Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are designed to ensure that (1) information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (2) that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2023. The Company’s management has concluded that the Company’s disclosure controls and procedures as of June 30, 2023, were effective at the reasonable assurance level.
Management’s Annual Report on Internal Controls over Financial Reporting .
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) and designing such internal controls to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. There are inherent limitations to the effectiveness of any system of internal control over financial reporting, including the possibility of human error or the circumvention or overriding of controls and procedures. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.
Management conducted its evaluation of the effectiveness of its internal control over financial reporting based on the framework in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that the Company’s internal control over financial reporting as of June 30, 2023, was effective.
Changes in 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.
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 9C. DISCL OSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
This information is incorporated by reference to Koss Corporation’s Proxy Statement for its 2023 Annual Meeting of Stockholders to be filed with the Commission under Regulation 14A within 120 days of the end of the fiscal year covered by this Form 10-K. The Company adopted a code of ethics, which is a "code of ethics" as defined by applicable rules of the SEC, which is applicable to its directors, officers and employees. The code of ethics is publicly available on the Company's website at investors.koss.com. If the Company makes any substantive amendments to the code of ethics or grants any waiver, including any implicit waiver, from a provision of the code to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, the Company will disclose the nature of the amendment or waiver on that website or in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION.
This information is incorporated by reference to Koss Corporation’s Proxy Statement for its 2023 Annual Meeting of Stockholders to be filed with the Commission under Regulation 14A within 120 days of the end of the fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
This information is incorporated by reference to Koss Corporation’s Proxy Statement for its 2023 Annual Meeting of Stockholders to be filed with the Commission under Regulation 14A within 120 days of the end of the fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
This information is incorporated by reference to Koss Corporation’s Proxy Statement for its 2023 Annual Meeting of Stockholders to be filed with the Commission under Regulation 14A within 120 days of the end of the fiscal year covered by this Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
This information is incorporated by reference to Koss Corporation’s Proxy Statement for its 2023 Annual Meeting of Stockholders to be filed with the Commission under Regulation 14A within 120 days of the end of the fiscal year covered by this Form 10-K.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as part of this report:
1. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
27
Consolidated Balance Sheets as of June 30, 2023 and 2022
29
Consolidated Statements of Income for the Years Ended June 30, 2023 and 2022
30
Consolidated Statements of Cash Flows for the Years Ended June 30, 2023 and 2022
31
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2023 and 2022
32
Notes to Consolidated Financial Statements
33
2. Financial Statement Schedules
All schedules have been omitted because the information is not applicable, is not material or because the information required is included in the Consolidated Financial Statements or the notes thereto.
3. Exhibits Filed
See Exhibit Index attached hereto.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Koss Corporation and Subsidiaries
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 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
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and the significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
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 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. Assumptions subject to estimate included discount rates, mortality rates, and a future retirement date. Changes to these assumptions may have a material impact on the consolidated financial statements.
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 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.
We tested the discount and mortality rate assumptions used by management to calculate the deferred compensation liability by independently determining our own assumptions based on the relevant facts and circumstances and recalculating the deferred compensation liability utilizing those assumptions.
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
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agreement. 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
PCAOB ID 344
We have served as the Company’s auditor since 2019.
Milwaukee, Wisconsin
August 25, 2023
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KOSS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30,
2023
2022
ASSETS
Current assets:
Cash and cash equivalents
$
3,091,062
$
9,208,170
Short-term investments
17,064,274
—
Accounts receivable, less allowance for doubtful accounts of $ 6,027 and $ 2,027 , respectively
1,379,517
1,846,620
Inventories
6,423,441
8,631,362
Prepaid expenses and other current assets
284,622
188,478
Interest receivable
51,150
—
Income tax receivable
86,901
3,085
Total current assets
28,380,967
19,877,715
Equipment and leasehold improvements, net
953,903
1,088,017
Other assets:
Operating lease right-of-use asset
3,015,887
3,247,725
Cash surrender value of life insurance
6,020,048
5,744,724
Total other assets
9,035,935
8,992,449
Total assets
$
38,370,805
$
29,958,181
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
267,513
$
796,163
Accrued liabilities
970,530
560,356
Deferred revenue
450,312
543,891
Operating lease liability
236,225
223,530
Income taxes payable
87,237
6,118
Total current liabilities
2,011,817
2,130,058
Long-term liabilities:
Deferred compensation
1,997,120
1,937,229
Deferred revenue
113,003
169,210
Operating lease liability
2,787,970
3,024,195
Total long-term liabilities
4,898,093
5,130,634
Total liabilities
6,909,910
7,260,692
Stockholders' equity:
Common stock, $ 0.005 par value, authorized 20,000,000 shares; issued and outstanding 9,234,795 and 9,147,795 shares, respectively
46,174
45,739
Paid in capital
13,113,993
12,653,402
Retained earnings
18,300,728
9,998,348
Total stockholders' equity
31,460,895
22,697,489
Total liabilities and stockholders' equity
$
38,370,805
$
29,958,181
The accompanying notes are an integral part of these Consolidated Financial Statements.
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KOSS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30,
2023
2022
Net sales
$
13,099,651
$
17,705,519
Cost of goods sold
8,642,237
10,989,889
Gross profit
4,457,414
6,715,630
Selling, general and administrative expenses
29,358,466
5,813,607
Income (loss) from operations
( 24,901,052 )
902,023
Other income
33,000,000
362,390
Interest income
520,809
11,513
Income before income tax provision
8,619,757
1,275,926
Income tax provision
317,377
7,517
Net income
$
8,302,380
$
1,268,409
Income per common share:
Basic
$
0.90
$
0.14
Diluted
$
0.85
$
0.13
Weighted-average number of shares:
Basic
9,192,799
9,070,277
Diluted
9,753,760
9,985,662
The accompanying notes are an integral part of these Consolidated Financial Statements.
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KOSS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
2023
2022
Operating activities:
Net income
$
8,302,380
$
1,268,409
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for (recovery of) doubtful accounts receivable
4,000
( 35,305 )
Depreciation of equipment and leasehold improvements
230,292
293,465
Accretion of discount on treasury securities
( 226,603 )
—
Noncash operating lease expense
8,308
—
Stock-based compensation expense
289,676
463,633
Change in cash surrender value of life insurance
( 187,329 )
( 211,636 )
Provision (benefit) for deferred compensation
59,891
( 160,120 )
Deferred compensation gain
—
( 71,250 )
Deferred compensation relieved
—
( 472,883 )
Other income - Net gain from life insurance benefits
—
( 262,391 )
Loss on disposal of fixed assets
2,263
7,856
Net changes in operating assets and liabilities:
Accounts receivable
463,103
429,470
Inventories
2,207,921
( 2,729,850 )
Prepaid expenses and other current assets
( 96,144 )
267,526
Interest receivable
( 51,150 )
—
Income taxes receivable
( 83,816 )
—
Income taxes payable
81,119
( 1,510 )
Accounts payable
( 528,650 )
397,730
Accrued liabilities
410,174
44,789
Deferred revenue
( 149,786 )
( 170,463 )
Net cash provided by (used in) operating activities
10,735,649
( 942,530 )
Investing activities:
Purchase of equipment and leasehold improvements
( 98,441 )
( 108,158 )
Life insurance premiums paid
( 87,995 )
( 95,887 )
Proceeds from life insurance policy
—
2,014,184
Proceeds from the maturity of treasury securities
2,022,000
—
Purchases of treasury securities
( 18,859,671 )
—
Net cash (used in) provided by investing activities
( 17,024,107 )
1,810,139
Financing activities:
Proceeds from exercise of stock options
171,350
1,390,346
Net cash provided by financing activities
171,350
1,390,346
Net (decrease) increase in cash and cash equivalents
( 6,117,108 )
2,257,955
Cash and cash equivalents at beginning of year
9,208,170
6,950,215
Cash and cash equivalents at end of year
$
3,091,062
$
9,208,170
Supplemental cash flow information:
Cash paid for income taxes
$
320,073
$
—
The accompanying notes are an integral part of these Consolidated Financial Statements.
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KOSS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Paid in
Retained
Shares
Amount
Capital
Earnings
Total
Balance, June 30, 2021
8,608,706
43,044
10,802,118
8,729,939
19,575,101
Net income
—
—
—
1,268,409
1,268,409
Stock-based compensation expense
—
—
463,633
—
463,633
Exercise of common stock options
539,089
2,695
1,387,651
—
1,390,346
Balance, June 30, 2022
9,147,795
45,739
12,653,402
9,998,348
22,697,489
Net income
—
—
—
8,302,380
8,302,380
Stock-based compensation expense
—
—
289,676
—
289,676
Exercise of common stock options
87,000
435
170,915
—
171,350
Balance, June 30, 2023
9,234,795
$
46,174
$
13,113,993
$
18,300,728
$
31,460,895
The accompanying notes are an integral part of these Consolidated Financial Statements.
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KOSS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS — Koss Corporation ("Koss"), a Delaware corporation, and its 100 %-owned subsidiaries (collectively the "Company"), reports its finances as a single reporting segment, as the Company’s only business line is the design, manufacture and sale of stereo headphones and related accessories. The Company leases its plant and office in Milwaukee, Wisconsin. The domestic market is served by domestic sales representatives and independent manufacturers' representatives working directly with certain retailers, distributors, and original equipment manufacturers. International markets are served by domestic sales representatives and sales personnel in the Netherlands and the Caucasus region which utilize independent distributors in several foreign countries. The Company has two subsidiaries, Koss Corp B.V. and Koss U.K. Limited ("Koss UK"), which were formed to comply with certain European Union ("EU") requirements. Koss Corp B.V. and Koss UK are non-operating and hold no assets.
BASIS OF CONSOLIDATION — The Consolidated Financial Statements include the accounts of Koss and its subsidiaries, Koss Corp B.V. and Koss UK, which are 100 %-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION — Revenues from product sales are recognized when the customer obtains control of the product, which typically occurs upon shipment from the Company's facility. There are a very limited number of customers for which control does not pass until they have received the products at their facility. Revenue from product sales is adjusted for estimated warranty obligations and variable consideration, which are detailed below. The amount of revenue recognized is to reflect the consideration expected to be received for those goods or services.
Warranties - The Company offers a lifetime warranty to consumers in the United States and certain other countries. This lifetime warranty creates a future performance obligation. The Company determines the standalone selling price for this performance obligation using the cost-plus method. There are also certain foreign distributors that receive warranty repair parts and replacement headphones to satisfy warranty obligations in those countries. The Company defers revenue to recognize the future obligations related to these warranties. The deferred revenue is based on historical analysis of warranty claims relative to sales. 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. The Company typically receives payment for product at the time of shipment or under normal collection terms, which are generally 30-60 days. The Company estimates that the warranty related performance obligation is satisfied within one to three years and therefore uses that same time frame for recognition of the deferred revenue, using amortization of 50 % in year 1 , 30 % in year 2 , and 20 % in year 3 for domestic sales. Export deferred revenue, where applicable, is recognized over a 12-month period from date of shipment.
Reserves for Variable Consideration - Revenue from product sales is recorded at the net sales price, which includes estimates of variable consideration for which reserves are established and which result from returns, rebates, and co-pay assistance that are offered within contracts between the Company and its customers. Overall, these reserves reflect the Company's best estimates of the amount of consideration to which it is entitled based on the terms of the contract. If actual results in the future vary from the estimates, the Company will adjust these estimates, which would affect net sales and operating results in the period such variances become known.
Product Returns - The Company generally offers customers a limited right of return. The Company estimates the amount of product sales that may be returned by its customers and records the estimate as a reduction of revenue in the period the related product revenue is recognized. Product return liabilities are estimated using historical sales and returns information. If actual results in the future vary from the estimates, the Company will adjust these estimates, which would affect net sales and operating results in the period such variances become known.
Volume Rebates - The Company offers volume rebates to certain customers in the United States and certain foreign distributors. These volume rebates are tied to sales volume within specified periods. The amount of revenue is reduced for variable consideration related to customer rebates, which are calculated using expected values and is based on program specific factors such as expected rebate percentages and expected volumes. 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
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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.
RESEARCH AND DEVELOPMENT — Research and development is primarily comprised of product prototypes and testing. These activities, charged to operations as a component of selling, general and administrative expenses in the accompanying Consolidated Statements of Income, amounted to $ 288,231 and $ 285,244 in 2023 and 2022, respectively.
ADVERTISING COSTS — Advertising costs included within selling, general and administrative expenses in the accompanying Consolidated Statements of Income were $ 65,374 in 2023 and $ 50,513 in 2022. Such costs are expensed as incurred.
INCOME TAXES — The Company operates as a C Corporation under the Internal Revenue Code (the “Code"). Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred income tax assets and liabilities are adjusted through the provision for income taxes. The differences relate principally to different methods used for depreciation and amortization for income tax purposes, net operating loss carryforwards, capitalization requirements of the Code, allowances for doubtful accounts, provisions for excess and obsolete inventory, stock-based compensation, warranty reserves, and other income tax related carryforwards. A valuation allowance is established when necessary to reduce deferred income tax assets to the amount that is more likely than not to be realized.
PATENT COSTS — The Company incurs on-going legal fees and filing costs related to the patent portfolio. These costs are expensed in the period they are incurred since no patent legal costs were probable to provide a future economic benefit.
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. The Company maintains its cash on deposit at a commercial bank located in the United States of America. The Company periodically has cash balances in excess of insured amounts. The Company has not experienced, and does not expect to incur, any losses on these deposits.
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. The carrying value of inventory is reviewed for impairment on at least a quarterly basis, or more frequently if warranted due to changes in market conditions. See Note 5 for additional information on inventory.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS — Equipment and leasehold improvements are stated at cost. 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. Major expenditures for property and equipment and significant renewals are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation and
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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 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.
LIFE INSURANCE POLICIES — Life insurance policies are stated at cash surrender value or at the amount the Company would receive in the case of split-dollar arrangements. 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, 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. The selling, general and administrative expenses recorded during the year end June 30, 2022, also include the gain recorded as a result of the reversal of the deferred compensation current and noncurrent liabilities recorded for the Company’s founder who passed away on December 21, 2021. See Note 10 for additional information on deferred compensation.
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. 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. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. Management determines fair value using an undiscounted future cash flow analysis or other accepted valuation techniques. 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 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. The Company accounts for stock-based compensation in accordance with ASC 718 "Compensation - Stock Compensation". 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 — 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.
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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.
2. 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.
3. REVENUE RECOGNITION
The Company disaggregates its net sales by geographical location as it believes it best depicts how the nature, timing and uncertainty of net sales and cash flows are affected by economic factors. The following table summarizes net sales by geographical location:
2023
2022
United States
$
9,848,521
$
13,132,899
Export
3,251,130
4,572,620
Net Sales
$
13,099,651
$
17,705,519
Deferred revenue relates primarily to consumer and customer warranties. These constitute future performance obligations, and the Company defers revenue related to these future performance obligations. Effective July 1, 2022, the Company decreased its 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. The deferred revenue liability was $ 883,564 as of June 30, 2 021 . 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.
4. INVESTMENTS
The following table summarizes the unrealized positions for the held-to-maturity debt securities as of June 30, 2023:
TThe
Amortized cost basis
Gross unrealized gains
Gross unrealized losses
Fair Value
US Treasury securities
$
17,064,274
$
—
$
93,740
$
16,970,534
Total
$
17,064,274
$
—
$
93,740
$
16,970,534
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
Fair value
Due within one year
$
17,064,274
$
16,970,534
Total
$
17,064,274
$
16,970,534
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5. INVENTORIES
The components of inventories at June 30, 2023 and 2022 were as follows:
2023
2022
Raw materials
$
2,071,360
$
2,217,621
Finished goods
6,178,186
8,302,546
Inventories, gross
8,249,546
10,520,167
Reserve for obsolete inventory
( 1,826,105 )
( 1,888,805 )
Inventories, net
$
6,423,441
$
8,631,362
6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The major categories of equipment and leasehold improvements at June 30, 2023 and 2022 are summarized as follows:
Estimated useful lives (in years)
2023
2022
Machinery and equipment
5 - 10
$
619,064
$
601,315
Furniture and office equipment
5 - 10
337,419
337,419
Tooling
5
4,506,044
4,506,044
Computer & technology equipment
3 - 5
197,072
197,073
Leasehold improvements
3 - 11
2,864,335
2,951,054
Assets in progress
N/A
256,038
235,749
8,779,972
8,828,654
Less: accumulated depreciation and amortization
7,826,069
7,740,637
Equipment and leasehold improvements, net
$
953,903
$
1,088,017
7. INCOME TAXES
The Company utilizes the liability method of accounting for income taxes. The liability method measures the expected income tax impact of future taxable income and deductions implicit in the Consolidated Balance Sheets. The income tax provision in 2023 and 2022 consisted of the following:
Year Ended June 30,
2023
2022
Current:
Federal
$
230,139
$
—
State
87,238
7,517
Deferred
—
—
Total income tax provision
$
317,377
$
7,517
The 2023 and 2022 tax results in an effective rate different than the federal statutory rate because of the following:
Year Ended June 30,
2023
2022
Federal income tax liability at statutory rate
$
1,803,000
$
267,945
State income tax liability, net of federal income tax effect
323,565
47,765
Utilization of net operating loss carryforwards
( 1,720,747 )
—
(Decrease) increase in valuation allowance
( 44,841 )
1,486,001
Stock option (deduction)
( 24,218 )
( 1,966,822 )
Non-deductible officers' compensation
—
127,612
All other permanent items
( 41,701 )
( 50,573 )
R&D credit
( 19,340 )
( 34,936 )
Return-to-provision
( 54,414 )
( 38,863 )
Expiration of stock options and tax credits
—
7,573
State tax rate change
83,094
157,716
Uncertain tax position
25,269
—
Other
( 12,290 )
4,099
Total income tax provision
$
317,377
$
7,517
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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:
2023
2022
Deferred income tax assets:
Deferred compensation
$
491,608
$
479,340
Stock-based compensation
117,607
107,499
Accrued expenses and reserves
571,719
551,562
Deferred revenue
138,665
176,447
Federal and state net operating loss carryforwards
8,216,671
9,942,511
IRC Section 174 research and development costs
63,855
—
Credit carryforwards
169,552
292,155
Equipment and leasehold improvements
136,294
122,764
Lease liability
744,431
803,603
Valuation allowance
( 9,906,018 )
( 11,671,606 )
Total deferred income tax assets
744,384
804,275
Equipment and leasehold improvements
—
—
ROU asset
( 742,386 )
( 803,603 )
Other
( 1,998 )
( 672 )
Net deferred income tax assets
$
-
$
-
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 $ 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, 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. As of the end of the period, the Company has evaluated all evidence concerning the usage of their deferred tax assets and the determination has been made to maintain a full valuation allowance on the Company’s net deferred tax asset. 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.
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. 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.
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Additionally, GAAP provides guidance on the recognition of interest and penalties related to income taxes. No interest or penalties related to income taxes has been accrued or recognized as of and for the years ended June 30, 2023 or 2022. The Company records interest related to unrecognized tax benefits in interest expense.
The Company files income tax returns in the United States federal jurisdiction and in several state jurisdictions. The Company’s federal tax returns for tax years and state income tax returns are open for the standard statutory period.
The following are the changes in the valuation allowance:
Balance,
Decrease (Increase)
beginning
in valuation
Balance,
Year Ended June 30,
of year
allowance
end of year
2023
$
( 11,671,606 )
$
1,765,588
$
( 9,906,018 )
2022
$
( 10,185,605 )
$
( 1,486,001 )
$
( 11,671,606 )
8. 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 for letters of credit for the benefit of the Company of up to a sublimit of $ 1,000,000 . There are no unused line fees in the credit facility. On January 28, 2021, the Credit Agreement was amended to extend the expiration to October 31, 2022, and to change the interest rate to Wall Street Journal Prime less 1.50 %. A Third Amendment to the Credit Agreement effective October 30, 2022, extends the maturity date to October 31, 2024. The Company and the Lender also entered into a General Business Security Agreement dated May 14, 2019, under which the Company granted the Lender a security interest in substantially all of the Company’s assets in connection with the Company’s obligations under the Credit Agreement. The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type. The negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, disposition of assets, mergers, and liquidations, among other restrictions. As of 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.
The Company incurs interest expense primarily related to its secured credit facility. There was no interest expense for the years ended June 30, 2023 or 2022.
9. ACCRUED LIABILITIES
Accrued liabilities as of June 30, 2023 and 2022 were as follows:
2023
2022
Cooperative advertising and promotion allowances
$
77,181
$
200,175
Customer credit balances
281,780
30,515
Employee benefits
76,323
75,101
Legal and professional fees
85,500
86,500
Bonus and profit-sharing
369,529
91,784
Sales commissions and bonuses
46,857
39,195
Other
33,360
37,086
Total accrued liabilities
$
970,530
$
560,356
10. DEFERRED COMPENSATION
As of June 30, 2023 and 2022, the Company has a deferred compensation agreement with a current officer. 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 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.
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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 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. The current officer's retirement date is estimated to be October 2029.
11. INCOME PER COMMON AND COMMON STOCK EQUIVALENT SHARE
Basic income per share is computed based on the weighted-average number of common shares outstanding. Diluted income per common share is calculated assuming the exercise of stock options except where the result would be anti-dilutive. The following table reconciles the numerator and denominator used to calculate basic and diluted income per share:
Year Ended
2023
2022
Numerator
Net income
$
8,302,380
$
1,268,409
Denominator
Weighted average shares, basic
9,192,799
9,070,277
Dilutive effect of stock compensation awards (1)
560,961
915,385
Diluted shares
9,753,760
9,985,662
Net income attributable to common shareholders per share:
Basic
$
0.90
$
0.14
Diluted
$
0.85
$
0.13
(1) No exercised stock options were anti-dilutive for the years ended June 20, 2023 and 2022.
12. STOCK OPTIONS
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 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.
As of June 30, 2023, there was $ 195,205 of total unrecognized compensation cost related to stock options granted under the 2012 Plan. This cost is expected to be recognized over a weighted average period of 1.33 years. The Company recognized stock-based compensation expense of $ 289,676 and $ 463,633 in 2023 and 2022, respectively. These expenses were included in selling, general and administrative expenses.
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. No options were granted during the years ended June 30, 2023 and 2022.
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The following table identifies options granted, exercised, canceled, or available for exercise pursuant to the 2012 Plan:
Aggregate
Weighted
Intrinsic
Weighted
Average
Value of
Stock
Average
Remaining
In-The-
Number of
Options
Exercise
Contractual
Money
Shares
Price Range
Price
Life - Years
Options
Shares under option at June 30, 2021
1,748,000
$
1.73 - $ 6.00
$
2.29
4.86
$
36,594,280
Granted
—
$
—
$
—
Exercised
( 539,089 )
$
1.73 - $ 6.00
$
2.58
Expired
—
$
—
$
—
Forfeited
( 150,000 )
$
1.73 - $ 2.65
$
2.00
Shares under option at June 30, 2022
1,058,911
$
1.73 - $ 2.92
$
2.18
3.72
$
5,055,797
Granted
—
$
—
$
—
Exercised
( 87,000 )
$
1.73 - $ 2.65
$
1.97
Expired
—
$
—
$
—
Forfeited
( 51,000 )
$
1.73 - $ 2.65
$
1.92
Shares under option at June 30, 2023
920,911
$
1.73 - $ 2.92
$
2.21
2.21
$
1,373,117
Exercisable as of June 30, 2022
264,577
$
1.73 - $ 2.92
$
2.45
2.06
$
1,180,591
Exercisable as of June 30, 2023
532,245
$
1.73 - $ 2.92
$
2.38
1.30
$
700,947
The aggregate intrinsic value of outstanding and exercisable stock options is defined as the difference between the market value of the Company's stock on any given date and the exercise price, multiplied by the number of in-the-money outstanding and exercisable stock options.
A summary of intrinsic value and cash received from stock option exercises and fair value of vested stock options for the fiscal years ended June 30, 2023 and 2022 is as follows:
2023
2022
Total intrinsic value of stock options exercised
$
371,714
$
9,032,778
Cash received from stock option exercises
$
171,350
$
1,390,346
Total fair value of stock options vested
$
448,476
$
620,018
Total recognized tax benefit
$
77,328
$
1,778,981
Weighted
Average
Grant Date
Shares
Fair Value
Non-vested as of June 30, 2021
1,460,000
$
1.23
Granted
—
—
Vested
( 515,666 )
1.20
Forfeited
( 150,000 )
1.38
Non-vested as of June 30, 2022
794,334
1.22
Granted
—
—
Vested
( 354,668 )
1.26
Forfeited
( 51,000 )
1.34
Non-vested as of June 30, 2023
388,666
$
1.17
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13. STOCK REPURCHASE PROGRAM
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 in the amount authorized for repurchase under the program. As of June 30, 2023, the repurchase of an aggregate of $ 45,500,000 of common stock was authorized under the stock repurchase program, of which $ 43,360,247 had been expended. No shares were repurchased in fiscal year 2023 or 2022.
14. LEASES
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. The lease extension maintained the rent at a fixed rate of $ 380,000 per year and included an option to renew at an increased rate of $ 397,000 for an additional five years ending June 30, 2033 (the “Second Extended Term”). The negotiated increase in rent slated for 2028 will be the first increase in rent since 1996. The Company is responsible for all property maintenance, insurance, taxes, and other normal expenses related to ownership.
The Company used its incremental borrowing rate as of the date of renewal, May 24, 2022, to recalculate the net present value of the operating lease ROU asset and liability. Both the Extended Term and the Second Extended Term renewal options were included in the calculation of the ROU asset and liability as the Company believes it is reasonably certain to exercise both rights to renew. The non-lease components of the agreement related to common area maintenance charges are accounted for separately.
Supplemental information related to lease expense and valuation of the ROU asset and liability was as follows:
Year Ended
2023
2022
Operating lease cost
$
387,669
$
380,000
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
( 380,000 )
$
( 380,000 )
Weighted-average remaining lease term (in years)
10
11
Weighted-average discount rate
5.25 %
5.25 %
The maturity schedule of future minimum lease payments and reconciliation to the operating lease liabilities reported on the 2023 Consolidated Balance Sheet is as follows:
Year Ending June 30,
2024
$
380,000
2025
380,000
2026
380,000
2027
380,000
2028
380,000
Thereafter
1,985,000
Total lease payments
3,885,000
Present value adjustment
( 860,805 )
Total lease liabilities
$
3,024,195
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15. RELATED PARTY TRANSACTIONS
The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is controlled by five equal ownership interests in trusts held by the five beneficiaries of the former chairman’s revocable trust and includes current stockholders of the Company. 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.
16. EMPLOYEE BENEFIT PLANS
Substantially all domestic employees are participants in the Koss Employee Stock Ownership Trust ("KESOT") under which an annual contribution in either cash or common stock may be made at the discretion of the Board of Directors. No contributions were made for the fiscal years 2023 or 2022.
The Company maintains a retirement savings plan under Section 401(k) of the Internal Revenue Code. This plan covers all employees of the Company who have completed one full fiscal quarter of service. Matching contributions can be made at the discretion of the Board of Directors. For fiscal years 2023 and 2022, the matching contribution was 25 % of employee contributions to the plan. Vesting of Company contributions occurs immediately. Company contributions were $ 92,986 and $ 89,314 during 2023 and 2022, respectively.
17. CONCENTRATIONS
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 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. Approximately 24 % and 4 % of the Company's trade accounts receivable at June 30, 2023 and 2022, were foreign receivables denominated in U.S. dollars.
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 % of the manufacturing costs in fiscal year 2023 and 2022. The Company has a long-term relationship with this vendor. However, increased costs from the vendor or an interruption of supply from this vendor could have a material adverse effect on the Company's profit margins and profitability.
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18. LEGAL MATTERS
As of June 30, 2023, the Company is involved in the following matters described below:
As previously reported, the Company has launched a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio. The Company has continued to enforce its intellectual property by filing complaints against certain parties alleging infringement on the Company’s patents relating to its wireless audio technology. In the event that a monetary award or judgment is received by the Company in connection with these complaints, all or portions of such amounts will be due to third parties. The Company may incur additional fees and costs related to these lawsuits, however, timing and impact on its financial statements is uncertain. Depending on the response to and the underlying results of the enforcement program, the Company may continue to litigate its claims, enter into licensing arrangements or reach some other outcome potentially advantageous to its competitive position . During the 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. that some of the Company's wireless products may infringe on certain One-E-Way patents. No lawsuits involving these allegations have yet been filed and served on the Company. The Company is currently investigating whether these allegations have any merit. Depending on the results of the investigation and the defense of these allegations, the ultimate resolution of this matter may have a material effect on the Company's financial statements. The Company estimates that this matter will ultimately be resolved at a cost of approximately $ 41,000 and has accrued this amount as of June 30, 2023 and 2022.
The ultimate resolution of these matters is not determinable unless otherwise noted.
We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving these claims against us, individually or in aggregate, will not have a material adverse impact on our Consolidated Financial Statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
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EXHIBIT INDEX
Exhibit No.
Exhibit Description
3.1
Amended and Restated Certificate of Incorporation of Koss Corporation, as in effect on November 19, 2009. Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2009 and incorporated herein by reference.
3.2
By-Laws of Koss Corporation. Filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference.
3.3
Amendment to the By-Laws of Koss Corporation. Filed as Exhibit 3.3 to the Company’s Current Report on Form 8-K on March 7, 2006 and incorporated herein by reference.
3.4
Amendment to the By-Laws of Koss Corporation. Filed as Exhibit 3.4 to the Company's Annual report on Form 10-K for the year ended June 30, 2020 and incorporated herein by reference.
4.1
Description of Common Stock of Koss Corporation. 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.
9.1
Restated Voting Trust Agreement by and among Michael J. Koss (the Voting Trustee) and John C. Koss, Jr. and Michael J. Koss, as co-Trustees of the John C. Koss, Sr. Revocable Trust, the Nancy Koss 2012 Trust, the Koss Family Trust and Michael J. Koss as President of K.F.T. Corporation**
10.1
Death Benefit Agreement with John C. Koss. Filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference. *
10.2
Stock Purchase Agreement with John C. Koss. 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. *
10.3
Consent of Directors (Supplemental Executive Retirement Plan for Michael J. Koss dated March 7, 1997). Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference. *
10.4
Revolving Credit Agreement dated May 14, 2019, between Koss Corporation and Town Bank Filed as Exhibit 10.1 to the Company’s Form 8-K on May 16, 2019 and incorporated by reference herein.
10.5
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.
10.6
Second Amendment to Revolving Credit Agreement dated February 4, 2022**
10.7
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.
10.8
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.
10.9
Koss Corporation 2012 Omnibus Incentive Plan (Incorporated by reference to Appendix B to Koss Corporation's Definitive Proxy Statement on Schedule 14A filed on August 27, 2012). *
14
Koss Corporation Code of Ethics. Filed as Exhibit 14 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2011 and incorporated by reference herein.
21.1
Subsidiaries of Koss Corporation. Filed as Exhibit 21.1 to the Company’s Annual report on Form 10-K for the year ended June 30, 2020 and incorporated herein by reference.
23.1
Consent of Wipfli LLP. **
31.1
Rule 13a -14(a)/15d-14(a) Certification of Chief Executive Officer. **
31.2
Rule 13a -14(a)/15d-14(a) Certification of Chief Financial Officer. **
32.1
Section 1350 Certification of Chief Executive Officer. ***
32.2
Section 1350 Certification of Chief Financial Officer. ***
101
The following financial information from Koss Corporation's Annual Report on Form 10-K for the year ended June 30, 2023, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2023 and 2022 , (ii) Consolidated Statements of Income for the years ended June 30, 2023 and 2022, (iii) Consolidated Statements of Cash Flows for the years ended June 30, 2023 and 2022 , (iv) Consolidated Statements of Stockholders' Equity for the years ended June 30, 2023 and 2022 and (v) the Notes to Consolidated Financial Statements.
104
The cover page from Koss Corporation’s Annual Report on Form 10-K for the year ended June 30, 2023, filed with the Securities and Exchange Commission on August 26, 2023, formatted in XBRL Cover Page Interactive Data File **
__________________________
*
Denotes a management contract or compensatory plan or arrangement
**
Filed herewith
***
Furnished herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KOSS CORPORATION
By:
/s/ Michael J. Koss
August 25, 2023
Michael J. Koss
Chairman
Chief Executive Officer
By:
/s/ Kim M. Schulte
August 25, 2023
Kim M. Schulte
Chief Financial Officer
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on August 25, 2023.
/s/ Michael J. Koss
/s/ Thomas L. Doerr
Michael J. Koss, Director
Thomas L. Doerr, Director
/s/ Steven A. Leveen
/s/ Theodore H. Nixon
Steven A. Leveen, Director
Theodore H. Nixon, Director
/s/ William J. Sweasy
/s/ Lenore E. Lillie
William J. Sweasy, Director
Lenore E. Lillie, Director
46
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.