What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2023-08-25 compared with 2022-08-26 · 181 added, 118 removed, 506 unchanged (37% of the section changed)

14 unchanged sentences

Changes in Internal Control over Financial Reporting

T here were no changes in the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

There were no changes in the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

OTHER INFORMATION

32 unchanged sentences

Koss Corporation and Subsidiaries

Milwaukee, Wisconsin

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Koss Corporation and Subsidiaries (the “Company”) as of June 30, 2023 and 2022, and the related statements of income, stockholders’ equity, and cash flows for the years ended June 30, 2023 and 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material aspects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for the years ended June 30, 2022 and 2021, in conformity with accounting principles generally accepted in the United States of America.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its cash flows for the years ended June 30, 2023 and 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

12 unchanged sentences

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgements.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosure to which it relates.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgements.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Deferred Compensation

As described in Note 9 to the consolidated financial statements, the Company has a deferred compensation agreement with a current officer as of June 30, 2022 and 2021 and had a deferred compensation agreement with a former officer as of June 30, 2021, which are measured at their estimated net present value.

As described in Note 10 to the consolidated financial statements, the Company has a deferred compensation agreement with a current officer as of June 30, 2023 and 2022, which is measured at its estimated net present value.

The principal consideration for our determination that deferred compensation should be a critical audit matter was based on the subjective nature of the assumptions estimated and used by management to calculate the deferred compensation liability.

2 unchanged sentences

The primary audit procedures we performed to address this critical audit matter included:

 We evaluated the design effectiveness of controls over the Company’s process for accounting and recording the deferred compensation liability.

 We tested the design of controls over the Company’s process for accounting and recording the deferred compensation liability.

 We evaluated management’s calculation methodology and its compliance with accounting principles generally accepted in the United States of America regarding deferred compensation liabilities.

1 unchanged sentence

 We confirmed with the current officer his expected retirement date.

Other Income and Contingent Legal Expenses

As described in Notes 1 and 18 to the consolidated financial statements, the Company entered into a licensing revenue agreement with a third party during the year ended June 30, 2023.

Contingent legal fees were incurred and paid related to obtaining the licensing

The principal considerations for our determination that other income and legal expenses should be a critical audit matter was based on the materiality of the transactions, their significant effect on the comparability of the consolidated financial statements, and the determination of classification within the statement of income.

The primary audit procedures we performed to address this critical audit matter included:

 We tested the design of controls over the Company’s process for accounting and recording for license proceeds and related contingent legal expenses.

 We evaluated management’s conclusion and its compliance with accounting principles generally accepted in the United States of America regarding the timing, recognition, presentation and disclosure of license proceeds and legal expenses.

 We vouched license proceeds to the license agreement and bank statement deposits.

We confirmed the amount of legal expenses incurred with the relevant parties.

/s/ Wipfli LLP

7 unchanged sentences

Cash and cash equivalents

Short-term investments

Accounts receivable, less allowance for doubtful accounts of $ 6,027 and $ 2,027 , respectively

Prepaid expenses and other current assets

Interest receivable

Income tax receivable

Total current assets

23 unchanged sentences

Retained earnings

Total stockholder'

Total stockholders'

Total liabilities and stockholders'

6 unchanged sentences

Income (loss) from operations

( 24,901,052 )

Interest income

8 unchanged sentences

Operating activities:

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

(Recovery of) doubtful accounts of accounts receivable

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

Provision for (recovery of) doubtful accounts receivable

Depreciation of equipment and leasehold improvements

Accretion of discount on treasury securities

Noncash operating lease expense

Stock-based compensation expense

Change in cash surrender value of life insurance

(Benefit) provision for deferred compensation

Provision (benefit) for deferred compensation

Deferred compensation gain

Deferred compensation relieved

Other income - SBA loan forgiveness

Other income - Net gain from life insurance benefits

4 unchanged sentences

Prepaid expenses and other current assets

Interest receivable

Income taxes receivable

3 unchanged sentences

Deferred revenue

Net cash (used in) provided by operating activities

Net cash provided by (used in) operating activities

Investing activities:

2 unchanged sentences

Proceeds from life insurance policy

Net cash provided by (used in) investing activities

Proceeds from the maturity of treasury securities

Purchases of treasury securities

( 18,859,671 )

Net cash (used in) provided by investing activities

( 17,024,107 )

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

( 6,117,108 )

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplemental cash flow information:

Cash paid for income taxes

The accompanying notes are an integral part of these Consolidated Financial Statements.

51 unchanged sentences

Changes in such accruals may be required if actual sales volume differs from estimated sales volume, which would affect net sales and operating results in the period such variances become known.

Seller Fees – The Company pays fees to a major online marketplace for use of its services.

Referral fees, the commission paid to the online platform to cover the costs associated with promoting, advertising, and facilitating product sales to its customers, are calculated as a percentage of the sales price and are imposed on sales of all products sold through the marketplace.

When orders are fulfilled by the online marketplace, the Company is assessed fulfillment fees to cover the cost of fulfillment of the order as well as the assumption of risk of inventory control, damages and returns.

The fees assessed are based on a product’s category, price, size and weight and are deducted from the sales price of each product prior to remittance to the Company with revenue reported on a net basis.

Prior to fiscal

year 2023, revenue from orders obtained through the online marketplace but fulfilled by the Company direct to the end customer was reported net of referral fees, and related fulfillment costs were recorded in cost of goods sold.

Effective with the current year, the referral fees of $ 43,190 were reported as selling expense and revenue was reported as gross sales.

As a result of the accounting change, a reclass was made for fiscal year ending June 30, 2022 to move $ 98,252 of referral fees from Net Sales to Selling, General and Administrative Expenses to report these sales on a consistent basis.

Sales Commissions - The Company has elected the practical expedient of not capitalizing sales commissions.

11 unchanged sentences

These costs are expensed in the period they are incurred since no patent legal costs were probable to provide a future economic benefit.

INCOME (LOSS) PER COMMON AND COMMON STOCK EQUIVALENT SHARE — Income (loss) per common and common stock equivalent share is calculated under the provisions of Topic 260 in the Accounting Standards Codification ("ASC") which provides for calculation of “basic” and “diluted” income (loss) per share.

Basic income (loss) per common and common stock equivalent share includes no dilution and is computed by dividing net income (loss) by the weighted average common shares outstanding for the period.

Diluted income (loss) per common and common stock equivalent share reflects the potential dilution of securities that could share in the earnings of an entity.

See Note 10 for additional information on income (loss) per common and common stock equivalent share.

INCOME PER COMMON AND COMMON STOCK EQUIVALENT SHARE — Income per common and common stock equivalent share is calculated under the provisions of Topic 260 in the Accounting Standards Codification ("ASC") which provides for calculation of “basic” and “diluted” income per share.

Basic income per common and common stock equivalent share includes no dilution and is computed by dividing net income by the weighted average common shares outstanding for the period.

Diluted income per common and common stock equivalent share reflects the potential dilution of securities that could share in the earnings of an entity.

See Note 11 for additional information on income per common and common stock equivalent share.

CASH AND CASH EQUIVALENTS — The Company considers depository accounts and investments with a maturity at the date of acquisition and expected usage of three months or less to be cash and cash equivalents.

2 unchanged sentences

The Company has not experienced, and does not expect to incur, any losses on these deposits.

ACCOUNTS RECEIVABLE — Accounts receivable consists of unsecured trade receivables due from customers.

ACCOUNTS RECEIVABLE — Accounts receivable consist of unsecured trade receivables due from customers.

An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review of the past due item and general economic conditions .

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 premium and accretion of discount to maturity.

Such amortization or accretion is included in interest income, along with other interest on cash and cash equivalents.

See Note 4 for additional information on investments.

INVENTORIES — As of June 30, 2023 and 2022, the Company’s inventory was recorded using standard cost which approximates the lower of first in first out (“FIFO”) cost or net realizable value.

2 unchanged sentences

EQUIPMENT AND LEASEHOLD IMPROVEMENTS — Equipment and leasehold improvements are stated at cost.

Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the respective assets.

Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the respective assets.

Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.

1 unchanged sentence

Maintenance, repairs and minor renewals are expensed as incurred.

When assets are retired or otherwise disposed of, their costs and related accumulated depreciation and amortization are removed from the accounts and any resulting gains or losses are included in operations.

When assets are retired or otherwise disposed of, their costs and related accumulated depreciation and

amortization are removed from the accounts and any resulting gains or losses are included in operations.

See Note 6 for additional information on equipment and leasehold improvements.

LEASES — The Company determines if a contract is a lease at the date of inception.

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 the former chairman’s revocable trust and is an operating lease.

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

The lease agreement provides the Company the right to substantially all of the economic benefits and direct the use of the building, thus is considered a lease.

The agreement does not convey ownership of the building to the lessee at the end of the term of the lease so is accounted for as an operating lease.

Operating leases are reported on the Company's Consolidated Balance Sheets as operating lease right-of-use ("ROU") assets and operating lease liabilities.

Operating lease ROU assets and liabilities are valued at the present value of the future lease payment obligations.

The Company uses a rate based upon current incremental borrowing rates to determine the present value of future lease payments as the rate is not implicit in the lease.

Operating lease expense is recorded on a straight-line basis over the life of the lease taking into account expected renewal periods.

1 unchanged sentence

Increases in cash surrender value, net of annual premiums paid, and the proceeds from company-owned life insurance policies are included in selling, general and administrative expenses and other income, respectively, in the Consolidated Statements of Income.

DEFERRED COMPENSATION —At June 30, 2022, the Company’s deferred compensation liability is for a current officer and at June 30, 2021 is for a current and former office and is calculated based on various assumptions which may include compensation, years of service, expected retirement date, discount rates, and mortality tables.

DEFERRED COMPENSATION —At June 30, 2023 and 2022, the Company’s deferred compensation liability is for a current officer and is calculated based on years of service and compensation, along with various assumptions related to 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 Consolidated Statements of Income.

2 unchanged sentences

FAIR VALUE OF FINANCIAL INSTRUMENTS — Cash equivalents, accounts receivable, and accounts payable approximate fair value based on the short maturity of these instruments.

The Company’s investments are classified as held-to-maturity and reported at amortized cost on the Consolidated Balance Sheets.

The fair value is based upon quoted market prices and is disclosed in Note 4.

IMPAIRMENT OF LONG-LIVED ASSETS — The Company evaluates the recoverability of the carrying amount of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.

The Company evaluates the recoverability of equipment and leasehold improvements annually, or more frequently if events or circumstances indicate that an asset might be impaired.

If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value.

2 unchanged sentences

No impairments of the Company's long-lived assets were recorded in the years ended June 30, 2023 or 2022.

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.

LEGAL COSTS — All legal costs related to litigation, for which the Company is liable, are charged to operations as incurred, except contingent legal fees as described below.

Proceeds from the settlement of legal disputes are recorded in other income when the

amounts are determinable, and the collection is certain.

License proceeds are considered functional and as such are recorded at a point in time, based on the underlying agreement.

Related contingent legal fees and expenses are recorded in selling, general and

administrative expense at that time.

Changes to the contingent legal fee expenses would cause a material impact to the results of operations.

STOCK-BASED COMPENSATION — The Company has a stock-based employee compensation plan, which is described more fully in Note 12.

1 unchanged sentence

Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period.

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

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

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

Other income is shown as a separate line on the condensed Consolidated Statements of Income.

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

On November 3, 2020, the Company was notified that the full $ 506,700 of the SBA Loan (see Note 7) was forgiven.

The loan forgiveness was treated as other income and shown as a separate line on the Consolidated Statements of Operations for the year ended June 30, 2021.

The Company followed the debt and debt extinguishment accounting model for the SBA Loan forgiveness.

Other income also includes $ 378,805 received from a director in settlement of a short sale under Rule 144 during the year ended June 30, 2021.

OTHER INCOME — The Company maintains a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio, by filing complaints against certain parties alleging infringement on the Company’s patents relating to its wireless headphone technology.

The Company has granted license agreements related to certain patents allowing the Company to recover certain of the fees and costs that were involved with the underlying efforts to enforce this portfolio .

In the years ended June 30, 2023 and 2022, the Company received licensing proceeds of $ 33,000,000 and $ 100,000 , respectively, which were recorded as other income.

In the year ended June 30, 2022, the Company also recognized approximately $ 262,000 of other income related to the proceeds from company-owned life insurance policies on its founder, who passed away on December 21, 2021.

USE OF ESTIMATES — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reported periods.

Actual results could differ from those estimates.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes (Topic 740)", which removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

This guidance also clarifies and simplifies other areas of ASC 740.

This guidance was effective for the Company July 1, 2021.

Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings in the period of adoption.

The adoption of the new standard did not have a material impact to income taxes reported in the financial statements for the year ended June 30, 2022.

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.

REVENUE RECOGNITION

4 unchanged sentences

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

Effective July 1, 2022, the Company decreased its rates from 3 % to 2.4 % for domestic sales and from 14 % to 10 % for export sales to reflect recent warranty experience.

The Company recognized revenue, which was included in the deferred revenue liability at the beginning of the periods, of $ 338,529 and $ 453,693 in the years ended June 30, 2023 and 2022, respectively, for performance obligations related to consumer and customer warranties.

1 unchanged sentence

The Company estimates that the deferred revenue performance obligations are satisfied within 1 to 3 years and therefore uses the same time frame for recognition of the deferred revenue.

The following table summarizes the unrealized positions for the held-to-maturity debt securities as of June 30, 2023:

Amortized cost basis

Gross unrealized gains

Gross unrealized losses

US Treasury securities

There were no investments held at June 30, 2022.

The following table summarizes the fair value and amortized cost basis of the held-to-maturity debt securities by contractual maturity as of June 30, 2023:

Amortized Cost Basis

Due within one year

The components of inventories at June 30, 2023 and 2022 were as follows:

8 unchanged sentences

The major categories of equipment and leasehold improvements at June 30, 2023 and 2022 are summarized as follows:

useful lives (in years)

Estimated useful lives (in years)

Machinery and equipment

14 unchanged sentences

State income tax liability, net of federal income tax effect

Increase in valuation allowance

Stock option (deduction)

Utilization of net operating loss carryforwards

( 1,720,747 )

(Decrease) increase in valuation allowance

Stock option (deduction)

( 1,966,822 )

4 unchanged sentences

State tax rate change

Uncertain tax position

Total income tax provision

For the year ended June 30, 2023, as a result of additional income generated by licensing fees, partially 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 $ 230,139 and $ 87,238 , respectively, for the year ended June 30, 2023.

For the year ended June 30, 2022, a state tax provision of $ 7,517 was recorded.

The federal income tax expense was zero for the year ended June 30, 2022.

Temporary differences which give rise to deferred income tax assets and liabilities at June 30, 2023 and June 30, 2022 include:

5 unchanged sentences

Federal and state net operating loss carryforwards

IRC Section 174 research and development costs

Credit carryforwards

5 unchanged sentences

Total deferred income tax assets

Deferred income tax liabilities:

Equipment and leasehold improvements

Net deferred income tax assets

Deferred income tax balances reflect the effects of temporary differences between the tax bases of assets and liabilities and their carrying amounts.

D eferred income tax balances reflect the effects of temporary differences between the tax bases of assets and liabilities and their carrying amounts.

These differences are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.

The recognition of these deferred tax balances will be realized through normal recurring operations and, as such, the Company has recorded the value of such expected benefits.

The Company has federal net operating loss carryforwards of approximately $ 352,000 which expire in fiscal year 2037 and approximately $ 38,202,000 which can be carried forward indefinitely.

The Company has federal net operating loss carryforwards of approximately $ 31,793,000 which can be carried forward indefinitely.

The Company has state net operating loss carryforwards totaling approximately $ 10,944,000 in Wisconsin, which expire in tax years 2030 through 2041, and approximately $ 15,090,000 in other states.

In the year ended June 30, 2022, the Company generated federal net operating losses of approximately $ 7,199,000 .

At the state level, the fiscal 2022 net operating loss generated in Wisconsin was approximately $ 1,144,000 and approximately $ 3,536,000 in all other states combined.

In the year ended June 30, 2023, the Company estimates that federal net operating loss carryforwards of approximately $ 7,006,000 will be utilized to offset taxable income.

At the state level, net operating loss carryforwards of $ 4,565,000 in Wisconsin and all other states combined are expected to be utilized.

The Company's remaining tax loss carryforward as of June 30, 2023 is expected to be approximately $ 31,800,000 .

Taxable income was generated during the year ended June 30, 2023, mainly as a result of non-recurring license proceeds and, as such, the future realization of this continues to be uncertain.

The valuation allowance was adjusted to continue to fully offset the deferred tax asset as there is sufficient negative evidence to support a full valuation allowance.

The need for a valuation allowance is evaluated each accounting period based on the Company’s evaluation of positive and negative evidence concerning the usage of their deferred tax assets.

1 unchanged sentence

The need for a valuation allowance is an estimate at period-end, which is subject to change once additional evidence is obtained in future periods.

Future evidence includes, but is not limited to, license agreement proceeds which are expected to be recorded into earnings in the subsequent period.

This is a subsequent event that was not known or knowable at June 30, 2022.

When the license proceeds are recognized in a future period, the evidence will be considered in determining the Company's expected usage of their deferred tax assets, and may have a material impact on the Company's financial statements.

Generally accepted accounting principles in the United States (“GAAP”) prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return.

There were no additional significant matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on the Company’s Consolidated Financial Statements for the years ended June 30, 2022 and 2021.

The Company recorded a liability of approximately $ 25,000 as a reserve for an uncertain tax position (“UTP”) related to the research and development credits taken.

The reserve for UTP was recorded in income taxes receivable on the Consolidated Balance Sheet as of June 30, 2023.

There were no other matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on the Company’s Consolidated Financial Statements for the years ended June 30, 2023 and 2022.

Additionally, GAAP provides guidance on the recognition of interest and penalties related to income taxes.

1 unchanged sentence

The Company records interest related to unrecognized tax benefits in interest expense.

The Company does not believe it has any unrecognized tax benefits as of June 30, 2022 or 2021.

Any changes to the Company's unrecognized tax benefits during the fiscal years ended June 30, 2022 and 2021 would have impacted the effective tax rate.

The Company files income tax returns in the United States federal jurisdiction and in several state jurisdictions.

8 unchanged sentences

( 11,671,606 )

( 10,185,605 )

CREDIT FACILITY AND SBA LOAN

On May 14, 2019, the Company entered into a secured credit facility ("Credit Agreement") with Town Bank (“Lender”).

The Credit Agreement provides for a $ 5,000,000 revolving secured credit facility with an interest rate of 1.50 % over LIBOR.

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

The Credit Agreement provides for a $ 5,000,000 revolving secured credit facility for letters of credit for the benefit of the Company of up to a sublimit of $ 1,000,000 .

There are no unused line fees in the credit facility.

On January 28, 2021, the Credit Agreement was amended to extend the expiration to October 31, 2022, and to change the interest rate to Wall Street Journal Prime less 1.50 %.

A Third Amendment to the Credit Agreement effective October 30, 2022, extends the maturity date to October 31, 2024.

The Company and the Lender also entered into a General Business Security Agreement dated May 14, 2019, under which the Company granted the Lender a security interest in substantially all of the Company’s assets in connection with the Company’s obligations under the Credit Agreement.

1 unchanged sentence

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

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

As of June 30, 2023, the Company was in compliance with all covenants related to the Credit Agreement.

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

On November 3, 2020, the Company was notified that the full principal amount of the SBA Loan received under the Small Business Administration ("SBA") Paycheck Protection Program (the “PPP”) of the CARES Act through Town Bank had been forgiven and $ 506,700 was recorded as other income in the 2021 Consolidated Statement of Income.

The Company incurs interest expense primarily related to its secured credit facility.

4 unchanged sentences

Customer credit balances

Current deferred compensation

Employee benefits

5 unchanged sentences

As of June 30, 2023 and 2022, the Company has a deferred compensation agreement with a current officer.

As of June 30, 2021 the Company also had a deferred compensation agreement with a former officer, who has since passed away.

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 Consolidated Statements of Income.

The Company's current and non-current deferred compensation obligations are included in accrued liabilities and deferred compensation, respectively, in the Consolidated Balance Sheets.

The Board of Directors entered into an agreement to continue the 1991 base salary of the Company’s founder and former chairman beginning in fiscal year ended June 30, 2015 and continuing for the remainder of his life.

In December 2021, the former officer passed away.

In fiscal year 2022 payments totaling $ 71,250 were made to the former officer under the deferred compensation arrangement until December 31, 2021 and were expensed as paid.

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

As a result, deferred compensation income of $ 472,883 was recognized in selling, general and administrative expenses during the year ended June 30, 2022.

The remaining deferred compensation liability of $ 1,937,229 and $ 2,168,599 recorded at June 30, 2022 and June 30, 2021, respectively, relates to a supplemental retirement plan for a current officer that calls for annual cash compensation following retirement from the Company in an amount equal to 2 % of base salary, as defined in the agreement, multiplied by the number of years of service to the Company.

The Company's non-current deferred compensation obligation is included in deferred compensation in the Consolidated Balance Sheets.

Deferred compensation income of $ 472,883 was recognized in selling, general and administrative expenses during the year ended June 30, 2022 when the deferred compensation liability related to the deferred compensation arrangement with Company’s founder and former chairman was relieved upon his passing on December 21, 2021.

Payments of $ 71,250 made to the former chairman during the period before his passing partially offset the income.

The deferred compensation liability of $ 1,997,120 and $ 1,937,229 recorded at June 30, 2023 and June 30, 2022, respectively, relates to a supplemental retirement plan for a current officer that calls for annual cash compensation following retirement from the Company in an amount equal to 2 % of base salary, as defined in the agreement, multiplied by the number of years of service to the Company.

The retirement payments are to be paid monthly to the officer until his death and then to his surviving spouse monthly until her death.

Deferred compensation (income)/expense of ($ 231,370 ) and $ 102,000 was recognized under this arrangement during the years ended June 30, 2022 and 2021, respectively, to record the liability at net present value of the future expected payments.

The net present value was calculated using a discount factor of 4.78 % at June 30, 2022 and 3.29 % as of June 30, 2021.

Deferred compensation expense/(income) of $ 59,891 and ($ 231,370 ) was recognized under this arrangement during the years ended June 30, 2023 and 2022, respectively, to record the liability at net present value of the future expected payments.

The net present value was calculated using a discount factor of 5.21 % and 4.78 % at June 30, 2023 and 2022, respectively.

The life expectancies used in the calculation of net present value were 18.90 and 19.70 years for fiscal years ended June 30, 2023 and 2022, respectively.

8 unchanged sentences

Net income attributable to common shareholders per share:

(1) No stock options were anti-dilutive for the years ended June 20, 2022 and 2021.

(1) No exercised stock options were anti-dilutive for the years ended June 20, 2023 and 2022.

STOCK OPTIONS

In 2012, pursuant to the recommendation of the Board of Directors, the stockholders ratified the creation of the Company’s 2012 Omnibus Incentive Plan (the “2012 Plan”), which superseded the 1990 Flexible Incentive Plan (the "1990 Plan").

The 2012 Plan is administered by a committee of the Board of Directors and provides for granting of various stock-based awards including stock options to eligible participants, primarily officers and certain key employees.

A total of 2,000,000 shares of common stock were available under the terms of the 2012 Plan plus shares outstanding under the 1990 Plan that expired or were otherwise forfeited, canceled or terminated after July 25, 2012, the Effective Date of the 2012 Plan.

As of June 30, 2022, there were 690,308 options available for future grants.

Options vest over a 3 -to- 5 -year period from the date of grant, with a maximum term of 5 to 10 years.

The Company's policy is to issue new shares when stock options are exercised.

As of July 25, 2022, the tenth anniversary of the 2012 Plan, no further awards may be made under the 2012 Plan.

The fair value of each stock option grant was estimated as of the date of grant using the Black-Scholes pricing model.

As of July 25, 2022, the tenth anniversary of the Company’s 2012 Omnibus Incentive Plan (the “2012 Plan”), the 2012 Plan expired.

A new plan (the “2023 Plan”) was approved by the Board of Directors on July 26, 2023, and will be proposed to be approved by the shareholders at the Company’s Annual Meeting in October 2023.

The 2023 Plan will be administered by the Compensation Committee of the Board of Directors and provide for the granting of various stock-based incentive awards to eligible participants, primarily officers and certain key employees of the Company.

If approved, the 2023 Plan will have 2,000,000 shares of common stock available for issuance thereunder, plus any shares subject to awards remaining outstanding under the 2012 Plan that expired or are otherwise forfeited, canceled, or terminated.

The Company expects that stock options granted under the 2023 Plan would vest over a three -to- five-year period from the date of grant and have a maximum term of five to ten years .

As with the 2012 Plan, pursuant to the 2023 Plan new shares will be issued upon exercise of stock options.

The fair value of each stock option grant under the 2012 Plan was estimated as of the date of grant using the Black-Scholes pricing model.

The resulting compensation cost for fixed awards with graded vesting schedules is amortized on a straight-line basis over the vesting period for the entire award.

Forfeitures are accounted for as they occur.

The expected term of awards granted is determined based on historical experience with similar awards, giving consideration to the expected term and vesting schedules.

The expected volatility is determined based on the Company’s historical stock prices over the most recent period commensurate with the expected term of the award.

The risk-free interest rate is based on U.S.

The expected term of awards granted was determined based on historical experience with similar awards, giving consideration to the expected term and vesting schedules.

The expected volatility was determined based on the Company’s historical stock prices over the most recent period commensurate with the expected term of the award.

The risk-free interest rate was based on U.S.

Treasury zero-coupon issues with a remaining term commensurate with the expected term of the award.

3 unchanged sentences

These expenses were included in selling, general and administrative expenses.

Options are granted at a price equal to or greater than the market value of the common stock on the date of grant.

The per share weighted average fair value of the stock options granted during the year ended June 30, 2021 was $ 1.12 .

No options were granted during the year ended June 30, 2022.

Options were granted at a price equal to or greater than the market value of the common stock on the date of grant.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model.

For the options granted in 2021, the Company used the following weighted-average assumptions:

Expected stock price volatility

Risk free interest rate

Expected dividend yield

Expected life of options (years)

The following table identifies options granted, exercised, canceled, or available for exercise pursuant to the 1990 Plan and the 2012 Plan:

No options were granted during the years ended June 30, 2023 and 2022.

The following table identifies options granted, exercised, canceled, or available for exercise pursuant to the 2012 Plan:

Shares under option at June 30, 2021

2 unchanged sentences

1.73 - $ 2.65

1.77 - $ 6.00

1.77 - $ 5.24

Shares under option at June 30, 2022

22 unchanged sentences

No shares were repurchased in fiscal year 2023 or 2022.

The Company has an agreement with the former chairman, in the event of his death, at the request of the executor of his estate, to repurchase up to $ 2,000,000 of Company common stock from his estate.

The Company did not have the right to require the estate to sell stock to the Company.

Upon his passing, the estate has twelve months to exercise the right to require the Company to repurchase the stock.

The estate did not exercise this right as of June 30, 2022 and is not expected to do so.

As of June 30, 2022, the estate of the former chairman did not hold a material amount of Company stock.

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 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 (the “Extended Term”), and is being accounted for as an operating lease.

15 unchanged sentences

Present value adjustment

( 1,017,275 )

Total lease liabilities

RELATED PARTY TRANSACTIONS

The lease is described more fully in Note 14.

During the year ended June 30, 2023, the Company made a charitable contribution of $ 75,000 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 approximately $ 4,000 of charitable contributions made to the Foundation during the year ended June 30, 2022.

EMPLOYEE BENEFIT PLANS

8 unchanged sentences

CONCENTRATIONS

In the years ended June 30, 2022 and 2021, the Company’s largest customers were Amazon Seller Central and Ingram Micro, respectively.

The Company’s sales to Amazon Seller Central were approximately 13 % and 3 % of net sales in fiscal year 2022 and 2021, respectively.

Ingram Micro sales were approximately 10 % and 18 % of net sales in fiscal year 2022 and 2021, respectively.

In the years ended June 30, 2023 and 2022, the Company’s largest concentration of sales came from direct-to-consumer through the Amazon portal and were approximately 20 % and 16 % of net sales in fiscal year 2023 and 2022, respectively.

The five largest customers of the Company accounted for approximately 51 % of net sales in fiscal year 2023 and 44 % in fiscal year 2022.

The two customers with the largest accounts receivable balances as of June 30, 2022 and 2021 were Ingram Micro and Amazon Vendor Central.

Accounts receivable from Ingram Micro as of June 30, 2022 and June 30, 2021, represented 19 % and 24 % of total trade accounts receivables, respectively.

Amazon Vendor Central accounts receivable as of June 30, 2022 and June 30, 2021, were approximately 18 % and 19 % of total trade account receivables, respectively.

The three customers with individual accounts receivable balances greater than 10% as of June 30, 2023 and 2022 were Eurostar, Ingram Micro and Amazon Vendor Central.

Accounts receivable from Eurostar represented 24 % of total trade accounts receivable as of June 30, 2023.

As of June 30, 2022, there was no receivable from Eurostar.

Ingram Micro accounts receivable as of June 30, 2023 and 2022, were approximately 14 % and 19 % of total trade account receivables, respectively.

Amazon Vendor Central accounts receivables were approximately 13 % and 18 % of total trade account receivables as of June 30, 2023 and 2022, respectively.

The majority of international customers, outside of Canada, purchase products on a cash against documents or cash in advance basis.

1 unchanged sentence

The Company uses contract manufacturing facilities in the People’s Republic of China.

The majority of the contract manufacturing is done by two vendors with one vendor representing approximately 59 % and 52 % of the manufacturing costs in fiscal years 2022 and 2021, respectively.

The majority of the contract manufacturing is done by two vendors with one vendor representing approximately 59 % of the manufacturing costs in fiscal year 2023 and 2022.

The Company has a long-term relationship with this vendor.

5 unchanged sentences

In the event that a monetary award or judgment is received by the Company in connection with these complaints, all or portions of such amounts will be due to third parties.

The Company does not expect to incur additional fees and costs related to these lawsuits that may have a material impact to its financial statements.

The Company may incur additional fees and costs related to these lawsuits, however, timing and impact on its financial statements is uncertain.

Depending on the response to and the underlying results of the enforcement program, the Company may continue to litigate its claims, enter into licensing arrangements or reach some other outcome potentially advantageous to its competitive position .

During the year ended June 30, 2023, in connection with its intellectual property enforcement program, the Company granted a license covering certain of its patents and recognized gross proceeds of $ 33,000,000 , which were recorded as other income, offset by legal fees and related expenses of approximately $ 22,141,000 which were recorded as selling, general and administrative expenses.

Also, on August 4, 2023 , the Company’s lawsuit against Plantronics, Inc.

and Polycom, Inc.

was dismissed following resolution of the litigation between the parties and had no impact on the Company’s financial statements.

 The Company was notified by One-E-Way, Inc.

3 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 to $ 140,000 and has accrued the lower amount as of June 30, 2022 and 2021.

The Company estimates that this matter will ultimately be resolved at a cost of approximately $ 41,000 and has accrued this amount as of June 30, 2023 and 2022.

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

1 unchanged sentence

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

SUBSEQUENT EVENTS

In July 2022, in connection with its ongoing intellectual property enforcement program, which includes lawsuits alleging infringement of patents relating to its wireless audio technology, the Company has granted licenses covering certain Company patents and will realize approximately $ 12 million in non-recurring net proceeds, after fees and expenses, in the first quarter of fiscal year 2023.

EXHIBIT INDEX

10 unchanged sentences

Filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended June 30, 2020 and incorporated herein by reference.

Restated Voting Trust Agreement by and among Michael J.

Koss (the Voting Trustee) and John C.

and Michael J.

Koss, as co-Trustees of the John C.

Revocable Trust, the Nancy Koss 2012 Trust, the Koss Family Trust and Michael J.

Koss as President of K.F.T.

Corporation**

Death Benefit Agreement with John C.

2 unchanged sentences

Filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference.

Salary Continuation Resolution for John C.

Filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference.

Consent of Directors (Supplemental Executive Retirement Plan for Michael J.

3 unchanged sentences

First Amendment to Revolving Credit Agreement dated January 28, 2022, and between Koss Corporation and Town Bank filed as Exhibit 10.1 to the Company’s Form 10-Q on January 29, 2022 and incorporated by reference here.

Second Amendment to Revolving Credit Agreement dated February 4, 2022**

Third Amendment to Revolving Credit Agreement, effective October 30, 2022, by and between the Company and Town Bank.

Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q on October 28, 2022 and incorporated herein by reference.

General Business Security Agreement dated May 14, 2019, between Koss Corporation and Town Bank Filed as Exhibit 10.2 to the Company’s Form 8-K on May 16, 2019 and incorporated by reference herein.

35 unchanged sentences

/s/ William J.

/s/ Lenore E.

Sweasy, Director

Lillie, Director

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 9A. Controls and Procedures