KOSS CORP

Previous wording

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 newly imposed tariffs, inflation, slower growth or recession, higher interest rates, and wage 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.

Current wording

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 tariff volatility, slower growth or recession, higher interest rates, sticky wage growth and slowing 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.

Previous wording

Gross profit as a percentage of sales increased by 3.7 percentage points over the prior fiscal year from 34.1% to 37.8%. A favorable sales mix, with a higher mix of higher margin sales to certain domestic distributors and DTC coupled with sales to Europe that generated higher than normal margins due to new product sales. The prior year’s adverse impact of the continued sell-through of inventory brought in at higher freight rates also contributed to the favorable gross margin for the 2025 fiscal year.

Current wording

Gross profit as a percentage of sales increased by 4.1 percentage points over the prior fiscal year from 37.8% to 41.9%. Excluding the tariff refunds of $753,000 recorded as an offset to cost of sales, gross margins were 36.1% for fiscal 2026, a 1.7% decline from the previous fiscal year. The adverse impact of the tariffs on product coming from China was somewhat offset by a favorable sales mix, with a higher mix of higher margin sales to domestic distributors coupled with less lower sales to Europe.

Previous wording

Selling, general and administrative expenses increased 7.5% over the prior fiscal year principally due to the increase in new product compliance testing and certification. Legal fees and expenses also increased in support of the Company’s patent defense litigation and the settlement of an ADA lawsuit related to the Koss.com website.

Current wording

Selling, general and administrative expenses increased 7.0% over the prior fiscal year due to legal fees and expenses incurred in relation to patent litigation during the year, along with an increase in deferred compensation expense. The legal fees were offset by licensing proceeds from the patents, and timing of new product compliance testing and certification resulted in lower expense during the fiscal year.

Previous wording

Total tax expense of $17,482 was recorded for the year ended June 30, 2025 driven by minimum required payments and in increase in the uncertain tax position (UTP) related to research and development credits taken in the prior year and the appropriate tax and penalties that would 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.

Current wording

Total income tax expense of $10,892 and $17,482, respectively, was recorded for the years ended June 30, 2026 and 2025 arising from minimum required payments and in increase in the uncertain tax position (UTP) related to research and development credits taken in previous years that could potentially be denied.

Previous wording

Gross profit as a percentage of net sales for the year ended June 30, 2025 was 37.8% versus 34.1% for the prior fiscal year. Gross margins vary by customer, product, and markets and, as a result, any shifts in the mix can impact the overall gross margin. A favorable mix of higher margin sales to certain of our domestic distributors and DTC sales was coupled with a higher mix of sales to Europe which included a significant amount of sales of new product at higher margins. This was slightly offset by the adverse impact of newly imposed tariffs included in inventory sold in the last quarter of fiscal year 2025 along with a write-off of some obsolete inventory. The negative impact of the sell-through of inventory brought in at higher freight rates in the prior year also contributed to the increase in gross margins year over year. Freight rates increased slightly throughout the year due mainly to strong demand, capacity constraints and disruptions in major ports. Rates are expected to settle back down in the first part of the coming fiscal year as the Peak Season Surcharge (PSS) imposed in the fourth quarter of fiscal year 2025 was cancelled. The Company renewed its partnership agreement with a dedicated freight forwarder, which will continue to provide access to lower freight rates even if market rates should go up, and a lane was added to a bonded warehouse which may be utilized to defer tariff spend. The cost of additional loading, unloading and storage at this new facility will be offset by the delayed payments to the Custom Border Patrol for product stored there until final delivery to the Company. The first shipment to the bonded warehouse occurred in August 2025, deferring the tariffs until the product arrives at the Company’s plant in Milwaukee, WI. The Company continues to stay abreast of current events that might impact future freight rates and will act accordingly to ensure availability of goods. The impact of broader economic factors such as newly imposed tariffs, inflation and shifts in consumer behavior could result in overcapacity in the market and rising freight costs. The Company continues to monitor the situation.

Current wording

Gross profit as a percentage of net sales for the year ended June 30, 2026 was 41.9% compared to 37.8% for fiscal year 2025. Excluding the approximately $753,000 tariff refund received in the fourth quarter of fiscal 2026 and recorded as an offset to cost of sales, the gross margin for the current fiscal year would be 36.1%, a 170-basis point decrease versus the prior fiscal year. Gross margins vary by customer, product, and markets and, as a result, any shifts in the mix can impact the overall gross margin. The current year’s increase in gross margins is largely fueled by the tariff refunds received during the year for some of the refunds paid between March 2025 and February 2026, along with a favorable customer mix, which included higher volumes of higher margin DTC and sales to certain of our domestic distributors, and a higher margin custom headphone order delivered in the first quarter of fiscal 2026. The adverse impact of the tariffs paid during fiscal year 2026 for product from China and included in the value of the inventory sold throughout the year partially offset the positive margin impacts. Global freight rates rose from July 2025 to June 2026, driven by regulatory capacity tightening, front-loaded import volumes ahead of the Section 122 tariff expiration on July 24, 2026 and potentially higher imposed tariffs, and elevated fuel costs. The Company maintained stable freight costs throughout the year through its relationship with a dedicated freight forwarder and because nearly 10% of fiscal year sales were custom headphones shipped directly from China with freight costs paid by the customer. Rates are expected to rise during the first quarter of the coming fiscal year due to General Rate Increases (GRI) and Peak Season Surcharges (PSS). The Company renewed its partnership agreement with the dedicated freight forwarder in May 2026, which will continue to provide access to lower freight rates even if market rates go up. The Company continues to stay abreast of current events that might impact future freight rates by monitoring trade newsletters and executive orders and will react as necessary to ensure availability of goods. The impact of broader economic factors such as newly imposed and higher tariffs, inflation and shifts in consumer behavior could result in overcapacity in the market and rising freight costs.

Previous wording

Interest income of $879,774 and $847,644 was recorded during the fiscal years ended June 30 2025 and 2024, 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.

Current wording

Interest income of $883,995 and $879,774 was recorded during the fiscal years ended June 30, 2026 and 2025, respectively, due 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.

Previous wording

Total tax expense of $17,482 was recorded for the year ended June 30, 2025. Federal tax expense of $5,570 wasrecorded for the uncertain tax position related to research and development (R&D) credits taken in a prior year and state tax expense of $11,912 related mostly to minimum estimated state tax payments due. In the prior year, a net income tax benefit of $73,604 was reported 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 preparation and submission of the fiscal year 2023 tax returns during the third quarter fiscal year 2024. State income tax expense of $7,674, which represented only the required minimum estimated tax payments due, partially offset the benefit. The effective tax rate was 2.1% for the fiscal year ended June 30, 2025 compared to 7.2% for the previous fiscal year.

Current wording

Total income tax expense of $10,892 and $17,482 was recorded for the years ended June 30, 2026 and 2025, respectively. During fiscal 2026, federal tax expense of $2,892 wasrecorded for the UTP related to research and development (R&D) credits taken in a prior year and state tax expense of $8,000 related mostly to minimum estimated state tax payments due. In the prior year, federal tax expense of $5,570 was recorded for the UTP and state income tax expense of $11,912 was recorded which represented mostly required minimum estimated tax payments due. The effective tax rate was 2.9% for the fiscal year ended June 30, 2026 compared to 2.0% for the previous fiscal year.

Previous wording

The Company’s taxable losses for the years ended June 30, 2025 and 2024 increased the federal tax loss carryforward by approximately $1,150,000 and $1,270,000, respectively, resulting in an expected carryforward of approximately $34,00,000 by the end of the current fiscal year. The current fiscal year adjustment to the net operating loss carryforward increased the deferred tax asset to approximately $8,700,000 as of June 30, 2025, 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.

Current wording

The Company’s taxable losses for the years ended June 30, 2026 and 2025 increased the federal tax loss carryforward by approximately $577,800 and $1,150,000, respectively, resulting in a carryforward of approximately $34,611,200 by the end of fiscal year 2026. The current fiscal year adjustment to the net operating loss carryforward increased the deferred tax asset to approximately $8,847,000 as of June 30, 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.

Previous wording

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 be successful with the remaining complaints, the Company may receive additional royalties, offers to purchase its intellectual property, or other remedies advantageous to its competitive position. 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.

Current wording

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 is successful with the remaining complaint, the Company may receive additional 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.

Previous wording

The Company believes that its financial position remains strong. The Company had $2.8 million of cash and cash equivalents, $12.9 million of short-term investments and available credit facilities of $5.0 million on June 30, 2025.

Current wording

The Company believes that its financial position remains strong. The Company had $3.0 million of cash and cash equivalents, $16.8 million of United States Treasury investments available for sale and available credit facilities of $5.0 million on June 30, 2026.

Previous wording

U.S. tariff policy has undergone significant changes under President Donald Trump’s administration, leading to heightened global trade tensions and economic repercussions. In April 2025, the U.S. government imposed tariffs of up to 145% on certain imports from China, significantly increasing the Company’s expected duty costs for goods sourced from China. On May 12, 2025, the U.S. and China reached a temporary 90-day trade truce, reducing these tariffs to approximately 30%. 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 impact consumer confidence with cuts to discretionary spending, switching to lower-priced brands and delaying large purchases which, in turn, impact the Company’s sales volumes. Inflationary cost increases have resulted in higher costs of commodities, packaging materials, and wages, along with higher energy and transportation costs. 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.

Current wording

U.S. tariff policy remains volatile and continues to affect the Company’s landed costs and supply-chain planning. The temporary 10% Section 122 global import surcharge that applied to product sourced from China beginning in February 2026 expired on July 24, 2026. At the same time, the U.S. Trade Representative implemented replacement Section 301 tariffs tied to forced-labor import-policy findings, generally applying additional duties of 10% or 12.5% to imports from a broad group of economies, including China. For goods originating from China, these measures apply in addition to existing product-specific tariffs, including Section 301 duties and any other applicable duty programs, so the Company’s effective 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 and contributed to inflationary pressure, reduced consumer confidence, cuts to discretionary spending, switching to lower-priced brands, and delayed purchases, which had an impact on the Company’s sales volumes. Inflationary cost increases have also resulted in higher costs of commodities, packaging materials, wages, energy, and 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.

Previous wording

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 imposed tariffs, or a failure to procure adequate components, may lead to delays in manufacturing or increases in costs.

Current wording

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, increased tariffs, or a failure to procure adequate components, may lead to delays in manufacturing or increases in costs.

Previous wording

The global supply chain remains fragile despite pockets of stabilization and improved predictability. Freight rates have risen due to strong U.S. import demand and rerouting around the Red Sea and Suez Canal. While the Company rarely uses the Suez route and does not expect material impact, elevated costs and transit delays are affecting resellers 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 and the Middle East, and the supply chain team remains ready to increase inventory investment as needed. This includes being alert to potential short supply situations, assisting suppliers with acquisition of critical components and utilizing alternative sources and/or air freight.

Current wording

The global supply chain remains volatile despite some stabilization and improved predictability. It continues to be exposed to geopolitical events, changes in trade policy and carrier capacity. Freight rates have risen on certain U.S. to China trade lanes as a result of strong U.S. import demand ahead of the late-July tariff deadlines and peak season surcharges. However, tariff uncertainty has caused some importers to delay bookings. Persian Gulf, Red Sea and Suez Canal routing 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 freight costs, container availability constraints, schedule uncertainty and transit delays are affecting suppliers, resellers and customers who rely on that corridor. The Company continues to closely monitor developments in Eastern Europe, 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 monitoring for potential short supply situations, assisting suppliers with acquisition of critical components and utilizing alternative sources and/or air freight when appropriate.

Previous wording

During the fiscal year ended June 30, 2025, cash used in operating activities of the Company consisted of approximately $375,000 of payments to the Custom Border Patrol for the newly imposed tariffs on product shipped from China. This was partially offset by IRS refunds of $262,000 relating to employer payroll taxes incorrectly paid in prior years on the gains from the disqualifying dispositions of incentive stock options. Cash used in operating activities of the Company during the prior fiscal year related mostly to bonus payouts of $403,000 and funding of $362,000 relating to reimbursement of employee payroll taxes incorrectly withheld on the gains from the disqualifying dispositions of incentive stock options. Cash outflow was partially offset by tighter inventory buying practices and interest received on investments.

Current wording

During the fiscal year ended June 30, 2026, cash provided by operating activities of the Company was primarily driven by $1.0 million of IEEPA tariff refunds, along with a $512,000 IRS refund received relating to employer payroll taxes incorrectly paid in prior years on the gains from the disqualifying dispositions of incentive stock options. Payments of approximately $922,000 to the Custom Border Patrol for tariffs on product shipped from China, as well as payment of the Company’s annual insurance premiums at the beginning of the year offset 75% of those cash inflows. Cash used in operating activities of the Company during the prior fiscal year consisted of payments of $375,000 for tariffs on goods sourced from China, partially offset by refunds of $262,000 from the IRS related to the employer payroll taxes incorrectly paid during prior years.

Previous wording

Net cash used by investing activities for fiscal year 2025 was mostly related to capital expenditures comprised of a new roof section replacement for $346,000 and other leasehold improvements of approximately $75,000. The Company also paid life insurance premiums of $71,000 on company-owned life insurance policies for two of its executives. Proceeds of $14,303,000 from the maturity of U.S. Treasury securities were received during the year, of which $14,059,000 was reinvested in new similar securities at a discount of $197,000. For the fiscal year ended June 30, 2024, cash used by investing activities was related to capital expenditures, including the replacement of a roof section of the building and HVAC upgrades for approximately $330,000 and premiums of $82,000 on company-owned life insurance policies for two of its executives. Proceeds of $14,331,000 were received during the prior fiscal year from the maturity of U.S. Treasury securities which were mostly reinvested to purchase $14,286,000 of similar securities at a $300,000 discount.

Current wording

Net cash used by investing activities during the year ended June 30, 2026 was primarily due to capital expenditures consisting of the 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. The Company also paid $51,000 for life insurance premiums on company-owned policies for two of its executives. Proceeds of $14,041,000 from the maturity of U. S. Treasury securities were received during the year, of which $13,998,000 was reinvested in new U.S. Treasury securities at a discount of $87,300. Net cash used by investing activities for fiscal year 2025 was also mostly related to capital expenditures comprised of a new roof section replacement for $346,000 and other leasehold improvements of approximately $75,000. The Company also paid life insurance premiums of $71,000 on company-owned life insurance policies for two of its executives. Proceeds of $14,303,000 from the maturity of U.S. Treasury securities were received during the year, of which $14,059,000 was reinvested in new similar securities at a discount of $197,000.

Previous wording

The cash generated from financing activities in the fiscal years ended June 30, 2025 and 2024 was solely a result of stock option exercises. In the fiscal year ended 2025, exercises of stock options for 156,643 shares generated $305,908 of cash while stock option exercises for 65,000 shares in the previous fiscal year generated $134,975 of cash.

Current wording

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 year ended June 30, 2025 was solely a result of stock option exercises. In the fiscal year ended 2026, exercises of stock option for 10,000 shares generated $21,100 of cash while stock option exercises for 156,643 shares during the prior fiscal year generated $305,908 of cash.

Previous wording

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 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 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.

Current wording

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 U.S. Treasury securities, cash provided by operating activities and borrowings available under its credit 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.

Previous wording

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.

Current wording

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.

Previous wording

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, warranties, impairment of long-lived assets, deferred compensation, 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, recently enacted 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.

Current wording

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, changes in 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.

Previous wording

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 10 to the Consolidated Financial Statements for additional information on deferred compensation.

Current wording

The Company’s deferred compensation liability is for a current officer and is calculated based on various assumptions that 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 11 to the Consolidated Financial Statements for additional information on deferred compensation.