What changed in this filing

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Item 1. Financial Statements

2023-01-27 compared with 2022-10-28 · 125 added, 66 removed, 193 unchanged (50% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

September 30, 2022

December 31, 2022

June 30, 2022

1 unchanged sentence

Cash and cash equivalents

Short term investments, net of unamortized discounts

Accounts receivable, less allowance for doubtful accounts of $ 10,500 and $ 2,027 , respectively

1 unchanged sentence

Prepaid expenses and other current assets

Interest receivable

Total current assets

1 unchanged sentence

Other assets:

Long term investments, net of unamortized discounts

Operating lease right-of-use asset

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Three Months Ended

Six Months Ended

Cost of goods sold

Selling, general and administrative expenses

(Loss) from operations

(Loss) income from operations

( 1,347,813 )

( 23,832,185 )

Interest income

Income (loss) before income tax provision

Income tax provision

Net income (loss)

Income (loss) per common share:

(Loss) income before income tax provision

( 1,249,981 )

Income tax (benefit) provision

Net (loss) income

( 1,146,879 )

(Loss) income per common share:

Weighted-average number of shares:

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Three Months Ended

Six Months Ended

Operating activities:

Net income (loss)

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

Provision for doubtful accounts of accounts receivable

Provision for (recovery of) doubtful accounts of accounts receivable

Depreciation of equipment and leasehold improvements

Amortization of discount on treasury securities

Noncash operating lease expense

1 unchanged sentence

Change in cash surrender value of life insurance

Provision for deferred compensation

(Benefit) provision for deferred compensation

Deferred compensation paid

Deferred compensation relieved

Other income - Net gain from life insurance benefits

Net changes in operating assets and liabilities:

2 unchanged sentences

Prepaid expenses and other current assets

Interest receivable

Income taxes payable

6 unchanged sentences

Life insurance premiums paid

Purchases of investments

( 14,884,929 )

Net cash (used in) investing activities

( 15,023,416 )

Financing activities:

1 unchanged sentence

Net cash provided by financing activities

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

( 4,395,893 )

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Non-cash financing and investing activity:

Reclassification of cash surrender value of life insurance to life insurance receivable

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

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

Three Months Ended September 30, 2022

Six Months Ended December 31, 2022

Balance, June 30, 2022

1 unchanged sentence

Stock option exercises

Balance, September 30, 2022

Three Months Ended September 30, 2021

Balance, December 31, 2022

Six Months Ended December 31, 2021

Balance, June 30, 2021

1 unchanged sentence

Stock option exercises

Balance, December 31, 2021

Three Months Ended December 31, 2022

Balance, September 30, 2022

( 1,146,879 )

Stock-based compensation expense

Stock option exercises

Balance, December 31, 2022

Three Months Ended December 31, 2021

Balance, September 30, 2021

Stock-based compensation expense

Stock option exercises

Balance, December 31, 2021

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

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

December 31, 2022

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.

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

equity for the three and six months ended December 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.

GAAP”) and have not been audited.

8 unchanged sentences

Actual results could differ from the Company's estimates.

B) INCOME TAXES

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.

1 unchanged sentence

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

During the quarter ended December 31, 2022, a federal tax benefit of $ 74,389 and a state tax benefit of $ 28,713 were recorded based on a taxable loss.

While declining sales contributed to the taxable loss, the main drivers were a payment made to the Company’s external patent litigation counsel and legal expenses paid related to the Company’s program focused on the enforcement of its intellectual property.

For the six months ended December 31, 2022, as a result of additional income generated by licensing fees, offset by related legal fees and expenses, taxable income for the period was generated.

On December 22, 2017, 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 $ 120,125 , respectively.

For the three and six months ended December 31, 2021, a state tax provision of $ 1,031 and $ 2,062 , respectively, was recorded.

The federal income tax expense was zero for the three and six months ended December 31, 2021.

The effective tax rate was 5.3 % in the six months ended December 31, 2022 and less than 1 % in the six months ended December 31, 2021.

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 will be approximately $ 32,500,000 .

Given the taxable loss generated during the quarter ended December 31, 2022, the expected utilization of the estimated tax loss carryforward decreased, which increased the deferred tax asset to approximately $ 9,600,000 as of December 31, 2022, and the future realization of this continues to be uncertain.

The valuation allowance also increased 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 December 31, 2022 and June 30, 2022 include:

December 31, 2022

June 30, 2022

14 unchanged sentences

Net deferred income tax assets

C) LEGAL COSTS

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 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.

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 six months ending December 31, 2022 and 2021, 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.

E) DEFERRED COMPENSATION

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 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

The deferred compensation liability recorded at December 31, 2022 and June 30, 2022 is $ 1,891,154 and $ 1,937,229 , respectively.

The decrease in the deferred compensation liability for the current officer during the six months ended December 31, 2022 resulted in a reduction of compensation expense under this arrangement of $ 46,075 .

In December 2021, the Company’s founder and former officer passed away.

The Company had a total deferred compensation liability of $ 472,883 recorded at June 30, 2021 related to the former officer, which at his death was relieved.

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

Payments of $ 71,250 made under this arrangement during the six months ended December 31, 2021 were expensed as paid .

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):

8 unchanged sentences

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 following table summarizes the unrealized positions for the held-to-maturity debt securities as of December 31, 2022:

Amortized cost basis

Gross unrealized gains

Gross unrealized losses

US treasury securities

The following table summarizes the fair value and amortized cost basis of the held-to-maturity debt securities by contractual maturity as of December 31, 2022:

Amortized Cost Basis

Due within one year

Due after one year through five years

The components of inventories were as follows:

September 30, 2022

December 31, 2022

June 30, 2022

15 unchanged sentences

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.

As of December 31, 2022, the Company was in compliance with all covenants related to the Credit Agreement.

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

REVENUE RECOGNITION

2 unchanged sentences

Three Months Ended

September 30,

Six Months Ended

United States

2 unchanged sentences

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.

In the six months ended December 31, 2022 and 2021, the Company recognized revenue which was included in the deferred revenue liability at the beginning of the periods of $ 210,236 and $ 335,578 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.

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,

Net income (loss)

(LOSS) INCOME PER COMMON AND COMMON STOCK EQUIVALENT SHARE

Basic (loss) income per share is computed based on the weighted-average number of common shares outstanding.

Diluted (loss) income per common share is calculated assuming the exercise of stock options except where the result would be anti-dilutive.

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

Three Months Ended December 31,

Six Months Ended December 31,

Net (loss) income

( 1,146,879 )

Weighted average shares, basic

1 unchanged sentence

Diluted shares

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

(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.

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

(1) Excludes approximately 590,046 weighted average stock options during the three months ended December 31, 2022, as the impact of such awards was anti-dilutive.

For the three months ended December 31, 2021, as well as the six months ended December 31, 2022 and 2021, 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.

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.

2 unchanged sentences

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.

During the six months ended December 31, 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.

1 unchanged sentence

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.

There were no charitable contributions made to the Foundation during the three months ended December 31, 2022 nor the three and six months ended December 31, 2021.

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.

As of December 31, 2022, the Company’s top four accounts receivable customers represented approximately 20 %, 14 %, 13 %, and 12 % of trade accounts receivables.

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

LEGAL MATTERS

As of September 30, 2022, the Company is involved in the matters described below:

As of December 31, 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.

2 unchanged sentences

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.

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.

During the quarter ended December 31, 2022, the Company made a payment of $ 950,000 to its external patent litigation team and incurred an additional $ 175,000 of related legal expense.

The amounts became estimable during the second quarter, thus the expense was recorded in the second quarter as a change in estimate.

Total legal fees and related expenses of $ 1,139,568 and $ 22,196,428 , respectively, were recorded as selling, general and administrative expense during the three and six months ended December 31, 2022 in connection with its program focused on enforcing its intellectual property.

During the three and six-month periods ended December 31, 2021, $ 30,583 and $ 56,950 , respectively, of legal fees and related expenses were recorded.

• 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.

2 unchanged sentences

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 Company estimates that this matter will ultimately be resolved at a cost of approximately $ 41,000 , which amount was accrued as of December 31, 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.

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.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

7 unchanged sentences

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

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.

1 unchanged sentence

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