What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-08-26 compared with 2021-08-20 · 106 added, 79 removed, 132 unchanged (58% of the section changed)

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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.

The Company developed stereo headphones in 1958 and has been a leader in the industry ever since.

See also the “Cautionary Statement Regarding Forward-Looking Statements” on page 4 of this Report.

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.

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They are relatively 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, other products are more of a discretionary spend.

The results of the Company's operations are therefore susceptible to consumer confidence and macroeconomic factors.

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.

Fiscal Year 2022 Summary

 Net sales increased 6.7% to $19,546,008 on increases in U.S.

distributor, export market and direct-to-consumer (“DTC”) sales.

Export sales increased 67% while domestic sales fell 6%.

 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%.

The increase was primarily due to a US mass retailer dropping a lower margin product as well as a change in the mix of sales by product and by channel.

 Selling, general and administrative expense was higher as a result of employer taxes on stock option exercises and deferred compensation expense.

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.

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.

There 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.

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Consolidated Performance Summary

Net sales increase (decrease) %

Net sales (decrease) increase %

Gross profit as % of net sales

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Interest income

Income (loss) before income tax provision (benefit)

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

Income before income tax provision

Income before income tax provision as % of net sales

Income tax provision

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

Income tax provision as % of income before taxes

2022 Results of Operations Compared with 2021

Net sales for 2021 increased primarily due to increased sales in the Company's export markets.

Domestic sales reflected mixed results among markets but, overall, declined 5.7% compared to 2020.

Export net sales increased by $2,097,131 or 66.6% to $5,247,650.

Export distributors had strong volumes especially in the Czech Republic, Scandinavia and Russia.

These have historically been key markets and led the resurgence in sales volumes.

These markets were strong despite the restrictions through the COVID-19 pandemic.

The Company expects to see continued growth as restrictions are eased.

For the year ended June 30, 2021, domestic net sales decreased 5.7% from $15,161,311 to $14,298,358.

There was a significant shift in sales to distributors and DTC from mass retail with a US mass retailer dropping their branded products from their planogram.

The business has become much more oriented to distributors and DTC along with certain OEM products.

Sales into the education marketplace decreased due to large shipments late in the year ended June 30, 2020 that were not repeated this year as those customers re-establish their testing services.

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.

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.

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.

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.

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.

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.

The margin rates are very dependent on mix of sales by customer, product and sales channel.

The lower sales to a US-based mass retailer, which has discontinued the product supplied by the Company, improved margin rates.

Improved sales in the U.S.

through distributors, DTC market and the export markets improved the margin rates.

Early in the year ended June 30, 2021, freight costs were higher than normal as product was shipped by air to meet customer delivery schedules.

Late in the fiscal year, cargo-freight costs began to rise as cargo carriers significantly increased pricing.

The Company expects high freight costs to continue into the fiscal year ended June 30, 2022 and negatively impact margins.

Selling, general and administrative expenses for the year ended June 30, 2021, increased 15.9% or approximately $976,000 to approximately $7,123,000.

The primary factor was employer taxes on stock option exercises of approximately $571,000 in the current year.

There was also increased deferred compensation expenses.

These costs were partially offset by a reduction in the 401k company match.

Deferred compensation expense increased by approximately $244,000 due to changes in the assumptions on life expectancy, discount rates, and a higher payout based on years of service and earnings.

The 401k company match decreased approximately $172,000 as the percentage match was decreased.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

The Company has recovered certain of the fees and costs that were involved with the underlying efforts to enforce this portfolio, as further described in the notes to the financial statements included in this Annual Report on Form 10-K.

If the program is successful, the Company may receive royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position;

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.

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.

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

Income tax expense for the year ended June 30, 2022, was comprised of the U.S.

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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.

The Company has been closely monitoring the COVID-19 situation to protect the health and safety of its employees and customers.

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.

The Company continued to see strong demand in the year ended June 30, 2021 for specific communication headphones as people continued to work from home and studied online due to COVID-19 related directives.

However, certain retail businesses throughout the Company’s markets, particularly in certain European markets, have seen continued disruption.

The Company expects sporadic negative sales impacts to continue until markets reopen fully and consumer spending returns to normal.

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.

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.

The Company saw a surge in the sale of specific communication headsets in the year ended June 30, 2021 that did not repeat in fiscal year 2022.

Also, certain retail businesses throughout the Company’s markets, particularly in certain European markets have seen continued disruption due to the spread of the Omicron subvariant BA.2.

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.

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

The Company's future results will be heavily determined by timely rollout of the vaccines, effectiveness of the vaccines, the duration of the pandemic, impact of the variants, its geographic spread, further business disruptions and the overall impact on the global economy.

Many European countries continued to have lockdowns in the year ended June 30, 2021, which negatively impacted sales into those countries.

The Company’s future results will be heavily determined by the duration of the pandemic, impact of the variants, its geographic spread, further business disruptions and the overall impact on the global economy.

During fiscal 2022, inflationary cost increases have impacted our commodities, packaging materials and transportation costs.

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.

They included 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.

The Company is committed to continuing to execute these plans.

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

This portion of the Company's supply chain was disrupted early in the quarter ended March 31, 2020.

Until recently, these disruptions had little on-going impact.

In the past six to nine months, the Company began experiencing issues related to the availability of containers and routing to move products in a time efficient manner.

Since late fiscal year 2021, the Company has continued to experience issues related to the availability of containers and routing to move products in a cost effective and time efficient manner.

There have also been impacts to the movement of new product introductions and costs.

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and (4) utilizing alternative sources and/or air freight.

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

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.

The Company is committed to continuing to execute these plans.

The Company had $6,950,215 of cash and available credit facilities of $5,000,000 on June 30, 2021, 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.

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.

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.

There were no sales to Russia or Ukraine in the fourth quarter.

We are uncertain, however, of the impact it will have on future operating results.

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.

Liquidity and Capital Resources

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Operating Activities

The Company generated less cash from operations despite having an improvement in net income of $959,101.

Changes in operating assets and liabilities used $500,565 of cash in the year ended June 30, 2021 compared to generating $1,597,977 in cash during the year ended June 30, 2020.

The movement of working capital in the year ended June 30, 2021 is more representative of the business in a year of growth and with sales shifting to export distributors.

The Company is very focused on working capital, especially inventory levels, to adjust to changes in the business and the impacts of shipping delays on lead times from China.

Cash used by the Company in operations was $942,530 despite having an improvement in net income of $774,815.

Changes in operating assets and liabilities used $1,762,308 of cash in the year ended June 30, 2022 compared to using $500,565 in cash during the year ended June 30, 2021.

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.

Investing Activities

Cash used in investing activities was higher for 2021 as the Company increased spending on leasehold improvements and the implementation of a new ERP system.

The Company is planning approximately $600,000 for tooling and leasehold improvements in the year ending June 30, 2022.

The tooling expenditures are to support new product introductions.

The Company expects to generate sufficient funds through operations to fund these expenditures.

Cash provided by investing activities was $1,810,139 during the year ended June 30, 2022 and related to the receipt of $2,014,184 of proceeds on company-owned life insurance policies on the Company’s founder who passed away in December 2021.

Premiums of $95,887 were paid during the year on these and other life insurance policies on other executives.

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.

Financing Activities

The cash generated from financing activities in the year ended June 30, 2021 was driven by stock option exercises.

In the year ended June 30, 2020, the $506,700 cash generated from financing activities was the unsecured loan the Company entered into under the Small Business Administration Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") through Town Bank.

As of June 30, 2021, the Company had no outstanding borrowings on its bank line of credit facility under the Credit Agreement (described below under "Credit Facility").

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").

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.

In addition to capital expenditures, the Company has interest payments when it uses its line of credit facility.

The Company believes that cash generated from operations, together with borrowings available under its credit facility, should provide it with adequate liquidity to meet operating requirements, debt service requirements, and capital expenditures.

Management is focusing on increasing sales, especially in 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.

Short Term Liquidity

The Company anticipates funding its normal recurring trade payables, accrued expenses, ongoing R&D costs and any potential interest payments, if it utilizes its line of credit facility, through existing working capital and funds provided by operating activities.

The majority of the Company’s purchase obligations are pursuant to funded contractual arrangements with its customers.

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.

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.

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.

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.

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.

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).

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”) for a two-year term expiring on May 14, 2021.

On May 14, 2019, the Company entered into a secured credit facility “"Credit Agreement’) with Town Bank (“Lender”) for a two-year term expiring on May 14, 2021.

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

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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.

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.

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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 has approved increases of between $1,000,000 to $5,000,000 in the stock repurchase program.

Subsequently, the Board of Directors periodically approved increases of between $1,000,000 to $5,000,000 in the stock repurchase program.

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, 2021, the Board of Directors has authorized the repurchase by the Company of up to $2,139,753 in Company common stock at the discretion of the Chief Executive Officer of the Company.

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.

Future stock purchases under this program are dependent on management’s assessment of value versus market price, may occur either on the open market or through privately negotiated transactions and may be financed through the Company’s cash flow or by borrowing.

Contractual Obligation

The Company leases the 126,000 square foot facility from Koss Holdings, LLC, which is wholly-owned by the Company’s former chairman.

On January 5, 2017, the lease was renewed for a period of five years, ending June 30, 2023, and is being accounted for as an operating lease.

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.

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

The lease extension maintained the rent at a fixed rate of $380,000 per year.

The Company has the option to renew the lease for an additional five years beginning July 1, 2028 and ending June 30, 2033 under the same terms and conditions except that the annual rent will increase to $397,000.

The negotiated increase in rent slated for 2028 will be the first increase in rent since 1996.

The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership.

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The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in additional material impacts to the Company’s consolidated financial statements in future reporting periods.

Despite the Company’s efforts to evaluate the extent to which COVID-19 will impact the Company’s business and financial results, the ultimate impact of COVID-19 depends on factors beyond the Company’s knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects.

Despite the Company’s efforts to evaluate the extent to which COVID-19 will continue to impact the Company’s business and financial results, the ultimate impact of COVID-19 depends on factors beyond the Company’s knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects.

As a result, the Company is unable to estimate the full extent to which COVID-19 will negatively impact its financial results or liquidity.

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.

Revenues from product sales are recognized when the customer obtains control of the product, which typically occurs upon shipment from the Company’s facility.

There are a very limited number of customers for which control does not pass until they have received the products at their facility.

Revenue from product sales is adjusted for estimated warranty obligations and variable consideration, which are detailed below.

The Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09 (Topic 606), Revenue from Contracts with Customers.

This standard superseded nearly all existing revenue recognition guidance and provides a five-step analysis to determine when and how revenue is recognized.

The Company uses a five-step analysis to determine how revenue is recognized.

The underlying principle is to recognize revenue when promised goods or services transfer to the customer.

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These specific reserves are re-evaluated and adjusted as additional information is received that impacts the amount reserved.

However, the ultimate collectibility of the unsecured receivable is dependent upon the financial condition of an individual customer, which could change rapidly and without warning.

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.

The Company values its inventories using standard cost which approximates the lower of first in first out (“FIFO”) cost or net realizable value.

Valuing inventories at the lower of cost or market requires the use of estimates and judgment.

Valuing inventories at the lower of cost or net realizable value requires the use of estimates and judgment.

The Company continues to use the same techniques to value inventories that it has in the past.

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This, or certain additional actions or market developments, could create excess inventory levels, which would impact the valuation of our inventories.

Any actions taken by our customers or market developments that could impact the value of our inventory are considered when determining the lower of cost or market valuations.

Any actions taken by our customers or market developments that could impact the value of our inventory are considered when determining the lower of cost or net realizable value valuations.

The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on historical and projected usage and production requirements.

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The deferred revenue is based on historical analysis of warranty claims relative to sales.

This deferred revenue reflects the Company's best estimates of the amount of warranty returns and repairs it will experience during those future periods.

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.

Deferred Compensation

The Company’s deferred compensation liabilities are for a current and former officer and are calculated based on compensation, years of service, discount rates and mortality tables.

The Company’s deferred compensation liability is for a current officer and is calculated based on various assumptions that may include compensation, years of service, expected retirement date, discount rates and mortality tables.

The related expense is calculated using the net present value of the expected payments and is included in selling, general and administrative expenses in the Consolidated Statements of Operations.

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In addition, management estimates the expected retirement date for the current officer as that impacts the timing for expected future payments.

The Company had a deferred compensation liability for a former office and in December 2021, the former officer passed away, and the portion of the deferred compensation liability related to the former officer was relieved.

See Note 9 for additional information on deferred compensation.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis