KOSS CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis supplements our management’s discussion and analysis for the year ended June 30, 2025 as contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on August 29, 2025, and presumes that readers have read or have access to such discussion and analysis. The following discussion and analysis should also be read together with the unaudited consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that reflect our plans and strategy for our business and involve risks and uncertainties. You should review the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2025, as updated by subsequent filings with the Securities and Exchange Commission, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read “Cautionary Statement Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q. Overview The Company initially developed stereo headphones in 1958 and has been recognized as a leader in the industry ever since. Koss markets a complete line of high-fidelity headphones, wireless Bluetooth® headphones, wireless Bluetooth® speakers, computer headsets, telecommunications headsets, and active noise canceling headphones. The Company operates as one business segment, as its principal business line is the design, manufacture and sale of stereo headphones and related accessories. Financial Results The following table presents selected financial data for the three months ended September 30, 2025 and 2024: Three Months Ended September 30 Financial Performance Summary 2025 2024 Net sales $ 4,070,778 $ 3,201,868 Net sales increase (decrease) % from prior year period 27.1% (5.1)% Gross profit $ 1,628,692 $ 1,172,926 Gross profit as % of net sales 40.0% 36.6% Selling, general and administrative expenses $ 1,674,732 $ 1,810,059 Selling, general and administrative expenses as % of net sales 41.1% 56.5% Interest income $ 293,128 $ 220,358 Interest expense $ (599) $ — Income (loss) before income tax provision $ 246,489 $ (416,775) Income (loss) before income tax provision as % of net sales 6.1% (13.0)% Income tax provision $ 2,760 $ 2,760 Income tax provision as % of income (loss) before income tax provision 1.1% (0.7)% ‎ 15 Table of Contents Fiscal 2026 Period Results Compared with Fiscal 2025 Period (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 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 $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. 16 Table of Contents The Company maintains a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio. The Company has enforced its intellectual property by filing complaints against certain parties alleging infringement on the Company’s patents relating to its wireless headphone technology. If efforts are successful, the Company may receive royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position from time to time. However, there is no guarantee of a positive outcome from these efforts in the future, 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. The Company believes that its financial position remains strong. 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, 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. 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. Other risk factors further exacerbated by inflation include supply chain disruptions, increased oil and energy costs, risks of international operations and the recruitment and retention of talent. Supply Chain Disruption and Trade Tensions with China - The Company faces significant risks due to reliance on third-party supply chains, primarily in southern China and Taiwan, distribution networks and the availability of necessary components to produce a considerable number of our products . Issues such as pandemic restrictions, geopolitical unrest, labor shortages, strikes, and component procurement failures could delay manufacturing and increase costs. The escalating U.S.-China tariff war has severely disrupted supply chains, impacting both domestic industries and global trade dynamics. Continued geopolitical tensions between China and Taiwan may affect future shipments from Taiwan-based suppliers. Adverse changes in social, political, regulatory, or economic conditions could increase product costs or delay shipments. The escalation of trade tensions might lead to retaliatory trade restrictions, potentially 17 Table of Contents affecting the Company's ability to source products from China or conduct business internationally. 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, with limited ability to pass increased tariffs and freight costs onto customers. Broad tariffs may shift supply chains out of China, which could cause inflation to rise, impacting costs and consumer demand. The Company will continue to monitor the evolving situation and others that may arise as the changes in the current labor landscape, coupled with rising inflation and energy prices, could potentially exacerbate disruptions in the supply chain, delay product shipments and increase transportation costs. Russia’s Invasion of Ukraine - Financial and credit markets around the world experienced volatility following the invasion of Ukraine by Russia in February 2022. In response to the invasion, the United States, United Kingdom, and European Union, along with others, imposed significant sanctions and export controls against Russia, Russian banks and certain Russian individuals and these sanctions remain unchanged. 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 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. They are a significant threat to individual organizations and national security. High-profile security breaches at other companies and in government agencies have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyberattacks targeting businesses. We rely on accounting, financial, and operational management information systems to conduct our operations. Any disruption in these systems could adversely affect our ability to conduct our business. Furthermore, as part of our normal business activities, we collect and store common confidential information about customers, employees, vendors, and suppliers. This information is entitled to protection under a number of regulatory regimes. Any failure to maintain the security of the data, including the penetration of our network security and the misappropriation of confidential and personal information, could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also result in deterioration in customers confidence in us and other competitive disadvantages, and thus could have a material adverse impact on our financial condition and results of operations . While we devote resources to security measures to protect our systems and data, these measures cannot provide absolute security and there is a risk that these types of attacks could impact the entire supply and distribution chain for the Company’s product line. 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. ‎ 18 Table of Contents Liquidity and Capital Resources Cash Flows 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: 2025 2024 Operating activities $ 762,617 $ 201,554 Investing activities (1,052,130) (392,773) Financing activities (2,371) 104,870 Net decrease in cash and cash equivalents $ (291,884) $ (86,349) Operating Activities 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 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 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. Liquidity The Company believes its existing cash and cash equivalents, investments in short-term U.S. Treasury securities, cash provided by operating activities and available borrowings under its credit facility, if any, will be sufficient to meet its anticipated working capital, and capital expenditure requirements during the next twelve months. There can be no assurance, however, that the Company’s business will continue to generate cash flow at current levels. If the Company is unable to generate sufficient cash flow from operations, then it may be required to sell assets, reduce capital expenditures, or draw on its credit facilities. The Company regularly evaluates new product offerings, inventory levels and capital expenditures to ensure that it is effectively allocating resources in line with current market conditions. Credit Facility On May 14, 2019, the Company entered into a secured credit facility (“Credit Agreement”) with Town Bank (“Lender”). The Credit Agreement provides for a $5,000,000 revolving secured credit facility for letters of credit for the benefit of the Company of up to a sublimit of $1,000,000. There are no unused line fees in the credit facility. On January 28, 2021, the Credit Agreement was amended 19 Table of Contents 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. The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type. The negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, disposition of assets, mergers and liquidations, among other restrictions. As of 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 The Company leases its 126,000 square foot facility from Koss Holdings, LLC, which is controlled by five equal ownership interests in trusts held by the five beneficiaries of a former chairman’s revocable trust and includes current stockholders of the Company . On May 24, 2022, the lease was renewed for a period of five years, ending June 30, 2028, and is being accounted for as an operating lease. 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. The facility is in good repair and, in the opinion of management, is suitable and adequate for the Company’s business purposes. Critical Accounting Policies and Estimates There have been no significant changes in our critical accounting policies and estimates from the information we provided in our Annual Report on Form 10-K for the fiscal year ended June 30, 2025. Off-Balance Sheet Transactions At September 30, 2025, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements. ‎ 20 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.