2023, a state income tax benefit of $
30,910
was recorded mainly as a result of an update to state apportionment percentages.
No
federal tax benefit or provision was recorded for the quarter. For the nine
months ended March 31, 2023, 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, the Tax Cuts and Jobs Act
(TCJA) was enacted which changed the rules for deducting net operating losses
(NOLs). Before 2017, 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 2017 and 2018 could be utilized to
offset taxable income at 100 percent. The utilization of net operating loss
carryforwards significantly reduced the taxable income, resulting in federal
and state tax provisions of $
374,714
and $
89,214
, respectively, for the nine months ended March 31, 2023. For the three and
nine months ended March 31, 2022, a state tax provision of $
3,575
and $
5,638
, respectively, was recorded. The federal income tax expense was
zero
for the three and nine months ended March 31, 2022.
7
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Table of Contents
The effective tax rate was
5.1
% in the nine months ended March 31, 2023 and less than
1
% in the nine months ended March 31, 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. The Company's remaining
tax loss carryforward as of June 30, 2023 is expected to be approximately $
32,600,000
. A taxable loss was generated during the quarter ended March 31, 2023,
lessening the expected utilization of the estimated tax loss carryforward, and
as such, the future realization of this continues to be uncertain. The
valuation allowance was adjusted to continue to fully offset the 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 March 31, 2023 and June 30, 2022 include:
March 31, 2023 June 30, 2022
Deferred income tax assets:
Deferred compensation $ 471,577 $ 479,340
Stock-based compensation 115,323 107,499
Accrued expenses and reserves 637,160 551,562
Deferred revenue 136,900 176,447
Federal and state net operating loss carryforwards 8,014,182 9,942,511
Credit carryforwards 318,357 292,155
Equipment and leasehold improvements 133,336 122,764
Lease liability 762,212 803,603
Valuation allowance ( (
9,825,086 11,671,606
) )
Total deferred income tax assets 763,961 804,275
Deferred income tax liabilities:
ROU asset ( (
763,793 803,603
) )
Other ( (
168 672
) )
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 of legal costs
are recorded when the amount and items to be paid are confirmed by the third
party. Proceeds from the settlement of legal disputes are recorded in other
income when the amounts are determinable, and the collection is certain.
Related contingent legal fees and expenses are recorded in selling, general
and administrative expense at that time.
E) OTHER INCOME
In the nine months ending March 31, 2023 and 2022, the Company received
licensing proceeds of $
33,000,000
and $
100,000
, respectively, which were recorded as other income. In December 2021, the
Company also recognized approximately $
256,000
of other income related to the proceeds from company-owned life insurance
policies on its founder, who passed away on December 21, 2021.
Other income is shown as a separate line on the condensed consolidated
statements of operations.
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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, 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 March 31, 2023 and June 30, 2022 is $
2,000,012
and $
1,937,229
, respectively. The increase in the deferred compensation liability for the
current officer during the nine months ended March 31, 2023 resulted in
compensation expense under this arrangement of $
62,783
. 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, resulting in deferred compensation income of $
472,883
recognized in selling, general and administrative expenses during the nine
months ended March 31, 2022. Deferred compensation payments of $
71,250
made under this arrangement during the period prior to his passing were
expensed as paid
, along with compensation expense of $
116,310
recorded related to the increase in the deferred compensation liability for
the current officer, resulting in $
285,323
of deferred compensation income recorded during that nine-month period.
G) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments
. 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. The new guidance represents
significant changes to accounting for credit losses. 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. The expected credit losses estimate will be based upon
historical information, current conditions, and reasonable and supportable
forecasts. On November 15, 2019
,
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 filers that are eligible 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 assessing
the impact of the adoption of this standard on the Company's financial
statements.
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 summarizes the unrealized positions for the held-to-maturity
debt securities as of March 31, 2023:
Amortized cost basis Gross unrealized gains Gross unrealized losses Fair Value
US treasury securities $ 16,994,990 $ - $ 18,864 $ 16,976,126
Total $ 16,994,990 $ - $ 18,864 $ 16,976,126
The following table summarizes the fair value and amortized cost basis of the
held-to-maturity debt securities by contractual maturity as of March 31, 2023:
Amortized Cost Basis Fair value
Due within one year $ 12,045,520 $ 12,032,385
Due after one year through five years 4,949,470 4,943,741
Total $ 16,994,990 $ 16,976,126
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3. INVENTORIES
The components of inventories were as follows:
March 31, 2023 June 30, 2022
Raw materials $ 2,148,104 $ 2,217,621
Finished goods 6,805,658 8,302,546
Inventories, gross 8,953,762 10,520,167
Reserve for obsolete inventory ( (
1,874,503 1,888,805
) )
Inventories, net $ 7,079,259 $ 8,631,362
4. 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
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 March 31,
2023, the Company was in compliance with all covenants related to the Credit
Agreement. As of March 31, 2023, and June 30, 2022, 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 Nine Months Ended
March 31, March 31,
2023 2022 2023 2022
United States $ 2,717,144 $ 3,735,235 $ 7,589,385 $ 9,781,357
Export 652,016 899,317 2,406,235 3,634,149
Net Sales $ 3,369,160 $ 4,634,552 $ 9,995,620 $ 13,415,506
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, the
Company decreased its deferral rates from
3
% to
2.4
% for domestic sales and from
14
% to
10
% for export sales to reflect recent warranty experience. In the nine months
ended March 31, 2023 and 2022, the Company recognized revenue which was
included in the deferred revenue liability at the beginning of the periods of $
284,584
and $
394,963
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.
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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 March 31, Nine Months Ended March 31,
2023 2022 2023 2022
Numerator
Net (loss) income $ ( $ 403,204 $ 8,565,011 $ 882,814
232,853
)
Denominator
Weighted average shares, basic 9,206,135 9,147,795 9,183,042 9,044,532
Dilutive effect of stock compensation awards (1) - 740,288 608,585 979,941
Diluted shares 9,206,135 9,888,083 9,791,627 10,024,473
Net (loss) income attributable to common shareholders per share:
Basic $ ( $ 0.04 $ 0.93 $ 0.10
0.03
)
Diluted $ ( $ 0.04 $ 0.87 $ 0.09
0.03
)
(1) Excludes approximately
514,878
weighted average stock options during the three months ended March 31, 2023,
as the impact of such awards was anti-dilutive. For the three months ended
March 31, 2022, as well as the nine months ended March 31, 2023 and 2022,
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. 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 nine months ended March 31, 2023, 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
March 31, 2023 nor the three and nine months ended March 31, 2022.
8. ACCOUNTS RECEIVABLE CONCENTRATIONS
As of March 31, 2023, the Company's top
four
accounts receivable customers represented approximately
32
%,
11
%,
11
%, and
8
% of trade accounts receivables. These same customers represented approximately
19
%,
4
%,
3
%, and
18
% of trade accounts receivable at June 30, 2022.
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9. LEGAL MATTERS
As of March 31, 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 will be due
to third parties. The Company may incur additional fees and costs related to
these lawsuits, however, timing and impact on its 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. Total
legal fees and related expenses of $
68,543
and $
22,264,972
, respectively, were recorded as selling, general and administrative expense
during the three and nine months ended March 31, 2023 in connection with its
program focused on enforcing its intellectual property. During the three and
nine-month periods ended March 31, 2022, $
20,416
and $
77,365
, respectively, of legal fees and related expenses were recorded.
.
In July 2019,
the 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 financial statements. The Company estimates that this
matter will ultimately be resolved at a cost of approximately $
41,000
, which was accrued as of March 31, 2023 and June 30, 2022.
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.
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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 pandemic on the economy, the impact of the
Russian-Ukrainian conflict on the Company's operations,
borrowing costs, 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, 2022 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.
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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, 2022 as contained in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
August 26, 2022, 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, 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(R) headphones, wireless
Bluetooth(R) 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 nine
months ended March 31, 2023, and 2022:
Three Months Ended Nine Months Ended
March 31 March 31
Financial Performance Summary 2023 2022 2023 2022
Net sales $ 3,369,160 $ 4,634,552 $ 9,995,620 $ 13,415,506
Net sales (decrease) increase % from prior year period (27.3)% 16.2% (25.5)% (5.0)%
Gross profit $ 1,292,678 $ 1,963,216 $ 3,605,063 $ 5,094,747
Gross profit as % of net sales 38.4% 42.4% 36.1% 38.0%
Selling, general and administrative expenses $ 1,746,034 $ 1,566,430 $ 27,890,606 $ 4,576,521
Selling, general and administrative expenses as % of net sales 51.8% 33.8% 279.0% 34.1%
Interest income $ 189,593 $ 3,578 $ 314,482 $ 7,837
Other income $ - $ 6,415 $ 33,000,000 $ 362,389
(Loss) income before income tax (benefit) provision $ (263,763) $ 406,779 $ 9,028,939 $ 888,452
(Loss) income before income tax as % of net sales (7.8)% 8.8% 90.3% 6.6%
Income tax (benefit) provision $ (30,910) $ 3,575 $ 463,928 $ 5,638
Income tax (benefit) provision as % of (loss) income before income tax 11.7% 0.9% 5.1% 0.6%
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Fiscal 2023 Period Results Compared with Fiscal 2022 Period
(comments refer to the three and nine-month periods ended March 31 unless
otherwise noted)
Net sales for the quarter ended March 31, 2023 decreased by $1,265,000, or
27.3%, primarily due to reduced sales to certain of our distributors in the
domestic market and online retailers, as well as lower sales in the European
markets. For the nine-month period ended March 31, 2023, net sales decreased
by $3,420,000, or 25.5%, with over 50% of the reduction due to a slowdown in
certain of our domestic distributor sales. This was coupled with a continued
decline in sales to our European and Asian markets.
Net sales in the domestic market were approximately $2,717,000 in the three
months ended March 31, 2023, compared to approximately $3,735,000 in the prior
year period, a decrease of $1,018,000, or 27.3%. Domestic net sales for the
nine months ended March 31, 2023 decreased from $9,781,000 in the prior year
period to $7,589,000, a decline of $2,192,000, or 22.4%. A weakness in
consumer demand and bloated customer inventory levels have resulted in a 38%
decrease in net sales to certain of our domestic distributors, representing
approximately 85% of the drop in domestic net sales. Growth in direct-to-consume
r (DTC) sales of $214,000, or 8.7%, during the nine months ended March 31,
2023 over the same period in the prior year helped to slightly offset the
decline.
Export net sales for the three months ended March 31, 2023 decreased by
$247,000, or 27.5%, compared to the three months ended March 31, 2022, behind
a decrease in sales to our distributors in Russia and Ukraine due to the
continued discord in that region. Export net sales were down $1,228,000, or
33.8%, in the nine months ended March 31, 2023 versus the same prior year
period.
The decline in overall sales during fiscal year 2023 heightened the impact of
the drop-off in sales to the two distributors in Russia and Ukraine,
representing nearly 50% of the decrease in export sales for the current year.
The 12.4% and 34.7% reduction in sales to our European and Asian distributors,
respectively, for the current nine-month period also contributed to the
decline.
Gross profit margin decreased to 36.1% for the nine months ended March 31,
2023, compared to 38.0% for the nine months ended March 31, 2022. As the
Company sold off inventory brought in during the prior year at higher freight
rates, the margins on those sales were adversely impacted. Margins were also
negatively impacted by fixed manufacturing expenses that do not flex with
sales volume. Favorability from lower freight costs during the current
nine-month period, as a result of declining rates and a decreasing investment
in inventory, provided some positive impact on the overall margin as a partial
offset.
Freight rates remained constant through the quarter ended March 31, 2023 and
are expected to continue as general container demand remains stable and the
partnership with a dedicated freight forwarder is maintained.
Selling, general and administrative expenses for the three months ended March
31, 2023 were $1,746,000, a $180,000 or 11.5% increase over the same period in
the prior year. The decrease in the discount rates used to calculate the
deferred compensation liability resulted in an increase in the liability with
a corresponding increase to expense. This, coupled with an increase in legal
fees compared to the prior year, were the main factors for the increase. For
the nine months ended March 31, 2023, selling, general and administrative
expenses increased by approximately $23,314,000 to $27,891,000 compared to the
prior year period. The significant increase was primarily a result of
approximately $22,265,000 in legal fees and expenses incurred in support of
the Company's patent defense litigation. Also, increased expense related to a
bonus accrual of $381,000 and a second quarter profit-sharing payout of
$576,000 were recorded as a result of the increased net income before income
taxes for the first nine months of fiscal year 2023 due mainly to the
licensing proceeds received during the quarter ended September 30, 2022,
partially offset by the aforementioned legal fees and expenses. A decrease of
$108,000 in employer taxes on stock option exercises slightly offset the
significant increase in expense for the current nine-month period.
Other income for the nine months ended March 31, 2023 consisted entirely of
$33,000,000 in licensing proceeds received in the first quarter. The Company
received licensing proceeds of $100,000, which was also recorded as other
income, in the first quarter of the prior year. Also, in December 2021, the
Company recognized other income on the proceeds from a company-owned life
insurance policy on its founder, who passed away on December 21, 2021. Total
other income for the nine months ended March 31, 2022 was $362,000.
An income tax benefit of approximately $31,000 was recorded during the third
quarter of fiscal year 2023 as a result of the taxable loss for the period.
Income tax expense for the nine months ended March 31, 2023 was approximately
$464,000 and was comprised of the U.S. federal statutory rate of 21% and the
blended state income tax rate of approximately 3.8%, 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 in federal and state tax provisions of $374,714 and $89,214,
respectively. For the three and nine months ended March 31, 2022, a state tax
provision of $3,575 and $5,638, respectively, was recorded. The federal income
tax expense was zero for the three and nine months ended March 31, 2022. The
effective tax rate was 5.1% in the nine months ended March 31, 2023 and less
than 1% in the nine months ended March 31, 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.
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In the nine months ended March 31, 2023, stock option exercises resulted in
tax deductible compensation expense of approximately $332,000 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, th
e remaining expected federal tax loss carryforward is expected to approximate
$32,600,000 by the end of the fiscal year. The quarterly adjustment to the
estimated tax loss carryforward decreased the deferred tax asset to
approximately $9,800,000 as of March 31, 2023, and the future realization of
this continues to be uncertain.
The valuation allowance was also increased to fully offset the 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 tax loss occurred.
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, there is
no guarantee of a positive outcome from these efforts in the future, which
could ultimately be time-consuming and unsuccessful. Additionally, all or
portions of monetary awards or judgments received by the Company in connection
with these complaints will be due to third parties.
The Company believes that its financial position remains strong. The Company
had $2.9 million of cash and cash equivalents, $12.0 million of short-term
investments and available credit facilities of $5.0 million on March 31, 2023.
Recent Events
Recent events continuing to impact our business include COVID-19, the
inflationary cost environment, disruption in our supply chain, the ongoing
crisis in Eastern Europe, and the threatened rail strike in the U.S.
As more fully described below, we expect each of these factors will impact our
fiscal 2023 performance.
While the impact of these factors 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:
The Company continues to closely monitor 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 supply of the Company's products to our customers throughout the
world. While we expect the impacts of COVID-19 on our business to moderate,
there still remains uncertainty around the pandemic. As a result of the
COVID-19 pandemic, uncertainty with respect to its economic effects has
impacted not only our operating results but also the global economy. The
extent and nature of government actions to ease restrictions vary based upon
the current extent and severity of the COVID-19 pandemic within their
respective countries and localities. Certain of the Company's suppliers have
been, and could continue to be, impacted by the COVID-19 pandemic, resulting
in disruptions to 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.
The Company is committed to executing these plans and remains in close contact
with its supply chain to monitor future possible implications, especially on
production facilities.
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Inflationary Cost Environment and Supply Chain Disruption -
The Company continues to experience
inflationary cost increases in our commodities, packaging materials, wages and
higher energy and transportation costs. 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 at the beginning of the third
quarter of the current fiscal year. The Company also continues to work 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 easing of COVID-19 restrictions in China, manufacturing operations
and major ports could continue to 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 April 2023, United Parcel Service (UPS) and the International Brotherhood
of Teamsters Union started labor contract talks to negotiate better pay, no
forced overtime and the elimination of a two tier pay system. Members of the
union have stated that they are prepared to walk off the job if UPS fails to
deliver a deal before the current contract expires at midnight on July 31,
2023. 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, some union leaders and railroad executives have voluntarily
reopened the conversation around paid sick leave in hopes of negotiating an
improvement. The Company continues to monitor both situations as ether strike
in the U.S. could potentially exacerbate disruptions 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. In
accordance with the Executive Order declared on April 6, 2022, the Company
suspended sales into Russia. Also, given the continued humanitarian crisis in
Ukraine as a result of the conflict, and the population seeking refuge in
other countries, sales to Ukraine have also ceased. The lack of sales to
Russia and Ukraine during the nine months ended March 31, 2023 compared to net
sales of approximately $600,000, or 4% of total net sales for the same period
in the prior year. The continuation of the conflict will have an impact on
sales to the region in the future, however we are uncertain of what that
impact will be on the results of operations.
Liquidity and Capital Resources
Cash Flows
The following table summarizes cash flows from operating, investing and
financing activities for the nine months ended March 31, 2023 and 2022:
Total cash provided by (used in): 2023 2022
Operating activities $ 10,616,726 $ (672,895)
Investing activities (17,040,594) 1,820,269
Financing activities 137,330 1,390,346
Net (decrease) increase in cash and cash equivalents $ (6,286,538) $ 2,537,720
Operating Activities
A majority of the cash provided by operating activities during the nine months
ended March 31, 2023 is the result of the licensing proceeds received,
partially offset by the payment of related legal fees and expenses as well as
the profit-sharing payout in the second quarter. Additionally, the continued
reduction in inventory levels as the Company's investment tapers off
contributed to the cash provided by operating activities during the first nine
months of the current fiscal year. The use of cash in the same nine-month
period in the prior year was related to the impact of the deliberate
investment in inventory to ensure adequate stock levels to mitigate the impact
of potential supply chain delays. An increase in accounts payable and accrued
liabilities as a result of the increased inventory investment and customer
deposits from our European distributors provided cash from operating
activities to partially offset the use.
17
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Investing Activities
Cash used by investing activities for the nine months ended March 31, 2023 was
almost entirely related to the purchase of $17,300,000 of U.S. Treasury
securities at a discount. 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
Cash provided by financing activities is due entirely to stock option
exercises. In the nine months ended March 31, 2023, an aggregate of 69,000
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 $137,000. During the nine
months ended March 31, 2022, 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.
As of March 31, 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 March 31,
2023 or March 31, 2022 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 that
cash generated from operations, together with healthy cash reserves and
available borrowings, provide it with adequate liquidity to meet operating
requirements, debt service requirements and planned or necessary tooling,
leasehold and other capital expenditures for the next twelve months following
the date of this Quarterly Report on Form 10-Q and thereafter for the
foreseeable future. The Company regularly evaluates new product offerings,
inventory levels and capital expenditures to ensure that it is effectively
allocating resources in line with current market conditions.
Credit Facility
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 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 March 31,
2023, the Company was in compliance with all covenants related to the Credit
Agreement. As of March 31, 2023 and June 30, 2022, there were no outstanding
borrowings on the facility.
Contractual Obligation
The Company leases the 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. 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 March 31, 2023, the Company did not have any transactions, obligations or
relationships that could be considered off-balance sheet arrangements.
18
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Table of Contents
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 March 31, 2023.
The Company's Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures as of March
31, 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., 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, Inc. filed in the U.S. District
Court in the Western District of Texas on July 22, 2020 was dismissed on July
23, 2022 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, as
filed with the Securities and Exchange Commission on August 28, 2022. 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.
19
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Table of Contents
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 nine months ended March 31, 2023, by the
Company.
COMPANY REPURCHASES OF EQUITY SECURITIES
Total # of Average Total Number of Approximate
Shares Purchased as Dollar Value of
Shares Price Paid
Part of Publicly Shares Available under
Purchased per Share Announced Plan (1) Repurchase Plan
January 1 - - $ - - $ 2,139,753
January 31, 2023
February 1 - - $ - - $ 2,139,753
February 28, 2023
March 1 - March - $ - - $ 2,139,753
31, 2023
(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 March
31, 2023.
20
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Table of Contents
Item 6.
Exhibits
Exhibit No. Exhibit Description
3.1 Amended and Restated Certificate of Incorporation of Koss
Corporation, as in effect on November
19, 2009. Filed as Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the period
ended December 31, 2009 and incorporated herein by reference.
3.2 By-Laws of Koss Corporation. Filed as Exhibit
3.2 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1996
and incorporated herein by reference.
3.3 Amendment to the By-Laws of Koss Corporation.
Filed as Exhibit 3.3 to the Company's
Current Report on Form 8-K on March 7,
2006 and incorporated herein by reference.
3.4 Amendment to the By-Laws of Koss Corporation.
Filed as Exhibit 3.4 to the Company's
Annual Report on Form 10-K on August 27,
2020 and incorporated herein by reference.
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 Section 1350 Certification of Chief Executive Officer **
32.2 Section 1350 Certification of Chief Financial Officer **
101 The following financial information from Koss Corporation's Quarterly Report on Form
10-Q for the quarter ended March 31, 2023, formatted in XBRL (eXtensible Business Reporting
Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2023 and June 30, 2022,
(ii) Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months
ended March 31, 2023 and 2022 (iii) Condensed Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended March 31, 2023 and 2022, (iv) Condensed Consolidated Statements
of Stockholders' Equity (Unaudited) for the three and nine months ended March 31, 2023
and 2022 and (v) the Notes to Condensed Consolidated Financial Statements (Unaudited). *
__________________________
*
Filed herewith
** Furnished herewith
21
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Table of Contents
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
/s/ Michael J. Koss May 12, 2023
Michael J. Koss
Chairman
Chief Executive Officer
/s/ Kim M. Schulte May 12, 2023
Kim M. Schulte
Chief Financial Officer
Principal Accounting Officer
22
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael J. Koss, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Koss Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the condensed financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my supervision, to
ensure that material information relating to the registrant, including its
subsidiary, is made known to me by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under my supervision,
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report my conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Dated:
May
12
, 202
3
/s/ Michael J. Koss
Michael J. Koss
Chairman and Chief Executive Officer
-------------------------------------------------------------------------------
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I,
Kim
M
. S
chulte
, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Koss Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the condensed financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under my supervision, to ensure that
material information relating to the registrant, including its subsidiary, is
made known to me by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under my supervision,
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report my conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Dated:
May
12
, 202
3
/s/
Kim
M
. S
chulte
Kim
M
. S
chulte
Chief Financial Officer
-------------------------------------------------------------------------------
Exhibit 32.1
Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
I, Michael J. Koss, Chief Executive Officer of Koss Corporation (the Company),
hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350 that to my knowledge:
(i) the Quarterly Report on Form 10-Q of
the Company for the quarter ended
March
3
1
, 202
3
(the Report) fully complies with the requirements of Section 13(a) or Section
15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Michael J. Koss
Michael J. Koss
Chairman and Chief Executive Officer
Dated:
May
12
, 202
3
Note: This certification accompanies the Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not be deemed filed, except to the
extent required by the Sarbanes-Oxley Act of 2002, by the Company for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended.
-------------------------------------------------------------------------------
Exhibit 32.2
Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
I,
Kim
M
. S
chulte
, Chief Financial Officer of Koss Corporation (the Company), hereby certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350 that to my knowledge:
(i) the Quarterly Report on Form 10-Q of
the Company for the quarter ended
March
3
1
, 202
3
(the Report) fully complies with the requirements of Section 13(a) or Section
15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/
Kim
M
. S
chulte
Kim
M
. S
chulte
Chief Financial Officer
Dated:
May
12
, 202
3
Note: This certification accompanies the Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not be deemed filed, except to the
extent required by the Sarbanes-Oxley Act of 2002, by the Company for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended.
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