KOSS 10-K & 10-Q changes, risk factors and insider trading

We engage in operations,operations and enter into agreements with counterparties located outside the U.S., which exposes us to political, governmental, and economic instability and foreign currency exchange rate fluctuations. Any disruption caused by these factors could harm our business, results of operations, financial condition, liquidity, and prospects. Risks associated with potential operations, commitments, and investments outside of the U.S. include but are not limited to risks of:

Continued volatility in trade relations between the U.S. and China, including the potential for reinstatedhigher tariffs or new trade restrictions, could adversely impact the Company’s sourcing, pricing, and profitability. The Company is actively monitoring these developments and assessing mitigation strategies, including alternative sourcing arrangements, however, no assurance can be given that such strategies will fully offset the impact of adverse trade policy changes.

The current hostilities in Eastern Europe and the resulting economic sanctions imposed by the government have impacted the global economy. While we have no operations in Russia or Ukraine, we are unable to sell to certain of our customers in Russia as a result of this event. The continuation of the military conflict in Eastern Europe, as well as the tension in the Middle East, could lead to increased supply chain disruptions, inflationary pressures and volatility in global markets that could negatively impact our operations. The economies of Europe have also been impacted by these conflicts as a direct result of disruptions in transportation and the supply of energy, high food prices and tight credit. These factors can have a direct impact on the consumer’s ability to access and purchase the Company’s products.

The Company sells lines of products with suggested retail prices ranging from less than $10 up to $1,000. The gross margin for each of these models varies in terms of percentages. The Company finds the low-priced portion of the market most competitive and therefore most subject to pressure on gross margin percentages, which tends to lower profit contributions. Therefore, a shift in customer specifications and preferences toward lower priced items could lead to lower gross margins and lower profit contributions per unit of sale. Due to the range of products that the Company sells, the product sales mix can produce a variation in profit margins. Some distributors sell a limited range of products that yield lower profit margins than others. Most notably, the budget-priced stereo headphone segment of the market (below $10 retail), which is distributed through mass market retailers, computer stores, and office supply stores and to school systems, tends to yield the lowest gross margins. An increase in business with these types of accounts, if coupled with a simultaneous reduction in sales to customers with higher gross margins, would reduce profit margins and profitability.

AnCybersecurity threats or other disruptions to our information systems interruption, cyberattacksystems, or breachthose inof securityour third-party service providers, could adversely affect our business.

Cyberattacks are a growing geopolitical risk, becoming larger, more frequent, more sophisticated and more relentless as technology has evolved,evolved and geopolitical instability has increased, 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. While we devote resources to security measures to protect our systems and data, these measures cannot provide absolute security. These types of attacks can also have an impact on 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 the weakest link, whether that is a financial service provider, third party distributor, reseller, transportation service provider, contract manufacturer, customer or consumer.

‎On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (the “OBBB Act”), was enacted. The OBBB Act is a sweeping tax and spending law that makes permanent many provisions of the 2017 Tax Cuts and Jobs Act (the “TCJA”), while introducing new tax policies and restructuring others. While certain provisions may reduce the Company’s tax liability, such as modifications to corporate tax rates, deductions, credits, treatment of foreign income, and expensing rules, others may introduce new complexity and audit risk. The Company willhas continuenot tobeen monitorsignificantly impacted by the potentialOBBB Act, however, the ultimate impact of the OBBBrecently Act. Becauseenacted tax lawslegislation arewill dynamicdepend on future Treasury regulations, IRS guidance and oftenour retroactivebusiness or uncertain in interpretation, projected tax liabilities may differ significantly from eventual obligations. The net impact remains uncertain, and misapplication of the new rules could lead to materially adverse outcomes.operations.

The market price of our common stock ishas been and may continue to be subject to pricesignificant volatility.fluctuations Additionally,due over the years, the Company, the technology industry, and the stock market asto a wholevariety haveof experiencedfactors, dramaticmany andof extremewhich stockare pricebeyond andour volume fluctuations that have affected stock prices in ways that may have been driven primarily by social media hype rather than companies’ operating performance and prospects.control. Factors such as the depth and liquidity of the market for our common stock, investor perceptions of us and our business, actions by institutional shareholders, strategic actions by us, litigation, changes in accounting standards, policies, guidance, interpretations and principles, additions or departures of key personnel, a decline in demand for our products and our results of operations, financial performance and future prospects may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from realizing the liquidity of their shares. During the fiscal year ended June 30, 2025,2026, the sales price of our common stock fluctuated between a reported high sales price of $18.73$8.59 on July 3,23, 20242025 and a reported low sales price of $4.00$3.50 on AprilMarch 9,30, 2025.2026. The trading volume in shares of our common stock can also vary widely. For example, during the most recent fiscal year, daily trading volume ranged from a low of 11,4005,600 shares on MayApril 1,10, 20252026 to a high of 70,055,5006,521,500 on July 3,23, 2024.2025. Our market capitalization, as implied by various trading prices, can reflect valuations that diverge significantly from those seen prior to volatility and, to the extent these valuations reflect trading dynamics unrelated to our financial performance or prospects, purchasers of our common stock could incur substantial losses if there are declines in market prices driven by a return to earlier valuations. As a result of this volatility, investors may experience losses on their investment in our common stock.

Although certain of the Company’s products could be viewed as essential by consumers for use with mobile phones and other portable electronic devices, many other models represent a more discretionary spend. The results of the Company’s operations are therefore susceptible to consumer confidence and adverse macroeconomic factors such as newlytariff imposed tariffs, inflation,volatility, slower growth or recession, higher interest rates, sticky wage growth and wageslowing job creation and commodity inflation. In addition, the economic sanctions imposed as a result of the Russia/Ukraine conflict have impacted certain of our customers in those markets and the surrounding regions.

Total income tax expense of $17,482$10,892 and $17,482, respectively, was recorded for the yearyears ended June 30, 2026 and 2025 drivenarising byfrom minimum required payments and in increase in the uncertain tax position (UTP) related to research and development credits taken in theprevious prior year and the appropriate tax and penaltiesyears that wouldcould potentially be incurred should there be a denial of the credits During the prior year, a federal tax benefit of $73,604 was recorded as a result of the return-to-provision adjustment identified during the third quarter of fiscal year 2024.denied.

Interest income of $879,774$883,995 and $847,644$879,774 was recorded during the fiscal years ended June 3030, 20252026 and 2024,2025, respectively, due almost entirely to interest earned on the U.S. Treasury investments held during the years in order to earn a return on the Company’s excess cash while maintaining a low risk profile.

Total income tax expense of $10,892 and $17,482 was recorded for the yearyears ended June 30, 2025.2026 Federaland 2025, respectively. During fiscal 2026, federal tax expense of $5,570$2,892 was recorded for the uncertain tax positionUTP related to research and development (R&D) credits taken in a prior year and state tax expense of $11,912$8,000 related mostly to minimum estimated state tax payments due. In the prior year, a net incomefederal tax benefitexpense of $73,604$5,570 was reportedrecorded for the year, which included a federal income tax benefit of $81,278 recorded as a result of the return-to-provision (RTP) adjustments recorded in the period identified. The RTP adjustments were identified as part of the preparationUTP and submission of the fiscal year 2023 tax returns during the third quarter fiscal year 2024. Statestate income tax expense of $7,674,$11,912 was recorded which represented only themostly required minimum estimated tax payments due, partially offset the benefit.due. The effective tax rate was 2.1%2.9% for the fiscal year ended June 30, 20252026 compared to 7.2%2.0% for the previous fiscal year.

The Company’s taxable losses for the years ended June 30, 20252026 and 20242025 increased the federal tax loss carryforward by approximately $1,150,000$577,800 and $1,270,000,$1,150,000, respectively, resulting in an expecteda carryforward of approximately $34,00,000$34,611,200 by the end of the current fiscal year.year 2026. The current fiscal year adjustment to the net operating loss carryforward increased the deferred tax asset to approximately $8,700,000$8,847,000 as of June 30, 2025,2026, and the future realization of this continues to be uncertain. The valuation allowance was increased to fully offset the net deferred tax asset as there is sufficient negative evidence to support the maintaining of a full valuation allowance as, excluding unusual, infrequent items, a three-year cumulative tax loss occurred.

As previously reported, the Company maintains a program focused on enforcing its intellectual property and, in particular, certain of its patent portfolio. The Company has enforced its intellectual property by filing complaints against certain parties alleging infringement on the Company’s patents relating to its wireless headphone technology. The Company has, in the past, recovered certain of the fees and costs that were involved with the underlying efforts to enforce this portfolio and, if the program continues to beis successful with the remaining complaints,complaint, the Company may receive additional royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position.benefits. There is no guarantee, however, of a positive outcome from these efforts, which could ultimately be time-consuming and unsuccessful. Additionally, the Company may owe all or a portion of any future proceeds arising from the enforcement program to third parties.

The Company believes that its financial position remains strong. The Company had $2.8$3.0 million of cash and cash equivalents, $12.9$16.8 million of short-termUnited States Treasury investments available for sale and available credit facilities of $5.0 million on June 30, 2025.2026.

U.S. tariff policy hasremains undergonevolatile significantand changes under President Donald Trump’s administration, leadingcontinues to heightenedaffect the Company’s landed costs and supply-chain planning. The temporary 10% Section 122 global tradeimport tensionssurcharge andthat economicapplied repercussions.to Inproduct Aprilsourced 2025,from China beginning in February 2026 expired on July 24, 2026. At the same time, the U.S. governmentTrade imposedRepresentative implemented replacement Section 301 tariffs of uptied to 145%forced-labor onimport-policy certainfindings, generally applying additional duties of 10% or 12.5% to imports from a broad group of economies, including China. For goods originating from China, significantlythese increasingmeasures apply in addition to existing product-specific tariffs, including Section 301 duties and any other applicable duty programs, so the Company’s expectedeffective duty burden remains dependent on product classification, country of origin, entry date, and any applicable exclusions. During fiscal year 2026, tariffs and tariff uncertainty increased duty costs for goods sourced from China. On May 12, 2025, the U.S.China and China reached a temporary 90-day trade truce, reducing these tariffscontributed to approximatelyinflationary 30%.pressure, During fiscal year 2025, inflation remained elevated with Personal Consumption Expenditures (PCE) inflation up 2.6% compared to a year ago. The Federal Reserve has maintained higher interest rates, even amid persisting tariff-driven price pressures. Energy prices have seen some mild relief, although their deflationary impact is modest compared to tariff-induced inflation. As such, rising costs and tariff uncertainty continue to impactreduced consumer confidence withconfidence, cuts to discretionary spending, switching to lower-priced brandsbrands, and delayingdelayed largepurchases, purchaseswhich which,had in turn,an impact on the Company’s sales volumes. Inflationary cost increases have also resulted in higher costs of commodities, packaging materials, and wages, along with higher energyenergy, and transportation costs.transportation. These increases have been partially mitigated by somewhat higher pricing on new product launches, and the 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, risks of international operations, tight labor markets, and the challenges in recruitment and retention of talent.

The Company relies on our third-party supply chain, primarily in southern China, and distribution networks and the availability of necessary components to produce a considerable number of our products. A reduction or interruption in supply, including interruptions due to pandemic related restrictions, geopolitical unrest, labor shortages or strikes, newly imposedincreased tariffs, or a failure to procure adequate components, may lead to delays in manufacturing or increases in costs.

The global supply chain remains fragilevolatile despite pockets ofsome stabilization and improved predictability. It continues to be exposed to geopolitical events, changes in trade policy and carrier capacity. Freight rates have risen dueon certain U.S. to China trade lanes as a result of strong U.S. import demand ahead of the late-July tariff deadlines and reroutingpeak aroundseason thesurcharges. However, tariff uncertainty has caused some importers to delay bookings. Persian Gulf, Red Sea and Suez Canal.Canal Whilerouting remains fluid, with many carriers avoiding the Persian Gulf, Red Sea and Suez Canal because of ongoing security risks. Although the Company rarely uses the Suez route and does not expect a material impact, elevated costsfreight costs, container availability constraints, schedule uncertainty and transit delays are affecting suppliers, resellers and customers who rely on carriers traversing that corridor. Freight rates may ease during the new fiscal year, but espionage, tariff uncertainly and capacity stress continue to pose risks. The Company continues to closely monitor developments in the tension in Eastern Europe andEurope, the Middle East, trade policy between the U.S. and China, and tariff actions and the supply chain team remains ready to increase inventory investment as needed. This includes beingmonitoring alert tofor potential short supply situations, assisting suppliers with acquisition of critical components and utilizing alternative sources and/or air freight.freight when appropriate.

Cash from the exercise of stock options during the year ended June 30, 2026 provided the majority of the cash from financing activities, offset some by principal payments made on a finance lease for a new reach truck leased for the warehouse at the beginning of the year. The cash generated from financing activities in the fiscal yearsyear ended June 30, 2025 and 2024 was solely a result of stock option exercises. In the fiscal year ended 2025,2026, exercises of stock optionsoption for 156,64310,000 shares generated $305,908$21,100 of cash while stock option exercises for 65,000156,643 shares induring the previousprior fiscal year generated $134,975$305,908 of cash.

The Company anticipates funding its normal recurring trade payables, accrued expenses, ongoing R&D costs, inventory purchases, related tariffs and any potential interest payments, if it utilizes its line of credit facility, through existing working capital, funds provided by operating activities and interest earned on investments. Payment terms for the majority of the Company’s international customers, as well as custom and OEM customers, are cash in advance whereby funds are received before a shipment is even made. The Company believes its existing cash, cash equivalents, investments in short-term U.S. Treasury securities, cash provided by operating activities and borrowings available under its credit facility, if any,facility will be sufficient to meet its anticipated working capital, and capital expenditure requirements during the next twelve months. There can be no assurance, however, that the Company’s business will continue to generate cash flow at current levels. If the Company is unable to generate sufficient cash flow from operations, then it may be required to sell assets, reduce capital expenditure, or draw on its credit facilities. Management is focused on increasing sales, especially in the U.S. distributor market, DTC, and the export markets, increasing new product introductions, increasing the generation of cash from operations, and improving the Company’s overall earnings to help improve the Company’s liquidity. The Company regularly evaluates new product offerings, inventory levels, and capital expenditure to ensure that it is effectively allocating resources in line with current market conditions.

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 and the foreseeable future. The Company’s future capital requirements, to a certain extent, are also subject to general conditions in or affecting the electronics industry and are subject to general economic, political, financial, competitive, legislative, and regulatory factors that are beyond its control. Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from its credit facilities are insufficient to fund its future activities, the Company may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in the Credit Agreement (as defined below). In addition, the Company may also need to seek additional equity funding or debt financing if it becomes a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services, or technologies.

Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We have made estimates and we continually evaluate our estimates and judgments, including those related to doubtful accounts, product returns, excess inventories, capitalized tariffs and freight costs, warranties, impairment of long-lived assets, deferred compensation, fair value of equity awards, income taxes and other contingencies. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances, taking into consideration certain possible adverse impacts from inflation, recentlychanges enactedin tariffs, the economic sanctions imposed on the international community as a result of the continued conflicts in Eastern Europe and the Middle East, and any changes to the global economic situation as a consequence of future pandemics. Actual results may differ from these estimates.

The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of the customer’s current credit information. The Company continuously monitors collections and payments from customers and maintains an allowance for estimated credit losses. Accounts receivable are stated net of an allowance for doubtful accounts. The Company establishes an allowance based upon the current expected credit loss impairment model. The Company applies a historical loss rate based upon historic write-offs, adjusted for current conditions and reasonable and supportable forecasts of future losseslosses, as necessary. The Company may also record a specific reserve for individual accounts if they become aware of specific customer circumstances such as bankruptcy or deterioration in operational results or financial position. These specific reserves are re-evaluated and adjusted as additional information is received that impacts the amount reserved. However, the ultimate collectability of the unsecured receivable is dependent upon the financial condition of an individual customer, which could change rapidly and without warning.

The Company’s deferred compensation liability is for a current officer and is calculated based on various assumptions that may include compensation, years of service, expected retirement date, discount rates and mortality tables. The related expense is calculated using the net present value of the expected payments and is included in selling, general and administrative expenses in the Consolidated Statements of Operations. Management makes estimates of life expectancy and discount rates using information available from several sources. In addition, management estimates the expected retirement date for the current officer as that impacts the timing for expected future payments. See Note 1011 to the Consolidated Financial Statements for additional information on deferred compensation.

The following table presents selected financial data for the three and sixnine months ended DecemberMarch 31, 20252026 and 20242025:

Fiscal 2026 Period Results Compared with Fiscal 2025 Period (comments refer to the threethree- and six-monthnine-month periods ended DecemberMarch 31, 20252026 and 20242025 unless otherwise noted)

Net sales for the three months ended DecemberMarch 31, 20252026 totaledwere $2,861,000,$2,825,000, a decreaseslight increase of $696,000,$44,000, or 19.6%,1.6%, compared to $3,557,000$2,781,000 for the three months ended DecemberMarch 31, 2024.2025. The decreaseincrease wasresulted almostfrom entirelya due40% to new product sales to the European marketincrease 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 distributorsdistributor andorders, coupled with a slight23% increase in direct-to-consumer (DTC) sales slightlyshipments, offset themostly declines.by Forlower sales in our European and Asian markets. Sales of $9,757,000 for the sixnine months ended DecemberMarch 31, 2025,2026 exceeded sales of $6,932,000$9,540,000 were $173,000, or 2.6%, ahead offor the same period in the prior year asby $217,000, or 2.3% due mainly to a resultsignificant of a considerable salesales of custom headphones to a customer in the Education segment,segment plus a 16% increase in DTC sales, offset by deficitsa considerable decline in sales to our largest European distributors.

Gross profit as a percentage of net sales for the three months ended DecemberMarch 31, 20252026 was 29.0%35.5% against a gross profit percentage of 39.5%39.0% for the comparable period in the prior year, a decrease of 10.5%.350 basis points. For the sixnine months ended DecemberMarch 31, 2025,2026, gross margins were 35.5%35.5%, versusa 38.1%decrease of 290 basis points from the margin of 38.4% for the same six-monthnine-month period in the prior year. The current year’s erosion in margins is predominantly a result of theadverse impact of tariffssignificant International Emergency Economic Powers Act (IEEPA) and reciprocal tariffs, some as high as 145%, on inventory thatbrought wasin and sold throughout the secondyear, quarteralong andwith entire first halfsales of fiscalinventory 2026,brought some of which was tariffedin at 145%.higher freight rates, were the main reasons for the margin erosion for both periods. A favorable customer mix, including higher salesmix 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 adversenegative impact of the tariffs.impacts.

Tariff policies have fluctuated overOver the lastpast twelvenine months, particularlyU.S. withtariff respectpolicy toon tradeChina-produced policiesgoods has remained a significant factor affecting the Company’s cost structure and tariffssupply appliedchain to trade between China and the U.S.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 untilthroughout Novemberthe 2026,fiscal butyear. futureFuture changes in trade policypolicy, however, could result in significantly higher duties. FederalOn February 20, 2026, the federal courts have ruled that the broad tariffs imposed under theIEEPA International Emergency Economic Powers Act (IEEPA) arewere illegal and exceeded the President’s statutory authority. TheSoon Supremeafter, CourtPresident heardTrump oralinvoked argumentsa on10% Novemberglobal 5,tariff 2025using toSection consider122 of the Trade Act of 1974. Also following the invalidation of the IEEPA tariffsand inreciprocal tariffs, the consolidated caseCourt of LearningInternational ResourcesTrade v.(CIT) 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 rulesruled that the IEEPAduties tariffspaid wereare illegallyunlawful imposed,and importersinitiated coulda massive refund process. The Company may seek reliquidation and refunds,refunds thoughvia claims made in the administrationCustom couldBorder turnPatrol’s (CBP) new Consolidated Administration and Processing of Entries (CAPE) portal as soon as it is ready to otherbegin statutesaccepting claims. While refunds are expected, they are not guaranteed and timing of the refund is currently expected to supporttake tariffs.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 totaledof $1,845,000$1,722,000 for the three months ended DecemberMarch 31, 2025,2026 anincreased increase of $298,000,$118,000, or 19.3%,7.4%, in comparison to $1,547,000$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 sixnine months ended DecemberMarch 31, 2025,2026, selling, general and administrative expenses were $3,520,000,$5,242,000 versus $4,960,000 for the nine-month period ended March 31, 2025, an increase of $163,000,$282,000, or 4.9%,5.7%. versusThe $3,357,000primary forcause of the six-monthincrease period ended December 31, 2024. The increases for both the three- and six- month periods are due mostly to theis $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 2026.2026 Anand 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, dueas toa 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, was mostly offset by a decline in other legal and professional fees unrelated to patent litigation.completed.

Other income for the three and sixnine months ended DecemberMarch 31, 20252026 consisted entirely of $250,000 in non-recurring licensing proceeds. There was no other income recorded for the three and six months ended DecemberMarch 31, 2024.2026 or the three- and nine-month periods ended March 31, 2025.

State tax expense of $2,760$1,825 and $7,345 was recorded for eachthe ofthree and nine months ended March 31, 2026, respectively, and $5,204 and $10,724 for the three months ended December 31, 2025 and 2024 and $5,520 was recorded for each of the sixnine months ended DecemberMarch 31, 2025 and 2024,2025, reflecting the minimum required state tax due. NoAside 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 taxtaxes waswere recorded during the first halfnine months of either fiscal year 2026as duea toresult of the net operating loss (NOL) carryforwards available to offset most taxable income. The effective tax rate for the three and sixnine months ended DecemberMarch 31, 20252026 was less than 1% and 1.7%, respectively.1%. The effective tax rate for the three and sixnine months ended DecemberMarch 31, 20242025 was 2.8%1.9% and 1.7%,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 approximatesapproximated $34,760,000$35,290,000 at the end of the secondthird quarter of fiscal year 2026,2026. resultingThe incurrent afiscal year to date adjustment to the net operating loss carryforward increased the deferred tax asset related to the Company'sCompany’s federal and state net operating loss carry forwards ofto roughlyapproximately $8,877,000$9,006,000 as of DecemberMarch 31, 2025.2026. 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.

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. 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. 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$1.9 million of cash and cash equivalents, $13.0$16.9 million of short-term investments and available credit facilities of $5.0 million on DecemberMarch 31, 2025. The Company also had $4.0 million of long-term investments in U.S. treasury debt securities on December 31, 2025.2026.

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, amoderate, softeninguneven jobgrowth in the labor market and rising long-termsteady unemployment, still elevated borrowing costs, even after three quarter-point interest rate cuts in the first half of the Company’s fiscal year, steadilycontinually 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.

Inflationary Cost Environment and the Impact on Consumer Confidence – InGlobal additioninflation 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 thesignificantly expectedlower inflationinterest asrates, resulting in a resulthigher-for-longer ofenvironment. In addition, the newlyconflicts imposedin tariffs,the Middle East have contributed to sustained elevated interest rates and volatile energy costscosts. continue. While the Federal Reserve cut its benchmark federal funds rate by 0.75 percentage points via three separate cuts since June 30, 2025, consumerConsumer 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, theThe Company will continue to experience higher costs for commodities and packaging materials due to the recentlytariffs, enactedalbeit tariffsat lower rates, and will react with pricing actions in the coming quarter and as it deems necessary. The 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. TheAny 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. 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 – 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 sixnine months ended DecemberMarch 31, 2024,2026 thereand 2025, sales of $31,000 and $80,000, respectively, were nearly $39,000 in salesmade 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. 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. The U.S. 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. 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.

The following table summarizes cash flows from operating, investing and financing activities for the sixnine months ended DecemberMarch 31, 20252026 and 20242025:

CashFixed usedasset byadditions investingof activities$316,000 forduring the sixnine months ended DecemberMarch 31, 20252026 wasconsisted due mostly toof 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 purchases.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$9,035,000 were received during the first halfnine months of fiscal year 2026 from the redemption of U.S. Treasury securities and $2,998,000$8,998,000 of new U.S. Treasury securities were purchased at a net discountpremium of $1,000$8,600 during that same period. Cash used by investing activities for the sixnine months ended DecemberMarch 31, 20242025 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 $7,085,000$9,179,000 received during the sixnine months ended DecemberMarch 31, 20242025 from the maturity of U.S. Treasury securities were mostly reinvested to purchase $7,059,000$9,059,000 of similar securities at a $61,000$60,000 discount.

Cash from the exercise of stock options during the six-monthnine-month period ended DecemberMarch 31, 20252026 provided the majority of the cash from financing activities.activities, Principaloffset slightly by 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.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 sixnine months ended DecemberMarch 31, 2024,2025, 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 DecemberMarch 31, 20252026 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 sixnine months ended DecemberMarch 31, 20252026 or 20242025 under the Company’s stock repurchase program.

The CompanyManagement believes its existing cash andcash, cash equivalents, investments in short-term U.S. Treasury securities, cash providedgenerated byfrom operating activitiesoperations and available borrowings under its credit facility, if any,facility will be sufficient to meet itsthe Company’s anticipated working capital,operating and capital expenditure requirements duringfor at least the next twelve months.months There can be no assurance, however, thatand the Company’sforeseeable 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.future.

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 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 DecemberMarch 31, 2025,2026, the Company was in compliance with all covenants related to the Credit Agreement. As of DecemberMarch 31, 20252026 and June 30, 2025, there were no outstanding borrowings on the facility.

At DecemberMarch 31, 2025,2026, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.