What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-08-25 compared with 2022-08-26 · 110 added, 110 removed, 128 unchanged (63% of the section changed)

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See also the “Cautionary Statement Regarding Forward-Looking Statements” on page 4 of this Report.

The Company initially developed stereo headphones in 1958 and has been a leader in the industry ever since.

Koss and the Company have been recognized as the creator of the personal listening industry.

The Company initially developed the first Koss SP 3 stereo headphones in 1958 and has been an innovator in the field ever since.

We market a complete line of high-fidelity headphones, wireless Bluetooth® headphones, wireless Bluetooth® speakers, computer headsets, telecommunications headsets, and active noise canceling headphones.

Koss operates as one business segment, as its only business line is the design, manufacture and sale of stereo headphones and related accessories.

The Company’s products are sold domestically and internationally through a variety of retailers and distributors, as well as directly to other manufacturers for including with their own products.

Koss operates as one business segment, as its only business line is the design, manufacture and sale of stereo headphones and related personal listening accessories.

The Company’s products are sold domestically and internationally through a variety of retailers and distributors, as well as directly to other manufacturers to include with their own products.

Changes in sales volume are driven primarily by the addition or loss of customers, a customer adding or removing a product from its inventory, or changes in economic conditions.

They are relatively less impacted by seasonality or the traditional holiday shopping season.

Although certain of the Company’s products could be viewed as essential by consumers for use with mobile phones and other portable electronic devices, other products are more of a discretionary spend.

The results of the Company’s operations are therefore susceptible to consumer confidence and macroeconomic factors.

Sales levels are less impacted by seasonality or the traditional holiday shopping season.

Although certain of the Company’s products could be viewed as essential by consumers for use with mobile phones and other portable electronic devices, many other models represent a more discretionary spend.

The results of the Company’s operations are therefore susceptible to consumer confidence and adverse macroeconomic factors such as inflation, slower growth or recession, higher interest rates, and wage and commodity inflation.

In addition, the economic sanctions imposed as a result of the Russia/Ukraine conflict have impacted certain of our customers in those markets and the surrounding regions.

The impacts of COVID-19 have moderated since it was declared a global pandemic by the World Health Organization in March 2020.

The Company continues to monitor any changes regarding the pandemic and any future impacts of COVID-19 on our business, operations, and financial results.

Fiscal Year 2023 Summary

 Net sales declined 9.9% to $17,607,267 after decreased sales in the fourth quarter.

A strategic shift away from mass retailers and reduced sales to U.S.

distributors were the major factors.

 Net sales declined 26.0% to $13,099,651 due predominantly to weaker consumer demand led by constraints on consumer spending brought on by higher inflation and, as a result, lower disposable income.

Over inventory positions at some U.S.

distributors also contributed to the decline.

Export sales fell 29% while domestic sales fell 25%.

 Gross profit as a percent of sales increased 3.2% to 37.6%.

The increase was primarily due to a change in the mix of sales by channel as higher margin direct-to-consumer (“DTC”) sales grew while we discontinued the sale of a lower margin product to a U.S.

mass retailer.

 Selling, general and administrative expense declined mainly as a result of income related to the Company’s deferred compensation agreements.

The deferred compensation liability related to the founder was released upon his passing in December 2021, resulting in income of $472,883, and the deferred compensation liability of a current officer was reduced due to increasing interest rates during the year.

There was also a significant reduction in employer taxes on stock option exercises year over year.

 Tax expense for the year ended June 30, 2022 was minimal due to an offsetting change in the valuation allowance for deferred tax assets.

 Gross profit as a percentage of sales decreased 3.9 percentage points to 34.0%.

The decrease was primarily due to fixed manufacturing expenses that do not flex with the lower sales volume.

The favorable mix of higher margin direct-to-consumer (“DTC”) sales offset the year over year decline in higher margin domestic distributors.

 Selling, general and administrative expenses increased significantly as a result of legal fees and expenses incurred in support of the Company’s patent defense litigation.

Excluding the effect of these legal fees and expenses, selling, general and administrative expenses increased by approximately $1.3 million, or 24.9%.

Bonus and profit-sharing expense as a consequence of the net income from licensing proceeds during the year also contributed to the increase.

 Other income for the year ended June 30, 2023 consisted entirely of $33,000,000 in licensing proceeds received in the first quarter of the year.

 Tax expense for the year ended June 30, 2023 was $317,377 as a direct impact of the licensing income earned during the year.

Consolidated Results

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Consolidated Performance Summary

Net sales (decrease) increase %

Net sales decrease

Gross profit as % of net sales

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2023 Results of Operations Compared with 2022

Net sales for 2022 decreased behind reduced sales to U.S.

distributors coupled with a strategic shift away from mass retailers in favor of online DTC sales.

A 72% increase in DTC sales helped to offset some of the decrease.

Sales in the Company’s export markets declined 13% compared to 2021.

Net sales for the fiscal year 2023 declined by 26.0% mainly as a result of lower sales to U.S.

distributors coupled with a 28.9% drop in sales to the Company’s export markets.

For the year ended June 30, 2023, domestic net sales decreased $3,284,378, or 25.0% to $9,848,521.

Excluding DTC, the decline was 21.2%, from $12,403,400 to $9,768,601, as a result of the decline in sales to U.S.

distributors and a U.S.

mass retailer dropping their branded products from its planogram in the third quarter of the prior year.

DTC has continued to grow and has become our largest market class at 18.5% of total net sales for the year.

At the same time, the Company has shifted away from domestic retail distributors, and the number of retail outlets carrying our products decreased from approximately 7,400 during fiscal year 2021 to 2,000 during fiscal year 2022.

Export net sales lost momentum in the current fiscal year, decreasing $675,029 or 12.9% to $4,572,620.

Export distributors in the Czech Republic and Ukraine had strong volumes for the year despite lingering COVID-19 restrictions and despite the disruption of sales to Ukraine in the fourth quarter as a result of the continued hostility with Russia.

This was more than offset, however, by a 39.6% decrease in sales to distributors in Asia, as well as those in Russia due to the suspension of sales as required by the Executive Order 14071 signed on April 6, 2022.

Gross profit increased to 37.6% for the year ended June 30, 2022, compared to 34.4% for the prior fiscal year.

The margin rates are very dependent on mix of sales by customer, product and sales channel.

The heightened level of higher margin DTC sales, coupled with the end of low margin sales to a US-based mass retailer, which discontinued the product supplied by the Company late in the third quarter of the prior fiscal year, improved margin rates.

The delays throughout the supply chain that began late last fiscal year as a result of the persistence of COVID-19 in all parts of the world, and more recently due in part to the recent conflict in Eastern Europe, continue to affect the Company.

COVID related extensions of the Chinese New Year added to the delays in product shipments from suppliers in Asia.

The ongoing disruption in ocean freight and congestion at the ports on the U.S.

west coast resulting in delivery delays have resulted in increased inbound shipping costs.

While rising shipping costs are expected to linger and negatively impact margins in the foreseeable future, the Company did contract with a dedicated freight forwarding partner to secure fixed rates.

Rates did stabilize in the current quarter as a result.

Selling, general and administrative expenses for the year ended June 30, 2022, decreased 19.8% or approximately $1,407,000 to approximately $5,715,000.

The primary factor was $633,000 of income recorded in the current year as a result of a decrease in the deferred compensation liability compared to an expense of $308,000 in the prior year.

Income of $473,000 was recognized with the reversal of the deferred compensation liability for the Company’s founder who passed away in December 2021, which was offset by $71,250 of payments accrued and made to the former officer prior to his passing.

Also, as a result of increasing interest rates, deferred compensation income of $231,000 was recorded related to the change in the net present value of the future expected payments to a current officer as a result of increasing interest rates.

Sales to U.S.

distributors were impacted by an oversupply of inventory as a consequence of higher-level purchases during the pandemic followed by recent weakened consumer demand for our product due to inflation.

While DTC sales, believed to be a significant approach to driving growth, remained stable year over year, it continued to represent the Company’s largest market class, growing from approximately 19% of total net sales during the twelve months ended June 30, 2022 to approximately 25% during the current fiscal year.

Export net sales also saw a downturn during the current fiscal year, decreasing $1,321,490 or 28.9% to $3,251,130.

The adverse impacts from the war between Russia and Ukraine, along with increasing inflation and higher energy costs, drove an approximately 27% decline in sales to export distributors in Europe by nearly $1,000,000 versus fiscal year 2022.

Lost sales of approximately $600,000 to Russia and Ukraine made up the majority of the drop.

A decrease in sales to distributors in Asia also contributed to the decline mainly behind a lack of sales to one of the Company’s non-retail original equipment manufacturers that utilizes Koss headphones in one of their products.

Sales to this market were over $350,000 during the year ended June 30, 2022.

Gross profit as a percentage of net sales decreased to 34.0% for the year ended June 30, 2023, compared to 37.9% for the prior fiscal year.

Gross margins vary by customer, product, and markets and, as a result, any shifts in the mix can impact the overall gross margin.

While the mix of higher margin DTC sales was favorable compared to the prior fiscal year, fixed manufacturing overhead expenses that don’t flex with sales negatively impacted the margins for the year.

And while freight costs improved during the first half of the year and then stabilized in the back half, the movement of inventory received at the higher freight costs will continue to offset the reduced shipping costs.

The Company renewed its contract with the freight forwarder, stabilizing contract rates and bringing them in line with market rates.

UPS reached a tentative agreement for a new five-year national contract with the Teamsters on July 25, 2023, averting a potential crisis in small package shipping.

The new agreement is likely to increase the Company’s future freight costs.

Selling, general and administrative expenses for the year ended June 30, 2023 increased by approximately $23,545,000 to $29,358,000 compared to the prior year period.

The significant change was predominantly a result of the increase of approximately $22,276,000 in legal fees and expenses incurred in support of the Company’s patent defense litigation.

Excluding the effect of these legal fees and expenses, selling, general and administrative expenses increased by approximately $1.3 million, or 24.9%.

Also, a bonus accrual of $334,000 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 fiscal year 2023 due mainly to the licensing proceeds received during the first quarter of 2023, partially offset by the aforementioned legal fees and expenses.

During the year ended June 30, 2023, deferred compensation expense of $60,000 was recorded related to the change in the net present value of the future expected payments to a current officer as a result of an additional vesting year, which increased the future annual payments.

This compares to $633,000 of income recorded in the prior fiscal year as a result of income of $473,000 recognized with the reversal of the deferred compensation liability for the Company’s founder who passed away in December 2021, offset by $71,250 of payments accrued and made to the former officer prior to his passing, and deferred compensation income of $231,000 recognized under the arrangement for the current officer as a result of increasing interest rates.

Employer taxes on stock option exercises of approximately $28,000 were recorded in the current year compared to $134,000 in the prior year, a decrease of $106,000.

Other income for the year ended June 30, 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 fiscal year 2022 was $362,390.

Interest income of $520,809 was recorded during the year ended June 30, 2023 for interest earned on U.S.

Treasury securities that were purchased midyear to better secure the Company’s excess cash while earning a return.

Interest income of $11,513 was earned on a money market account in the prior fiscal year.

Income tax expense of $317,377 for the year ended June 30, 2023 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 $230,139 and $87,237, respectively.

For the year ended June 30, 2022, there was no federal tax provision and a state tax provision of $7,517 was recorded.

The effective tax rate was 3.7% for the fiscal year ended June 30, 2023 compared to less than 1% for the previous fiscal year.

During the twelve months ended June 30, 2023, stock option exercises resulted in tax deductible compensation expense of approximately $368,000 and will offset some of the taxable income generated by the net licensing proceeds.

Net operating loss carryforwards were also utilized to reduce the taxable income and, as such, th e remaining expected federal tax loss carryforward is expected to approximate $31,800,000 by the end of the fiscal year.

The current fiscal year adjustment to the estimated tax loss carryforward decreased the deferred tax asset to approximately $8,200,000 as of June 30, 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.

As previously reported, the Company maintains a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio.

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The Company has recovered certain of the fees and costs that were involved with the underlying efforts to enforce this portfolio, as further described in the notes to the financial statements included in this Annual Report on Form 10-K.

Part of the litigation related to this enforcement has been recently dismissed and the Company expects to receive non-recurring net proceeds of $10-$14 million from the granting of licenses to certain of its patents.

If the program continues to be successful, the Company may receive additional royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position;

Part of the litigation related to this enforcement has been recently dismissed and the Company received non-recurring net proceeds of nearly $11,000,000 from the granting of licenses to certain of its patents.

If the program continues to be successful with the remaining complaints, the Company may receive additional royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position;

however, there is no guarantee of a positive outcome from these efforts, which could ultimately be time consuming and unsuccessful.

Additionally, the Company may owe all or a portion of any future proceeds arising from the enforcement program to third parties.

Income tax expense for the year ended June 30, 2022, was comprised of the U.S.

federal statutory rate of 21%, and the effect of state income taxes, offset by an adjustment to the valuation allowance for deferred tax assets until it is more likely than not that the Company will be able to use the net operating loss carryforwards at which time the valuation allowance will be removed.

The effective tax rate was approximately 0% in the fiscal year ended June 30, 2022.

It is anticipated that the effective rate in future years will be reduced by utilization of a portion or all of the approximately $38,554,000 of federal net operating loss carryforwards.

The Company has closely monitored the impact of COVID-19 (including the continuing emergence of variants) in order 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 the impacts of COVID-19 on our business have moderated, 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 are varied based upon the current extent and severity of the COVID-19 pandemic within their respective countries and localities.

The Company saw a surge in the sale of specific communication headsets in the year ended June 30, 2021 that did not repeat in fiscal year 2022.

Also, certain retail businesses throughout the Company’s markets, particularly in certain European markets have seen continued disruption due to the spread of the Omicron subvariant BA.2.

The Company expects the negative sales impacts caused by this disruption to continue until markets more fully re-open and consumer spending returns to normal.

The ultimate magnitude of the COVID-19 pandemic, including the extent of its impact on the Company’s business, financial position, results of operations and 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 heavily determined by the duration of the pandemic, impact of the variants, its geographic spread, further business disruptions and the overall impact on the global economy.

During fiscal 2022, inflationary cost increases have impacted our commodities, packaging materials and transportation costs.

Pricing actions implemented in the third quarter of the current fiscal year partially mitigated these increases and working with a dedicated freight forwarding partner has helped to minimize freight rate increases.

To protect the safety, health and well-being of employees, customers, and suppliers, the Company implemented several preventive measures while also meeting the needs of global customers.

They included increased frequency of cleaning and disinfecting of facilities, social distancing practices, remote working when possible, restrictions on business travel, holding certain events virtually and limitations on visitor access to facilities.

The Company is committed to continuing to execute these plans.

The Company believes that its financial position remains strong.

The Company had $3.1 million of cash and cash equivalents, $17.1 million of short-term investments and available credit facilities of $5.0 million on June 30, 2023.

During fiscal 2023, inflation, rising interest rates and higher energy costs have impacted consumers’ discretionary spending and, as a result, the Company’s sales volumes.

Inflationary cost increases have also had an impact on our commodities, packaging materials, labor costs, and transportation costs.

Pricing actions implemented in the third quarter of fiscal year 2023 partially mitigated these increases and working with a dedicated freight forwarding partner has helped to minimize freight rate increases.

The Company’s supply chain is primarily in southern China.

Since late fiscal year 2021, the Company has continued to experience issues related to the availability of containers and routing to move products in a cost effective and time efficient manner.

There have also been impacts to the movement of new product introductions and costs.

The Company is monitoring the situation closely and the supply chain team has modified business plans, which include, but are not limited to:

(1) increasing the investment in inventory;

(2) being alert to potential short supply situations;

(3) assisting suppliers with acquisition of critical components;

and (4) utilizing alternative sources and/or air freight.

The invasion of Ukraine by Russia and the sanctions imposed in response to this conflict have increased global economic and political uncertainty.

While some issues related to the availability of containers and routings have subsided, the Company continues to monitor the situation closely and the supply chain team will modify business plans as necessary.

This could include increasing the investment in inventory, being alert to potential short supply situations, assisting suppliers with acquisition of critical components and utilizing alternative sources and/or air freight.

The invasion of Ukraine by Russia in February 2022 and the broad economic sanctions imposed in response to this conflict have increased global economic and political uncertainty.

In accordance with Executive Order 14071 declared on April 6, 2022, the Company suspended sales into Russia.

Given the current humanitarian crisis in Ukraine and the population seeking refuge in other countries as a result of the conflict, sales to Ukraine have also been impacted.

Neither Russia nor Ukraine constitutes a significant portion of the business, making up less than 3.4% of total net sales of the Company for the year ended June 30, 2022.

There were no sales to Russia or Ukraine in the fourth quarter.

Given the humanitarian crisis in Ukraine and the population seeking refuge in other countries as a result of the ongoing conflict, sales to Ukraine were also impacted.

Prior to the war, neither Russia nor Ukraine constituted a significant portion of the business, making up less than 3.4% of total net sales of the Company for the year ended June 30, 2022.

There were no sales to Russia or Ukraine in the current fiscal year.

We are uncertain, however, of the impact it will have on future operating results.

The Company had $9,208,170 of cash and available credit facility of $5,000,000 on June 30, 2022, which the Company expects to be sufficient to fund its operations beyond the next twelve months from the date of filing this Form 10-K.

Liquidity and Capital Resources

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Financing activities

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Operating Activities

Cash used by the Company in operations was $942,530 despite having an improvement in net income of $774,815.

Changes in operating assets and liabilities used $1,762,308 of cash in the year ended June 30, 2022 compared to using $500,565 in cash during the year ended June 30, 2021.

The movement of working capital in the year ended June 30, 2022 is representative of declining sales and a continued investment in critical products to ensure adequate levels were available and maintained given the continued disruption of and delays in the supply chain.

This is reflected in the low backorders number at the end of the year.

Cash provided by operating activities of the Company during the year ended June 30, 2023 was the result of the licensing proceeds received, partially offset by the payment of related legal fees and expenses, along with a second quarter profit-sharing payout.

Additionally, the Company’s discipline around and the management of inventory purchases has led to a continued decline in inventory balances during the year.

For the year ended June 30, 2022, the Company used cash of $942,530 for operating activities related to the

deliberate investment in inventory to ensure adequate stock levels of critical products were available in case of potential supply chain disruption and delays.

Investing Activities

Cash provided by investing activities was $1,810,139 during the year ended June 30, 2022 and related to the receipt of $2,014,184 of proceeds on company-owned life insurance policies on the Company’s founder who passed away in December 2021.

Premiums of $95,887 were paid during the year on these and other life insurance policies on other executives.

Purchases of equipment and leasehold improvements by the Company during the year ended June 30, 2022 were minimal at $108,158 compared to the $600,155 spent for tooling and leasehold improvements in the year ended June 30, 2021.

No significant capital expenditures are anticipated for fiscal year 2023.

Cash used by investing activities for year ended June 30, 2023 was almost entirely related to the purchase of approximately $18,860,000 of U.S.

Treasury securities at a discount.

Purchases of equipment and leasehold improvements by the Company during the year ended June 30, 2023 was $98,441 compared to $108,158 spent for tooling and leasehold improvements in the prior year.

Cash provided by investing activities for the year ended June 30, 2022 was the result of proceeds of a company-owned life insurance policy on the Company’s founder upon his passing on December 21, 2021, slightly offset by the fixed asset purchases.

Capital expenditures for fiscal year 2024 are expected to be approximately $400,000 related to leasehold improvements.

Financing Activities

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In the year ended June 30, 2023, there were stock option exercises of 87,000 shares generating $171,350 of cash.

This compares to the exercise of 539,089 options during the year ended June 30, 2022, which generated cash of $1,390,346.

Short Term Liquidity

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The majority of the Company’s purchase obligations are pursuant to funded contractual arrangements with its customers.

The Company believes its existing cash, cash equivalents, cash provided by operating activities and borrowings under its credit facility will be sufficient to meet its anticipated working capital, and capital expenditure requirements during the next twelve months.

The Company believes its existing cash, cash equivalents, investments in short-term U.S.

Treasury securities, cash provided by operating activities and borrowings under its credit facility, if any, will be sufficient to meet its anticipated working capital, and capital expenditure requirements during the next twelve months.

There can be no assurance, however, that the Company’s business will continue to generate cash flow at current levels.

If the Company is unable to generate sufficient cash flow from operations, then it may be required to sell assets, reduce capital expenditures or draw on its credit facilities.

The Company anticipates that existing sources of liquidity, credit facilities, and cash flows from operations will be sufficient to satisfy its cash needs for the foreseeable future.

Management is focused on increasing sales, especially in DTC and the export markets, increasing new product introductions, increasing the generation of cash from operations, and improving the Company’s overall earnings to help improve the Company’s liquidity.

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.

If the Company is unable to generate sufficient cash flow from operations, then it may be required to sell assets, reduce capital expenditure, or draw on its credit facilities.

Management is focused on increasing sales, especially in the U.S.

distributor market, DTC, and the export markets, increasing new product introductions, increasing the generation of cash from operations, and improving the Company’s overall earnings to help improve the Company’s liquidity.

The Company regularly evaluates new product offerings, inventory levels, and capital expenditure to ensure that it is effectively allocating resources in line with current market conditions.

Long Term Liquidity

The Company’s future capital requirements, to a certain extent, are also subject to general conditions in or affecting the electronics industry and are subject to general economic, political, financial, competitive, legislative, and regulatory factors that are beyond its control.

Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from its credit facilities are insufficient to fund its future activities, the Company may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in the Credit Agreement (as defined below).

Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from its credit facilities are

insufficient to fund its future activities, the Company may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in the Credit Agreement (as defined below).

In addition, the Company may also need to seek additional equity funding or debt financing if it becomes a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services, or technologies.

Credit Facility

On May 14, 2019, the Company entered into a secured credit facility “"Credit Agreement’) with Town Bank (“Lender”) for a two-year term expiring on May 14, 2021.

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.

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 as well as 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.

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The negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, disposition of assets, mergers and liquidations, among other restrictions.

The Company is currently in material compliance with all covenants related to the Credit Agreement.

The Company is currently in compliance with all covenants related to the Credit Agreement.

As of June 30, 2023, and June 30, 2022, there were no outstanding borrowings on the facility.

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In April 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 approved increases of between $1,000,000 to $5,000,000 in the stock repurchase program.

As of June 30, 2022, the most recently approved increase was for additional purchases of $2,000,000, which occurred in October 2006, for an aggregate maximum of $45,500,000, of which $43,360,247 had been expended through June 30, 2022.

Subsequently, the Board of Directors periodically approved increases in the amount authorized for repurchase under the program.

As of June 30, 2023, the Board had authorized the repurchase of an aggregate of $45,500,000 of common stock under the stock repurchase program, of which $43,360,247 had been expended.

No purchases were made during the years ended June 30, 2023 or 2022.

There were no stock repurchases under the program in fiscal year 2023 or 2022.

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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 5 beneficiaries of the former Chairman’s revocable trust.

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 the former Chairman’s revocable trust and includes current stockholders of the Company.

On May 24, 2022, the lease was renewed for a period of five years, ending June 30, 2028, and is being accounted for as an operating lease.

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The preparation of these Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We continually evaluate our estimates and judgments, including those related to doubtful accounts, product returns, excess inventories, warranties, impairment of long-lived assets, deferred compensation, income taxes and other contingencies.

We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances.

We have made estimates and we continually evaluate our estimates and judgments, including those related to doubtful accounts, product returns, excess inventories, warranties, impairment of long-lived assets, deferred compensation, income taxes and other contingencies.

We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances, taking into consideration certain possible adverse impacts from inflation, the economic sanctions imposed on the international community as a result of the continued conflict between Russia and Ukraine, and any changes to the global economic situation as a consequence of the COVID-19 pandemic.

Actual results may differ from these estimates.

The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to:

the magnitude and duration of COVID-19, the impact of COVID-19 variants, the extent to which it will impact worldwide macroeconomic conditions, the speed of the anticipated recovery, access to capital markets, and governmental and business reactions to the pandemic.

The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of June 30, 2022 and through the date of the filing of this Annual Report on Form 10-K.

The accounting matters assessed included, but were not limited to estimates related to revenue, the accounting for potential liabilities and accrued expenses, the assumptions utilized in valuing stock-based compensation issued for services, the realization of deferred tax assets, the inventory valuation reserve, and assessments of impairment related to long-lived assets.

The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in additional material impacts to the Company’s consolidated financial statements in future reporting periods.

Despite the Company’s efforts to evaluate the extent to which COVID-19 will continue to impact the Company’s business and financial results, the ultimate impact of COVID-19 depends on factors beyond the Company’s knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects.

As a result, the Company is unable to estimate the full extent to which COVID-19 will negatively impact its financial results or liquidity.

Below are the estimates that we believe are critical to the understanding of the Company’s results of operations and financial condition.

Other accounting policies are described in Note 1, “Significant Accounting Policies” to the consolidated financial statements included in this Annual Report on Form 10-K.

Revenue Recognition

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This deferred revenue reflects the Company’s best estimates of the amount of warranty returns and repairs it will experience during those future periods.

If future warranty activity varies from the estimates, the Company will adjust the estimated deferred revenue, which would affect net sales and operating results in the period that such adjustment becomes known.

future warranty activity varies from the estimates, the Company will adjust the estimated deferred revenue, which would affect net sales and operating results in the period that such adjustment becomes known.

Deferred Compensation

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In addition, management estimates the expected retirement date for the current officer as that impacts the timing for expected future payments.

The Company had a deferred compensation liability for a former office and in December 2021, the former officer passed away, and the portion of the deferred compensation liability related to the former officer was relieved.

See Note 10 for additional information on deferred compensation.

Stock-Based Compensation

The Company has a stock-based employee compensation plan, which is described more fully in Note 11.

The Company has a stock-based employee compensation plan, which is described more fully in Note 12 to the Consolidated Financial Statements.

The Company accounts for stock-based compensation in accordance with ASC 718 "Compensation - Stock Compensation".

11 unchanged sentences

New Accounting Pronouncements

Applicable new accounting pronouncements are set forth under Item 15 of this annual report and are incorporated herein by reference.

Applicable new accounting pronouncements are set forth under Item 15 of this Annual Report on Form 10-K and are incorporated herein by reference.

QUANTITATIVE AND QU ALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable .

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

2 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-K

Item 7. Management’s Discussion and Analysis