What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-10-31 compared with 2025-05-09 · 84 added, 83 removed, 87 unchanged (66% of the section changed)

9 unchanged sentences

Financial Results

The following table presents selected financial data for the three and nine months ended March 31, 2025 and 2024:

The following table presents selected financial data for the three months ended September 30, 2025 and 2024:

Three Months Ended

Nine Months Ended

Financial Performance Summary

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Interest income

Loss before income tax provision (benefit)

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

Income tax provision (benefit)

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

Interest expense

Income (loss) before income tax provision

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

Income tax provision

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

Fiscal 2026 Period Results Compared with Fiscal 2025 Period

(comments refer to the three and nine-month periods ended March 31, 2025 unless otherwise noted)

Net sales for the three months ended March 31, 2025 were $2,781,000 compared to $2,638,000 for the same three-month period in the prior year, an increase of $143,000, or 5.4%.

Increased sales to a certain segment of our domestic distributors, along with recurring orders from two of our custom OEM customers, were partially offset by lower sales from the other domestic distributors.

Sales of $9,540,000 for the nine months ended March 31, 2025 were ahead by $168,000, or 1.8%, compared to sales of $9,372,000 for the nine months ended March 31, 2024.

Higher sales to our European and Asian distributors, along with a custom headphone order to a new customer and a year-over-year increase in direct-to-consumer (“DTC”) sales were mostly offset by lower sales in the other market segments.

Sales to the export markets were $612,000 for the three months ended March 31, 2025, a slight increase of $30,000, or 5.1%, over sales of $582,000 for the same period in the prior year behind higher sales to our Asian distributors.

A decrease in sales to our European distributors offset most of that favorability and was due mainly to timing of expected reorders being pushed back to the fourth quarter of the fiscal year.

Export sales for the nine months ended March 31, 2025 were $3,022,000, a $976,000, or 47.7%, increase over sales of $2,045,000 for the same period in the prior year.

Sales to European distributors were up 41% over the prior year, due to the continued success of new product sales as well as overall inventory restocking.

Sales to the Asian markets were up $182,000, or 67.0%, compared to last year driven by sales of headphones used in metal detecting units.

There were no sales to our Russian distributor during the current fiscal year, nor have there been any since April 2022.

For the three months ended March 31, 2025, sales to the domestic markets increased by $114,000, or 5.5%, as compared to the same period in the prior year.

Sales of custom therapeutic listening headphones to one OEM customer and custom elements to another OEM customer were the biggest driver, while increased sales to a particular domestic distributor segment and DTC sales were offset by declines in other domestic distributor sales and sales to e-tailers.

Sales for the nine months ended March 31, 2025 were $6,518,000, down $808,000, or 11.0%, compared to $7,326,000 for the nine months ended March 31,2024.

A 57% decline in sales to the education markets, mainly due to timing, along with lower sales to domestic distributors, the music and books sector and e-tailers, was slightly offset by a 16.2% increase in DTC sales and a $262,000 custom headphones order.

As a percentage of net sales for the three months ended March 31, 2025, gross margin was 39.0%, which compares favorably to a gross margin of 31.9% for the same three months in the prior year, an increase of 710 basis points.

Margin improvement for the third quarter of the current fiscal year was largely due to the adverse impact in the prior year of the sell-through of inventory investment made while freight costs were higher.

Margins were positively impacted in the three months ended March 31, 2025 due to a decrease in the reserve for excess and obsolete inventory compared to the same period in the prior year.

A more favorable customer mix also contributed to the improved margins.

For the nine months ended March 31, 2025, the gross margin was 38.4%, an increase of 620 basis points over the gross margin of 32.2% for the same nine-month period in the prior year.

In the prior year, the adverse impact related to the sell-through of inventory brought in at higher freight costs drove the improvement in margins for the first nine months of the current year.

The write-off of some obsolete inventory partially offset those gains.

Despite a slowdown in the increase in freight rates, due to increased competition, post-Lunar New Year demand lull and capacity growth, shipment costs remain elevated and are expected to increase in the next quarter due to disruptions in key shipping routes, capacity issues, market volatility and general rate increases.

Transit times decreased over the last quarter.

The Company will sign a new contract with its dedicated freight forwarder in May but does not expect significant changes regarding freight costs or available services.

With the recent tariff announcements, the Company expects to pay significantly more in duties going forward for product manufactured in China.

(comments refer to the three-month periods ended September 30, 2025 and 2024 unless otherwise noted)

Net sales for the three months ended September 30, 2025 totaled $4,071,000, which reflects an increase of $869,000, or 27.1%, compared to $3,202,000 in the same period of the previous year.

This growth was primarily attributable to a substantial order from an Education customer, as well as an increase in direct-to-consumer (DTC) sales of $170,000, or 22.5%, and a notable 243% year-over-year rise in sales to the Asia market.

These gains, however, were partially offset by delays in re-orders from certain customers in the European market.

Export sales of $749,000 were $285,000, or 27.6%, behind sales of $1,035,000 for the first fiscal quarter of the prior year.

Sales to our largest distributors in central and northern Europe were down 70.0%, mainly as a result of orders submitted too late to ship in the quarter.

Stronger than expected sales to our Asian distributors helped to make up for the decline from the same quarter in the prior year.

Sales to the domestic markets increased from $2,167,000 in the three months ended September 30, 2024 to $3,322,000 for the current fiscal year’s first quarter, growth of $1,154,000, or 53.3%.

The sizable sale of custom headphones to the Company’s largest education customer, along with a nearly 23% rise in DTC sales were the main contributing factors to the significant sales growth year over year.

These gains were partially offset by a 38% decrease in sales to the Company’s largest domestic distributor and a 27% decline in sales to e-tailers.

Gross margins as a percentage of net sales for the three months ended September 30, 2025 was 40.0%, an increase of 340 basis points over the gross margin of 36.6% for the same fiscal quarter in the prior year.

The current year improvement in margins was a result of a favorable customer mix, prior year’s reserve established for excess inventory which did not repeat and a reduced margin impact from fixed manufacturing costs.

The sale of inventory purchased at the 145% tariff rate adversely impacted the margins for the current quarter, offsetting some of the gains.

Freight costs remained stable throughout the quarter as capacity and demand dynamics normalized.

Shipment costs are projected to rise in the second quarter due to a planned peak season surcharge in October due to anticipated spikes in demand for freight capacity ahead of major retail and holiday seasons.

The Company continues its relationship with a dedicated freight forwarder and also maintains a relationship with a bonded warehouse to help defer tariff payments.

The additional unloading, storage and loading costs at this facility are offset by the postponed payments to the Custom Border Patrol for stored product until needed.

Transit times increased over the previous quarter.

The Company will continue monitoring relevant events and adapt as needed to ensure product availability.

Tariff policies have fluctuated over the last six months, particularly with respect to trade policies and tariffs applied to trade between China and the U.S.

The Company is currently subject to certain tariff rates on products manufactured in China that are lower than those previously imposed, but future changes in trade policy could result in significantly higher duties.

Federal courts have ruled that the tariffs imposed under the International Emergency Economic Powers Act (IEEPA) are illegal and exceeded the President’s statutory authority, however, the Supreme Court is scheduled to consider the IEEPA tariffs in the consolidated case of Learning Resources v.

Trump in November 2025.

If the Supreme Court ultimately rules that the IEEPA tariffs were illegally imposed, duty refunds could be possible, though the administration could turn to other statutes to support tariffs.

Given the volatility of the tariff landscape and the substantial amount of product coming from China, the Company continues to closely monitor the latest updates and their impact on operations, planning efforts and financial conditions.

Selling, general and administrative expenses of $1,604,000 for the three months ended March 31, 2025 increased $152,000, or 10.5%, from $1,451,000 for the same three-month period in the prior year.

The increase was due mainly to new product certification and compliance testing, along with higher online advertising spend.

For the nine months ended March 31, 2025, selling, general and administrative expenses of $4,960,000 were higher by $388,000, or 8.5%, compared to $4,572,000 for the nine months ended March 31, 2024.

Increased spend related to certification, compliance and online advertising was also the primary driver of the year over year nine-month period overall increase, coupled with expenditures related to contract resources utilized to modify existing NetSuite functionality to incorporate necessary security and user rights.

The reduction in stock-based compensation expense during the current year partially offset the increases as the remaining unvested stock options granted as part of the Koss Corporation 2012 Omnibus Incentive Plan (the “2012 Plan”) are nearly fully vested.

An immaterial federal income tax expense was booked during the three and nine months ended March 31, 2025 due to the amendment of the 2022 fiscal year tax return as a result of adjustments for employer payroll taxes inappropriately paid in that year related to the gains from the disqualifying dispositions of incentive stock options.

No federal income tax expense was recorded for the same periods

in the prior year, however, as a result of the Return-to-Provision (RTP) adjustment recorded during the third quarter of fiscal year 2024, a federal income tax benefit of $82,652 was recorded for both the three and nine months ended March 31, 2024.

State income tax expense of $5,203 and $1,522 was recorded for the three months ended March 31, 2025 and 2024, respectively, and $10,724 and $5,281 was recorded for the nine months ended March 31, 2025 and 2024, respectively, reflecting the minimum required state tax due.

The effective tax rate for the three and nine months ended March 31, 2025 was 1.9% and 1.8%, respectively.

For the three and nine months ended March 31, 2024, the effective tax rate was 20.5% and 8.4%, respectively.

Selling, general, and administrative expenses totaled $1,675,000 for the three months ended September 30, 2025, a decrease of $135,000, or 7.5%, compared to $1,810,000 for the same period in the prior year.

This decline was primarily due to lower spending on new product compliance testing and certifications, reduced legal fees, and a decrease in deferred compensation expense associated with the change in the discount rate used to calculate the related liability Stock-based compensation expense also declined as the remaining unvested stock options granted as part of the Koss Corporation 2012 Omnibus Incentive Plan (the “2012 Plan”) are nearly fully vested.

Higher sales commissions to external sales representatives partially offset some of the favorability.

State tax expense of $2,760 was recorded for each of the three months ended September 30, 2025 and 2024, reflecting the minimum required state tax due.

No federal income tax was recorded due to net operating loss (NOL) carryforwards available to offset most taxable income.

The effective tax rate for the three months ended September 30, 2025 and 2024 was 1.1% and 0.7%, respectively.

It is anticipated that the effective rate in future years will continue to be reduced by utilization of a portion or all of the available federal and state net operating loss (NOL) carryforwards that existed as of June 30, 2025.

The Company’s remaining expected federal tax loss carryforward approximates $33,600,000 at the end of the third quarter.

The taxable loss for the initial nine months of the fiscal year increased the deferred tax asset by approximately $190,000, leading to a deferred tax asset related to the Company's net operating loss carry forwards of roughly $8,600,000 as of March 31, 2025.

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

The Company’s remaining expected federal tax loss carryforward approximates $34,500,000 at the end of the first quarter of fiscal year 2026, resulting in a deferred tax asset related to the Company's net operating loss carry forwards of roughly $8,800,000 as of September 30, 2025.

The valuation allowance was adjusted accordingly to fully offset the net deferred tax asset as there is not sufficient positive evidence to support a reduction in a full valuation allowance as, excluding unusual, infrequent items, a three-year cumulative tax loss has occurred.

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

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The Company believes that its financial position remains strong.

The Company had $2.9 million of cash and cash equivalents, $10.1 million of short-term investments and available credit facilities of $5.0 million on March 31, 2025.

The Company had $2.5 million of cash and cash equivalents, $13.9 million of short-term investments and available credit facilities of $5.0 million on September 30, 2025.

The Company also had $4.0 million of long-term investments in U.S.

treasury debt securities on September 30, 2025.

Recent Trends

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

These include economic uncertainty from unexpected job growth, recently enacted tariffs and the global trade war, elevated inflation and interest rates, reduced consumer confidence, disruption in our supply chain, the ongoing crises in Eastern Europe and the Middle East and increased risk of cyberattacks.

These include economic uncertainty from unexpected job growth, tariff volatility and the global trade war, elevated inflation, weakening of the job market and rising long-term unemployment, sustained higher interest rates (albeit descending over the last few months), reduced consumer confidence, disruption in our supply chain, the conflict in Eastern Europe and instability in the Middle East and increased risk of cyberattacks.

While the impact of these factors on our fiscal 2026 performance remains uncertain, we will continue to evaluate the extent to which these factors will impact our business, financial condition, or results of operations.

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

Tariffs - As of April 2025, U.S.

tariff policy has undergone significant changes under President Donald Trump's administration, leading to heightened global trade tensions and economic repercussions.

The tariff announcements have significantly increased the Company's expected duty costs for products manufactured in China to as high as 145%.

The new tariffs are also expected to increase inflation in the short term, which could result in a decline in consumer sentiment.

The Company continues to monitor the volatile tariff landscape to assess its impact on operations, planning, and financial conditions.

Inflationary Cost Environment and the Impact on Consumer Confidence – In addition to the expected inflation as a result of the newly imposed tariffs , higher interest rates and higher energy costs continue.

A pervasive sense of uncertainty is evident, and consumer sentiment is waning.

Consumers may put off making purchase decisions and cut back on overall spending, which could impact the Company’s sales volumes.

As noted, the Company will experience higher costs for commodities and packaging materials due to the recently enacted tariffs and will react with pricing actions as it deems necessary.

Government Shutdown - The federal government shutdown on October 1, 2025 , when new appropriations or a continuing resolution failed to be passed.

The economic impact of a short shutdown on the economy is generally modest and partially recovered later, however, given the current environment of weaker hiring, inflation concerns and global uncertainty, the risk to the economy could potentially be higher than in previous shutdowns and will depend on duration.

The Company does provide product to the federal government and fulfillment of these orders has been delayed as a direct result of the shutdown.

Tariffs - In April 2025, the U.S.

government imposed tariffs of up to 145% in certain imports from China, which significantly increased the Company’s expected duty cost for goods sourced from China.

Since then, President Trump and his administration have implemented several temporary pauses to allow for trade negotiations.

In May 2025, a 90-day tariff truce between the U.S.

and China reduced reciprocal tariffs down to 10%, however, an additional 20% fentanyl-related tariff remained, resulting in a total 30% tariff on many Chinese goods.

In August 2025 President Trump signed an executive order extending the tariff pause for another 90 days, with the suspension of additional reciprocal tariffs on Chinese goods remaining in effect until November 10, 2025 while trade negotiations continue.

As of October 30, 2025, it has been reported that the fentanyl-related tariff has been reduced by half, to 10%.

The suspension of further, heightened tariffs allows time to de-escalate tensions and reach a potential long-term agreement.

However, the Company continues to monitor the volatile tariff landscape to assess its impact on inflation and consumer sentiment which could impact operations, planning, and financial conditions.

Inflationary Cost Environment and the Impact on Consumer Confidence – In addition to the expected inflation as a result of the newly imposed tariffs , sustained higher interest rates and higher energy costs continue.

While the Federal Reserve cut its benchmark federal funds rate by .25 percentage points since June 30, 2025, the overall effect on consumer sentiment and purchasing decisions is muted because a small cut typically does not offset more dominant economic factors, such as concerns over inflation and the labor market.

Consumers may still put off making purchase decisions and cut back on overall spending, which could impact the Company’s sales volumes.

As noted, the Company will experience higher costs for commodities and packaging materials due to the recently enacted tariffs and will react with pricing actions in the coming quarter and as it deems necessary.

T he Company continues to work with a dedicated freight forwarding partner to minimize freight rate increases.

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

While there is a humanitarian crisis in Ukraine created by the war and the population continues to seek refuge in other countries, the Company continues to receive orders from their Ukrainian distributor in the first half of both fiscal years 2025 and 2024 with potential for more in the current year.

During the three and nine months ended March 31, 2025 and 2024, there were no sales to Russia.

While there is a humanitarian crisis in Ukraine created by the war and the population continues to seek refuge in other countries, the Company continued to receive orders from their Ukrainian distributor since the conflict began with potential for more in the current year.

During the three months ended September 30, 2025 and 2024, there were no sales to Russia.

Cyberattacks - Cyberattacks are a growing geopolitical risk, becoming larger, more frequent, more sophisticated and more relentless as technology has evolved, resulting in privacy, security, and compliance concerns.

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While we devote resources to security measures to protect our systems and data, these measures cannot provide absolute security and there is a risk that these types of attacks could impact the entire supply and distribution chain for the Company’s product line.

In a world that runs on the internet, the Company can only be as strong as its weakest link, whether as a financial service provider, third party distributor, reseller, transportation service provider, contract manufacturer, customer or consumer.

Given connectivity through the internet, the Company can only be as strong as its weakest link, whether that is a financial service provider, third party distributor, reseller, transportation service provider, contract manufacturer, customer or consumer.

Liquidity and Capital Resources

The following table summarizes cash flows from operating, investing and financing activities for the nine months ended March 31, 2025 and 2024:

The following table summarizes cash flows from operating, investing and financing activities for the three months ended September 30, 2025 and 2024:

Total cash (used in) provided by:

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Financing activities

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents

Operating Activities

The cash provided by operating activities during the nine months ending March 31, 2025 was mainly driven by customer deposits of approximately $334,000 for orders that will ship in the next quarter.

Cash used in operating activities during the nine months ended March 31, 2024 was primarily a result of the payment of bonuses earned in the year previous.

Cash provided by improvements in cash flow related to working capital, namely the reduction of inventory levels, offset the majority of outflow.

The cash provided by operating activities during the three months ending September 30, 2025 was primarily due to the IRS refund of $512,000 relating to employer payroll taxes incorrectly paid in prior years on the gains from the disqualifying dispositions of incentive stock options combined with improvements in cash flow related to working capital, namely the reduction of inventory levels and the collection of customer receivables.

Cash provided by operating activities during the three months ended September 30, 2024 was primarily a result of customer deposits for orders shipping in the next quarter.

Also contributing to the positive cash flow was the refund of $362,000 by the Company’s payroll vendor relating to employee payroll taxes on the gains from the disqualifying dispositions of incentive stock options as the Company chose to instead issue the checks directly to the employees.

Investing Activities

Cash used by investing activities for the nine months ended March 31, 2025 was related mostly to fixed asset expenditures, namely the replacement of a second roof section of the Company’s facility for approximately $346,000 and other leasehold improvements.

Payments of approximately $70,000 were also made for the premiums on the Company-owned life insurance policies on two of its executives.

Proceeds of $9,179,000 received during the nine months ended March 31, 2025 from the maturity of U.S.

Treasury securities were mostly reinvested to purchase $9,059,000 of similar securities at a net discount of $60,000.

Cash used by investing activities for the nine months ended March 31, 2024 was also related to fixed asset expenditures, predominantly the replacement of the first roof section of the building for approximately $300,000.

The Company also paid $82,000 in premiums on the Company-owned life insurance policies on two of its executives.

Proceeds of $14,331,000 from the maturity of U.S.

Treasury securities were received and utilized to purchase $14,286,000 of similar securities at a $300,000 discount.

Cash used by investing activities for the three months ended September 30, 2025 was primarily due to the purchase of a new U.S.

Treasury security after receipt of payment on a significant order.

The $1,020,000 security was purchased at a $20,000 discount.

The Company also paid premiums of $51,000 on the company-owned life insurance policies on two of its executives.

Cash used by investing activities for the three months ended September 30, 2024 was related mostly to fixed asset expenditures, namely the replacement of a second roof section of the building, and the payment of the premiums on the company-owned life insurance policies on two of its executives.

Proceeds of $5,034,000 received during the three months ended September 30, 2024 from the maturity of U.S.

Treasury securities were mostly reinvested to purchase $5,057,000 of similar securities at a $58,000 discount.

Financing Activities

Cash from the exercise of stock options during the nine months ended March 31, 2025 and 2024 provided the only cash from financing activities.

An aggregate of 76,000 and 20,000 shares of common stock, respectively, were issued as a result of employee stock option exercises under grants still outstanding from the Company’s 2012 Omnibus Incentive Plan for those periods.

As of March 31, 2025 and June 30, 2024, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stock in the three and nine months ended March 31, 2025 or 2024 under the Company’s stock repurchase program.

Cash used for financing activities in the three-month period ended September 30, 2025 was for principal payments on the finance lease for a new reach truck for the warehouse.

Cash from the exercise of stock options provided the only cash from financing activities for the first quarter of the prior fiscal year.

An aggregate of 51,000 shares of common stock were issued as a result of employee stock option exercises under grants still outstanding from the Company’s 2012 Omnibus Incentive Plan.

As of September 30, 2025 and June 30, 2025, the Company had no outstanding borrowings on its bank line of credit facility.

There were no purchases of common stock in the three months ended September 30, 2025 or 2024 under the Company’s stock repurchase program.

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

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There are no unused line fees in the credit facility.

On January 28, 2021, the Credit Agreement was amended to change the interest rate to Wall Street Journal Prime less 1.50%.

An amendment to the Credit Agreement effective October 30, 2024, extended the maturity date to October 31, 2026, and removed one of the covenants requiring submission of annual financial

performance projections to the Lender.

On January 28, 2021, the Credit Agreement was amended

to change the interest rate to Wall Street Journal Prime less 1.50%.

An amendment to the Credit Agreement effective October 30, 2024, extended the maturity date to October 31, 2026, and removed one of the covenants requiring submission of annual financial performance projections to the Lender.

The Company and the Lender also entered into a General Business Security Agreement dated May 14, 2019 under which the Company granted the Lender a security interest in substantially all of the Company’s assets in connection with the Company’s obligations under the Credit Agreement.

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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.

As of March 31, 2025, the Company was in compliance with all covenants related to the Credit Agreement.

As of March 31, 2025 and June 30, 2024, there were no outstanding borrowings on the facility.

As of September 30, 2025, the Company was in compliance with all covenants related to the Credit Agreement.

As of September 30, 2025 and June 30, 2025, there were no outstanding borrowings on the facility.

Contractual Obligation

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Off-Balance Sheet Transactions

At March 31, 2025, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

At September 30, 2025, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

Quantitative and Qualitative Disclosures About Market Risk

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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-Q

Item 2. Management’s Discussion and Analysis