KOSS CORP 10-Q

Item 1. Financial Statements KOSS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, 2022 June 30, 2022 ASSETS Current assets: Cash and cash equivalents $ 20,870,957 $ 9,208,170 Accounts receivable, less allowance for doubtful accounts of $ 9,496 and $ 2,027 , respectively 1,773,132 1,846,620 Inventories, net 7,898,496 8,631,362 Prepaid expenses and other current assets 398,467 188,478 Total current assets 30,941,052 19,874,630 Equipment and leasehold improvements, net 1,032,180 1,088,017 Other assets: Operating lease right-of-use asset 3,190,862 3,247,725 Cash surrender value of life insurance 5,973,016 5,744,724 Total other assets 9,163,878 8,992,449 Total assets $ 41,137,110 $ 29,955,096 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 521,417 $ 796,163 Accrued liabilities 1,514,699 560,356 Deferred revenue 393,252 543,891 Operating lease liability 227,124 223,530 Income taxes payable 600,974 3,033 Total current liabilities 3,257,466 2,126,973 Long-term liabilities: Deferred compensation 1,979,530 1,937,229 Deferred revenue 133,113 169,210 Operating lease liability 2,966,294 3,024,195 Total long-term liabilities 5,078,937 5,130,634 Total liabilities 8,336,403 7,257,607 Stockholders' equity: Common stock, $ 0.005 par value, authorized 20,000,000 shares; issued and outstanding 9,179,795 and 9,147,795 , respectively 45,899 45,739 Paid in capital 12,811,717 12,653,402 Retained earnings 19,943,091 9,998,348 Total stockholders' equity 32,800,707 22,697,489 Total liabilities and stockholders' equity $ 41,137,110 $ 29,955,096 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 3 Table of Contents KOSS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended September 30 2022 2021 Net sales $ 3,354,529 $ 4,365,067 Cost of goods sold 2,168,305 2,783,230 Gross profit 1,186,224 1,581,837 Selling, general and administrative expenses 23,670,596 1,780,798 (Loss) from operations ( 22,484,372 ) ( 198,961 ) Other income 33,000,000 100,000 Interest income 27,056 633 Income (loss) before income tax provision 10,542,684 ( 98,328 ) Income tax provision 597,941 1,031 Net income (loss) $ 9,944,743 $ ( 99,359 ) Income (loss) per common share: Basic $ 1.09 $ ( 0.01 ) Diluted $ 1.01 $ ( 0.01 ) Weighted-average number of shares: Basic 9,157,284 8,843,946 Diluted 9,849,043 8,843,946 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 4 Table of Contents KOSS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended September 30 2022 2021 Operating activities: Net income (loss) $ 9,944,743 $ ( 99,359 ) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for doubtful accounts of accounts receivable 7,469 480 Depreciation of equipment and leasehold improvements 67,610 80,438 Noncash operating lease expense 2,556 — Stock-based compensation expense 88,035 138,876 Change in cash surrender value of life insurance ( 140,298 ) ( 167,084 ) Provision for deferred compensation 42,301 88,810 Deferred compensation paid — ( 37,500 ) Net changes in operating assets and liabilities: Accounts receivable 66,019 120,587 Inventories 732,866 ( 1,390,691 ) Prepaid expenses and other current assets ( 209,989 ) ( 194,087 ) Income taxes payable 597,941 1,031 Accounts payable ( 274,746 ) 624,512 Accrued liabilities 954,343 ( 11,661 ) Deferred revenue ( 186,736 ) ( 82,445 ) Net cash provided by (used in) operating activities 11,692,114 ( 928,093 ) Investing activities: Purchase of equipment and leasehold improvements ( 11,773 ) ( 57,194 ) Life insurance premiums paid ( 87,994 ) ( 95,726 ) Net cash (used in) investing activities ( 99,767 ) ( 152,920 ) Financing activities: Proceeds from exercise of stock options 70,440 1,364,046 Net cash provided by financing activities 70,440 1,364,046 Net increase in cash and cash equivalents 11,662,787 283,033 Cash and cash equivalents at beginning of period 9,208,170 6,950,215 Cash and cash equivalents at end of period $ 20,870,957 $ 7,233,248 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 5 Table of Contents KOSS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) Three Months Ended September 30, 2022 Common Stock Paid in Retained Shares Amount Capital Earnings Total Balance, June 30, 2022 9,147,795 $ 45,739 $ 12,653,402 $ 9,998,348 $ 22,697,489 Net income — — — 9,944,743 9,944,743 Stock-based compensation expense — — 88,035 — 88,035 Stock option exercises 32,000 160 70,280 — 70,440 Balance, September 30, 2022 9,179,795 $ 45,899 $ 12,811,717 $ 19,943,091 $ 32,800,707 Three Months Ended September 30, 2021 Common Stock Paid in Retained Shares Amount Capital Earnings Total Balance, June 30, 2021 8,608,706 $ 43,044 $ 10,802,118 $ 8,729,939 $ 19,575,101 Net (loss) — — — ( 99,359 ) ( 99,359 ) Stock-based compensation expense — — 138,876 — 138,876 Stock option exercises 529,089 2,645 1,361,401 — 1,364,046 Balance, September 30, 2021 9,137,795 $ 45,689 $ 12,302,395 $ 8,630,580 $ 20,978,664 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 6 Table of Contents KOSS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2022 (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) BASIS OF PRESENTATION 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. 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) 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 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. ‎ 7 Table of Contents 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 $ 489,409 $ 479,340 Stock-based compensation 110,179 107,499 Accrued expenses and reserves 575,687 551,562 Deferred revenue 166,358 176,447 Federal and state net operating loss carryforwards 7,498,610 9,942,511 Credit carryforwards 300,889 292,155 Equipment and leasehold improvements 110,659 122,764 Lease liability 789,533 803,603 Valuation allowance ( 9,251,287 ) ( 11,671,606 ) Total deferred income tax assets 790,037 804,275 Deferred income tax liabilities: ROU asset ( 789,533 ) ( 803,603 ) Other ( 504 ) ( 672 ) 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. 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 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. ‎ 8 Table of Contents 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 2. INVENTORIES The components of inventories were as follows: September 30, 2022 June 30, 2022 Raw materials $ 2,228,870 $ 2,217,621 Finished goods 7,523,432 8,302,546 Inventories, gross 9,752,302 10,520,167 Reserve for obsolete inventory ( 1,853,806 ) ( 1,888,805 ) Inventories, net $ 7,898,496 $ 8,631,362 3. 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 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. ‎ 9 Table of Contents 4. 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 September 30, 2022 2021 United States $ 2,712,751 $ 2,787,519 Export 641,778 1,577,548 Net Sales $ 3,354,529 $ 4,365,067 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 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. 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. 5. INCOME (LOSS) PER COMMON AND COMMON STOCK EQUIVALENT SHARE Basic income (loss) per share is computed based on the weighted-average number of common shares outstanding. Diluted income (loss) 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 income (loss) per share: Three Months Ended September 30, 2022 2021 Numerator Net income (loss) $ 9,944,743 $ ( 99,359 ) Denominator Weighted average shares, basic 9,157,284 8,843,946 Dilutive effect of stock compensation awards (1) 691,759 — Diluted shares 9,849,043 8,843,946 Net income (loss) attributable to common shareholders per share: Basic $ 1.09 $ ( 0.01 ) Diluted $ 1.01 $ ( 0.01 ) (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. 6. 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. 10 Table of Contents 7. ACCOUNTS RECEIVABLE CONCENTRATIONS 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. 8. LEGAL MATTERS 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 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. 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 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. ‎ 11 Table of Contents 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, 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 and the Company’s operations, borrowing costs, changes in tax rates, pending or threatened litigation and investigations, 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. ‎ 12 Table of Contents