What changed in this filing

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Item 1. Financial Statements

2022-10-28 compared with 2022-05-06 · 107 added, 85 removed, 152 unchanged (56% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

March 31, 2022

September 30, 2022

June 30, 2022

35 unchanged sentences

Three Months Ended

Nine Months Ended

Cost of goods sold

Selling, general and administrative expenses

Income (loss) from operations

(Loss) from operations

( 22,484,372 )

Interest income

7 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Nine Months Ended

Three Months Ended

Operating activities:

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

(Recovery of) provision for doubtful accounts of accounts receivable

Net income (loss)

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Provision for doubtful accounts of accounts receivable

Depreciation of equipment and leasehold improvements

Noncash operating lease expense

Stock-based compensation expense

2 unchanged sentences

Deferred compensation paid

Deferred compensation relieved

Other income - SBA loan forgiveness

Other income - Net gain from life insurance benefits

Loss on disposal of fixed assets

Net changes in operating assets and liabilities:

1 unchanged sentence

( 1,390,691 )

( 1,318,377 )

Prepaid expenses and other current assets

3 unchanged sentences

Deferred revenue

Net cash provided by operating activities

Net cash provided by (used in) operating activities

Investing activities:

1 unchanged sentence

Life insurance premiums paid

Proceeds from life insurance policy

Net cash provided by (used in) investing activities

Net cash (used in) investing activities

Financing activities:

7 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

Nine Months Ended March 31, 2022

Three Months Ended September 30, 2022

Balance, June 30, 2022

1 unchanged sentence

Stock option exercises

Balance, March 31, 2022

Nine Months Ended March 31, 2021

Balance, September 30, 2022

Three Months Ended September 30, 2021

Balance, June 30, 2021

1 unchanged sentence

Stock option exercises

Balance, March 31, 2021

Three Months Ended March 31, 2022

Balance, December 31, 2021

Stock-based compensation expense

Stock option exercises

Balance, March 31, 2022

Three Months Ended March 31, 2021

Balance, December 31, 2020

Stock-based compensation expense

Stock option exercises

Balance, March 31, 2021

Balance, September 30, 2021

The accompanying notes are an integral part of these condensed consolidated financial statements.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

September 30, 2022

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A) BASIS OF PRESENTATION

The condensed consolidated balance sheets as of March 31, 2022 and June 30, 2021, the condensed consolidated statements of operations for the three and nine months ended March 31, 2022 and 2021, the condensed consolidated statements of cash flows for the nine months ended March 31, 2022 and 2021, and the condensed consolidated statements of stockholders'

equity for the three and nine months ended March 31, 2022 and 2021, have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“U.S.

The condensed consolidated balance sheets as of September 30, 2022 and June 30, 2022, the condensed consolidated statements of operations for the three months ended September 30, 2022 and 2021, the condensed consolidated statements of cash flows for the three months ended September 30, 2022 and 2021, and the condensed consolidated statements of stockholders'

equity for the three months ended September 30, 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.

1 unchanged sentence

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 disclosure normally included in consolidated financial statements prepared in accordance with U.S.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S.

GAAP have been condensed or omitted.

5 unchanged sentences

B) INCOME TAXES

A state tax provision of $3,575 and $5,638 was recorded for the three and nine months ended March 31, 2022.

For the three and nine months ended March 31, 2021, the state tax provision was $ 49 and $ 4,068 , respectively.

The federal income tax expense was zero for the three and nine months ended March 31, 2022 and 2021.

In the nine months ended March 31, 2022, stock option exercises resulted in tax deductible compensation expense of approximately $ 8,000,000 .

The deduction of this stock option exercise compensation expense is expected to cause a tax loss in the year ended June 30, 2022, which will be carried forward to future tax years.

The tax loss carryforward as of June 30, 2022, including the stock-based compensation expense deductions in the nine months ended March 31, 2022, is expected to be approximately $ 39,000,000 .

The adjustment to the estimated tax loss carryforward decreased the deferred tax asset to approximately $ 11,800,000 as of March 31, 2022, and the future realization of this is uncertain.

The valuation allowance was also decreased to fully offset the deferred tax asset.

C) OTHER INCOME

In December 2021, the Company recognized approximately $ 262,000 of other income related to the proceeds from company-owned life insurance policies on its founder, who passed away on December 21, 2021.

In July 2021, the Company entered into a license agreement with a headphone manufacturer (whereby the manufacturer licensed the use of certain patents in certain of their headphones).

The one-time license fee of $ 100,000 was also treated as other income.

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 September 30, 2022, additional income generated by licensing fees that were offset by related legal fees and expenses, resulted in taxable income for the period.

The utilization of net operating loss carryforwards significantly reduced the taxable income, resulting in a state tax provision of $ 148,838 and federal income tax provision of $ 449,103 .

During the three months ended September 30, 2021, a state tax provision of $ 1,031 was recorded.

There was no federal tax provision recorded for the three months ended September 30, 2021.

The Company expects to utilize a portion of its tax loss carryforwards for the year ended June 30, 2023 and the Company's remaining tax loss carryforward will be approximately $ 30,500,000 .

The expected utilization of the estimated tax loss carryforward decreased the deferred tax asset to approximately $ 9,300,000 as of September 30, 2022, and the future realization of this continues to be uncertain.

The valuation allowance also decreased 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 September 30, 2022 and June 30, 2022 include:

September 30, 2022

June 30, 2022

Deferred income tax assets:

Deferred compensation

Stock-based compensation

Accrued expenses and reserves

Deferred revenue

Federal and state net operating loss carryforwards

Credit carryforwards

Equipment and leasehold improvements

Lease liability

Valuation allowance

( 9,251,287 )

( 11,671,606 )

Total deferred income tax assets

Deferred income tax liabilities:

Net deferred income tax assets

C) 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 income when the amounts are determinable, and the collection is certain.

Related legal fees and expenses are recorded in selling, general and administrative expense at that time.

D) OTHER INCOME

In the period ending September 30, 2022, the Company received licensing proceeds of $ 33,000,000 , which were recorded as other income.

Other income is shown as a separate line on the condensed consolidated statements of operations.

There was a related payment of $ 100,000 to a third party that was charged to legal expense in the first quarter.

D) DEFERRED COMPENSATION

The Company’s deferred compensation liabilities are for a current and former officer and are calculated based on various assumptions which may include compensation, years of service, expected retirement date, discount rates, and mortality tables.

In the period ending September 30 2021, the Company received licensing proceeds of $ 100,000 , which were also recorded as other income.

Other income is shown as a separate line on the condensed consolidated statements of operations.

E) 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 Company’s current and non-current compensation obligations are included in accrued liabilities and deferred compensation, respectively, in the condensed consolidated balance sheets.

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.

Deferred compensation income of $ 472,883 was recognized in selling, general and administrative expenses as a result.

Payments of $ 71,250 were made under this arrangement until December 31, 2021 and were expensed as paid.

The remaining deferred compensation liability of $ 2,284,909 and $ 2,168,599 recorded at March 31, 2022 and June 30, 2021, respectively, relates to a current officer’s plan.

Deferred compensation expense of $ 20,000 and $ 116,310 was recognized under this arrangement in the three and nine months ended March 31, 2022.

The deferred compensation liability recorded at September 30, 2022 and June 30, 2022, is $ 1,979,530 and $ 1,937,229 , respectively.

Deferred compensation expense of $ 42,301 and $ 88,810 was recognized under this arrangement in the three months ended September 30, 2022 and September 30, 2021, respectively.

F) 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 are or not believed by management to have a

The components of inventories were as follows:

March 31, 2022

September 30, 2022

June 30, 2022

6 unchanged sentences

Inventories, net

CREDIT FACILITY AND SBA LOAN

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 with an interest rate of 1.50 % over LIBOR.

The Credit Agreement also provides for letters of credit for the benefit of the Company of up to a sublimit of $ 1,000,000 .

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.

1 unchanged sentence

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, 2022, the Company was in material compliance with all covenants related to the Credit Agreement.

As of March 31, 2022, and June 30, 2021, there were no outstanding borrowings on the facility.

On April 13, 2020, the Company received an unsecured loan (the "SBA Loan") for $ 506,700 under the Small Business Administration ("SBA") Paycheck Protection Program (the “PPP”) of the CARES Act through Town Bank.

On November 3, 2020, the Company was notified that the full principal amount of $ 506,700 had been forgiven and was recorded as other income in the accompanying condensed statement of operations for the nine months ended March 31, 2021.

As of September 30, 2022, the Company was in compliance with all covenants related to the Credit Agreement.

As of September 30, 2022, and June 30, 2022, there were no outstanding borrowings on the facility.

REVENUE RECOGNITION

2 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

United States

1 unchanged sentence

These constitute future performance obligations, and the Company defers revenue related to these future performance obligations.

In the nine months ended March 31, 2022 and 2021, the Company recognized revenue, which was included in the deferred revenue liability at the beginning of the periods, of $ 394,963 and $ 271,179 respectively, for performance obligations related to consumer and customer warranties.

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 three months ended September 30, 2022 and 2021, the Company recognized revenue, which was included in the deferred revenue liability at the beginning of the periods, of $ 167,939 and $ 153,221 respectively, for performance obligations related to consumer and customer warranties.

The deferred revenue liability was $ 883,564 as of June 30, 2021.

4 unchanged sentences

The following table reconciles the numerator and denominator used to calculate basic and diluted income (loss) per share:

Three Months Ended March 31,

Nine Months Ended March 31,

Three Months Ended September 30,

Net income (loss)

3 unchanged sentences

Net income (loss) attributable to common shareholders per share:

(1) Excludes approximately 2,226,184 weighted average stock options during the three months ended March 31, 2021, as the impact of such awards was anti-dilutive.

For the three and nine months ended March 31, 2022, and the nine months ended March 31, 2021, no stock options were anti-dilutive.

RELATED PARTY LEASE

The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is wholly owned by the Company’s former Chairman’s revocable trust.

On January 5, 2017, the lease was renewed for a period of five years , ending June 30, 2023, 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 the same rate for an additional five years ending June 30, 2028.

(1) Excludes approximately 1,500,528 weighted average stock options during the three months ended September 30, 2021, as the impact of such awards was anti-dilutive.

For the three months ended September 30, 2022, no stock options were anti-dilutive.

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 5 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 three months ended 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 September 30, 2021.

ACCOUNTS RECEIVABLE CONCENTRATIONS

As of March 31, 2022, the Company’s top two accounts receivable customers represented approximately 28 % and 18 % of trade accounts receivables.

As of September 30, 2022, the Company’s top four accounts receivable customers represented approximately 19 %, 15 %, 13 %, and 10 % of trade accounts receivables.

These same customers represented approximately 19 %, 18 %, 3 %, and 0 % of trade accounts receivable at June 30, 2022.

LEGAL MATTERS

As of March 31, 2022, the Company is involved in the matters described below:

• In July 2020, the Company filed complaints in United States District Court against each of Apple Inc., Bose Corporation, PEAG, LLC d/b/a JLab Audio, Plantronics, Inc.

and Polycom, Inc., and Skullcandy, Inc.

The complaints allege infringement on the Company’s patents relating to its wireless audio technology.

As of September 30, 2022, 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 does not expect to incur additional fees and costs related to these lawsuits that will have a material impact to its financial statements.

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 its claims, enter into licensing arrangements or reach some other outcome potentially advantageous to its competitive position.

A trial date for the suit against Apple Inc.

District Court in the Western District of Texas is currently set for July 25, 2022.

• Early in fiscal year 2020, the Company was notified by One E-Way, Inc.

During the period ended September 30, 2022 in connection with its program focused on enforcing its intellectual property, legal fees and related expenses of $ 21,016,408 were recorded as selling, general, and administrative expense.

• 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 and has been accrued as of September 30, 2022 and June 30, 2022.

The ultimate resolution of these matters is not determinable unless otherwise noted.

We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business.

Although management currently believes that resolving these claims against us, individually or in aggregate, will not have a material adverse impact on our condensed consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

We are also subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business.

Although management currently believes that resolving these claims against us, individually or in the aggregate, will not have a material adverse impact on our condensed consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This 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).

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.

9 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements