KOSS CORP

Previous wording

The following table presents selected financial data for the three and six months ended December 31, 2024 and 2023:

Current wording

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

Previous wording

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

Current wording

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

Previous wording

Sales to the export markets for the three months ended December 31, 2024 were $1,376,000 compared to $693,000 for the same period in the prior year due almost entirely to increased sales to two of our largest European distributors. New product sales to these European distributors exceeded our expectations, resulting in an over 90% increase in sales compared to the same period in the prior year. Export sales for the six months ended December 31, 2024 was $2,410,000, a $947,000, or 64.7%, increase over the same period in the prior year. Similar to the second quarter, sales to the two largest European distributors were 111% above the prior year, driven by the success of new product sales. Overall sales to Europe grew by $1,241,000, or 61%, while sales to our Asian and Canadian markets rose by $95,000, or 30.1%. There were no sales to our Russian distributor during the current fiscal year, nor have there been any since April 2022.

Current wording

Sales to the export markets were $612,000 for the three months ended March 31, 2025, a slight increase of $30,000, or 5.1%, over sales of $582,000 for the same period in the prior year behind higher sales to our Asian distributors. A decrease in sales to our European distributors offset most of that favorability and was due mainly to timing of expected reorders being pushed back to the fourth quarter of the fiscal year. Export sales for the nine months ended March 31, 2025 were $3,022,000, a $976,000, or 47.7%, increase over sales of $2,045,000 for the same period in the prior year. Sales to European distributors were up 41% over the prior year, due to the continued success of new product sales as well as overall inventory restocking. Sales to the Asian markets were up $182,000, or 67.0%, compared to last year driven by sales of headphones used in metal detecting units. There were no sales to our Russian distributor during the current fiscal year, nor have there been any since April 2022.

Previous wording

Gross profit as a percentage of net sales for the three months ended December 31, 2024 was 39.5%, compared to 33.0% for the three months ended December 31, 2023, an increase of 650 basis points. Margins for the second quarter of the prior year were negatively impacted by working through the inventory investment made while freight costs were higher, along with an increase in the reserve for excess and obsolete inventory. During the second quarter of the current fiscal year, inventory levels remained fairly constant, having little impact on margins as lower freight costs were capitalized into inventory. Significant new product sales to Europe at higher margins combined with a higher volume of higher margin DTC sales also contributed to the increased gross margins for the three months ending December 31, 2024. For the six months ended December 31, 2024, the gross margin was 38.1%, an increase of 580 basis points over the gross margin of 32.3% for the first half of the prior year. A more favorable customer mix of sales, including increased higher margin DTC sales, new product sales to our European distributors at higher margins and a higher volume of higher margin sales to certain domestic distributors, drove the higher gross margin in the first half of fiscal year 2025. This combined with the prior year’s adverse impact of the sell-through of inventory brought in at higher freight costs and resulted in the gap in margins year over year for the six months ended December 31, 2024.

Current wording

As a percentage of net sales for the three months ended March 31, 2025, gross margin was 39.0%, which compares favorably to a gross margin of 31.9% for the same three months in the prior year, an increase of 710 basis points. Margin improvement for the third quarter of the current fiscal year was largely due to the adverse impact in the prior year of the sell-through of inventory investment made while freight costs were higher. Margins were positively impacted in the three months ended March 31, 2025 due to a decrease in the reserve for excess and obsolete inventory compared to the same period in the prior year. A more favorable customer mix also contributed to the improved margins. For the nine months ended March 31, 2025, the gross margin was 38.4%, an increase of 620 basis points over the gross margin of 32.2% for the same nine-month period in the prior year. In the prior year, the adverse impact related to the sell-through of inventory brought in at higher freight costs drove the improvement in margins for the first nine months of the current year. The write-off of some obsolete inventory partially offset those gains.

Previous wording

$5,520 and $3,758 was recorded for the six months ended December 31, 2024 and 2023, respectively, reflecting the minimum required state tax due plus estimated tax due on negligible net taxable income after state NOL deductions. The effective tax rate was 2.8% and 1.7% in the three and six months ended December 31, 2024, respectively. The effective tax rate was less than 1% for the three and six months ended December 31, 2023. It is anticipated that the effective rate in the current year and future years will continue to be reduced by utilization of a portion or all of the available federal and state net operating loss carryforwards that existed as of June 30, 2024.

Current wording

An immaterial federal income tax expense was booked during the three and nine months ended March 31, 2025 due to the amendment of the 2022 fiscal year tax return as a result of adjustments for employer payroll taxes inappropriately paid in that year related to the gains from the disqualifying dispositions of incentive stock options. No federal income tax expense was recorded for the same periods in the prior year, however, as a result of the Return-to-Provision (RTP) adjustment recorded during the third quarter of fiscal year 2024, a federal income tax benefit of $82,652 was recorded for both the three and nine months ended March 31, 2024. State income tax expense of $5,203 and $1,522 was recorded for the three months ended March 31, 2025 and 2024, respectively, and $10,724 and $5,281 was recorded for the nine months ended March 31, 2025 and 2024, respectively, reflecting the minimum required state tax due. The effective tax rate for the three and nine months ended March 31, 2025 was 1.9% and 1.8%, respectively. For the three and nine months ended March 31, 2024, the effective tax rate was 20.5% and 8.4%, respectively. 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, 2024.

Previous wording

The Company’s remaining expected federal tax loss carryforward approximates $32,900,000 at the end of the second quarter. The small taxable gain for the first quarter of fiscal year 2025 decreased the net operating loss carryforward deferred tax asset by approximately $3,000 and the taxable loss in the second quarter increased it by approximately $14,000, resulting in a deferred tax asset of approximately $8,500,000 as of December 31, 2024. Thevaluation allowance was adjusted accordingly to fully offset the net deferred tax asset as there is sufficient negative evidence to support the maintaining of a full valuation allowance as, excluding unusual, infrequent items, a three-year cumulative tax loss has occurred.

Current wording

The Company’s remaining expected federal tax loss carryforward approximates $33,600,000 at the end of the third quarter. The taxable loss for the initial nine months of the fiscal year increased the deferred tax asset by approximately $190,000, leading to a deferred tax asset related to the Company's net operating loss carry forwards of roughly $8,600,000 as of March 31, 2025. Thevaluation allowance was adjusted accordingly to fully offset the net deferred tax asset as there is sufficient negative evidence to support the maintaining of a full valuation allowance as, excluding unusual, infrequent items, a three-year cumulative tax loss has occurred.

Previous wording

The Company believes that its financial position remains strong. The Company had $2.5 million of cash and cash equivalents, $7.2 million of short-term investments and available credit facilities of $5.0 million on December 31, 2024.

Current wording

The Company believes that its financial position remains strong. The Company had $2.9 million of cash and cash equivalents, $10.1 million of short-term investments and available credit facilities of $5.0 million on March 31, 2025.

Previous wording

Recent and ongoing macroeconomic and geopolitical conditions have impacted, and will continue to impact, our business. These include economic uncertainty from unexpected job growth, elevated inflation and interest rates, reduced consumer confidence, disruption in our supply chain and trade tensions with China, the ongoing crises in Eastern Europe, the continued conflict in the Middle East and increased risk of cyberattacks.

Current wording

Recent and ongoing macroeconomic and geopolitical conditions have impacted, and will continue to impact, our business. These include economic uncertainty from unexpected job growth, recently enacted tariffs and the global trade war, elevated inflation and interest rates, reduced consumer confidence, disruption in our supply chain, the ongoing crises in Eastern Europe and the Middle East and increased risk of cyberattacks.

Previous wording

While inflation rates have consistently decreased over the last few months, the Company is still experiencing higher costs for commodities, packaging materials, and wages, along with higher energy and transportation costs. The Company continues to monitor costs and will react with pricing actions 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.

Current wording

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

Previous wording

Supply Chain Disruption and Trade Tensions with China -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, or a failure to procure adequate components, may lead to delays in manufacturing or increases in costs. Many of the Company’s products are sourced from contract manufacturing facilities in the People’s Republic of China and Taiwan. There continues to be geopolitical tension between China and the United States, as well as geopolitical tension between China and Taiwan that may affect future shipments from Taiwan-based suppliers. Any other adverse changes in the social, political, regulatory or economic conditions in the countries could materially increase the cost of the products we buy from our foreign suppliers or delay shipments of products. Sustained uncertainty about, or worsening of, economic relations and further escalation of trade tensions between the United States and China, or any other country in which the Company conducts business, could result in retaliatory trade restrictions that restrict our ability to source products from China or continue business in such other country. Any alterationsto our business strategy or operations made in order to adapt to or comply with any such changes would be time-consuming and expensive, and the Company may not be able to pass along most increases in tariffs and freight charges to the Company’s customers, which would also directly affect profits. President-elect Donald Trump intends to direct a good portion of his tariff escalation on products sourced from China. Broad tariffs on Chinese exports encourage shifting supply chains out of China to other global regions and

Current wording

Supply Chain Disruption and Trade Tensions with China -The Company faces significant risks due to reliance on third-party supply chains, primarily in southern China and Taiwan, distribution networks and the availability of necessary components to produce a considerable number of our products. Issues such as pandemic restrictions, geopolitical unrest, labor shortages, strikes, and component procurement failures could delay manufacturing and increase costs. The escalating U.S.-China tariff war has severely disrupted supply chains, impacting both domestic industries and global trade dynamics. Continued geopolitical tensions between China and Taiwan may affect future shipments from Taiwan-based suppliers. Adverse changes in social, political, regulatory, or economic conditions could increase product costs or delay shipments. The escalation of trade tensions might lead to retaliatory trade restrictions, potentially affecting the Company's ability to source products from China or conduct business internationally. Any alterationsto 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.

Previous wording

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 may implement additional sanctions or take further punitive actions in the future. 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 did receive orders from their Ukrainian distributor in the first half of both fiscal year 2025 and 2024 with potential for more in the current year. During the three and six months ended December 31, 2024 and 2023, there were no sales to Russia.

Current wording

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 continues to receive orders from their Ukrainian distributor in the first half of both fiscal years 2025 and 2024 with potential for more in the current year. During the three and nine months ended March 31, 2025 and 2024, there were no sales to Russia.

Previous wording

The following table summarizes cash flows from operating, investing and financing activities for the six months ended December 31, 2024 and 2023:

Current wording

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

Previous wording

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. During the six months ended December 31, 2023, the cash used in operating activities was primarily the payment of bonuses earned in the prior year and general insurance premiums.

Current wording

The cash provided by operating activities during the nine months ending March 31, 2025 was mainly driven by customer deposits of approximately $334,000 for orders that will ship in the next quarter. Cash used in operating activities during the nine months ended March 31, 2024 was primarily a result of the payment of bonuses earned in the year previous. Cash provided by improvements in cash flow related to working capital, namely the reduction of inventory levels, offset the majority of outflow.

Previous wording

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 approximately $346,000, and the payment of the 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. Cash used by investing activities for the six months ended December 31, 2023 was also related to fixed asset expenditures, predominantly the replacement of the first roof section of the building for approximately $300,000. The Company also paid the premiums on the company-owned life insurance policies on two of its executives. Proceeds of $7,223,000 from the maturity of U.S. Treasury securities were received and utilized to purchase $7,177,000 of similar securities at a discount of $180,000.

Current wording

Cash used by investing activities for the nine months ended March 31, 2025 was related mostly to fixed asset expenditures, namely the replacement of a second roof section of the Company’s facility for approximately $346,000 and other leasehold improvements. Payments of approximately $70,000 were also made for the premiums on the Company-owned life insurance policies on two of its executives. Proceeds of $9,179,000 received during the nine months ended March 31, 2025 from the maturity of U.S. Treasury securities were mostly reinvested to purchase $9,059,000 of similar securities at a net discount of $60,000. Cash used by investing activities for the nine months ended March 31, 2024 was also related to fixed asset expenditures, predominantly the replacement of the first roof section of the building for approximately $300,000. The Company also paid $82,000 in premiums on the Company-owned life insurance policies on two of its executives. Proceeds of $14,331,000 from the maturity of U.S. Treasury securities were received and utilized to purchase $14,286,000 of similar securities at a $300,000 discount.

Previous wording

Cash from the exercise of stock options during the six months ended December 31, 2024 provided the only cash from financing activities. An aggregate of 76,000 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. Employee stock option exercises provided the only cash from financing activities during the six months ended December 31, 2023. An aggregate of 20,000 shares of common stock were issued as a result.

Current wording

Cash from the exercise of stock options during the nine months ended March 31, 2025 and 2024 provided the only cash from financing activities. An aggregate of 76,000 and 20,000 shares of common stock, respectively, were issued as a result of employee stock option exercises under grants still outstanding from the Company’s 2012 Omnibus Incentive Plan for those periods.

Previous wording

There were no purchases of common stock in the three and six months ended December 31, 2024 or 2023 under the stock repurchase program.

Current wording

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

Previous wording

The Company believes its existing cash and cash equivalents, investments in short-term U.S. Treasury securities, cash provided by operating activities and 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.

Current wording

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.