KOSS CORP 10-Q

Item 1. Financial Statements KOSS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, 2024 June 30, 2023 ASSETS Current assets: Cash and cash equivalents $ 2,912,679 $ 3,091,062 Short term investments 7,020,288 17,064,274 Accounts receivable, less allowance for credit losses of $ 1,922 and $ 6,027 , respectively 1,197,055 1,379,517 Inventories 4,661,005 6,423,441 Prepaid expenses and other current assets 1,117,276 1,002,514 Interest receivable 116,575 51,150 Income taxes receivable 210,778 86,901 Total current assets 17,235,656 29,098,859 Equipment and leasehold improvements, net 1,272,817 953,903 Other assets: Long term investments 10,012,611 — Operating lease right-of-use asset 2,825,348 3,015,887 Cash surrender value of life insurance 6,258,436 6,020,048 Total other assets 19,096,395 9,035,935 Total assets $ 37,604,868 $ 39,088,697 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 215,705 $ 267,513 Accrued liabilities 901,297 1,342,039 Deferred revenue 292,795 450,312 Operating lease liability 236,570 236,225 Income taxes payable 5,281 87,237 Total current liabilities 1,651,648 2,383,326 Long-term liabilities: Deferred compensation 2,110,507 1,997,120 Deferred revenue 117,402 113,003 Operating lease liability 2,602,838 2,787,970 Total long-term liabilities 4,830,747 4,898,093 Total liabilities 6,482,395 7,281,419 Stockholders' equity: Common stock, $ 0.005 par value, authorized 20,000,000 shares; issued and outstanding 9,254,795 and 9,234,795 , respectively 46,274 46,174 Paid in capital 13,269,630 13,113,993 Retained earnings 17,806,569 18,647,111 Total stockholders' equity 31,122,473 31,807,278 Total liabilities and stockholders' equity $ 37,604,868 $ 39,088,697 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 3 Table of Contents KOSS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended March 31 March 31 2024 2023 2024 2023 Net sales $ 2,637,606 $ 3,380,840 $ 9,371,668 $ 10,026,301 Cost of goods sold 1,796,083 2,076,482 6,354,015 6,390,557 Gross profit 841,523 1,304,358 3,017,653 3,635,744 Selling, general and administrative expenses 1,451,247 1,749,341 4,572,049 27,907,246 (Loss) from operations ( 609,724 ) ( 444,983 ) ( 1,554,396 ) ( 24,271,502 ) Other income — — — 33,000,000 Interest income 214,814 189,593 636,482 314,482 (Loss) income before income tax provision (benefit) ( 394,910 ) ( 255,390 ) ( 917,914 ) 9,042,980 Income tax provision (benefit) ( 81,130 ) ( 30,910 ) ( 77,372 ) 463,928 Net (loss) income $ ( 313,780 ) $ ( 224,480 ) $ ( 840,542 ) $ 8,579,052 (Loss) income per common share: Basic $ ( 0.03 ) $ ( 0.02 ) $ ( 0.09 ) $ 0.93 Diluted $ ( 0.03 ) $ ( 0.02 ) $ ( 0.09 ) $ 0.88 Weighted-average number of shares: Basic 9,254,795 9,206,135 9,243,559 9,183,042 Diluted 9,254,795 9,206,135 9,243,559 9,791,627 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 4 Table of Contents KOSS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended March 31 2024 2023 Operating activities: Net (loss) income $ ( 840,542 ) $ 8,579,052 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: (Recovery of) Provision for credit losses ( 4,105 ) 40,277 Depreciation of equipment and leasehold improvements 142,046 186,168 Accretion of discount on treasury securities ( 313,704 ) ( 110,632 ) Noncash operating lease expense 5,752 6,391 Stock-based compensation expense 119,937 243,688 Change in cash surrender value of life insurance ( 156,644 ) ( 147,012 ) Provision for deferred compensation 113,387 62,783 Loss on disposal of fixed assets — 2,263 Net changes in operating assets and liabilities: Accounts receivable 186,567 570,932 Inventories 1,762,436 1,552,103 Prepaid expenses and other current assets ( 114,762 ) ( 233,792 ) Interest receivable ( 65,425 ) ( 56,014 ) Income taxes receivable ( 123,877 ) — Income taxes payable ( 81,956 ) 247,170 Accounts payable ( 51,808 ) ( 442,850 ) Accrued liabilities ( 440,742 ) 324,507 Deferred revenue ( 153,118 ) ( 208,308 ) Net cash (used in) provided by operating activities ( 16,558 ) 10,616,726 Investing activities: Purchase of equipment and leasehold improvements ( 460,960 ) ( 68,242 ) Life insurance premiums paid ( 81,744 ) ( 87,994 ) Proceeds from the maturity of treasury securities 14,331,000 — Purchases of treasury securities ( 13,985,921 ) ( 16,884,358 ) Net cash used in investing activities ( 197,625 ) ( 17,040,594 ) Financing activities: Proceeds from exercise of stock options 35,800 137,330 Net cash provided by financing activities 35,800 137,330 Net (decrease) in cash and cash equivalents ( 178,383 ) ( 6,286,538 ) Cash and cash equivalents at beginning of period 3,091,062 9,208,170 Cash and cash equivalents at end of period $ 2,912,679 $ 2,921,632 Supplemental cash flow information: Cash paid for income taxes $ 128,463 $ 216,759 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 5 Table of Contents KOSS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) Nine Months Ended March 31, 2024 Common Stock Paid in Retained Shares Amount Capital Earnings Total Balance, June 30, 2023 9,234,795 $ 46,174 $ 13,113,993 $ 18,647,111 $ 31,807,278 Net (loss) — — — ( 840,542 ) ( 840,542 ) Stock-based compensation expense — — 119,937 — 119,937 Stock option exercises 20,000 100 35,700 — 35,800 Balance, March 31, 2024 9,254,795 $ 46,274 $ 13,269,630 $ 17,806,569 $ 31,122,473 Nine Months Ended March 31, 2023 Common Stock Paid in Retained Shares Amount Capital Earnings Total Balance, June 30, 2022 9,147,795 $ 45,739 $ 12,653,402 $ 10,327,899 $ 23,027,040 Net income — — — 8,579,052 8,579,052 Stock-based compensation expense — — 243,688 — 243,688 Stock option exercises 69,000 345 136,985 — 137,330 Balance, March 31, 2023 9,216,795 $ 46,084 $ 13,034,075 $ 18,906,951 $ 31,987,110 Three Months Ended March 31, 2024 Common Stock Paid in Retained Shares Amount Capital Earnings Total Balance, December 31, 2023 9,254,795 $ 46,274 $ 13,233,733 $ 18,120,349 $ 31,400,356 Net (loss) — — — ( 313,780 ) ( 313,780 ) Stock-based compensation expense — — 35,897 — 35,897 Balance, March 31, 2024 9,254,795 $ 46,274 $ 13,269,630 $ 17,806,569 $ 31,122,473 Three Months Ended March 31, 2023 Common Stock Paid in Retained Shares Amount Capital Earnings Total Balance, December 31, 2022 9,189,795 $ 45,949 $ 12,908,840 $ 19,131,431 $ 32,086,220 Net (loss) — — — ( 224,480 ) ( 224,480 ) Stock-based compensation expense — — 76,980 — 76,980 Stock option exercises 27,000 135 48,255 — 48,390 Balance, March 31, 2023 9,216,795 $ 46,084 $ 13,034,075 $ 18,906,951 $ 31,987,110 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 6 Table of Contents KOSS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) BASIS OF PRESENTATION The condensed consolidated balance sheets as of March 31, 2024 and June 30, 2023, the condensed consolidated statements of operations for the three and nine months ended March 31, 2024 and 2023, the condensed consolidated statements of cash flows for the nine months ended March 31, 2024 and 2023, and the condensed consolidated statements of stockholders' equity for the three and nine months ended March 31, 2024 and 2023, have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and have not been audited. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The operating results for any interim period are not necessarily indicative of the operating results that may be experienced for the full fiscal year. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30 , 2023. The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, allowances for credit losses, reserves for excess and obsolete inventories, long-lived and intangible assets, income tax valuation allowance , stock-based compensation and deferred compensation. Actual results could differ from the Company's estimates. B) REVISION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS During the second quarter of fiscal year 2024, the Company learned that due to misinterpretation of the required tax treatment for certain disqualifying dispositions of Incentive Stock Options (ISO), the Company improperly withheld amounts for Social Security and Medicare (“FICA”) taxes on the taxable gains resulting from those dispositions and remitted such amounts to the Internal Revenue Service (“IRS”). Thus, for such disqualifying dispositions of ISOs beginning in fiscal year 2021, certain employees are owed a refund from the Company for the overpayment of the FICA taxes, with a similar refund due to the Company from the IRS for the employer portion of the taxes which were also remitted to the IRS and expensed by the Company. The Company intends to reimburse the over withheld taxes to the impacted employees and to file amended 941-X forms with the IRS to claim a refund for both the Company overpayment of FICA taxes as well as the amounts refunded to employees. As of March 31, 2024 the over withheld taxes due to the impacted employees was $ 354,971 and is recorded in accrued liabilities on the condensed consolidated balance sheet as of that date. The refund expected from the IRS is $ 722,498 and is included in prepaid expenses and other current assets on the condensed consolidated balance sheet at March 31, 2024. Based on an analysis of Accounting Standards Codification ASC 250 – “Accounting Changes and Error Corrections” (“ASC 250”), Staff Accounting Bulletin 99 – “Materiality” and Staff Accounting Bulletin 108 – “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, the Company determined that these errors did not result in the previously issued consolidated financial statements being materially misstated, and as such no restatement was necessary. ‎ 7 Table of Contents The following tables present the effect of the revision on the condensed consolidated balance sheet as of June 30, 2023, the condensed consolidated statements of operations for the three and nine months ended March 31, 2023, and the condensed consolidated statement of cash flows for the nine months ended March 31, 2023. As of June 30, 2023 As Previously Reported Revision As Revised Condensed consolidated balance sheet: Prepaid expenses and other current assets 284,622 717,892 1,002,514 Total current assets 28,380,967 717,892 29,098,859 Total assets 38,370,805 717,892 39,088,697 Accrued liabilities 970,530 371,509 1,342,039 Total current liabilities 2,011,817 371,509 2,383,326 Total liabilities 6,909,910 371,509 7,281,419 Retained earnings 18,300,728 346,383 18,647,111 Total stockholders' equity 31,460,895 346,383 31,807,278 Three Months Ended March 31, 2023 Nine Months Ended March 31, 2023 As Previously Reported Revision As Revised As Previously Reported Revision As Revised Condensed consolidated statements of operations: Selling, general and administrative expenses 1,757,714 ( 8,373 ) 1,749,341 27,921,287 ( 14,041 ) 27,907,246 (Loss) from operations ( 453,356 ) 8,373 ( 444,983 ) ( 24,285,543 ) 14,041 ( 24,271,502 ) (Loss) income before income tax provision ( 263,763 ) 8,373 ( 255,390 ) 9,028,939 14,041 9,042,980 Net (loss) income ( 232,853 ) 8,373 ( 224,480 ) 8,565,011 14,041 8,579,052 (Loss) income per common share: Basic ( 0.03 ) ( 0.02 ) 0.93 0.93 Diluted ( 0.03 ) ( 0.02 ) 0.87 0.88 Nine Months Ended March 31, 2023 As Previously Reported Revision As Revised Condensed consolidated statement of cash flows: Net income 8,565,011 14,041 8,579,052 Prepaid expenses and other current assets ( 205,710 ) ( 28,082 ) ( 233,792 ) Accrued liabilities 310,466 14,041 324,507 Net cash provided by operating activities 10,616,726 ( 0 ) 10,616,726 The effect of this revision on the opening balances within the Company's condensed consolidated statements of stockholders' equity for the three and nine months ended March 31, 2024 and 2023 was as follows: As Previously Reported Revision As Revised Retained earnings, June 30, 2022 9,998,348 329,551 10,327,899 Total stockholders' equity, June 30, 2022 22,697,489 329,551 23,027,040 Retained earnings, December 31, 2022 18,796,212 335,219 19,131,431 Total stockholders' equity, December 31, 2022 31,751,001 335,219 32,086,220 Retained earnings, June 30, 2023 18,300,728 346,383 18,647,111 Total stockholders' equity, June 30, 2023 31,460,895 346,383 31,807,278 The Company's condensed consolidated statements of stockholders' equity for the three and nine months ended March 31, 2023 have also been revised to reflect the impacts to net (loss) income as presented above. 8 Table of Contents C) 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 discounts to maturity. Such amortization or accretion is included in interest income, along with other interest on cash and cash equivalents. D) FAIR VALUE MEASUREMENTS Fair value is the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants at the measurement date. A three-tier hierarchy prioritizes the inputs used in measuring fair value. These tiers include Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted market prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions. The asset's or liability's fair value measurement within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company’s U.S. treasury debt securities are recorded at amortized cost with fair value disclosure. They have a readily available market price (Level 1 input), thus a lesser degree of judgment needs to be used in measuring fair value, and fair value was determined by quoted market prices. E) INCOME TAXES We estimate a provision for income taxes based on the effective tax rate expected to be applicable for the fiscal year. If the actual results are different from these estimates, adjustments to the effective tax rate may be required in the period such determination is made. Additionally, discrete items are treated separately from the effective rate analysis and are recorded separately as an income tax provision or benefit at the time they are recognized. During the three and nine months ended March 31, 2024, a state income tax provision of $ 1,522 and $ 5,281 was recorded for the minimum tax payments expected given the taxable net losses in those periods. During the three and nine months ended March 31, 2024, a federal tax benefit of $ 82,653 was recorded as a result of the return-to-provision (RTP) adjustments recorded in the period identified. The adjustments were identified when the prior year tax returns were filed in the third quarter of fiscal year 2024. For the nine months ended March 31, 2023, as a result of additional income generated by licensing fees, offset by related legal fees and expenses, taxable income for the period was generated. For NOLs arising in tax years beginning after December 31, 2017, the Tax Cuts and Jobs Act (“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 is limited to 80 percent of the resulting taxable income. Utilization of net operating loss carryforwards significantly reduced the taxable income for the nine-month period ended March 31, 2023, resulting in federal and state tax provisions of $ 374,714 and $ 89,214 , respectively. For the three months ended March 31, 2023, a state income tax benefit of $ 30,910 was recorded mainly as a result of an update to state apportionment percentages. No federal tax benefit or provision was recorded for that quarter. The effective tax rate was less than 1 %, excluding the RTP adjustments, for the nine months ended March 31, 2024 and 5.1 % for the nine months ended March 31, 2023. It is anticipated that the effective rate in the current year and future years will continue to be reduced by utilization of a portion or all of the federal and state net operating loss carryforwards that existed as of June 30, 2023. The Company's taxable loss generated during the first nine months of fiscal year 2024 increased the tax loss carryforward as of March 31, 2024 to approximately $ 32,800,000 . Given the taxable loss for the nine-month period, the expectation for utilization of the estimated tax loss carryforward is lessened, and as such, the future realization of this continues to be uncertain. The valuation allowance was adjusted to continue to fully offset the net deferred tax asset as there is sufficient negative evidence to support a full valuation allowance. ‎ 9 Table of Contents Temporary differences which give rise to deferred income tax assets and liabilities at March 31, 2024 and June 30, 2023 include: March 31, 2024 June 30, 2023 Deferred income tax assets: Deferred compensation $ 516,932 $ 491,608 Stock-based compensation 77,530 117,607 Accrued expenses and reserves 524,892 571,719 Deferred revenue 100,973 138,665 Federal and state net operating loss carryforwards 8,456,728 8,216,671 IRC Section 174 research and development costs 113,521 63,855 Credit carryforwards 188,893 169,552 Equipment and leasehold improvements 130,637 136,294 Lease liability 684,670 744,431 Valuation allowance ( 10,093,269 ) ( 9,906,018 ) Total deferred income tax assets 701,507 744,384 Deferred income tax liabilities: ROU asset ( 680,737 ) ( 742,386 ) Other ( 20,770 ) ( 1,998 ) Total deferred income tax liabilities ( 701,507 ) ( 744,384 ) Net deferred income tax assets $ - $ - F) 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 disputes are recorded in other income when the amounts are determinable, and collection is certain. Related 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. The contingent legal fee expenses could have a material effect on the results of operations, however, timing and impact is uncertain and is dependent on the resolution of related litigation. G) OTHER INCOME No other income was received in the three and nine months ended March 31, 2024. In the three and nine months ending March 31, 2023, the Company received licensing proceeds of $ 0 and $ 33,000,000 , respectively, which was recorded as other income. Other income is shown as a separate line on the condensed consolidated statements of operations. H) DEFERRED COMPENSATION 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 condensed consolidated statements of operations. The deferred compensation liability recorded at March 31, 2024 and June 30, 2023 is $ 2,110,507 and $ 1,997,120 , respectively. The increase in the deferred compensation liability for the current officer, and thus the compensation expense recorded during the nine months ended March 31, 2024, was due mainly to the annual increase in the future payments under the arrangement. Compensation expense recorded under this arrangement was $ 113,387 for the first three quarters of the current fiscal year. Deferred compensation expense of $ 62,783 was recognized in the nine months ended March 31, 2023. I) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS Effective July 1, 2023, the Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including trade receivables and held-to-maturity debt securities. Financial assets measured at amortized cost are presented at the net amount expected to be collected by using an allowance for credit losses. 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 receivable. 10 Table of Contents The Company adopted ASU 2016-13 effective July 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost. Allowance for Credit Losses – Accounts Receivable: The allowance for credit losses is deducted from the cost basis of the receivable to present the net amount expected to be collected on the accounts. The Company measures expected credit losses for accounts receivable using the aging method whereby expected credit losses are determined on the basis of how long a receivable has been outstanding. Historical loss data is utilized to estimate expected losses as the risk characteristics of the customer base and the Company’s credit practices have not changed significantly over time. The estimates are then adjusted for current conditions, such as level of inflation and the potential change in credit availability given rising interest rates, as well as supportable and reasonable forecasts indicating whether these conditions will continue into the future or new ones will arise that need to be considered. Upon evaluation of the impact of this ASU, the Company concluded that minimal reserves were necessary as historical losses were immaterial, and, based on the qualitative and quantitative analysis performed in accordance with Topic 326 requirements, the Company determined there was no reasonable expectation of significant credit losses associated with the Company’s accounts receivable in the foreseeable future. Allowance for Credit Losses - Held-to Maturity Debt Securities: The Company did no t record an allowance for credit losses on held-to-maturity U.S. Treasury securities as these securities have the following characteristics that support a zero loss expectation: they are explicitly guaranteed by the U.S. government, are consistently highly rated by major rating agencies and have a long history of no credit losses. The adoption of ASU 2016-13 did not have a material impact on the Company’s condensed consolidated financial statements. Results for reporting periods beginning after July 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”). Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not have, or are not expected by management to have a material impact on the Company’s present or future consolidated financial statements . 2. INVESTMENTS The following tables summarize the unrealized positions for the held-to-maturity debt securities as of March 31, 2024 and June 30, 2023: March 31, 2024 Amortized cost basis Gross unrealized gains Gross unrealized losses Fair Value US Treasury securities $ 17,032,899 $ — $ ( 49,886 ) $ 16,983,013 Total $ 17,032,899 $ — $ ( 49,886 ) $ 16,983,013 June 30, 2023 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 ‎ 11 Table of Contents The following tables summarize the fair value and amortized cost basis of the held-to-maturity debt securities by contractual maturity as of March 31, 2024 and June 30, 2023: March 31, 2024 Amortized Cost Basis Fair value Due within one year $ 7,020,288 $ 7,007,734 Due after one year through five years 10,012,611 9,975,279 Total $ 17,032,899 $ 16,983,013 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 3. INVENTORIES The components of inventories were as follows: March 31, 2024 June 30, 2023 Raw materials $ 2,011,332 $ 2,071,360 Finished goods 4,519,572 6,178,186 Inventories, gross 6,530,904 8,249,546 Reserve for obsolete inventory ( 1,869,899 ) ( 1,826,105 ) Inventories, net $ 4,661,005 $ 6,423,441 4. CREDIT FACILITY 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 March 31, 2024, the Company was in compliance with all covenants related to the Credit Agreement. As of March 31, 2024 and June 30, 2023, there were no outstanding borrowings on the facility. ‎ 12 Table of Contents 5. 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: Three Months Ended Nine Months Ended March 31, March 31, 2024 2023 2024 2023 United States $ 2,055,551 $ 2,728,824 $ 7,326,220 $ 7,620,067 Export 582,055 652,016 2,045,448 2,406,234 Net Sales $ 2,637,606 $ 3,380,840 $ 9,371,668 $ 10,026,301 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, 2023, the Company increased its deferral rates from 2.4 % to 3 % for domestic sales and decreased its deferral rate from 10 % to 8 % for export sales to reflect recent warranty experience. In the nine months ended March 31, 2024 and 2023, the Company recognized revenue, which was included in the deferred revenue liability at the beginning of the periods of $ 264,251 and $ 284,584 , respectively, for performance obligations related to consumer and customer warranties. The Company estimates that the deferred revenue performance obligations are satisfied within one year to three years and therefore uses that same timeframe for recognition of the deferred revenue. 6. (LOSS) INCOME PER COMMON AND COMMON STOCK EQUIVALENT SHARE Basic (loss) income per common share is computed based on the weighted-average number of common shares outstanding. Diluted (loss) income per common share is calculated assuming the exercise of stock options except where the result would be anti-dilutive. The following table reconciles the numerator and denominator used to calculate basic and diluted (loss) income per share: Three Months Ended March 31, Nine Months Ended March 31, 2024 2023 2024 2023 Numerator Net (loss) income $ ( 313,780 ) $ ( 224,480 ) $ ( 840,542 ) $ 8,579,052 Denominator Weighted average shares, basic 9,254,795 9,206,135 9,243,559 9,183,042 Dilutive effect of stock compensation awards (1) — — — 608,585 Diluted shares 9,254,795 9,206,135 9,243,559 9,791,627 Net (loss) income attributable to common shareholders per share: Basic $ ( 0.03 ) $ ( 0.02 ) $ ( 0.09 ) $ 0.93 Diluted $ ( 0.03 ) $ ( 0.02 ) $ ( 0.09 ) $ 0.88 (1) Excludes 700,911 , 729,384 , and 999,557 weighted average stock options during the three and nine months ended March 31, 2024 and the three months ended March 31, 2023, respectively, as the impact of such awards was anti-dilutive. For the nine months ended March 31, 2023, no stock options were anti-dilutive. 7. 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 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. 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 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. During the nine months ended March 31, 2023, the Company accrued and made charitable contributions of $ 79,000 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 no charitable contributions made to the Foundation during the three and nine months ended March 31, 2024. 13 Table of Contents 8. ACCOUNTS RECEIVABLE CONCENTRATIONS As of March 31, 2024, the Company’s top three accounts receivable customers represented approximately 25 %, 12 % and 10 % of trade accounts receivable. The top three accounts receivable customers as of June 30, 2023 represented approximately 24 %, 14 % and 13 %. 9. EMPLOYEE STOCK OWNERSHIP PLAN The Company amended and restated its Koss Employee Stock Ownership Trust (“KESOT”) effective July 1, 2023 and received approval from the Board of Directors on July 26, 2023. Substantially all domestic employees are participants in the KESOT under which an annual contribution in either cash or common stock may be made at the discretion of the Board of Directors. All contributions to date have been fully allocated to employees’ company contribution accounts. No contributions were made for the three or nine months ended March 31, 2024 or 2023, respectively. 10 . STOCK-BASED COMPENSATION In 2023, pursuant to the recommendation of the Board of Directors, the shareholders approved the creation of the Koss Corporation 2023 Equity Incentive Plan (the “2023 Plan”). Concurrently with the adoption of the new plan, the Koss Corporation 2012 Omnibus Incentive Plan (the “2012 Plan”) was terminated. The Compensation Committee of the Board of Directors administers the 2023 Plan and provides for the granting of various stock-based incentive awards to eligible participants, primarily officers and certain key employees of the Company. 2,000,000 shares of common stock were authorized for issuance under the 2023 Plan, plus any shares subject to awards remaining outstanding under the 2012 Plan that expired or are otherwise forfeited, canceled, or terminated. The Company’s Board of Directors will determine the terms and conditions under which an option will become exercisable but expects that stock options granted under the 2023 Plan will vest over a three -to- five -year period from the date of grant. An option will expire no more than ten years from its grant date, with the exception of incentive stock options held by a 10% stockholder, which will expire no more than five years from the grant date. As with the 2012 Plan, pursuant to the 2023 Plan new shares will be issued upon exercise of stock options. As of March 31, 2024, no new stock-based awards have been granted under the 2023 Plan. 11. LEGAL MATTERS As of March 31, 2024, the Company is involved in the matters described below: • The Company maintains a program focused on enforcing its intellectual property and, in particular, certain patents in its patent portfolio. As part of this program, the Company filed 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, such as contingent legal fees, will be due to third parties. The Company may incur additional fees and costs related to these lawsuits, however, timing and impact on its condensed 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 nine months ended March 31, 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 was recorded as other income. Total legal fees and related expenses of $ 22,141,408 in the nine months ended March 31, 2023, respectively, offset these proceeds and were recorded as selling, general and administrative expense. • 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 condensed consolidated 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 March 31, 2024 and June 30, 2023. The ultimate resolution of these matters is not determinable unless otherwise noted. The Company is also subject to a variety of other claims and suits that arise from time to time in the ordinary course of its business. Although management currently believes that resolving these claims against the Company, individually or in the aggregate, will not have a material adverse impact on its condensed consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. 14 Table of Contents CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (the “Act”) (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities Exchange Commission, press releases, or otherwise. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Act. Forward-looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, anticipated financing needs, compliance with financial covenants in loan agreements, plans for acquisitions or sales of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events, the effects of pending and possible litigation and assumptions relating to the foregoing. In addition, when used in this Form 10-Q, the words “aims,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “thinks,” “may,” “will,” “shall,” “should,” “could,” “would,” “forecasts,” “predicts,” “potential,” “continue” and variations thereof and similar expressions are intended to identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements contained in this Form 10-Q, or in other Company filings, press releases, or otherwise. In addition to the factors discussed in this Form 10-Q, other factors that could contribute to or cause such differences include, but are not limited to, developments in any one or more of the following areas: future fluctuations in economic conditions, increase in prices for raw materials, labor, and fuel caused by rising inflation, the receptivity of consumers to new consumer electronics technologies, the rate and consumer acceptance of new product introductions, competition, pricing, the number and nature of customers and their product orders, production by third party vendors, foreign manufacturing, sourcing, and sales (including foreign government regulation, trade and importation concerns), the effects of the COVID-19 or other pandemics on the economy, the impact of the Russian-Ukrainian conflict, the Israel-Hamas war, or other disruptive geopolitical events on the Company’s operations, borrowing costs and interest rates, changes in tax rates, pending or threatened litigation and investigations and their outcomes, and other risk factors described in the Risk Factors and in Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023 and subsequently filed Quarterly Reports on Form 10-Q. Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect new information. ‎ 15 Table of Contents