What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2026-01-30 compared with 2025-10-31 · 88 added, 69 removed, 102 unchanged (61% of the section changed)

9 unchanged sentences

Financial Results

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

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

Three Months Ended

Six Months Ended

Financial Performance Summary

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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.

(comments refer to the three and six-month periods ended December 31, 2025 and 2024 unless otherwise noted)

Net sales for the three months ended December 31, 2025 totaled $2,861,000, a decrease of $696,000, or 19.6%, compared to $3,557,000 for the three months ended December 31, 2024.

The decrease was almost entirely due to new product sales to the European market in the second three months of the prior year, which did not repeat at the same level in the current period.

Gains in sales to certain of the Company’s domestic distributors and a slight increase in direct-to-consumer (DTC) sales slightly offset the declines.

For the six months ended December 31, 2025, sales of $6,932,000 were $173,000, or 2.6%, ahead of the same period in the prior year as a result of a considerable sale of custom headphones to a customer in the Education segment, offset by deficits in sales to European distributors.

Export sales of $612,000 for the three months ended December 31, 2025 were $763,000, or 55.5%, behind sales of $1,375,000 for the second quarter of the prior fiscal year.

Sales to our largest distributors in central and northern Europe were down 69.0%, largely as a result of higher, continued restock shipments during the three months ended December 31, 2024 of the new products launched in the first quarter of that year.

For the first half of fiscal year 2026, export sales were $1,361,000 compared to $2,410,000 for the same period in the prior year, a decrease of $1,049,000, or 43.5%.

Significant new product sales in the prior year were the primary driver of lower current year sales.

Strong sales to our Asian distributors, an increase of 115% compared to the prior year, helped to offset some of the decline.

Sales to the domestic markets of $2,249,000 for the three months ended December 31, 2025 reflect a $68,000, or 3.1%, increase over sales of $2,181,000 in the three months ended December 31, 2024.

Following a slowdown in orders, clear color headphone sales rose by nearly 31% as major domestic distributors restocked their inventory to meet shifting customer demand.

A 5.3% rise in DTC sales versus the prior three-month period helped boost domestic sales growth, but a one-time custom sale made in the three months ended December 31, 2024 offset the majority of the total sales uplift.

For the six months ended December 31, 2025, domestic market sales grew to $5,571,000 from $4,349,000 for the same six-month period in fiscal year 2025, a $1,222,000, or 28.1% increase.

The sizable custom headphone sale in the Education market during the first quarter was the main driver for the overall sales improvement in the current fiscal year.

Gross profit as a percentage of net sales for the three months ended December 31, 2025 was 29.0% against a gross profit percentage of 39.5% for the comparable period in the prior year, a decrease of 10.5%.

For the six months ended December 31, 2025, gross margins were 35.5% versus 38.1% for the same six-month period in the prior year.

The current year’s erosion in margins is predominantly a result of the impact of tariffs on inventory that was sold throughout the second quarter and entire first half of fiscal 2026, some of which was tariffed at 145%.

A favorable customer mix, including higher sales of higher margin domestic distributor and DTC sales, offset some of the adverse impact of the tariffs.

Freight costs increased modestly during the second quarter of fiscal 2026 as planned peak season surcharges came into effect.

Despite this, overall rates remained low due to ample capacity and soft overall demand.

Shipment costs are expected to decline slightly in the third quarter as the peak season surcharges fall off.

The Company continues its relationship with a dedicated freight forwarder but will be ceasing its relationship with the bonded warehouse as tariff rates have stabilized at 20%.

The inventory at the bonded warehouse will be strategically withdrawn as needed to fulfill orders throughout the remainder of fiscal year 2026.

The Company is prepared for the additional unloading, storage and loading costs at the facility in exchange for deferred payments to the Custom Border Patrol for stored product until needed.

Ongoing monitoring of developments will help the Company adapt and maintain product availability .

Tariff policies have fluctuated over the last twelve 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 now lower than those previously imposed and should remain stable until November 2026, but future changes in trade policy could result in significantly higher duties.

Federal courts have ruled that the broad tariffs imposed under the International Emergency Economic Powers Act (IEEPA) are illegal and exceeded the President’s statutory authority.

The Supreme Court heard oral arguments on November 5, 2025 to consider the IEEPA tariffs in the consolidated case of Learning Resources v.

Trump, and other companies have joined in the IEEPA tariff dispute.

As of mid-January 2026, the U.S.

Supreme Cout had not yet issued a decision.

If the Supreme Court ultimately rules that the IEEPA tariffs were illegally imposed, importers could seek reliquidation and refunds, 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.

Selling, general, and administrative expenses totaled $1,845,000 for the three months ended December 31, 2025, an increase of $298,000, or 19.3%, in comparison to $1,547,000 for the same period in the prior year.

For the six months ended December 31, 2025, selling, general and administrative expenses were $3,520,000, an increase of $163,000, or 4.9%, versus $3,357,000 for the six-month period ended December 31, 2024.

The increases for both the three- and six- month periods are due mostly to the $250,000 in legal fees and expenses incurred as a result of litigation related to patent defense that was resolved during the second quarter of fiscal year 2026.

An increase in the deferred compensation expense year over year, due to declining interest rates used to calculate the related liability

and an increase in the annual payments under the plan given an additional year of service was completed, was mostly offset by a decline in other legal and professional fees unrelated to patent litigation.

Other income for the three and six months ended December 31, 2025 consisted entirely of $250,000 in non-recurring licensing proceeds.

There was no other income recorded for the three and six months ended December 31, 2024.

State tax expense of $2,760 was recorded for each of the three months ended December 31, 2025 and 2024 and $5,520 was recorded for each of the six months ended December 31, 2025 and 2024, reflecting the minimum required state tax due.

No federal income tax was recorded during the first half of fiscal year 2026 due to net operating loss (NOL) carryforwards available to offset most taxable income.

The effective tax rate for the three and six months ended December 31, 2025 was less than 1% and 1.7%, respectively.

The effective tax rate for the three and six months ended December 31, 2024 was 2.8% and 1.7%, 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 NOL carryforwards that existed as of June 30, 2025.

The Company’s remaining expected federal tax loss carryforward approximates $34,760,000 at the end of the second quarter of fiscal year 2026, resulting in a deferred tax asset related to the Company's federal and state net operating loss carry forwards of roughly $8,877,000 as of December 31, 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.

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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 had $2.5 million of cash and cash equivalents, $13.0 million of short-term investments and available credit facilities of $5.0 million on December 31, 2025.

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

treasury debt securities on September 30, 2025.

treasury debt securities on December 31, 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.

These include economic uncertainty from tariff volatility and global trade tensions, persistent inflation pressures, a softening job market and rising long-term unemployment, still elevated borrowing costs, even after three quarter-point interest rate cuts in the first half of the Company’s fiscal year, steadily declining 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.

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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.

A continuing resolution was signed on November 12, 2025 to reopen the government with an agreement to provide temporary funding for most agencies through January 30, 2026.

The economic impact was generally modest with expectations for growth recovery, however, there are lingering impacts such as lack of timely critical economic data making gauging inflation and labor trends difficult, a backlog of small business loans, delays in federal licenses and SEC approvals, and supply chain disruptions in certain sectors such as aerospace and defense.

Since the current funding agreement is only temporary, there is some renewed uncertainty as the deadline approaches.

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

Tariffs - In April 2025, the U.S.

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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.

On November 10, 2025, the fentanyl-related tariffs were reduced by half to 10% following an Executive Order by President Trump, the existing 10% reciprocal tariff rate remained in place and tariff exclusions were extended to November 2026.

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 elevated interest rates and volatile energy costs continue.

While the Federal Reserve cut its benchmark federal funds rate by 0.75 percentage points via three separate cuts since June 30, 2025, consumer confidence continued to decline steadily due to concerns over high prices, tariffs and a softening labor market.

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

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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

affecting the Company's ability to source products from China or conduct business internationally.

The escalation of trade tensions might lead to retaliatory trade restrictions, potentially 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.

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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.

Russia’s Invasion of Ukraine – The United States and global markets continue to experience volatility and disruption resulting from the ongoing conflict between Russia and Ukraine, which began following the invasion of Ukraine by Russia in February 2022.

The significant sanctions and export controls imposed against Russia, certain Russian banks and Russian individuals by the U.S.

and other countries remain unchanged.

The Company suspended all sales to Russia in April 2022 in accordance with Executive Order 14071 and no sales were made to Russia since that time.

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 a Ukrainian distributor.

During the three and six months ended December 31, 2024, there were nearly $39,000 in sales to this distributor.

There were no sales to the Ukrainian distributor in the six months of fiscal year 2026, however, an order for approximately $30,000 was received and will ship out in the coming quarter.

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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Liquidity and Capital Resources

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

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

Total cash (used in) provided by:

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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.

The cash provided by operating activities during the six months ending December 31, 2025 was due to the $512,000 IRS refund received in the first quarter relating to employer payroll taxes incorrectly paid in prior years on the gains from the disqualifying dispositions of incentive stock options.

This cash inflow was mostly offset by payments to the Custom Border Patrol for tariffs on inventory purchased from China and payment of the Company’s annual insurance premiums, which is made in advance at the beginning of the fiscal year and recorded in expense over the next twelve months.

The cash used in operating activities during the six months ending December 31, 2024 was driven primarily by the net operating loss for the first half of the year, offset by improvements in working capital and the receipt of a partial refund of the employee and employer payroll taxes inappropriately withheld related to the gains from the disqualifying dispositions of incentive stock options.

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.

Cash used by investing activities for the six months ended December 31, 2025 was due mostly to replacement of the third roof section of the building at $269,000, a sprinkler system valve replacement and various new product tooling purchases.

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.

Total proceeds of $3,000,000 were received during the first half of fiscal year 2026 from the redemption of U.S.

Treasury securities and $2,998,000 of new U.S.

Treasury securities were purchased at a net discount of $1,000 during that same period.

Cash used by investing activities for the six months ended December 31, 2024 was related mostly to fixed asset expenditures, namely the replacement of a second roof section of the building for $346,000, and the payment of $71,000 in premiums on the company-owned life insurance policies on two of its executives.

Proceeds of $7,085,000 received during the six months ended December 31, 2024 from the maturity of U.S.

Treasury securities were mostly reinvested to purchase $7,059,000 of similar securities at a $61,000 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.

Cash from the exercise of stock options during the six-month period ended December 31, 2025 provided the majority of the cash from financing activities.

Principal payments on a finance lease for a new reach truck leased for the warehouse at the beginning of the year slightly offset cash provided.

A total of 10,000 shares of common stock were issued as a result of employee stock option exercises under grants that were still outstanding from the Company’s 2012 Omnibus Incentive Plan.

For the six months ended December 31, 2024, an aggregate of 76,000 shares of common stock were issued as a result of employee stock option exercises under grants outstanding from the Company’s 2012 Omnibus Incentive Plan.

As of December 31, 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 six months ended December 31, 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%.

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.

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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 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.

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

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

Contractual Obligation

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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.

At December 31, 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