What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2026-05-08 compared with 2026-01-30 · 108 added, 100 removed, 90 unchanged (70% of the section changed)

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Financial Results

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

The following table presents selected financial data for the three and nine months ended March 31, 2026 and 2025:

Three Months Ended

Six Months Ended

Nine Months Ended

Financial Performance Summary

Net sales increase (decrease) % from prior year period

Net sales increase % from prior year period

Gross profit as % of net sales

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Interest expense

Income (loss) before income tax provision

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

Loss before income tax provision

Loss before income tax provision as % of net sales

Income tax provision

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

Income tax provision as % of loss before income tax provision

Fiscal 2026 Period Results Compared with Fiscal 2025 Period

(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.

(comments refer to the three- and nine-month periods ended March 31, 2026 and 2025 unless otherwise noted)

Net sales for the three months ended March 31, 2026 were $2,825,000, a slight increase of $44,000, or 1.6%, compared to $2,781,000 for the three months ended March 31, 2025.

The increase resulted from a 40% increase in domestic distributor orders, coupled with a 23% increase in direct-to-consumer (DTC) shipments, offset mostly by lower sales in our European and Asian markets.

Sales of $9,757,000 for the nine months ended March 31, 2026 exceeded sales of $9,540,000 for the same period in the prior year by $217,000, or 2.3% due mainly to a significant sales of custom headphones to the Education segment plus a 16% increase in DTC sales, offset by a considerable decline in sales to our largest European distributors.

Export sales of $381,000 for the three months ended March 31, 2026 were down $230,000, or 37.7%, compared to sales of $612,000 for the three months ended March 31, 2025.

A near 70% reduction in sales to Asia versus the same prior year period and a 77% drop off in sales into Canada drove the decline.

The Asia shortfall was a result of repeat orders that came earlier in the fiscal year, and our largest Canadian distributor that will not buy U.S.

products at this time for political reasons.

For the nine months ended March 31, 2026, export sales totaled $1,742,000, a marked decrease of $1,279,000, or 42.3%, against the nine-month period ended March 31, 2025.

Sales to our largest distributors in central and northern Europe were down close to 60% largely as a result of delays in stock replenishment.

Year-to-date sales to Asia, however, exceeded sales during the first nine months of the prior year by 19%, compensated for some of the decline.

For the three months ended March 31, 2026, sales to the domestic markets totaled $2,444,000, representing an increase of $274,000, or 12.6%, compared to sales of $2,169,000 for the same period in the prior year.

The higher sales figures reflect increased demand within the domestic distributor market and a continued effort to drive more DTC sales through marketing campaigns and other social media initiatives.

Sales to the domestic markets during the nine months ended March 31, 2026 were $8,014,000, a rather significant year-over-year increase of $1,496,000, or 23.0%, as compared to sales of $6,518,000 for the nine months ended March 31, 2025.

As noted above, a sizable order by a customer in the Education market boosted sales for the period, along with an approximately 50% increase in sales to a particular segment of the domestic distribution market driven by general inventory restocks and a continued demand for clear colored headphones.

A 16% increase in DTC sales also contributed to the favorable sales, partially offset by two prior year custom orders that are expected to repeat in the fourth quarter potentially at a lower level .

Gross profit as a percentage of net sales for the three months ended March 31, 2026 was 35.5% against a gross profit percentage of 39.0% for the comparable period in the prior year, a decrease of 350 basis points.

For the nine months ended March 31, 2026, gross margins were 35.5%, a decrease of 290 basis points from the margin of 38.4% for the same nine-month period in the prior year.

The adverse impact of significant International Emergency Economic Powers Act (IEEPA) and reciprocal tariffs, some as high as 145%, on inventory brought in and sold throughout the year, along with sales of inventory brought in at higher freight rates, were the main reasons for the margin erosion for both periods.

A favorable mix of higher margin domestic distributor and DTC sales, coupled with sales of some obsolete and excess reserved inventory, helped to partially offset some of the negative impacts.

During the third quarter of fiscal 2026, freight rates decreased.

Peak season surcharges dropped off and a confluence of vessel overcapacity, weakened global demand, as well as the failure of the typical pre-Chinese New Year demand surge to materialize all contributed to lower shipping costs.

The Company does, however, expect an increase in ocean rates during the fourth quarter due to another peak season surcharge that will come into effect.

The Company continues its relationship with a dedicated freight forwarder and renewed the contract at the end of April.

Given the elimination of IEEPA and reciprocal tariffs and anticipated lower rates in the future, the Company has decided to cease its relationship with the bonded warehouse.

The inventory at the bonded warehouse will be completely withdrawn by the end of fiscal year 2026.

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

Over the past nine months, U.S.

tariff policy on China-produced goods has remained a significant factor affecting the Company’s cost structure and supply chain decisions.

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 fairly stable throughout the fiscal year.

Future changes in trade policy, however, could result in significantly higher duties.

On February 20, 2026, the federal courts ruled that the broad tariffs imposed under IEEPA were illegal and exceeded the President’s statutory authority.

Soon after, President Trump invoked a 10% global tariff using Section 122 of the Trade Act of 1974.

Also following the invalidation of the IEEPA and reciprocal tariffs, the Court of International Trade (CIT) ruled that the duties paid are unlawful and initiated a massive refund process.

The Company may seek reliquidation and refunds via claims made in the Custom Border Patrol’s (CBP) new Consolidated Administration and Processing of Entries (CAPE) portal as soon as it is ready to begin accepting claims.

While refunds are expected, they are not guaranteed and timing of the refund is currently expected to take 60-90 days.

The government can appeal or cause delays, with full restitution potentially taking months or years.

As such, the Company has not recorded any receivables related to the potential refunds amid the uncertainty.

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 $1,845,000 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.

Selling, general, and administrative expenses of $1,722,000 for the three months ended March 31, 2026 increased $118,000, or 7.4%, in comparison to $1,604,000 for the same period in the prior year.

The primary reasons for the increase were higher legal fees, increased commissions on larger sales turnover, and additional salary and a bonus accrual for a new headcount.

For the nine months ended March 31, 2026, selling, general and administrative expenses were $5,242,000 versus $4,960,000 for the nine-month period ended March 31, 2025, an increase of $282,000, or 5.7%.

The primary cause of the increase is $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 and directly offset by non-recurring licensing proceeds as noted below.

A decrease in other legal fees was offset by higher sales commissions in addition to an increase in the deferred compensation expense year over year, as a result of both 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.

Other income for the nine months ended March 31, 2026 consisted entirely of $250,000 in non-recurring licensing proceeds.

There was no other income recorded for the three months ended March 31, 2026 or the three- and nine-month periods ended March 31, 2025.

State tax expense of $1,825 and $7,345 was recorded for the three and nine months ended March 31, 2026, respectively, and $5,204 and $10,724 for the three and nine months ended March 31, 2025, reflecting the minimum required state tax due.

Aside from a $707 amount due and paid during the three months ended March 31, 2025 related to a prior-period tax return amendment, no federal income taxes were recorded during the first nine months of either fiscal year as a result of the net operating loss (NOL) carryforwards available to offset most taxable income.

The effective tax rate for the three and nine months ended March 31, 2026 was less than 1%.

The effective tax rate for the three and nine months ended March 31, 2025 was 1.9% and 1.8%, 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 Company’s remaining expected federal tax loss carryforward approximated $35,290,000 at the end of the third quarter of fiscal year 2026.

The current fiscal year to date adjustment to the net operating loss carryforward increased the deferred tax asset related to the Company’s federal and state net operating loss carry forwards to approximately $9,006,000 as of March 31, 2026.

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 has enforced its intellectual property by filing complaints against certain parties alleging infringement on the Company’s patents relating to its wireless headphone technology.

In the third quarter of fiscal year 2026, the final lawsuit among a series of legal actions initiated by the Company since 2020 was dismissed.

The Company is, however, appealing that decision.

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.

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The Company believes that its financial position remains strong.

The Company had $2.5 million of cash and cash equivalents, $13.0 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 December 31, 2025.

The Company had $1.9 million of cash and cash equivalents, $16.9 million of short-term investments and available credit facilities of $5.0 million on March 31, 2026.

Recent Trends

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

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.

These include economic uncertainty from tariff volatility and global trade tensions, persistent inflation pressures, moderate, uneven growth in the labor market and steady unemployment, still elevated borrowing costs, continually declining consumer confidence, disruption in our supply chain, the conflict in Eastern Europe and instability and escalation 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.

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.

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.

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.

Tariffs - On February 20, 2026, in Learning Resources, Inc.

Trump, the Supreme Court ruled that the IEEPA does not authorize the president to impose tariffs , declaring them unconstitutional and invalidating previous punitive tariffs on Chinese goods.

Shortly after the ruling, President Trump announced a temporary 10% global tariff on imports under Section 122 of the Trade Act, which he has threatened to raise to 15%.

These tariffs can be imposed for up to 150 days and are designed to address the U.S.

trade deficit and related imbalances.

As a result of the determination that IEEPA and reciprocal tariffs were unlawful, the Company is legally entitled and is expected to receive refunds of those tariffs.

The Company continues to monitor the status of the claims process as it is currently under development and the refunds face significant legal and operational hurdles.

These dynamics have contributed to variability in input costs and required the Company to actively manage supplier relationships, pricing strategies, and inventory planning.

Company continues to monitor trade policy developments and evaluate mitigation strategies to assess the impact on inflation and consumer sentiment which, in turn, could impact operations, planning, and financial conditions.

United States and Israel War with Iran – Escalating conflict between the United States and Iran poses material risks to global crude oil and refined fuel markets, as disruptions to Middle Eastern supply routes, including the Strait of Hormuz, could result in sharp and sustained increases in fuel prices and uncertainty in the financial markets.

Our business operations and supply chain are exposed to such geopolitical volatility, and a prolonged conflict could compound inflationary pressures and dampen broader U.S.

business activity in ways that may materially and adversely affect our financial condition and results of operations.

Inflationary Cost Environment and the Impact on Consumer Confidence – Global inflation has been persistent despite earlier declines, particularly affecting input costs.

While the Federal Reserve has initiated rate cuts during the fiscal year, elevated inflation from tariffs may restrict the ability to significantly lower interest rates, resulting in a higher-for-longer environment.

In addition, the conflicts in the Middle East have contributed to sustained elevated interest rates and volatile energy costs.

Consumer confidence continued to decline steadily due to concerns over high prices, increased energy costs, 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.

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.

The Company will continue to experience higher costs for commodities and packaging materials due to the tariffs, albeit at lower rates, and will react with pricing actions 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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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.

The U.S.-China tariff war has 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 affecting the Company's ability to source products from China or conduct business internationally.

Any 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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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.

During the nine months ended March 31, 2026 and 2025, sales of $31,000 and $80,000, respectively, were made to this distributor.

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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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.

Iran conflict has also significantly intensified cyber threats, characterized by Iran-linked hackers conducting high-volume, often low-impact, disruption attacks against U.S.

critical infrastructure, including defense contractors, data centers and water systems.

We rely on accounting, financial, and operational management information systems to conduct our operations.

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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.

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.

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 six months ended December 31, 2025 and 2024:

The following table summarizes cash flows from operating, investing and financing activities for the nine months ended March 31, 2026 and 2025:

Total cash (used in) provided by:

2 unchanged sentences

Financing activities

Net decrease in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Operating Activities

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.

The cash used in operating activities during the nine months ending March 31, 2026 was primarily driven by the net loss from operations, somewhat offset by improvements in working capital.

Payments to the Custom Border Patrol for tariffs on inventory purchased from Chinese suppliers plus payment of the Company’s annual insurance premiums at the beginning of the fiscal year were partially offset by a $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.

The cash provided by operating activities during the nine months ending March 31, 2025 was a result of $344,000 in customer deposits for orders that shipped in the following quarter.

Investing Activities

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.

Fixed asset additions of $316,000 during the nine months ended March 31, 2026 consisted of replacement of the third roof section of the Company’s building at a cost of $269,000, a sprinkler system valve replacement and various new product tooling and was the driving factor behind cash used by investing activities.

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

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

Total proceeds of $9,035,000 were received during the first nine months of fiscal year 2026 from the redemption of U.S.

Treasury securities and $8,998,000 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 purchased at a net premium of $8,600 during that same period.

Cash used by investing activities for the nine months ended March 31, 2025 was also 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 $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 $60,000 discount.

Financing Activities

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.

Cash from the exercise of stock options during the nine-month period ended March 31, 2026 provided the majority of the cash from financing activities, offset slightly by principal payments on a finance lease for a new reach truck leased for the warehouse at the beginning of the year.

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.

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.

For the nine months ended March 31, 2025, 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 March 31, 2026 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 nine months ended March 31, 2026 or 2025 under the Company’s stock repurchase program.

During the three months ended March 31, 2026, the Company reclassified its debt securities with an amortized cost of $16,994,043 from held-to-maturity to available-for-sale in order to provide increased flexibility in managing its liquidity and capital resources.

The reclassification was made in light of the Company’s updated strategy of diversification via acquisition and the related funding requirements of potential acquisition opportunities.

Following the transfer, the securities remain highly liquid and available to support working capital needs, strategic initiatives, and other general corporate purposes.

The transfer did not impact the Company’s cash position or results of operations, other than the recognition of an unrealized loss in other comprehensive loss related to marking the securities to fair value.

Management believes existing cash, cash equivalents, investments in short-term U.S.

Treasury securities, cash generated from operations and available borrowings under its credit facility will be sufficient to meet the Company’s anticipated operating and capital expenditure requirements for at least the next twelve months and the foreseeable future.

Credit Facility

7 unchanged sentences

The negative covenants include restrictions on other indebtedness, liens, fundamental changes, certain investments, disposition of assets, mergers and liquidations, among other restrictions.

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.

As of March 31, 2026, the Company was in compliance with all covenants related to the Credit Agreement.

As of March 31, 2026 and June 30, 2025, there were no outstanding borrowings on the facility.

Contractual Obligation

9 unchanged sentences

Off-Balance Sheet Transactions

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

At March 31, 2026, 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

1 unchanged sentence

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