What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-10-27 compared with 2023-05-12 · 104 added, 108 removed, 52 unchanged (80% of the section changed)

9 unchanged sentences

Financial Results

The following table presents selected financial data for the three and nine months ended March 31, 2023, and 2022:

The following table presents selected financial data for the three months ended September 30, 2023 and 2022:

Three Months Ended

Nine Months Ended

Financial Performance Summary

Net sales (decrease) increase % from prior year period

Net sales increase (decrease) % from prior year period

Gross profit as % of net sales

2 unchanged sentences

Interest income

(Loss) income before income tax (benefit) provision

(Loss) income before income tax provision

(Loss) income before income tax as % of net sales

Income tax (benefit) provision

Income tax (benefit) provision as % of (loss) income before income tax

Income tax provision

Income tax provision as % of (loss) income before income tax

Fiscal 2023 Period Results Compared with Fiscal 2022 Period

(comments refer to the three and nine-month periods ended March 31 unless otherwise noted)

Net sales for the quarter ended March 31, 2023 decreased by $1,265,000, or 27.3%, primarily due to reduced sales to certain of our distributors in the domestic market and online retailers, as well as lower sales in the European markets.

For the nine-month period ended March 31, 2023, net sales decreased by $3,420,000, or 25.5%, with over 50% of the reduction due to a slowdown in certain of our domestic distributor sales.

This was coupled with a continued decline in sales to our European and Asian markets.

Net sales in the domestic market were approximately $2,717,000 in the three months ended March 31, 2023, compared to approximately $3,735,000 in the prior year period, a decrease of $1,018,000, or 27.3%.

Domestic net sales for the nine months ended March 31, 2023 decreased from $9,781,000 in the prior year period to $7,589,000, a decline of $2,192,000, or 22.4%.

A weakness in consumer demand and bloated customer inventory levels have resulted in a 38% decrease in net sales to certain of our domestic distributors, representing approximately 85% of the drop in domestic net sales.

Growth in direct-to-consumer (DTC) sales of $214,000, or 8.7%, during the nine months ended March 31, 2023 over the same period in the prior year helped to slightly offset the decline.

Export net sales for the three months ended March 31, 2023 decreased by $247,000, or 27.5%, compared to the three months ended March 31, 2022, behind a decrease in sales to our distributors in Russia and Ukraine due to the continued discord in that region.

Export net sales were down $1,228,000, or 33.8%, in the nine months ended March 31, 2023 versus the same prior year period.

The decline in overall sales during fiscal year 2023 heightened the impact of the drop-off in sales to the two distributors in Russia and Ukraine, representing nearly 50% of the decrease in export sales for the current year.

The 12.4% and 34.7% reduction in sales to our European and Asian distributors, respectively, for the current nine-month period also contributed to the decline.

Gross profit margin decreased to 36.1% for the nine months ended March 31, 2023, compared to 38.0% for the nine months ended March 31, 2022.

As the Company sold off inventory brought in during the prior year at higher freight rates, the margins on those sales were adversely impacted.

Margins were also negatively impacted by fixed manufacturing expenses that do not flex with sales volume.

Favorability from lower freight costs during the current nine-month period, as a result of declining rates and a decreasing investment in inventory, provided some positive impact on the overall margin as a partial offset.

Freight rates remained constant through the quarter ended March 31, 2023 and are expected to continue as general container demand remains stable and the partnership with a dedicated freight forwarder is maintained.

Selling, general and administrative expenses for the three months ended March 31, 2023 were $1,746,000, a $180,000 or 11.5% increase over the same period in the prior year.

The decrease in the discount rates used to calculate the deferred compensation liability resulted in an increase in the liability with a corresponding increase to expense.

This, coupled with an increase in legal fees compared to the prior year, were the main factors for the increase.

For the nine months ended March 31, 2023, selling, general and administrative expenses increased by approximately $23,314,000 to $27,891,000 compared to the prior year period.

The significant increase was primarily a result of approximately $22,265,000 in legal fees and expenses incurred in support of the Company’s patent defense litigation.

Also, increased expense related to a bonus accrual of $381,000 and a second quarter profit-sharing payout of $576,000 were recorded as a result of the increased net income before income taxes for the first nine months of fiscal year 2023 due mainly to the licensing proceeds received during the quarter ended September 30, 2022, partially offset by the aforementioned legal fees and expenses.

A decrease of $108,000 in employer taxes on stock option exercises slightly offset the significant increase in expense for the current nine-month period.

Other income for the nine months ended March 31, 2023 consisted entirely of $33,000,000 in licensing proceeds received in the first quarter.

The Company received licensing proceeds of $100,000, which was also recorded as other income, in the first quarter of the prior year.

Also, in December 2021, the Company recognized other income on the proceeds from a company-owned life insurance policy on its founder, who passed away on December 21, 2021.

Total other income for the nine months ended March 31, 2022 was $362,000.

An income tax benefit of approximately $31,000 was recorded during the third quarter of fiscal year 2023 as a result of the taxable loss for the period.

Income tax expense for the nine months ended March 31, 2023 was approximately $464,000 and was comprised of the U.S.

federal statutory rate of 21% and the blended state income tax rate of approximately 3.8%, offset by an adjustment to the valuation allowance for deferred tax assets.

The utilization of net operating loss carryforwards significantly reduced the taxable income, resulting in federal and state tax provisions of $374,714 and $89,214, respectively.

For the three and nine months ended March 31, 2022, a state tax provision of $3,575 and $5,638, respectively, was recorded.

The federal income tax expense was zero for the three and nine months ended March 31, 2022.

The effective tax rate was 5.1% in the nine months ended March 31, 2023 and less than 1% in the nine months ended March 31, 2022.

(comments refer to the three-month periods ended September 30 unless otherwise noted)

Net sales of $3,374,000 for the quarter ended September 30, 2023 were fairly consistent with sales for the same quarter in the prior year, an increase of $10,000.

A reduction in direct-to-consumer (DTC) sales and sales to certain of our distributors in the domestic market were offset by an increase in sales to the European markets.

Export net sales for the three months ended September 30, 2023 increased by $129,000, or 20.1%, compared to the three months ended September 30, 2022, related to an order from a distributor in Eastern Europe.

A $66,000, or 41.7%, reduction in sales to our Asian distributor slightly dampened the overall increase.

Given the perpetuation of the conflict in Eastern Europe and related export restrictions, sales to our Russian distributor have not resumed and there have been no sales to that country since April 2022.

During the three months ended September 30, 2023, net sales to the domestic market declined by $119,000, or 4.4%, offsetting much of the increase in export sales.

Net sales in the domestic market were approximately $2,603,000 compared to $2,722,000 in the three months ended September 30, 2022.

A notable sale to a new customer did not outweigh the 28.6% drop in DTC sales as a general reduction in consumer confidence slowed spending.

A 12.6% decline in net sales to certain of our domestic distributors, resulting from continued overstocked inventory levels of non-Koss items at these distributors, also contributed to the overall decline.

Gross profit margin decreased to 31.6% for the three months ended September 30, 2023, compared to 35.5% for the three months ended September 30, 2022.

A less favorable customer mix of sales, with a lower volume of higher margin DTC and distributor sales, coupled with the continued sell through of Company inventory received from suppliers with higher freight rates, adversely impacted the gross margin.

An increase in inventory obsolescence also drove the reduction in margins.

Favorability in fixed manufacturing expenses during the three months ended September 30, 2023 as a result of cost savings initiatives provided some positive impact compared to the same period in the prior year.

Freight rates edged up slightly through the quarter ended September 30, 2023 and are expected to continue a slow rise during the next quarter.

Given the current labor landscape and the recent settlement of threatened carrier strikes and labor disputes, along with rising energy prices, the Company is anticipating an increase in transportation costs.

The Company’s partnership with a dedicated freight forwarder will help to stabilize contract rates to limit the impact.

While the recent announcement by Yellow freight lines that it has declared bankruptcy may impact carrier availability and increase freight costs, the Company has had no material direct exposure to Yellow.

Selling, general and administrative expenses declined by $22,144,000, or 93.5%, from $23,680,000 for the three months ended September 30, 2022 to $1,536,000 for the same three months in the current period.

The decrease was predominantly driven by the $21,016,000 of legal fees and related expenses incurred during the first quarter in the prior year in support of the Company’s patent defense litigation.

Also, expenses related to bonus and profit-sharing accruals of $381,000 and $576,000, respectively, were recorded during the quarter ended September 30, 2022 as a result of the increased net income before income taxes due mainly to the licensing proceeds received during that quarter, offset by the aforementioned legal fees.

Lastly, the increase in the discount rates used to calculate the deferred compensation liability resulted in a decrease in the liability with a corresponding decrease to expense during the current quarter.

No other income was recorded for the three months ended September 30, 2023.

Other income for the same three months in the prior period consisted entirely of $33,000,000 in licensing proceeds received.

Given the taxable loss for the first quarter of fiscal year 2024, no federal income tax expense was recorded.

State income tax expense of approximately $1,900 was recorded reflecting the minimum required tax due.

For the three months ended September 30, 2022, the utilization of net operating loss carryforwards significantly reduced the taxable income generated by the net licensing proceeds and income tax expense of $598,000, consisting of federal and state tax provisions of $449,000 and $149,000, respectively, was recorded.

The effective tax rate was less than 1% in the three months ended September 30, 2023 and 5.7% in the three months ended September 30, 2022.

It is anticipated that the effective rate in the current year and future years will be reduced by utilization of a portion or all of the federal net operating loss carryforwards that existed as of June 30, 2023.

In the nine months ended March 31, 2023, stock option exercises resulted in tax deductible compensation expense of approximately $332,000 and will offset some of the taxable income generated by the net licensing proceeds.

Net operating loss carryforwards were utilized to reduce the taxable income and, as such, th e remaining expected federal tax loss carryforward is expected to approximate $32,600,000 by the end of the fiscal year.

The quarterly adjustment to the estimated tax loss carryforward decreased the deferred tax asset to approximately $9,800,000 as of March 31, 2023, and the future realization of this continues to be uncertain.

The valuation allowance was also increased to fully offset the deferred tax asset as there is sufficient negative evidence to support the maintaining of a full valuation allowance as, excluding unusual, infrequent items, a three-year cumulative tax loss occurred.

The Company maintains a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio.

The Company’s remaining expected federal tax loss carryforward is expected to approximate $32,100,000 by the end of the fiscal year.

The taxable loss for the quarter increased the net operating loss carryforward deferred tax asset to approximately $8,300,000 as of September 30, 2023, and the future realization of this continues to be uncertain.

The valuation allowance was also increased to fully offset the net deferred tax asset as there is sufficient negative evidence to support the maintaining of a full valuation allowance as, excluding unusual, infrequent items, a three-year cumulative tax loss occurred.

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

The Company has enforced its intellectual property by filing complaints against certain parties alleging infringement on the Company’s patents relating to its wireless headphone technology.

If efforts are successful, the Company may receive royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position from time to time.

If efforts are successful, the Company may

receive royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position from time to time.

However, there is no guarantee of a positive outcome from these efforts in the future, which could ultimately be time-consuming and unsuccessful.

Additionally, all or portions of monetary awards or judgments received by the Company in connection with these complaints will be due to third parties.

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

The Company believes that its financial position remains strong.

The Company had $2.9 million of cash and cash equivalents, $12.0 million of short-term investments and available credit facilities of $5.0 million on March 31, 2023.

The Company had $2.0 million of cash and cash equivalents, $17.2 million of short-term investments and available credit facilities of $5.0 million on September 30, 2023.

Recent Events

Recent events continuing to impact our business include COVID-19, the inflationary cost environment, disruption in our supply chain, the ongoing crisis in Eastern Europe, and the threatened rail strike in the U.S.

As more fully described below, we expect each of these factors will impact our fiscal 2023 performance.

While the impact of these factors remains uncertain, we will continue to evaluate the extent to which these factors will impact our business, financial condition, or results of operations.

Recent and ongoing macroeconomic and geopolitical conditions have impacted, and will continue to impact, our business.

These include, the inflationary cost environment, reduced consumer confidence, disruption in our supply chain and trade tensions with China, the ongoing crisis in Eastern Europe, the crises in the Mideast, the possibility of a government shutdown in the U.S.

and increased risk of cyberattacks.

While the impact of these factors on our fiscal 2024 performance remains uncertain, we will continue to evaluate the extent to which these factors will impact our business, financial condition, or results of operations.

These and other uncertainties with respect to these recent events could result in changes to our current expectations.

The Company continues to closely monitor the impact of COVID-19 (including the emergence of variants) to protect the health and safety of its employees and customers.

Business plans are being continuously updated and executed to maintain supply of the Company’s products to our customers throughout the world.

While we expect the impacts of COVID-19 on our business to moderate, there still remains uncertainty around the pandemic.

As a result of the COVID-19 pandemic, uncertainty with respect to its economic effects has impacted not only our operating results but also the global economy.

The extent and nature of government actions to ease restrictions vary based upon the current extent and severity of the COVID-19 pandemic within their respective countries and localities.

Certain of the Company’s suppliers have been, and could continue to be, impacted by the COVID-19 pandemic, resulting in disruptions to inventory replenishment.

The Company expects the negative sales impacts caused by governmental responses to COVID-19, and the disruption in certain retail businesses to continue so long as new variants of the virus continue to emerge and spread.

The ultimate magnitude of the COVID-19 pandemic, including the extent of its impact on the Company’s business, financial position, results of operations or liquidity, cannot be reasonably estimated at this time due to the rapid development and fluidity of the situation.

The Company's future results will be determined by the effectiveness of vaccines, rollout of vaccine boosters, the duration of governmental pandemic restrictions, the impact of variants, geographic spread, further business disruptions and the overall impact on the economy throughout the world.

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

These measures include increased frequency of cleaning and disinfecting of facilities, and may also include, as necessary, social distancing practices, some remote working, restrictions on business travel, continuing to hold certain events virtually and limitations on visitor access to facilities.

The Company is committed to executing these plans and remains in close contact with its supply chain to monitor future possible implications, especially on production facilities.

Inflationary Cost Environment and Supply Chain Disruption - The Company continues to experience inflationary cost increases in our commodities, packaging materials, wages and higher energy and transportation costs.

These increases have been partially mitigated by pricing actions implemented by the Company in the third quarter of the prior fiscal year, with another increase at the beginning of the third quarter of the current fiscal year.

The Company also continues to work with a dedicated freight forwarding partner to minimize freight rate increases.

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

Delays throughout the supply chain continue as a result of the persistence of COVID-19 in all parts of the world, however, the Company does not believe that these continuing delays will be material to the Company as the cadence of specific customers’ bookings have become more consistent.

The Company is aware that with the easing of COVID-19 restrictions in China, manufacturing operations and major ports could continue to be impacted by an increase in COVID-19 illness, which could result in supply chain delays.

As such, the Company continues to monitor the situation closely, and the supply chain team has modified business plans, which include, but are not limited to:

(1) being alert to potential short supply situations;

(2) assisting suppliers with acquisition of critical components;

and (3) utilizing alternative sources and/or air freight.

In April 2023, United Parcel Service (UPS) and the International Brotherhood of Teamsters Union started labor contract talks to negotiate better pay, no forced overtime and the elimination of a two tier pay system.

Members of the union have stated that they are prepared to walk off the job if UPS fails to deliver a deal before the current contract expires at midnight on July 31, 2023.

Inflationary Cost Environment and Reduced Consumer Confidence - The Company continues to experience inflationary cost increases in our commodities, packaging materials, wages and higher energy and transportation costs, potentially impacting our ability to meet customer demand.

These increases have been partially mitigated by pricing actions implemented in the third quarter of the prior fiscal year, as well as working with a dedicated freight forwarding partner to minimize freight rate increases.

Inflation may impact customer demand for our products resulting from a slowdown in consumer spending as disposable income decreases due to rising interest rates, the price of essential items and dwindling savings.

Other risk factors further exacerbated by inflation include supply chain disruptions, rising oil and energy costs, risks of international operations and the recruitment and retention of talent.

Supply Chain Disruption and Trade Tensions with China - The Company relies on our third-party supply chain and distribution networks and the availability of necessary components to produce a significant number of our products.

A reduction or interruption in supply, including interruptions due to a reoccurrence of the COVID-19 pandemic, geopolitical unrest, labor shortages or strikes, or a failure to procure adequate components, may lead to delays in manufacturing or increases in costs.

The Company uses contract manufacturing facilities in the People’s Republic of China and Taiwan to produce a significant amount of our products.

There has been increasing geopolitical tension between China and Taiwan that may affect future shipments from Taiwan and China-based suppliers.

Any other adverse changes in the social, political, regulatory or economic conditions in the countries could materially increase the cost of the products we buy or delay shipments.

There has also been increasing geopolitical tension between China and the United States.

Sustained uncertainty about, or worsening of, economic relations and further escalation of trade tensions between the United States and China, or any other country in which the Company conducts business, could result in retaliatory trade restrictions that restrict our ability to source products from China or continue business in such other country.

Any alterations to our business strategy or operations made in order to adapt to or comply with any such changes would be time-consuming and expensive, and the Company may not be able to pass along most increases in tariffs and freight charges to the Company’s customers, which would also directly affect profits.

Our dependence on foreign suppliers for our products necessitates ordering products further in advance than we would if manufactured domestically, thus increasing investments in inventory.

Delays in receiving and shipping products due to interruptions in its supply chain would pose a risk of lower sales to the Company and the potential for price volatility, negatively impacting profits.

Recovery of a single facility through replacement of a supplier in the event of a disaster or suspension of supply could take an estimated six to twelve months.

On July 25, 2023, United Parcel Service (UPS) and the International Brotherhood of Teamsters Union reached a tentative five-year contract deal that averted a nationwide strike.

Also, since December 2022, when the U.S.

government abated a threatened railroad strike and implemented a labor agreement that prohibited the workers from striking, some union leaders and railroad executives have voluntarily reopened the conversation around paid sick leave in hopes of negotiating an improvement.

The Company continues to monitor both situations as ether strike in the U.S.

could potentially exacerbate disruptions in the supply chain and impact product shipments from suppliers and to customers, resulting in increased operating costs and delays in product shipments.

Russia’s Invasion of Ukraine - The ongoing Russia-Ukraine conflict and the sanctions imposed in response to this conflict have increased global economic and political uncertainty.

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

Also, given the continued humanitarian crisis in Ukraine as a result of the conflict, and the population seeking refuge in other countries, sales to Ukraine have also ceased.

The lack of sales to Russia and Ukraine during the nine months ended March 31, 2023 compared to net sales of approximately $600,000, or 4% of total net sales for the same period in the prior year.

The continuation of the conflict will have an impact on sales to the region in the future, however we are uncertain of what that impact will be on the results of operations.

government abated a threatened railroad strike and implemented a labor agreement that prohibited the workers from striking, there has been movement by some of the leading railroad companies to grant paid sick leave with continued negotiations between union leaders and railroad executives of each of the remaining railroads.

In addition, Yellow freight lines recently announced their insolvency, however, the Company had no material direct exposure to Yellow in the current fiscal year.

The Company continues to monitor these situations as the changes in the current labor landscape, the settlement of recent labor disputes, coupled with rising energy prices, could potentially exacerbate disruptions in the supply chain, delay product shipments and increase transportation costs.

Russia’s Invasion of Ukraine - Financial and credit markets around the world experienced volatility following the invasion of Ukraine by Russia in February 2022.

In response to the invasion, the United States, United Kingdom, and European Union, along with others,

imposed significant sanctions and export controls against Russia, Russian banks and certain Russian individuals and may implement additional sanctions or take further punitive actions in the future.

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

Also, as a result of the humanitarian crisis in Ukraine created by the war and the population seeking refuge in other countries, sales to Ukraine have been impacted.

During the three months ended September 30, 2023 and 2022, there were no sales to Russia.

Cyberattacks - Cyberattacks are a growing geopolitical risk, becoming larger, more frequent, more intricate and more relentless.

They are a significant threat to individual organizations and national security .

We rely on accounting, financial, and operational management information systems to conduct our operations.

Any disruption in these systems could adversely affect our ability to conduct our business.

Furthermore, as part of our normal business activities, we collect and store common confidential information about customers, employees, vendors, and suppliers.

This information is entitled to protection under a number of regulatory regimes.

Any failure to maintain the security of the data, including the penetration of our network security and the misappropriation of confidential and personal information, could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also result in deterioration in customers confidence in us and other competitive disadvantages, and thus could have a material adverse impact on our financial condition and results of operations .

While we devote resources to security measures to protect our systems and data, these measures cannot provide absolute security and the insurance coverage we maintain may be inadequate to cover claims, costs, and liabilities relating to cybersecurity incidents.

Liquidity and Capital Resources

The following table summarizes cash flows from operating, investing and financing activities for the nine months ended March 31, 2023 and 2022:

Total cash provided by (used in):

The following table summarizes cash flows from operating, investing and financing activities for the three months ended September 30, 2023 and 2022:

Total cash (used in) provided by:

Operating activities

3 unchanged sentences

Operating Activities

A majority of the cash provided by operating activities during the nine months ended March 31, 2023 is the result of the licensing proceeds received, partially offset by the payment of related legal fees and expenses as well as the profit-sharing payout in the second quarter.

Additionally, the continued reduction in inventory levels as the Company’s investment tapers off contributed to the cash provided by operating activities during the first nine months of the current fiscal year.

The use of cash in the same nine-month period in the prior year was related to the impact of the deliberate investment in inventory to ensure adequate stock levels to mitigate the impact of potential supply chain delays.

An increase in accounts payable and accrued liabilities as a result of the increased inventory investment and customer deposits from our European distributors provided cash from operating activities to partially offset the use.

The cash used in operating activities during the three-month period ending September 30, 2023, was primarily payment of bonuses earned in the prior year, renewal of the annual general insurance policies and state income tax payments.

The Company’s strict management of its inventory investment helped to retain cash in the first quarter.

During the three months ended September 30, 2022, the majority of the cash provided by operating activities resulted from the licensing proceeds received, partially offset by the payment of related legal fees and expenses.

The reduction in the Company’s investment in inventory also contributed to the cash provided by operating activities during that period.

Investing Activities

Cash used by investing activities for the nine months ended March 31, 2023 was almost entirely related to the purchase of $17,300,000 of U.S.

Treasury securities at a discount.

The Company believes that its cash flow from operations and available cash and its credit facility is sufficient to fund any necessary tooling, leasehold improvement and capital expenditures.

Cash used by investing activities for the three months ended September 30, 2023 was related to fixed asset expenditures, predominantly the replacement of a roof section of the building for approximately $300,000.

The Company also paid the premiums on the company-owned life insurance policies on two of its executives.

This is consistent with the investing activities for the three months ended September 30, 2022.

During the first quarter of the current fiscal year, proceeds of $2,000,000 from the maturity of U.S.

Treasury securities were received and were fully utilized to purchase another similar security.

The Company believes that its available cash and its credit facility is sufficient to fund any necessary tooling, leasehold improvement and capital expenditures.

Financing Activities

Cash provided by financing activities is due entirely to stock option exercises.

In the nine months ended March 31, 2023, an aggregate of 69,000 shares of common stock were issued as a result of employee stock option exercises under the Company’s 2012 Omnibus Incentive Plan.

The cash provided from these stock option exercises was approximately $137,000.

During the nine months ended March 31, 2022, an aggregate of 539,089 shares of common stock were issued as a result of employee stock option exercises under the Company’s 2012 Omnibus Incentive Plan.

The cash provided from these stock option exercises was approximately $1,390,000.

As of March 31, 2023, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stock in the three months ended March 31, 2023 or March 31, 2022 under the stock repurchase program.

The Company's capital expenditures are primarily for leasehold improvements and tooling.

In addition, it has interest payments on its borrowings when it uses its line of credit facility.

The Company believes that cash generated from operations, together with healthy cash reserves and available borrowings, provide it with adequate liquidity to meet operating requirements, debt service requirements and planned or necessary tooling, leasehold and other capital expenditures for the next twelve months following the date of this Quarterly Report on Form 10-Q and thereafter for the foreseeable future.

As there were no stock option exercises during the first quarter of the current fiscal year, there was no impact on cash due to financing activities.

In the same quarter in the prior year, cash provided by financing activities was due entirely to stock option exercises.

An aggregate of 32,000 shares of common stock were issued as a result of employee stock option exercises under the Company’s 2012 Omnibus Incentive Plan and the cash provided from these stock option exercises was approximately $70,000.

As of September 30, 2023, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stock in the three months ended September 30, 2023 or September 30, 2022 under the stock repurchase program.

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

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

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

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

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

1 unchanged sentence

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 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.

4 unchanged sentences

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

As of March 31, 2023, the Company was in compliance with all covenants related to the Credit Agreement.

As of March 31, 2023 and June 30, 2022, there were no outstanding borrowings on the facility.

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

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

Contractual Obligation

The Company leases the 126,000 square foot facility from Koss Holdings, LLC, which is controlled by five equal ownership interests in trusts held by the five beneficiaries of a former chairman’s revocable trust.

The Company leases its 126,000 square foot facility from Koss Holdings, LLC, which is controlled by five equal ownership interests in trusts held by the five beneficiaries of a former chairman’s revocable trust and includes current stockholders of the Company .

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

5 unchanged sentences

Off-Balance Sheet Transactions

At March 31, 2023, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

At September 30, 2023, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis