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What changed in KOSS CORP's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of KOSS CORP's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+205 added−220 removedSource: 10-K (2023-08-25) vs 10-K (2022-08-26)

Top changes in KOSS CORP's 2023 10-K

205 paragraphs added · 220 removed · 145 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

32 edited+5 added−4 removed20 unchanged
Biggest changeThese trademarks and patents are important to differentiate the Company from its competitors. Certain of the Company’s trademarks are of material value and importance to the conduct of its business. The Company considers protection of its proprietary developments important; however, the Company’s business is not, in the opinion of management, materially dependent upon any single trademark or patent.
Biggest changeThe Company considers protection of its proprietary developments important; however, the Company’s business is not, in the opinion of management, materially dependent upon any single trademark or patent. Given the significance of the Company’s intellectual property to its business, in 2019 the Company launched a program to enforce its intellectual property rights and protect its patent portfolio.
The Company has sales personnel currently located in the Netherlands and the Caucasus region to service the international export marketplace. Loss of these personnel would result in a transfer of sales and marketing responsibility.
The Company has sales personnel currently located in the Netherlands and the Caucasus region to service the international export marketplace. The loss of these personnel would result in a transfer of sales and marketing responsibility.
The Company has programs in place intended to address and mitigate the cybersecurity risks. These programs include regular monitoring of outside threats, continuous updating of software to mitigate risk and education of employees to the risks of external threats, and simplification of infrastructure to minimize servers.
The Company has programs in place intended to address and mitigate the cybersecurity risks. These programs include regular monitoring of outside threats, continuous updating of software to mitigate risk, education of employees to the risks of external threats, and simplification of infrastructure to minimize servers.
CUSTOMERS The Company markets a line of products used by consumers to listen to music, to work and study from home, and to listen to other audio related media. The Company distributes these products through distributors and retail channels in the U.S. and independent distributors throughout the rest of the world. Additionally, the Company fills direct-to-consumer orders on its website.
CUSTOMERS The Company markets a line of products used by consumers to listen to music, to work and study from home, and to listen to other audio-related media. The Company distributes these products through distributors and retail channels in the U.S. and independent distributors throughout the rest of the world. Additionally, the Company fills direct-to-consumer (DTC) orders on its website.
The Company’s products are sold through U.S. distributors, international distributors, audio specialty stores, the internet, national retailers, grocery stores, electronics retailers, military exchanges and prisons under the “Koss” name as well as private label. The Company also sells products to distributors for resale to school systems, and directly to other manufacturers for inclusion with their own products.
The Company’s products are sold through U.S. distributors, international distributors, audio specialty stores, the internet, national retailers, grocery stores, electronics retailers, and prisons under the “Koss” name as well as private label. The Company also sells products to distributors for resale to school systems, and directly to other manufacturers for inclusion with their own products.
The arrangements with foreign distributors do not contemplate that the Company pays any compensation other than any profit the distributors make upon their sale of the Company’s products. INTELLECTUAL PROPERTY John C. Koss is recognized for creating the stereo headphone industry with the first SP/3 stereo headphone in 1958.
The arrangements with foreign distributors do not contemplate that the Company pays any compensation other than any profit the distributors make upon their sale of the Company’s products. INTELLECTUAL PROPERTY John C. Koss is recognized for creating the personal listening industry with the first Koss SP/3 stereo headphone in 1958.
During fiscal years 2022 and 2021, the amounts incurred in complying with federal, state and local statutes and regulations pertaining to environmental standards 6 Table of Contents and occupational safety and health laws and regulations did not materially affect the Company’s operating results or financial condition.
During fiscal years 2023 and 2022, the amounts incurred in complying with federal, state and local statutes and regulations pertaining to environmental standards and occupational safety and health laws and regulations did not materially affect the Company’s operating results or financial 6 Table of Contents condition.
The Company’s information systems, or those of its third-party service providers, could also be penetrated by outside parties intent on extracting information, corrupting information or disrupting business processes. Such unauthorized access could disrupt the Company’s business, increase costs and/or could result in the loss of assets.
The Company’s information systems, or those of its third-party service providers, could also be penetrated by outside parties’ intent on extracting information, corrupting information or disrupting business processes. Such unauthorized access could disrupt the Company’s business, increase costs and/or result in the loss of assets.
As part of this enforcement program, the Company has filed and pursued lawsuits against a number of companies that the Company believes are infringing upon its patents, and may enter into licensing agreements or initiate additional lawsuits.
As part of this enforcement program, the Company has filed and pursued lawsuits against a number of companies that the Company believes have infringed or are infringing upon its patents and may enter into licensing agreements or initiate additional lawsuits.
WORKING CAPITAL AND BACKLOG The Company’s working capital needs do not differ substantially from those of its competitors in the industry and generally reflect the need to carry significant amounts of inventory to meet delivery requirements of its customers.
WORKING CAPITAL AND BACKLOG The Company’s working capital needs do not differ substantially from those of its competitors in the industry and generally reflect the need to carry sufficient amounts of inventory to meet delivery requirements of its customers.
The Company considers protecting its intellectual property rights to be central to its business model and competitive position in the stereo headphone industry. ‎ 5 Table of Contents SEASONALITY Although retail sales of consumer electronics have historically been higher during the holiday season, sales of stereo headphones have recently increased throughout the year.
The Company considers protecting its intellectual property rights to be central to its business model and competitive position in the stereo headphone industry. ‎ 5 Table of Contents SEASONALITY Although retail sales of consumer electronics have historically been higher during the holiday season, sales of stereo headphones have smoothed throughout the year.
The Company reports its results 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 reports its results as a single reporting segment, as the Company’s only business line is the design, manufacture and sale of stereo headphones and related personal listening accessories.
The Company’s five largest customers accounted for approximately 45% and 48% of net sales in fiscal years 2022 and 2021, respectively. COMPETITION The Company focuses on the stereo headphone industry. In the stereo headphone market, the Company competes with all major competitors, many of which are large and diversified and have greater total assets and resources than the Company.
The Company’s five largest customers accounted for approximately 51% and 45% of net sales in fiscal years 2023 and 2022, respectively. COMPETITION The Company focuses on the stereo headphone industry. In the stereo headphone market, the Company competes with all major competitors, many of which are large and diversified and have greater total assets and resources than the Company.
Management believes that the Company’s business is not seasonal as evidenced by the fact that the Company’s net sales for the last couple of years, including the year ended June 30, 2022, were almost equally split between the first and second halves of the year.
Management believes that the Company’s business is not seasonal as evidenced by the fact that the Company’s net sales for the last three years, including the year ended June 30, 2023, were almost equally split between the first and second halves of the year.
These activities were conducted by both Company personnel and outside consultants. There was $410,602 in expenses for research and development activities during fiscal year 2021. The Company expects to incur on-going research and development costs related to its Bluetooth® and traditional wired headphones as it is planning to introduce new product offerings on a regular basis.
These activities were conducted by both Company personnel and outside consultants. There was $285,244 in expenses for research and development activities during fiscal year 2022. The Company expects to incur on-going research and development costs related to its Bluetooth® and traditional wired headphones as it is planning to introduce new product offerings on a regular basis.
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, in which case the Company believes that it could restore production of its top 10 selling models (which represent approximately 62% of the Company’s 2022 net sales) within 12-18 months.
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, in which case the Company believes that it could restore production of its top 10 selling models (which represent approximately 57% of the Company’s 2023 net sales) within 18-24 months.
The Company relies upon its unique sound, quality workmanship, brand identification, engineering skills, and customer service, as well as its intellectual property portfolio, to maintain its competitive position. RESEARCH AND DEVELOPMENT The amount expensed on engineering and research activities relating to the development of new products or the improvement of existing products was $285,244 during fiscal year 2022.
The Company relies upon its unique sound, quality workmanship, brand identification, engineering skills, and customer service, as well as its intellectual property portfolio, to support its competitive position. RESEARCH AND DEVELOPMENT The amount expensed on engineering and research activities relating to the development of new products or the improvement of existing products was $288,231 during fiscal year 2023.
OPERATIONS The Company has a manufacturing facility in Milwaukee, Wisconsin and uses contract manufacturing facilities in the People’s Republic of China and Taiwan. A contract employee is based in China to manage supplier quality and to assist with development of new products.
The Company is uncertain, however, how the conflict will impact future sales. OPERATIONS The Company has a manufacturing facility in Milwaukee, Wisconsin and uses contract manufacturing facilities in the People’s Republic of China and Taiwan. A contract employee is based in China to manage supplier quality and to assist with development of new products.
The extent to which retailers and consumers view the Company as an innovative vendor of high quality stereo headphone products, and a provider of excellent after-sales customer service, is the extent to which the Company maintains a competitive advantage.
The extent to which retailers and consumers view the Company as a pioneer in the creation of the personal listening industry, an innovative vendor of high-quality stereo headphone products, and a provider of excellent after-sales customer service, is the extent to which the Company offers a competitive advantage.
Sales to Ukraine have also been impacted as a result of the humanitarian crisis there due to the ongoing hostilities. Neither Russia nor Ukraine represents a significant portion of the Company’s business; in the aggregate, less than 3.4% of net sales for the year ended June 30, 2022. The Company is uncertain, however, how the conflict will impact future sales.
Sales to Ukraine have also been impacted as a result of the humanitarian crisis there due to the ongoing hostilities. In the prior two fiscal years, neither Russia nor Ukraine represented a significant portion of the Company’s export business and, in the aggregate, was less than 3.4% of net sales for the year ended June 30, 2022.
As of June 30, 2022, the Company had 427 trademarks registered in 90 countries around the world and 153 patents in 25 countries. The Company has trademarks to protect the brand name, Koss, and its logo on its products. The Company also holds many design patents that protect the unique visual appearance of some of its products.
As of June 30, 2023, the Company had over 400 trademarks registered in approximately 90 countries around the world and over 160 patents in approximately 25 countries. The Company has trademarks to protect the brand name, Koss, and its logo on its products.
In addition, the governments of foreign nations may elect to erect trade barriers on imports. The creation of additional barriers would reduce the Company’s net sales and net income.
FOREIGN SALES The Company’s competitive position and risks relating to its business in foreign markets are comparable to those in the domestic market. In addition, the governments of the United States and foreign nations may elect to erect trade barriers on exports and/or imports, respectively. The creation of additional barriers would reduce the Company’s net sales and net income.
The Company is dependent upon its ability to retain a base of retailers and distributors to sell the Company’s line of products. A material loss of retailers or distributors would result in a loss of product placement and have an adverse effect on the Company’s financial results.
The Company is dependent upon its ability to retain a base of retailers and distributors to sell the Company’s line of products.
There are no employment or compensation commitments between the Company and its dealers. The Company has contracted several independent manufacturers’ representatives as part of its distribution efforts. The Company typically signs one-year contracts with these manufacturers’ representatives.
Management believes that it has sources of complete stereo headphones and raw materials that are adequate for its needs. There are no employment or compensation commitments between the Company and its dealers. The Company has contracted several independent manufacturers’ representatives as part of its distribution efforts.
The Company sources complete stereo headphones manufactured to its specifications from various manufacturers in Asia as well as raw materials used to produce stereo headphones at its plant in Milwaukee, Wisconsin. Management believes that it has sources of complete stereo headphones and raw materials that are adequate for its needs.
There are no other product line differentiations other than the quality of the sound produced by the stereo headphone itself, which is highly subjective. The Company sources complete stereo headphones manufactured to its specifications from various manufacturers in Asia as well as raw materials used to produce stereo headphones at its plant in Milwaukee, Wisconsin.
The Company markets its products through approximately 2,000 domestic retail outlets and numerous retailers worldwide. The Company also markets products directly to several original equipment manufacturers for use in their products. Sales to this customer base have been growing in recent years. In the year ended June 30, 2022, the Company’s largest customer was Amazon Seller Central .
The Company markets its products through many domestic retail outlets and numerous retailers worldwide. The Company also markets products directly to several original equipment manufacturers for use in their products.
During the last two fiscal years, net sales of all Koss products were distributed as follows: 2022 2021 United States $ 13,034,647 $ 14,298,358 Sweden 1,552,559 1,340,714 Czech Republic 1,195,768 1,400,615 Malaysia 395,914 567,181 Russian Federation 339,873 588,340 Canada 314,607 374,955 Ukraine 256,749 151,863 All other countries 517,150 823,982 Net sales $ 17,607,267 $ 19,546,008 As a result of the Russian-Ukraine conflict, the Company suspended all sales to Russia in accordance with Executive Order 14071 issued by President Biden on April 6, 2022.
During the last two fiscal years, net sales of all Koss products were distributed as follows: 2023 2022 United States $ 9,848,521 $ 13,132,899 Czech Republic 1,328,476 1,195,768 Sweden 997,058 1,552,559 Canada 209,159 314,607 Korea, Republic of 190,149 81,264 Belgium 176,581 132,880 Malaysia 122,172 395,914 All other countries 227,535 899,628 Net sales $ 13,099,651 $ 17,705,519 As a result of the Russian-Ukraine conflict, the Company suspended all sales to Russia in accordance with Executive Order 14071 issued by President Biden on April 6, 2022.
Approximately 76% of the Company’s fiscal year 2022 sales were from stereo headphones used for listening to music. The remaining approximately 24% of the Company’s sales were from headphones used in communications, education settings, and in conjunction with metal detectors, as well as to original equipment manufacturers (“OEM”).
The remaining approximately 20% of the Company’s sales were from headphones used in communications, education settings, and in conjunction with metal detectors, as well as sold to original equipment manufacturers (“OEM”). The products are not significantly differentiated by their retail sales channel or application with the exception of products sold to school systems, prisons, and OEM customers.
As of June 30, 2022, the Company had approximately 90 domestic dealers and its products were carried in approximately 2,000 domestic retail outlets and numerous retailers worldwide. International markets are served by domestic sales representatives and sales personnel in the Netherlands and the Caucasus region. The Company utilizes independent distributors in several foreign countries.
International markets are served by domestic sales representatives and sales personnel in the Netherlands and the Caucasus region. The Company utilizes independent distributors in several foreign countries. Approximately 80% of the Company’s fiscal year 2023 sales were from stereo headphones used for listening to music.
EMPLOYEES As of June 30, 2022, the Company employed 34 non-union employees, 3 of which were part-time employees. The Company also engaged temporary personnel at times during the year ended June 30, 2022. FOREIGN SALES The Company’s competitive position and risks relating to its business in foreign markets are comparable to those in the domestic market.
It is unclear as to whether any emerging and evolving regulations will have a material impact on the Company's results of operations. EMPLOYEES As of June 30, 2023, the Company employed 31 non-union employees, 3 of which were part-time employees. The Company also engaged temporary personnel at times during the year ended June 30, 2023.
Based on historical trends, management does not expect these practices to have a material effect on net sales or net income. The Company’s backlog of orders as of June 30, 2022, is minimal in relation to net sales during fiscal year 2022.
As of June 30, 2023, the Company’s backlog of orders was approximately $320,000, which the Company considers minimal in relation to net sales during fiscal year 2023 or projected sales for fiscal year 2024 net sales.
While limited, the Company does offer 90-120 day terms to certain customers such as Amazon Vendor Central, computer retailers and office supply stores. From time to time, although rarely, the Company may also extend payment terms to its customers for a special promotion.
On a limited basis, the Company does offer 90-120 day payment terms to certain customers and may, on a rare occasion, extend payment terms to its customers for a special promotion. Based on historical trends, management does not expect these practices to have a material effect on net sales or net income.
Removed
The products are not significantly differentiated by their retail sales channel or application with the exception of products sold to school systems, prisons, and OEM customers. There are no other product line differentiations other than the quality of the sound produced by the stereo headphone itself, which is highly subjective.
Added
The Company also holds many design patents that protect the unique visual appearance of some of its products. These trademarks and patents are important to differentiate the Company from its competitors. Certain of the Company’s trademarks are of material value and importance to the conduct of its business.
Removed
Given the significance of the Company’s intellectual property to its business, in 2019 the Company launched a program to enforce its intellectual property rights and protects its patent portfolio.
Added
In the years ended June 30, 2023 and 2022, the Company’s largest sales concentration was represented by its own DTC offerings via the Amazon portal and were approximately 20% and 16% of net sales in fiscal year 2023 and 2022, respectively. The Company’s products have broad distribution worldwide across many channels including distributors, specialty stores, mass merchants, and electronics stores.
Removed
In the year ended June 30, 2021, the largest customer was Ingram Micro. The Company’s sales to Amazon Seller Central, were approximately 13% and 3% of net sales in fiscal year 2022 and 2021, respectively. Ingram sales were approximately 10% and 18% of net sales in fiscal year 2022 and 2021, respectively.
Added
A material loss of retailers and/or distributors could result in a loss of product placement and have an adverse effect on the Company’s financial results, however, management believes that the impact of any such loss could be partially alleviated by a corresponding decrease, on a limited basis, in expenses.
Removed
The Company has broad distribution across many channels including specialty stores, mass merchants, and electronics stores. Management believes that any loss of revenues would be partially offset by a corresponding decrease, on a percentage basis, in expenses, thereby partially reducing the impact on the Company’s income from operations.
Added
The increasing costs related to worldwide certification of these technologies by country has increased the costs of regional compliance testing and has impacted the time to market on these wireless items.
Added
The increased public awareness and concern regarding climate change has resulted in increased regulations which are rapidly evolving. The Company continues to monitor the evolving regulations, as well as related required disclosures, to ensure that we will be conformant.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

54 edited+19 added−36 removed28 unchanged
Biggest changeFailure to attract and retain customers to sell the Company’s products could adversely affect sales volume and future profitability. The Company markets a line of products used by consumers to listen to music. The Company distributes these products through retail channels in the U.S. and independent distributors throughout the rest of the world.
Biggest changeThe Company distributes these products through large domestic distributors and some retail channels in the U.S. and independent distributors throughout the rest of the world. The Company is dependent upon its ability to attract and retain a base of customers to sell the Company’s line of products.
The Company sells lines of products with a suggested retail prices ranging from less than $10 up to $1,000. The gross margin for each of these models varies in terms of percentages. The Company finds the low-priced portion of the market most competitive and therefore most subject to pressure on gross margin percentages, which tends to lower profit contributions.
The Company sells lines of products with suggested retail prices ranging from less than $10 up to $1,000. The gross margin for each of these models varies in terms of percentages. The Company finds the low-priced portion of the market most competitive and therefore most subject to pressure on gross margin percentages, which tends to lower profit contributions.
We have experienced supply chain and shipping interruptions and constraints, volatility in demand for our products caused by sudden and significant changes in production levels by our suppliers, and disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements such as raw materials or other product components, transportation, work force, force majeure events.
In the past, we have experienced supply chain and shipping interruptions and constraints, volatility in demand for our products caused by sudden and significant changes in production levels by our suppliers, and disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements such as raw materials or other product components, transportation, work force, or force majeure events.
In the recent past, securities of certain companies have experienced significant and extreme volatility in stock price due to a sudden increase in demand for stock resulting in aggregate short positions in the stock exceeding the number of shares available for purchase, forcing investors with short exposure to pay a premium to repurchase shares for delivery to share lenders.
In the past, securities of certain companies have experienced significant and extreme volatility in stock price due to a sudden increase in demand for stock resulting in aggregate short positions in the stock exceeding the number of shares available for purchase, forcing investors with short exposure to pay a premium to repurchase shares for delivery to share lenders.
Component defects could make the Company’s products unsafe and create a risk of property damage and personal injury. There can be no assurance the Company will be able to detect and fix all issues and defects in the products it offers. Failure to do so can result in widespread technical and performance issues affecting the Company’s products.
Component defects could make the Company’s products unsafe and create a risk of property damage and personal injury. There can be no assurance the Company will be able to detect all issues and defects in the products it offers. Failure to do so can result in widespread technical and performance issues affecting the Company’s products.
Achieving market acceptance for new products may also require substantial marketing efforts and expenditures to increase consumer demand, which could constrain our management, financial and operational resources. If new products we introduce do not experience broad market acceptance or demand for our existing products wanes, our net sales and market share could decline.
Achieving market acceptance for new products may also require substantial marketing efforts and expenditures to increase consumer demand, which could constrain our management, financial and operational resources. If new products we introduce do not experience broad market acceptance or demand for our existing products wanes, our net sales could decline.
Our employees, directors and officers, and their affiliates, hold substantial amounts of shares of our common stock and have vested options for purchase of our common stock. Sales of a substantial number of such shares by these stockholders, or the perception that such sales will occur, may cause the market price of our common stock to decline.
Our employees, directors and officers, and their affiliates collectively hold substantial amounts of shares of our common stock and have vested options for the purchase of our common stock. Sales of a substantial number of such shares by these stockholders, or the perception that such sales will occur, may cause the market price of our common stock to decline.
Risks associated with potential operations, commitments and investments outside of the U.S. include but are not limited to risks of: global and local economic, social and political conditions and uncertainty; currency exchange restrictions and currency fluctuations; war, such as the invasion of Ukraine by Russia, or terrorist attack; local outbreak of disease, such as COVID-19; renegotiation or nullification of existing contracts or international trade arrangements; labor market conditions and workers’ rights affecting our manufacturing operations or those of our customers; macro-economic conditions impacting key markets and sources of supply; changing laws and policies affecting trade, taxation, financial regulation, immigration, and investment; compliance with laws and regulations that differ among jurisdictions, including those covering taxes, intellectual property ownership and infringement, imports and exports, anti-corruption and anti-bribery, antitrust and competition, data privacy, and environment, health, and safety; and general hazards associated with the assertion of sovereignty over areas in which operations are conducted, transactions occur, or counterparties are located.
Risks associated with potential operations, commitments, and investments outside of the U.S. include but are not limited to risks of: global and local economic, social and political conditions and uncertainty; currency exchange restrictions and currency fluctuations; export and import duties; war, such as the invasion of Ukraine by Russia, or terrorist attack; local outbreak of disease, such as COVID-19; renegotiation or nullification of existing contracts or international trade arrangements; labor market conditions and workers’ rights affecting our manufacturing operations or those of our customers; macro-economic conditions impacting key markets and sources of supply; changing laws and policies affecting trade, taxation, financial regulation, immigration, and investment; compliance with laws and regulations that differ among jurisdictions, including those covering taxes, intellectual property ownership and infringement, imports and exports, anti-corruption, and anti-bribery, antitrust and competition, data privacy, and environment, health, and safety; and general hazards associated with the assertion of sovereignty over areas in which operations are conducted, transactions occur, or counterparties are located.
Therefore, a shift in retail customer specifications and preferences toward lower priced items could lead to lower gross margins and lower profit contributions per unit of sale. Due to the range of products that the Company sells, the product sales mix can produce a variation in profit margins.
Therefore, a shift in customer specifications and preferences toward lower priced items could lead to lower gross margins and lower profit contributions per unit of sale. Due to the range of products that the Company sells, the product sales mix can produce a variation in profit margins.
If certain customers, individually or in the aggregate, choose to no longer sell our products, to slow their rate of purchase of our products or to decrease the number of products they purchase, our results of operations would be adversely affected.
If certain customers, individually or in aggregate, choose to no longer sell our products, slow their rate of purchase of our products or decrease the number of unique products they purchase, our results of operations would be adversely affected.
Some distributors sell a limited range of products that yield lower profit margins than others. Most notably, the budget-priced stereo headphone segment of the market (below $10 retail), which is distributed through mass market retailers, computer stores, and office supply stores tends to yield the lowest gross margins.
Some distributors sell a limited range of products that yield lower profit margins than others. Most notably, the budget-priced stereo headphone segment of the market (below $10 retail), which is distributed through mass market retailers, computer stores, and office supply stores and to school systems, tends to yield the lowest gross margins.
Factors such as the depth and liquidity of the market for our common stock, investor perceptions of us and our business, actions by institutional shareholders, strategic actions by us, litigation, changes in accounting standards, policies, guidance, interpretations and principles, additions or departures of key personnel and our results of operations, financial performance and future prospects may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from realizing the liquidity of their shares.
Factors such as the depth and liquidity of the market for our common stock, investor perceptions of us and our business, actions by institutional shareholders, strategic actions by us, litigation, changes in accounting standards, policies, guidance, interpretations and principles, additions or departures of key personnel, a decline in demand for our products and our results of operations, financial performance and future prospects may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from realizing the liquidity of their shares.
The Koss family, including certain members of our management, own a significant percentage of our stock, and as a result, the trading price for our shares may be depressed and they can take actions that may be adverse to the interests of our stockholders.
The Koss family, including certain members of our management, owns a significant percentage of our stock and, as a result, the trading price for our shares may be depressed and they can take actions that may be adverse to the interests of our stockholders.
Quality problems can also adversely affect the experience for users of the Company’s products, and result in harm to the Company’s reputation, loss of competitive advantage, poor market acceptance, reduced demand for products, delay in new product introductions and lost sales. An information systems interruption or breach in security could adversely affect us.
Quality problems can also adversely affect the experience for users of the Company’s products, and result in harm to the Company’s reputation, loss of competitive advantage, poor market acceptance, reduced demand for products, delay in new product introductions and lost sales. 11 Table of Contents An information systems interruption or breach in security could adversely affect us.
As all litigation is uncertain, there can be no assurance that any of this remaining or future litigation will be decided in our favor. We may be adversely affected by the financial condition of our retailers and distributors. Some of our retailers and distributors are experiencing financial difficulties as a result of current adverse economic conditions.
As all litigation is uncertain, there can be no assurance that any of this remaining or future litigation will be decided in our favor. We may be adversely affected by the financial condition of our retailers and distributors. Some of our retailers and distributors are experiencing financial difficulties because of current adverse economic conditions.
Other than restrictions on trading that arise under securities laws (or pursuant to our securities trading policy that is intended to facilitate compliance with securities laws), including the prohibition on trading in securities by or on behalf of a person who is aware of nonpublic material information, we have no restrictions on the right of our employees, directors and officers, and their affiliates, to sell their unrestricted shares of common stock. ‎ 15 Table of Contents
Other than restrictions on trading that arise under securities laws (or pursuant to our securities trading policy that is intended to facilitate compliance with securities laws), including the prohibition on trading in securities by or on behalf of a person who is aware of nonpublic material information, we have no restrictions on the right of our employees, directors and officers, and their affiliates, to sell their unrestricted shares of common stock. ‎ 14 Table of Contents ITEM 1B.
The loss of business of one or more principal customers or a change in the sales volume from a particular customer could have a material adverse effect on the Company’s sales volume and profitability. 10 Table of Contents A shift in customer specifications to lower priced items can reduce profit margins, negatively impacting profitability.
The loss of business of one or more principal customers or a change in the sales volume from a particular customer could have a material adverse effect on the Company’s sales volume and profitability. A shift in customer specifications to lower priced items can reduce profit margins, negatively impacting profitability.
In addition, due to his significant ownership stake and his service as our Principal Executive Officer and Chairman of the Board and Directors, Michael Koss controls the management of our business and affairs.
In addition, due to his significant ownership stake and his service as our Principal Executive Officer and Chairman of the Board of Directors, Michael Koss directs the management of our business and affairs.
A short squeeze has led and could continue to lead to volatile price movements in shares of our common stock that are unrelated or disproportionate to our operating performance or prospects and, once investors purchase the shares of our common stock necessary to cover their short positions, the price of our common stock may rapidly decline.
A short squeeze could lead to volatile price movements in shares of our common stock that are unrelated or disproportionate to our operating performance or prospects and, once investors purchase the shares of our common stock necessary to cover their short positions, the price of our common stock may rapidly decline.
In response to the invasion, the United States, United Kingdom and European Union, along with others, imposed significant new 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 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 12 Table of Contents further punitive actions in the future.
To the extent that increased prices arising from currency fluctuations decrease the overall demand for the Company’s products or motivate customers to purchase lower-priced, lower profit products, the Company’s sales, profits and cash flows could be adversely affected. Risks Related to our Stock Our stock price is subject to volatility. Our stock is subject to substantial price volatility.
To the extent that increased prices arising from currency fluctuations decrease the overall demand for the Company’s products or motivate customers to purchase lower-priced, lower profit products, the Company’s sales, profits, and cash flows could be adversely affected. Risks Related to our Stock Our stock price has been, and may in the future, be subject to significant fluctuations and volatility.
Michael Koss, our President and Chief Executive Officer, beneficially owned 4,233,410 shares of our common stock as of August 1, 2022, representing 44.5% of shares outstanding on such date, including shares held by a voting trust over which Mr. Koss holds sole voting and dispositive power.
Michael Koss, our President and Chief Executive Officer, beneficially owned 4,153,410 shares of our common stock as of August 1, 2023, representing 43.7% of shares outstanding on such date, including shares held by a voting trust over which Mr. Koss holds sole voting and dispositive power.
Our market capitalization, as implied by various trading prices, has recently reflected valuations that diverge significantly from those seen prior to recent volatility and that are significantly higher than our market capitalization prior to the recent increase, and to the extent these valuations reflect trading dynamics unrelated to our financial performance or prospects, purchasers of our common stock could incur substantial losses if there are declines in market prices driven by a return to earlier valuations.
Our market capitalization, as implied by various trading prices, can reflect valuations that diverge significantly from those seen prior to volatility and, to the extent these valuations reflect trading dynamics unrelated to our financial performance or prospects, purchasers of our common stock could incur substantial losses if there 13 Table of Contents are declines in market prices driven by a return to earlier valuations.
Additionally, the Company, the technology industry, and the stock market as a whole have experienced extreme stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to companies’ operating performance.
The market price of our stock is subject to price volatility. Additionally, over the years, the Company, the technology industry, and the stock market as a whole have experienced extreme stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to companies’ operating performance.
As a result, this customer generally may, with no notice or penalty, cease ordering and selling our products, or materially reduce its orders.
As a result, Amazon or any other customer generally may, with no notice or penalty, cease ordering and selling our products, or materially reduce their orders.
As a result, these competitors may be better equipped to influence consumer preferences or otherwise increase their market share by: quickly adapting to changes in consumer preferences; readily taking advantage of acquisition and other opportunities; discounting excess inventory; devoting greater resources to the marketing and sale of their products, including significant advertising, media placement and product endorsement; adopting aggressive pricing policies; and engaging in length y and costly intellectual property and other legal disputes.
As a result, these competitors may be better equipped to influence consumer preferences or otherwise increase their market share by: quickly adapting to changes in consumer preferences; readily taking advantage of acquisition and other opportunities; discounting excess inventory; devoting greater resources to the marketing and sale of their products, including significant advertising, media placement and product endorsement; adopting aggressive pricing policies; and engaging in length y and costly intellectual property and other legal disputes. 10 Table of Contents Additionally, the industry in which we compete generally has low barriers to entry that allow the introduction of new products or new competitors at a fast pace.
In accordance with Executive Order 14071 signed on April 6, 2022, the Company suspended sales into Russia. Also, given the current humanitarian crisis in Ukraine and the population seeking refuge in other countries, sales to Ukraine have been impacted.
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.
Risks Related to our International Operations Economic regulation, trade restrictions, and increasing manufacturing costs in China could adversely impact our business and results of operations. The Company uses contract manufacturing facilities in the People’s Republic of China. For many years, the Chinese economy has experienced periods of rapid growth.
Risks Related to our International Operations Economic regulation, trade restrictions, and increasing manufacturing costs in China could adversely impact our business and results of operations. The Company uses contract manufacturing facilities in the People’s Republic of China.
Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, customers, or others to disclose information or unwittingly provide access to systems or data.
Computer hackers and others routinely attempt to breach the security of technology products, services, and systems, and to fraudulently induce employees, customers, or others to disclose information or unwittingly provide access to systems or data. While we devote resources to security measures to protect our systems and data, these measures cannot provide absolute security.
Financial difficulties on the part of our retailers or distributors could have a material adverse effect on our results of operations and financial condition. One of our customer’s accounts for a significant amount of our net sales, and the loss of, or reduced purchases from, this or other customers could have a material adverse effect on our operating results.
Financial difficulties on the part of our retailers or distributors could have a material adverse effect on our results of operations and financial condition. Direct-to-Consumer sales through the Amazon marketplace account for a significant amount of our net sales and the loss of, or reduced purchases from, this sales channel could have a material adverse effect on our operating results.
During fiscal 2022, we have experienced inflationary cost increases in our commodities, packaging materials and transportation costs. These increases have been partially mitigated by pricing actions implemented in the third quarter of the current fiscal year, as well as working with a dedicated freight forwarding partner to minimize freight rate increases.
These increases have been partially mitigated by pricing actions implemented in the third quarter of the current fiscal year, as well as working with a dedicated freight forwarding partner to minimize freight rate increases.
Inflation has the potential to adversely affect our business, financial condition and results of operations by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers. There have been recent inflationary cost increases in our commodities, packaging materials and transportation costs.
Our business, financial condition and results of operations may be adversely impacted by the effects of inflation. Inflation has the potential to adversely affect our business, financial condition and results of operations by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers.
The Company may not be able to maintain customers or model selections and therefore may experience a reduction in its sales revenue until a model is restored to the mix or a lost customer is replaced by a new customer.
The Company has broad distribution across many channels including specialty stores, mass merchants, electronics stores and computer retailers. The Company may not be able to maintain customers or model selections and therefore may experience a reduction in its sales revenue until a model is restored to the mix or a lost customer is replaced by a new customer.
Our international operations could be adversely impacted by Russia’s invasion of Ukraine Financial and credit markets around the world experienced volatility following the invasion of Ukraine by Russia in February 2022.
The ongoing war between Russia and Ukraine could adversely affect our business, financial condition, and results of operations. Financial and credit markets around the world experienced volatility following the invasion of Ukraine by Russia in February 2022.
This is known as a “short squeeze.” These short squeezes have led to the price per share of those companies to trade at a significantly inflated rate that is disconnected from the underlying value of the company.
This is known as a “short squeeze.” These short squeezes can lead to the price per share of those companies to trade at a significantly inflated rate that is disconnected from the underlying value of the company. Trading by short sellers may increase the likelihood that our common stock will be the target of a short squeeze.
If we fail to obtain, maintain, or in some cases enforce our intellectual property rights, our competitors may be able to copy our designs, or use our brand name, trademarks or technology.
If we fail to obtain, maintain, or in some cases enforce our intellectual property rights, our competitors may be able to copy our designs, or use our brand name, trademarks, or technology. As a result, if we are unable to successfully protect our intellectual property rights, or resolve any conflicts effectively, our results of operations may be harmed.
A “short squeeze” due to a sudden increase in demand for shares of our common stock that largely exceeds supply has led to, and may continue to lead to, extreme price volatility in shares of our common stock.
As a result of this volatility, investors may experience losses on their investment in our common stock. A “short squeeze” due to a sudden increase in demand for shares of our common stock that largely exceeds supply could lead to extreme price volatility in shares of our common stock.
If our tax strategies are ineffective or we are not in compliance with domestic and international tax laws, our financial position, operating results and cash flows could be adversely affected. Our business, financial condition and results of operations may be adversely impacted by the effects of inflation.
We regularly assess all of these matters to determine the adequacy of our tax provision. If our tax strategies are ineffective or we are not in compliance with domestic and international tax laws, our financial position, operating results, and cash flows could be adversely affected.
Recently, in connection with its ongoing intellectual property enforcement program, which includes lawsuits alleging infringement of patents relating to its wireless audio technology, the Company has granted licenses covering certain Company patents. Some complaints we have filed remain outstanding.
Similarly, if we settle such legal proceedings, it may negatively affect how we operate our business. I n connection with its ongoing intellectual property enforcement program, which includes lawsuits alleging infringement of patents relating to its wireless audio technology, the Company has granted licenses covering certain Company patents. Other similar complaints filed remain outstanding.
Additionally, government trade policies, including the imposition of tariffs, export restrictions, sanctions or other retaliatory measures could limit our ability to source materials and products from China at acceptable prices or at all. We do not currently have arrangements with contract manufacturers in other countries that may be acceptable substitutes.
Any disruptions could adversely affect our business, financial condition or results of operations. ,” could limit our ability to source materials and products from China at acceptable prices or at all. We do not currently have arrangements with contract manufacturers in other countries that may be acceptable substitutes.
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. The Company is also at risk if trade restrictions are imposed on the Company’s products based upon country of origin.
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.
Our effective income tax rate could be adversely affected in the future by a number of factors, including: changes in the valuation of deferred tax assets and liabilities and changes in tax laws. We regularly assess all of these matters to determine the adequacy of our tax provision.
Changes in tax laws and unanticipated tax liabilities could adversely affect our effective income tax rate and profitability. We are subject to income taxes in the United States. Our effective income tax rate could be adversely affected in the future by several factors, including changes in the valuation of deferred tax assets and liabilities and changes in tax laws.
If resolved against us, such legal proceedings could result in excessive verdicts, injunctive relief or other equitable relief that may affect how we operate our business. Similarly, if we settle such legal proceedings, it may negatively affect how we operate our business.
Regardless of the merits of the claims, litigation may be expensive, time-consuming, and disruptive to our operations and distracting to management. If resolved against us, such legal proceedings could result in excessive verdicts, injunctive relief or other equitable relief that may affect how we operate our business.
In addition, the Company may not be able to pass along most increases in tariffs and freight charges to the Company’s customers, which would directly affect profits.
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.
We engage in operations, and enter into agreements with counterparties, located outside the U.S., which exposes us to political, governmental and economic instability and foreign currency exchange rate fluctuations. Any disruption caused by these factors could harm our business, results of operations, financial condition, liquidity and prospects.
We may be subject to risks related to doing business in, and having counterparties based in, foreign countries. We engage in operations, and enter into agreements with counterparties, located outside the U.S., which exposes us to political, governmental, and economic instability and foreign currency exchange rate fluctuations.
The Company is monitoring the situation closely and the supply chain team has modified business plans, which include, but are not limited to: (1) increasing the investment in inventory; (2) being alert to potential short supply situations; (3) assisting suppliers with acquisition of critical components; and (4) utilizing alternative sources and/or air freight.
The Company continuously monitors its supply chain in order to modify business plans as may be necessary. This could include increasing the investment in inventory, being alert to potential short supply situations, assisting suppliers with acquisition of critical 9 Table of Contents components and utilizing alternative sources and/or air freight .
These competitors may have significant competitive advantages, including greater financial, distribution, marketing and other resources, longer operating histories, better brand recognition among certain groups of consumers, and greater economies of scale. In addition, these competitors have long-term relationships with many of our larger retailers that are potentially more important to those retailers.
We face competition from consumer electronics brands that have historically dominated the stereo headphone market, in addition to sport brands and lifestyle companies that also produce headphone products. These competitors may have significant competitive advantages, including greater financial, distribution, marketing and other resources, longer operating histories, better brand recognition among certain groups of consumers, and greater economies of scale.
Our largest fiscal year 2022 customer, Amazon Seller Central, accounted for more than 13% and 3% of our net sales in fiscal years 2022 and 2021, respectively. We do not have long-term contracts with any of our customers and all of our customers generally purchase from us on a purchase order basis.
We do not have long-term contracts to conduct sales through the Amazon portal or for sales to any of our customers, and all of our customers generally purchase from us on a purchase order basis.
This significant concentration of share ownership may adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in companies with a controlling stockholder group.
This significant concentration of share ownership may adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in companies with a large stockholder, since such a stockholder can significantly influence all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets.
The latest COVID-19 resurgence resulted in another shut-down of several major ports in China, thus impacting manufacturing of our products and shipments from our suppliers. Additionally, recently there has been increasing geopolitical tension between China and Taiwan that may affect future shipments from Taiwan-based suppliers.
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-based suppliers.
On January 28, 2021, the intra-day sales price of our common stock fluctuated between a reported low sale price of $25.00 and a reported high sales price of $127.45. Additionally, the trading volume in shares of our common stock can vary widely.
During the fiscal year ended June 30, 2023, the sales price of our common stock fluctuated between a reported high sales price of $11.20 on July 25, 2022 and a reported low sales price of $3.56 on June 23, June 26, and June 27, 2023. The trading volume in shares of our common stock can also vary widely.
For example, during the fiscal year ended June 30, 2022, daily trading volume ranged from a low of 15,600 shares on June 24, 2022 to a high of 12.2 million on October 13, 2021.
For example, during the most recent fiscal year, daily trading volume ranged from a low of 3,200 shares on April 6, 2023 to a high of 7,202,400 on July 25, 2022.
The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Risks Related to Our Operations and Financial Results Reduction in present levels of cash flow could adversely affect the Company’s business. The Company’s primary source of liquidity historically has been operating cash flows.
The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Risks Related to Our Operations and Financial Results The Company is dependent on the proper functioning of our contract manufacturers in China, our supply chain, and our distribution networks.
Other inflationary pressures could affect wages, the cost and availability of components and materials, and our ability to meet customer demand. Inflation may further exacerbate other risk factors, including customer demand, supply chain disruptions, and risks of international operations and the recruitment and retention of talent.
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, risks of international operations and the recruitment and retention of talent.
Removed
The Company’s future cash flows from operations (on both a short-term and long-term basis) are dependent upon the following factors, among others:  the Company’s ability to attract new customers that will sell the Company’s products and pay for them;  the Company’s ability to retain its existing customers at the level of sales previously produced;  the volume of sales for these customers; and  maintaining business from one or more primary customers; Similarly, the Company’s future cash flows from operations are subject to the following risks and, among others:  changes in types of products that customers purchase in their sales mix;  poor or deteriorating economic conditions which would directly impact the ability of the Company’s customers to remain in business and pay for their products on a timely basis;  timely, efficient and cost effective movement of products from suppliers and to export customers:  management’s ability to minimize the impact of requests for increases in material or labor cost; and  the ability to collect in full and in a timely manner amounts due to the Company.
Added
Any disruptions could adversely affect our business, financial condition or results of operations. 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.
Removed
In addition, the Company’s cash flow is also dependent, to some extent, upon the ability to maintain operating margins. Weakening consumer demand, including due to recessionary and inflationary concerns, could adversely impact the Company’s cash flow and profitability.
Added
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.
Removed
We are dependent on the proper functioning of our critical facilities, our contract manufacturers in China, our supply chain and distribution networks and the financial stability of our customers, all of which have been negatively impacted by the COVID-19 pandemic in a manner that may have a materially adverse effect on our business, financial condition or results of operations.
Added
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.
Removed
Our ability to produce products may be materially adversely impacted by COVID-19. The Company has closely monitored 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.
Added
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.
Removed
While the impacts of COVID-19 on our business have moderated, there still remains uncertainty around the pandemic. As a result of the COVID-19 pandemic, uncertainty with respect to its economic effects has impacted not only our operating results but also the global economy.
Added
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.
Removed
The extent and nature of government actions to ease restrictions are varied based upon the current extent and severity of the COVID-19 pandemic within their respective countries and localities. In the prior year, the Company saw a surge in demand for communication headsets in the education market that did not repeat at the same level in fiscal year 2022.
Added
In April 2023, United Parcel Service (“UPS”) and the International Brotherhood of Teamsters Union (the “Teamsters”) started labor contract talks to negotiate better pay, no forced overtime and the elimination of a two tier pay system. On July 25, 2023, UPS and the Teamsters reached a tentative five-year contract deal that would avert a nationwide strike.
Removed
Also, certain retail businesses throughout the Company’s markets, particularly in certain European markets due to the spread of the Omicron subvariant BA.2, have seen continued disruption. The Company expects the negative sales impacts caused by this disruption to continue until markets more fully re-open and consumer spending returns to normal.
Added
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.
Removed
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.
Added
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.
Removed
The Company’s future results will be determined by the effectiveness of vaccines, rollout of vaccine boosters, the duration of the pandemic, impact of variants, its geographic spread, further business disruptions and the overall impact on the economy throughout the globe. 9 Table of Contents 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.
Added
The Company also believes that the recent loss of Yellow freight lines to insolvency could impact carrier availability and increase freight costs. The Company had no material direct exposure to Yellow in 2023. The current hostilities in Eastern Europe and the resulting economic sanctions imposed by the government have impacted the global economy.
Removed
They include increased frequency of cleaning and disinfecting of facilities, social distancing practices, remote working when possible, restrictions on business travel, holding certain events virtually and limitations on visitor access to facilities.
Added
While we have no operations in Russia or Ukraine, we are unable to sell to certain of our customers that have been negatively impacted by this event. The continuation of the military conflict could lead to increased supply chain disruptions, inflationary pressures and volatility in global markets that could negatively impact our operations.
Removed
The Company is committed to continuing to execute these plans and will remain in close contact with its supply chain to monitor future possible implications, especially on production facilities.
Added
However, these measures may entail additional costs to the Company and cannot guarantee that the Company will not be adversely affected by supply chain disruptions. Failure to attract and retain customers to sell the Company’s products could adversely affect sales volume and future profitability. The Company markets a line of products used by consumers to listen to music.
Removed
Company profits can suffer from interruption in its supply chain, including disruptions and price volatility in shipping products from China and Taiwan to the U.S. and from the Company’s warehouse in Milwaukee to its customers. The Company uses contract manufacturing facilities in the People’s Republic of China and Taiwan.
Added
In addition, these competitors have long-term relationships with many larger retailers that are potentially more important to those retailers.
Removed
The Company is at risk of business interruptions due to natural disaster, war, disease and government intervention through tariffs or trade restrictions, which lately have become of increased concern in these areas. Therefore, any interruptions in the supply chain for any of these reasons could directly impact the Company’s profits in a material, negative way.
Added
Our largest concentration of sales in fiscal year 2023 came from our DTC sales via the Amazon portal and accounted for more than 20% and 16% of our net sales in fiscal years 2023 and 2022, respectively.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeITEM 2. PROPERTIES The Company leases its 126,000 square foot facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is controlled by five equal ownership interests in trusts held by the 5 beneficiaries of the former chairman’s revocable trust.
Biggest changeITEM 2. PROPERTIES The Company leases its 126,000 square foot 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.
All facilities are in good repair and, in the opinion of management, are suitable and adequate for the Company’s business purposes.
All facilities are in good repair and, in the opinion of the management, are suitable and adequate for the Company’s business purposes.
The negotiated increase in rent slated for 2028 will be the first increase in rent since 1996. The lease is being accounted for as an operating lease. The Company is responsible for all property maintenance, insurance, taxes, and other normal expenses related to ownership. The Company utilizes its Milwaukee facility for administrative, corporate and production functions.
The negotiated increase in rent slated for 2028 will be the first increase in rent under the lease since 1996. The lease is being accounted for as an operating lease. The Company is responsible for all property maintenance, insurance, taxes, and other normal expenses related to ownership. The Company utilizes its Milwaukee facility for administrative, corporate and production functions.
On May 24, 2022, the lease was renewed extending the expiration to June 30, 2028 (the “Extended Term”), with a second extension (“Second Extended Term”) to June 30, 2033. The lease extension maintains the rent at a fixed rate of $380,000 per year for Extended Term with an increase to $397,000 per year for the Seconded Extended Term.
On May 24, 2022, the lease was renewed extending the expiration to June 30, 2028 (the “Extended Term”), with a second extension (“Second Extended Term”) to June 30, 2033. The lease extension maintains the rent at a fixed rate of $380,000 per year for the Extended Term with an increase to $397,000 per year for the Second Extended Term.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeDistrict Courts in District of Massachusetts (Bose Corporation), Southern District of California (PEAG, LLC), Northern District of California (Plantronics, Inc. and Polycome, Inc.), and District of Utah (Skullcandy, Inc.). ‎ 16 Table of Contents PART II
Biggest changeThe remaining lawsuits are pending in U.S. District Courts in District of Massachusetts (Bose Corporation), Southern District of California (PEAG, LLC), and District of Utah (Skullcandy, Inc.). ITEM 4. MINE SAFETY D ISCLOSURES Not applicable. ‎ 15 Table of Contents PART II
The lawsuit against Apple, Inc. filed in the U.S. District Court in the Western District of Texas on July 22, 2020 was dismissed on July 23, 2022 following resolution of the litigation between parties. The remaining lawsuits are pending in U.S.
The lawsuit against Apple, Inc. filed in the U.S. District Court in the Western District of Texas on July 22, 2020 was dismissed on July 23, 2022 following resolution of the litigation between parties. The lawsuit against Plantronics, Inc. and Polycom, Inc. was dismissed on August 4, 2023 following resolution of the litigation between parties.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeSubsequently, the Board of Directors periodically approved increases in the amount authorized for repurchase under the program. As of June 30, 2022, the Board had authorized the repurchase of an aggregate of $45,500,000 of common stock under the stock repurchase program, of which $43,360,247 had been expended. No purchases were made during the years ended June 30, 2022 or 2021.
Biggest changeSubsequently, the Board of Directors periodically approved increases in the amount authorized for repurchase under the program. As of June 30, 2023, the Board had authorized the repurchase of an aggregate of $45,500,000 of common stock under the stock repurchase program, of which $43,360,247 had been expended. No purchases were made during the years ended June 30, 2023 or 2022.
COMPANY REPURCHASES OF EQUITY SECURITIES Total Total Number of Approximate Dollar Number Average Shares Purchased as Value of Shares of Shares Price Paid Part of Publicly Available under Period (2022) Purchased per Share Announced Plan (1) Repurchase Plan April 1 - April 30 — $ — — $ 2,139,753 May 1 - May 31 — $ — — $ 2,139,753 June 1 - June 30 — $ — — $ 2,139,753 (1) 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.
COMPANY REPURCHASES OF EQUITY SECURITIES Total Total Number of Approximate Dollar Number Average Shares Purchased as Value of Shares of Shares Price Paid Part of Publicly Available under Period (2023) Purchased per Share Announced Plan (1) Repurchase Plan April 1 - April 30 — $ — — $ 2,139,753 May 1 - May 31 — $ — — $ 2,139,753 June 1 - June 30 — $ — — $ 2,139,753 (1) 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.
Any future determination to pay dividends will be at the discretion of our Board of Directors and will be dependent upon financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant. ‎ 17 Table of Contents
Any future determination to pay dividends will be at the discretion of our Board of Directors and will be dependent upon financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant. ‎ 16 Table of Contents
This number does not include individual participants in security position listings. There were no dividends declared during the fiscal years ended June 30, 2022 and 2021.
This number does not include individual participants in security position listings. There were no dividends declared during the fiscal years ended June 30, 2023 and 2022.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. MARKET INFORMATION ON COMMON STOCK The Company’s common stock is traded on The Nasdaq Capital Market under the trading symbol KOSS. There were 447 record holders of the Company’s common stock as of August 22, 2022.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. MARKET INFORMATION ON COMMON STOCK The Company’s common stock is traded on The Nasdaq Capital Market under the trading symbol KOSS. There were 494 record holders of the Company’s common stock as of August 22, 2023.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

48 edited+36 added−35 removed19 unchanged
Biggest changeThere was also a significant reduction in employer taxes on stock option exercises year over year. Tax expense for the year ended June 30, 2022 was minimal due to an offsetting change in the valuation allowance for deferred tax assets. ‎ 18 Table of Contents Consolidated Results The following table presents selected consolidated financial data for each of the past two fiscal years: Consolidated Performance Summary 2022 2021 Net sales $ 17,607,267 $ 19,546,008 Net sales (decrease) increase % (9.9)% 6.7% Gross profit $ 6,617,378 $ 6,732,135 Gross profit as % of net sales 37.6% 34.4% Selling, general and administrative expenses $ 5,715,355 $ 7,122,627 Selling, general and administrative expenses as % of net sales 32.5% 36.4% Interest income $ 11,513 $ 2,706 Other income $ 362,390 $ 885,505 Income before income tax provision $ 1,275,926 $ 497,719 Income before income tax provision as % of net sales 7.2% 2.5% Income tax provision $ 7,517 $ 4,125 Income tax provision as % of income before taxes 0.6% 0.8% 2022 Results of Operations Compared with 2021 Net sales for 2022 decreased behind reduced sales to U.S. distributors coupled with a strategic shift away from mass retailers in favor of online DTC sales.
Biggest changeBonus and profit-sharing expense as a consequence of the net income from licensing proceeds during the year also contributed to the increase. Other income for the year ended June 30, 2023 consisted entirely of $33,000,000 in licensing proceeds received in the first quarter of the year. Tax expense for the year ended June 30, 2023 was $317,377 as a direct impact of the licensing income earned during the year. ‎ 17 Table of Contents Consolidated Results The following table presents selected consolidated financial data for each of the past two fiscal years: Consolidated Performance Summary 2023 2022 Net sales $ 13,099,651 $ 17,705,519 Net sales decrease (26.0)% (9.4)% Gross profit $ 4,457,414 $ 6,715,630 Gross profit as % of net sales 34.0% 37.9% Selling, general and administrative expenses $ 29,358,466 $ 5,813,607 Selling, general and administrative expenses as % of net sales 224.1% 32.8% Interest income $ 520,809 $ 11,513 Other income $ 33,000,000 $ 362,390 Income before income tax provision $ 8,619,757 $ 1,275,926 Income before income tax provision as % of net sales 65.8% 7.2% Income tax provision $ 317,377 $ 7,517 Income tax provision as % of income before taxes 3.7% 0.6% 2023 Results of Operations Compared with 2022 Net sales for the fiscal year 2023 declined by 26.0% mainly as a result of lower sales to U.S. distributors coupled with a 28.9% drop in sales to the Company’s export markets.
The facility is in good repair and, in the opinion of management, is suitable and adequate for the Company’s business purposes. ‎ 22 Table of Contents Critical Accounting Policies Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States.
The facility is in good repair and, in the opinion of management, is suitable and adequate for the Company’s business purposes. ‎ 21 Table of Contents Critical Accounting Policies Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States.
Financing Activities The cash generated from financing activities in the years ended June 30, 2022 and 2021 was solely driven by stock option exercises. As of June 30, 2022, the Company had no outstanding borrowings on its bank line of credit facility under the Credit Agreement (described below under “Credit Facility").
Financing Activities The cash generated from financing activities in the years ended June 30, 2023 and 2022 was solely driven by stock option exercises. As of June 30, 2023, the Company had no outstanding borrowings on its bank line of credit facility under the Credit Agreement (described below under “Credit Facility").
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The purpose of this discussion and analysis is to enhance the understanding and evaluation of the financial position, results of operations, cash flows, indebtedness and other key financial information of the Company for fiscal years 2022 and 2021.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The purpose of this discussion and analysis is to enhance the understanding and evaluation of the financial position, results of operations, cash flows, indebtedness, and other key financial information of the Company for fiscal years 2023 and 2022.
If the program continues to be successful, the Company may receive additional royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position; however, there is no guarantee of a positive outcome from these efforts, which could ultimately be time consuming and unsuccessful.
If the program continues to be successful with the remaining complaints, the Company may receive additional royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position; however, there is no guarantee of a positive outcome from these efforts, which could ultimately be time consuming and unsuccessful.
As such, as of June 30, 2022, the amount of common stock subject to repurchase by the Company under the Board of Director’s prior authorization remained $2,139,753 at the discretion of the Chief Executive Officer of the Company.
As such, as of June 30, 2023, the amount of common stock subject to repurchase by the Company under the Board of Director’s prior authorization remained $2,139,753 at the discretion of the Chief Executive Officer of the Company.
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.
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 22 Table of Contents 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 negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, disposition of assets, mergers and liquidations, among other restrictions. The Company is currently in material compliance with all covenants related to the Credit Agreement. As of June 30, 2022, and June 30, 2021, there were no outstanding borrowings on the facility.
The negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, disposition of assets, mergers and liquidations, among other restrictions. The Company is currently in compliance with all covenants related to the Credit Agreement. As of June 30, 2023, and June 30, 2022, there were no outstanding borrowings on the facility.
Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. See also the “Cautionary Statement Regarding Forward-Looking Statements” on page 4 of this Report.
Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. See also the “Cautionary Statement Regarding Forward-Looking Statements” on page 4 of this Report. Overview John C.
However, the ultimate collectability of the unsecured receivable is dependent upon the financial condition of an individual customer, which could change rapidly and without warning. ‎ 23 Table of Contents Inventories The Company values its inventories using standard cost which approximates the lower of first in first out (“FIFO”) cost or net realizable value.
However, the ultimate collectability of the unsecured receivable is dependent upon the financial condition of an individual customer, which could change rapidly and without warning. Inventories The Company values its inventories using standard cost which approximates the lower of first in first out (“FIFO”) cost or net realizable value.
Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from its credit facilities are insufficient to fund its future activities, the Company may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in the Credit Agreement (as defined below).
Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from its credit facilities are 20 Table of Contents insufficient to fund its future activities, the Company may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in the Credit Agreement (as defined below).
Management is focused on increasing sales, especially in DTC and the export markets, increasing new product introductions, increasing the generation of cash from operations, and improving the Company’s overall earnings to help improve the Company’s liquidity.
Management is focused on increasing sales, especially in the U.S. distributor market, DTC, and the export markets, increasing new product introductions, increasing the generation of cash from operations, and improving the Company’s overall earnings to help improve the Company’s liquidity.
Contractual Obligation The Company leases the 126,000 square foot facility from Koss Holdings, LLC, which is controlled by five equal ownership interests in trusts held by the 5 beneficiaries of the former Chairman’s revocable trust.
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 the former Chairman’s revocable trust and includes current stockholders of the Company.
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 of between $1,000,000 to $5,000,000 in the stock repurchase program.
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.
The underlying principle is to recognize revenue when promised goods or services transfer to the customer. The amount of revenue recognized is to reflect the consideration expected to be received for those goods or services. See Note 3 to the Consolidated Financial Statements for additional information on revenue recognition.
The amount of revenue recognized is to reflect the consideration expected to be received for those goods or services. See Note 3 to the Consolidated Financial Statements for additional information on revenue recognition.
The Credit Agreement also provides 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.
The Credit Agreement provides for a $5,000,000 revolving secured credit facility as well as letters of credit for the benefit of the Company of up to a sublimit of $1,000,000. There are no unused line fees in the credit facility.
On January 28, 2021, the Credit Agreement was amended to extend the expiration to October 31, 2022, and to change the interest rate to Wall Street Journal Prime less 1.50%.
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.
Part of the litigation related to this enforcement has been recently dismissed and the Company expects to receive non-recurring net proceeds of $10-$14 million from the granting of licenses to certain of its patents.
Part of the litigation related to this enforcement has been recently dismissed and the Company received non-recurring net proceeds of nearly $11,000,000 from the granting of licenses to certain of its patents.
In addition, the Company may also need to seek additional equity funding or debt financing if it becomes a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services or technologies.
In addition, the Company may also need to seek additional equity funding or debt financing if it becomes a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services, or technologies. Credit Facility On May 14, 2019, the Company entered into a secured credit facility (“Credit Agreement”) with Town Bank (“Lender”).
There were no purchases of common stock in 2022 or 2021 under the stock repurchase program. In the year ended June 30, 2022, there were stock option exercises of 539,089 shares generating $1,390,346 of cash.
There were no purchases of common stock in 2023 or 2022 under the stock repurchase program. In the year ended June 30, 2023, there were stock option exercises of 87,000 shares generating $171,350 of cash. This compares to the exercise of 539,089 options during the year ended June 30, 2022, which generated cash of $1,390,346.
Income of $473,000 was recognized with the reversal of the deferred compensation liability for the Company’s founder who passed away in December 2021, which was offset by $71,250 of payments accrued and made to the former officer prior to his passing.
This compares to $633,000 of income recorded in the prior fiscal year as a result of income of $473,000 recognized with the reversal of the deferred compensation liability for the Company’s founder who passed away in December 2021, offset by $71,250 of payments accrued and made to the former officer prior to his passing, and deferred compensation income of $231,000 recognized under the arrangement for the current officer as a result of increasing interest rates.
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.
As previously reported, 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.
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. The expected term of the options and volatility are estimated using historical experience for the options by vesting period.
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.
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. ‎ 21 Table of Contents Long Term Liquidity The Company’s future capital requirements, to a certain extent, are also subject to general conditions in or affecting the electronics industry and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond its control.
Long Term Liquidity The Company’s future capital requirements, to a certain extent, are also subject to general conditions in or affecting the electronics industry and are subject to general economic, political, financial, competitive, legislative, and regulatory factors that are beyond its control.
We continually evaluate our estimates and judgments, including those related to doubtful accounts, product returns, excess inventories, warranties, impairment of long-lived assets, deferred compensation, income taxes and other contingencies. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
We have made estimates and we continually evaluate our estimates and judgments, including those related to doubtful accounts, product returns, excess inventories, warranties, impairment of long-lived assets, deferred compensation, income taxes and other contingencies.
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.
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.
Additionally, we analyze our ability to recognize the net deferred income tax assets created in each jurisdiction in which we operate to determine if valuation allowances are necessary based on the “more likely than not” criteria. 24 Table of Contents New Accounting Pronouncements Applicable new accounting pronouncements are set forth under Item 15 of this annual report and are incorporated herein by reference.
Deferred income tax provisions are based on changes in the deferred tax assets and liabilities from period to period. Additionally, we analyze our ability to recognize the net deferred income tax assets created in each jurisdiction in which we operate to determine if valuation allowances are necessary based on the “more likely than not” criteria.
As of June 30, 2022, the most recently approved increase was for additional purchases of $2,000,000, which occurred in October 2006, for an aggregate maximum of $45,500,000, of which $43,360,247 had been expended through June 30, 2022. There were no stock repurchases under the program in fiscal year 2022 or 2021.
As of June 30, 2023, the Board had authorized the repurchase of an aggregate of $45,500,000 of common stock under the stock repurchase program, of which $43,360,247 had been expended. No purchases were made during the years ended June 30, 2023 or 2022. There were no stock repurchases under the program in fiscal year 2023 or 2022.
Purchases of equipment and leasehold improvements by the Company during the year ended June 30, 2022 were minimal at $108,158 compared to the $600,155 spent for tooling and leasehold improvements in the year ended June 30, 2021. No significant capital expenditures are anticipated for fiscal year 2023.
Purchases of equipment and leasehold improvements by the Company during the year ended June 30, 2023 was $98,441 compared to $108,158 spent for tooling and leasehold improvements in the prior year.
Although certain of the Company’s products could be viewed as essential by consumers for use with mobile phones and other portable electronic devices, other products are more of a discretionary spend. The results of the Company’s operations are therefore susceptible to consumer confidence and macroeconomic factors.
Sales levels are less impacted by seasonality or the traditional holiday shopping season. Although certain of the Company’s products could be viewed as essential by consumers for use with mobile phones and other portable electronic devices, many other models represent a more discretionary spend.
The Company believes its existing cash, cash equivalents, cash provided by operating activities and borrowings under its credit facility will be sufficient to meet its anticipated working capital, and capital expenditure requirements during the next twelve months. There can be no assurance, however, that the Company’s business will continue to generate cash flow at current levels.
The Company believes its existing cash, cash equivalents, investments in short-term U.S. Treasury securities, cash provided by operating activities and borrowings under its credit facility, if any, will be sufficient to meet its anticipated working capital, and capital expenditure requirements during the next twelve months.
Given the current humanitarian crisis in Ukraine and the population seeking refuge in other countries as a result of the conflict, sales to Ukraine have also been impacted. Neither Russia nor Ukraine constitutes a significant portion of the business, making up less than 3.4% of total net sales of the Company for the year ended June 30, 2022.
Prior to the war, neither Russia nor Ukraine constituted a significant portion of the business, making up less than 3.4% of total net sales of the Company for the year ended June 30, 2022. There were no sales to Russia or Ukraine in the current fiscal year.
If the Company is unable to generate sufficient cash flow from operations, then it may be required to sell assets, reduce capital expenditures or draw on its credit facilities. The Company anticipates that existing sources of liquidity, credit facilities, and cash flows from operations will be sufficient to satisfy its cash needs for the foreseeable future.
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 expenditure, or draw on its credit facilities.
The risk-free interest rate is calculated based on the expected life of the options. The Company does not estimate forfeitures as they are recognized when they occur. Income Taxes We estimate a provision for income taxes based on the effective tax rate expected to be applicable for the fiscal year.
The expected term of the options and volatility are estimated using historical experience for the options by vesting period. The risk-free interest rate is calculated based on the expected life of the options. The Company does not estimate forfeitures as they are recognized when they occur.
Also, as a result of increasing interest rates, deferred compensation income of $231,000 was recorded related to the change in the net present value of the future expected payments to a current officer as a result of increasing interest rates.
During the year ended June 30, 2023, deferred compensation expense of $60,000 was recorded related to the change in the net present value of the future expected payments to a current officer as a result of an additional vesting year, which increased the future annual payments.
Pricing actions implemented in the third quarter of the current fiscal year partially mitigated these increases and working with a dedicated freight forwarding partner has helped to minimize freight rate increases. To protect the safety, health and well-being of employees, customers, and suppliers, the Company implemented several preventive measures while also meeting the needs of global customers.
Pricing actions implemented in the third quarter of fiscal year 2023 partially mitigated these increases and working with a dedicated freight forwarding partner has helped to minimize freight rate increases. The Company’s supply chain is primarily in southern China.
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 Company uses a five-step analysis to determine how revenue is recognized.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Consolidated Financial Statements included herewith. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
Income tax expense for the year ended June 30, 2022, was comprised of the U.S. federal statutory rate of 21%, and the effect of state income taxes, offset by an adjustment to the valuation allowance for deferred tax assets until it is more likely than not that the Company will be able to use the net operating loss carryforwards at which time the valuation allowance will be removed.
Income tax expense of $317,377 for the year ended June 30, 2023 was comprised of the U.S. federal statutory rate of 21% and the blended state income tax rate of approximately 3.8%, offset by an adjustment to the valuation allowance for deferred tax assets.
Changes in sales volume are driven primarily by the addition or loss of customers, a customer adding or removing a product from its inventory, or changes in economic conditions. They are relatively less impacted by seasonality or the traditional holiday shopping season.
The Company’s products are sold domestically and internationally through a variety of retailers and distributors, as well as directly to other manufacturers to include with their own products. Changes in sales volume are driven primarily by the addition or loss of customers, a customer adding or removing a product from its inventory, or changes in economic conditions.
The invasion of Ukraine by Russia and the sanctions imposed in response to this conflict have increased global economic and political uncertainty. In accordance with Executive Order 14071 declared on April 6, 2022, the Company suspended sales into Russia.
In accordance with Executive Order 14071 declared on April 6, 2022, the Company suspended sales into Russia. Given the humanitarian crisis in Ukraine and the population seeking refuge in other countries as a result of the ongoing conflict, sales to Ukraine were also impacted.
See Note 9 for additional information on deferred compensation. Stock-Based Compensation The Company has a stock-based employee compensation plan, which is described more fully in Note 11. The Company accounts for stock-based compensation in accordance with ASC 718 "Compensation–- Stock Compensation".
In addition, management estimates the expected retirement date for the current officer as that impacts the timing for expected future payments. See Note 10 for additional information on deferred compensation. Stock-Based Compensation The Company has a stock-based employee compensation plan, which is described more fully in Note 12 to the Consolidated Financial Statements.
Overview The Company initially developed stereo headphones in 1958 and has been a leader in the industry ever since. We market a complete line of high-fidelity headphones, wireless Bluetooth® headphones, wireless Bluetooth® speakers, computer headsets, telecommunications headsets, and active noise canceling headphones.
We market a complete line of high-fidelity headphones, wireless Bluetooth® headphones, wireless Bluetooth® speakers, computer headsets, telecommunications headsets, and active noise canceling headphones. Koss operates as one business segment, as its only business line is the design, manufacture and sale of stereo headphones and related personal listening accessories.
Additionally, the Company may owe all or a portion of any future proceeds arising from the enforcement program 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 $3.1 million of cash and cash equivalents, $17.1 million of short-term investments and available credit facilities of $5.0 million on June 30, 2023.
The Company is monitoring the situation closely and the supply chain team has modified business plans, which include, but are not limited to: (1) increasing the investment in inventory; (2) being alert to potential short supply situations; (3) assisting suppliers with acquisition of critical components; and (4) utilizing alternative sources and/or air freight.
This could include increasing the investment in inventory, being alert to potential short supply situations, assisting suppliers with acquisition of critical components and utilizing alternative sources and/or air freight. The invasion of Ukraine by Russia in February 2022 and the broad economic sanctions imposed in response to this conflict have increased global economic and political uncertainty.
The movement of working capital in the year ended June 30, 2022 is representative of declining sales and a continued investment in critical products to ensure adequate levels were available and maintained given the continued disruption of and delays in the supply chain. This is reflected in the low backorders number at the end of the year.
For the year ended June 30, 2022, the Company used cash of $942,530 for operating activities related to the deliberate investment in inventory to ensure adequate stock levels of critical products were available in case of potential supply chain disruption and delays.
Employer taxes on stock option exercises of approximately $134,000 were recorded in the current year compared to $571,000 in the prior year, a decrease of $437,000. 19 Table of Contents As previously reported, the Company maintains a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio.
Employer taxes on stock option exercises of approximately $28,000 were recorded in the current year compared to $134,000 in the prior year, a decrease of $106,000. 18 Table of Contents Other income for the year ended June 30, 2023 consisted entirely of $33,000,000 in licensing proceeds received in the first quarter.
The Company had $9,208,170 of cash and available credit facility of $5,000,000 on June 30, 2022, which the Company expects to be sufficient to fund its operations beyond the next twelve months from the date of filing this Form 10-K. 20 Table of Contents Liquidity and Capital Resources Cash Flows The following table summarizes our cash flows from operating, investing and financing activities for each of the past two fiscal years: Total cash provided by (used in): 2022 2021 Operating activities $ (942,530) $ 348,740 Investing activities 1,810,139 (704,206) Financing activities 1,390,346 3,306,272 Net increase in cash and cash equivalents $ 2,257,955 $ 2,950,806 Operating Activities Cash used by the Company in operations was $942,530 despite having an improvement in net income of $774,815.
We are uncertain, however, of the impact it will have on future operating results. 19 Table of Contents Liquidity and Capital Resources Cash Flows The following table summarizes our cash flows from operating, investing and financing activities for each of the past two fiscal years: Total cash provided by (used in): 2023 2022 Operating activities $ 10,735,649 $ (942,530) Investing activities (17,024,107) 1,810,139 Financing activities 171,350 1,390,346 Net (decrease) increase in cash and cash equivalents $ (6,117,108) $ 2,257,955 Operating Activities Cash provided by operating activities of the Company during the year ended June 30, 2023 was the result of the licensing proceeds received, partially offset by the payment of related legal fees and expenses, along with a second quarter profit-sharing payout.
Removed
Koss operates as one business segment, as its only business line is the design, manufacture and sale of stereo headphones and related accessories. The Company’s products are sold domestically and internationally through a variety of retailers and distributors, as well as directly to other manufacturers for including with their own products.
Added
Koss and the Company have been recognized as the creator of the personal listening industry. The Company initially developed the first Koss SP 3 stereo headphones in 1958 and has been an innovator in the field ever since.
Removed
Fiscal Year 2022 Summary  Net sales declined 9.9% to $17,607,267 after decreased sales in the fourth quarter. A strategic shift away from mass retailers and reduced sales to U.S. distributors were the major factors. Export sales fell 13% while domestic sales fell 9%.  Gross profit as a percent of sales increased 3.2% to 37.6%.
Added
The results of the Company’s operations are therefore susceptible to consumer confidence and adverse macroeconomic factors such as inflation, slower growth or recession, higher interest rates, and wage and commodity inflation. In addition, the economic sanctions imposed as a result of the Russia/Ukraine conflict have impacted certain of our customers in those markets and the surrounding regions.
Removed
The increase was primarily due to a change in the mix of sales by channel as higher margin direct-to-consumer (“DTC”) sales grew while we discontinued the sale of a lower margin product to a U.S. mass retailer.  Selling, general and administrative expense declined mainly as a result of income related to the Company’s deferred compensation agreements.
Added
The impacts of COVID-19 have moderated since it was declared a global pandemic by the World Health Organization in March 2020. The Company continues to monitor any changes regarding the pandemic and any future impacts of COVID-19 on our business, operations, and financial results.
Removed
The deferred compensation liability related to the founder was released upon his passing in December 2021, resulting in income of $472,883, and the deferred compensation liability of a current officer was reduced due to increasing interest rates during the year.
Added
Fiscal Year 2023 Summary  Net sales declined 26.0% to $13,099,651 due predominantly to weaker consumer demand led by constraints on consumer spending brought on by higher inflation and, as a result, lower disposable income. Over inventory positions at some U.S. distributors also contributed to the decline.
Removed
A 72% increase in DTC sales helped to offset some of the decrease. Sales in the Company’s export markets declined 13% compared to 2021. For the year ended June 30, 2022, domestic net sales decreased $1,263,353, or 8.8% to $13,034,267.
Added
Export sales fell 29% while domestic sales fell 25%.  Gross profit as a percentage of sales decreased 3.9 percentage points to 34.0%. The decrease was primarily due to fixed manufacturing expenses that do not flex with the lower sales volume.
Removed
Excluding DTC, the decline was 21.2%, from $12,403,400 to $9,768,601, as a result of the decline in sales to U.S. distributors and a U.S. mass retailer dropping their branded products from its planogram in the third quarter of the prior year.
Added
The favorable mix of higher margin direct-to-consumer (“DTC”) sales offset the year over year decline in higher margin domestic distributors.  Selling, general and administrative expenses increased significantly as a result of legal fees and expenses incurred in support of the Company’s patent defense litigation.
Removed
DTC has continued to grow and has become our largest market class at 18.5% of total net sales for the year. At the same time, the Company has shifted away from domestic retail distributors, and the number of retail outlets carrying our products decreased from approximately 7,400 during fiscal year 2021 to 2,000 during fiscal year 2022.
Added
Excluding the effect of these legal fees and expenses, selling, general and administrative expenses increased by approximately $1.3 million, or 24.9%.
Removed
Export net sales lost momentum in the current fiscal year, decreasing $675,029 or 12.9% to $4,572,620. Export distributors in the Czech Republic and Ukraine had strong volumes for the year despite lingering COVID-19 restrictions and despite the disruption of sales to Ukraine in the fourth quarter as a result of the continued hostility with Russia.
Added
For the year ended June 30, 2023, domestic net sales decreased $3,284,378, or 25.0% to $9,848,521. Sales to U.S. distributors were impacted by an oversupply of inventory as a consequence of higher-level purchases during the pandemic followed by recent weakened consumer demand for our product due to inflation.
Removed
This was more than offset, however, by a 39.6% decrease in sales to distributors in Asia, as well as those in Russia due to the suspension of sales as required by the Executive Order 14071 signed on April 6, 2022. Gross profit increased to 37.6% for the year ended June 30, 2022, compared to 34.4% for the prior fiscal year.
Added
While DTC sales, believed to be a significant approach to driving growth, remained stable year over year, it continued to represent the Company’s largest market class, growing from approximately 19% of total net sales during the twelve months ended June 30, 2022 to approximately 25% during the current fiscal year.
Removed
The margin rates are very dependent on mix of sales by customer, product and sales channel. The heightened level of higher margin DTC sales, coupled with the end of low margin sales to a US-based mass retailer, which discontinued the product supplied by the Company late in the third quarter of the prior fiscal year, improved margin rates.
Added
Export net sales also saw a downturn during the current fiscal year, decreasing $1,321,490 or 28.9% to $3,251,130. The adverse impacts from the war between Russia and Ukraine, along with increasing inflation and higher energy costs, drove an approximately 27% decline in sales to export distributors in Europe by nearly $1,000,000 versus fiscal year 2022.
Removed
The delays throughout the supply chain that began late last fiscal year as a result of the persistence of COVID-19 in all parts of the world, and more recently due in part to the recent conflict in Eastern Europe, continue to affect the Company.
Added
Lost sales of approximately $600,000 to Russia and Ukraine made up the majority of the drop. A decrease in sales to distributors in Asia also contributed to the decline mainly behind a lack of sales to one of the Company’s non-retail original equipment manufacturers that utilizes Koss headphones in one of their products.
Removed
COVID related extensions of the Chinese New Year added to the delays in product shipments from suppliers in Asia. The ongoing disruption in ocean freight and congestion at the ports on the U.S. west coast resulting in delivery delays have resulted in increased inbound shipping costs.
Added
Sales to this market were over $350,000 during the year ended June 30, 2022. Gross profit as a percentage of net sales decreased to 34.0% for the year ended June 30, 2023, compared to 37.9% for the prior fiscal year.
Removed
While rising shipping costs are expected to linger and negatively impact margins in the foreseeable future, the Company did contract with a dedicated freight forwarding partner to secure fixed rates. Rates did stabilize in the current quarter as a result. Selling, general and administrative expenses for the year ended June 30, 2022, decreased 19.8% or approximately $1,407,000 to approximately $5,715,000.
Added
Gross margins vary by customer, product, and markets and, as a result, any shifts in the mix can impact the overall gross margin. While the mix of higher margin DTC sales was favorable compared to the prior fiscal year, fixed manufacturing overhead expenses that don’t flex with sales negatively impacted the margins for the year.
Removed
The primary factor was $633,000 of income recorded in the current year as a result of a decrease in the deferred compensation liability compared to an expense of $308,000 in the prior year.
Added
And while freight costs improved during the first half of the year and then stabilized in the back half, the movement of inventory received at the higher freight costs will continue to offset the reduced shipping costs. The Company renewed its contract with the freight forwarder, stabilizing contract rates and bringing them in line with market rates.
Removed
The effective tax rate was approximately 0% in the fiscal year ended June 30, 2022. It is anticipated that the effective rate in future years will be reduced by utilization of a portion or all of the approximately $38,554,000 of federal net operating loss carryforwards.
Added
UPS reached a tentative agreement for a new five-year national contract with the Teamsters on July 25, 2023, averting a potential crisis in small package shipping. The new agreement is likely to increase the Company’s future freight costs.
Removed
The Company has closely monitored the impact of COVID-19 (including the continuing emergence of variants) in order to protect the health and safety of its employees and customers. Business plans are being continuously updated and executed to maintain supply of the Company’s products to our customers throughout the world.
Added
Selling, general and administrative expenses for the year ended June 30, 2023 increased by approximately $23,545,000 to $29,358,000 compared to the prior year period. The significant change was predominantly a result of the increase of approximately $22,276,000 in legal fees and expenses incurred in support of the Company’s patent defense litigation.

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