KOSS CORP

Current report

During fiscal year 2026, management announced its intention to pursue acquisition targets as part of its "diversification by acquisition" strategy. The Company expects this expanded strategy to substantially change its financial profile and generate predictable, recurring revenue streams. However, during the acquisition phase, selling, general and administrative costs are expected to increase.

Current report

Net sales for the three months ended September 30, 2026 were $3,094,000 compared to $4,071,000 for the three months ended September 30, 2025, a decrease of $977,000, or 24.0%. The prior year’s first quarter included a considerable sale involving a new product introduction and rollout in the Education segment that did not require a repeat in the first quarter of fiscal 2027. Increased sales to certain domestic distributors during the first quarter of fiscal 2027 helped to offset some of that decline.

Current report

Export sales for the current quarter were relatively consistent with those for the same period in the prior year, with sales of $727,000 for the three months ended September 30, 2026 compared to the prior year’s first quarter sales of $749,000, a slight decrease of $22,000, or 2.9%. An approximately 17% increase in sales to European distributors over the prior year was more than offset by a decline in sales to Asia as a result of a smaller reorder in the early part of the year compared to the same period in the prior year.

Current report

For the three months ended September 30, 2026, sales to the domestic markets totaled $2,367,000, a decline of $955,000, or 28.7%, compared to sales of $3,322,000 for the same period in the prior year. The significant sale to a particular Education customer during the first three months of the prior year did not recur in the same period in the current year. However, increased sales to other customers in the Education segment helped to slightly offset that decline, along with higher sales to certain of the Company’s domestic distributors, representing a continued demand for specialty headphones.

Current report

Gross profit as a percentage of net sales for the three months ended September 30, 2026 was 39.5% against a gross profit percentage of 40.0% for the comparable period in the prior year, a decrease of 50 basis points. The impact of fixed overhead manufacturing costs for a lower sales base, coupled with increased freight rates due to general rate increases and peak season surcharges, was mostly offset by the recognition of approximately $76,000 of the final tranche of refunds of the International Emergency Economic Powers Act (IEEPA) and reciprocal tariffs on product sourced from China. These tariffs were received in the fourth quarter of the prior year but were not recognized in the condensed consolidated financial statements until they could be clearly matched to specific duties paid after further research by the U.S. Customs and Border Protection (CBP) and company personnel. No other refunds for IEEPA tariffs are expected.

Current report

Shipment costs increased during the first quarter of fiscal 2027 due to general freight rate increases and peak season surcharges driven by heavy early holiday front-loading, peak-season demand, capacity crunches, and geopolitical route pressures from the ongoing Middle East crisis. The Company expects costs of shipments to be consistent or increase in the coming quarter as additional peak season surcharges are assessed. The Company continues its relationship with a dedicated freight forwarder to help mitigate the impact of higher rates. The Company continues to monitor current events and further supply chain and tariff developments in order to be prepared to react as necessary to maintain product availability.

Current report

The tariff landscape for China-sourced products has been incredibly volatile over the last few months. Following the Supreme Court's strike-down of the broad emergency-power IEEPA tariffs earlier in the calendar year, the temporary 10% surcharge under Section 122 expired on July 24, 2026. At the same time that these tariffs expired, a 12.5% Section 301 forced labor tariff covering headphone products from China was enacted immediately, and stacked directly on top of any applicable original, baseline Section 301 duties, in order to prevent a gap in trade enforcement. On October 7, 2026, the Office of the U.S. Trade Representative (USTR) formally announced that these tariffs will not terminate and are officially being continued. Following a high-profile summit between President Trump and Chinese President Xi Jinping in late September, a $60 billion reciprocal tariff reduction deal was announced, the “30-for-30” framework, that offers potential relief but, unfortunately, excludes headphones. The Company continues to monitor trade newsletters and executive orders so as to be able to react to tariff changes immediately.

Current report

Selling, general, and administrative expenses were $1,622,000 for the three months ended September 30, 2026, a decrease of $52,000, or 3.1%, from $1,675,000 for the same period in the prior year. The decrease was driven primarily by the lower deferred compensation liability required for the current quarter compared to the first quarter in fiscal 2026 as a result of increasing interest rates utilized as the discount factor for the deferred compensation liability calculation. The lower sales commissions and a larger increase in the value of the cash surrender value of the life insurance policies on two of the Company’s executives also contributed to the decline in selling, general and administrative expenses. Salaries on additional headcount hired in the last quarter of fiscal 2026 offset a significant portion of the favorability.

Current report

Inflationary Cost Environment and the Impact on Consumer Confidence –Global inflation has continued to persist driven by continuous price pressures, notably energy, which is considered a source of pressure to input costs. The primary catalyst for the recent “sticky” inflation appears to be the swing in energy costs triggered by the conflicts in the Middle East. In response to the persistent price pressures, the Federal Reserve raised the benchmark interest rate by 25 basis points at its September 2026 meeting, the first increase in three years. Due to the combination of higher energy costs, rising interest rates and higher input costs, consumer confidence has suffered a setback resulting in consumers potentially putting off making purchase decisions and cutting back on overall spending, which could impact the Company’s sales volumes.

Current report

Supply Chain Disruption and Trade Tensions with China -The Company relies on our third-party supply chain 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 possible future 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.

Current report

Artificial intelligence -Advances in artificial intelligence have increased the sophistication, frequency and effectiveness of cyber threats, including phishing attacks, business email compromise, credential theft, malware, social engineering and other attempts to gain unauthorized access to information systems or confidential data. Artificial intelligence technologies also may facilitate fraudulent communications, including convincing text, voice or video impersonations of employees, executives, suppliers or customers, which could result in unauthorized financial transactions, disclosure of sensitive information or operational disruption.

Current report

In addition, we and our third-party service providers may use artificial intelligence-enabled technologies to support certain business processes. The use of these technologies may increase risks relating to data privacy, confidentiality, cybersecurity, intellectual property, accuracy of information and compliance with evolving legal and regulatory requirements. Although we maintain policies, technical safeguards and internal controls designed to reduce these risks, no security measures can eliminate all cybersecurity or fraud risks associated with rapidly evolving artificial intelligence technologies. Any significant cybersecurity incident or misuse of artificial intelligence could disrupt our operations, damage our reputation, result in financial loss, expose us to litigation or regulatory proceedings and adversely affect our business, financial condition and results of operations.

Current report

The only cash used by financing activities during the first three months ended September 30, 2026 and 2025 was for principal payments on a finance lease for certain warehouse equipment.

Current report

The Company believes its existing cash, cash equivalents, the investments in U.S. Treasury securities 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.

Previous report

Net sales for the three months ended March 31, 2026 were $2,825,000, a slight increase of $44,000, or 1.6%, compared to $2,781,000 for the three months ended March 31, 2025. The increase resulted from a 40% increase in domestic distributor orders, coupled with a 23% increase in direct-to-consumer (DTC) shipments, offset mostly by lower sales in our European and Asian markets. Sales of $9,757,000 for the nine months ended March 31, 2026 exceeded sales of $9,540,000 for the same period in the prior year by $217,000, or 2.3% due mainly to a significant sales of custom headphones to the Education segment plus a 16% increase in DTC sales, offset by a considerable decline in sales to our largest European distributors.

Previous report

Export sales of $381,000 for the three months ended March 31, 2026 were down $230,000, or 37.7%, compared to sales of $612,000 for the three months ended March 31, 2025. A near 70% reduction in sales to Asia versus the same prior year period and a 77% drop off in sales into Canada drove the decline. The Asia shortfall was a result of repeat orders that came earlier in the fiscal year, and our largest Canadian distributor that will not buy U.S. products at this time for political reasons. For the nine months ended March 31, 2026, export sales totaled $1,742,000, a marked decrease of $1,279,000, or 42.3%, against the nine-month period ended March 31, 2025. Sales to our largest distributors in central and northern Europe were down close to 60% largely as a result of delays in stock replenishment. Year-to-date sales to Asia, however, exceeded sales during the first nine months of the prior year by 19%, compensated for some of the decline.

Previous report

For the three months ended March 31, 2026, sales to the domestic markets totaled $2,444,000, representing an increase of $274,000, or 12.6%, compared to sales of $2,169,000 for the same period in the prior year. The higher sales figures reflect increased demand within the domestic distributor market and a continued effort to drive more DTC sales through marketing campaigns and other social media initiatives. Sales to the domestic markets during the nine months ended March 31, 2026 were $8,014,000, a rather significant year-over-year increase of $1,496,000, or 23.0%, as compared to sales of $6,518,000 for the nine months ended March 31, 2025. As noted above, a sizable order by a customer in the Education market boosted sales for the period, along with an approximately 50% increase in sales to a particular segment of the domestic distribution market driven by general inventory restocks and a continued demand for clear colored headphones. A 16% increase in DTC sales also contributed to the favorable sales, partially offset by two prior year custom orders that are expected to repeat in the fourth quarter potentially at a lower level.

Previous report

Gross profit as a percentage of net sales for the three months ended March 31, 2026 was 35.5% against a gross profit percentage of 39.0% for the comparable period in the prior year, a decrease of 350 basis points. For the nine months ended March 31, 2026, gross margins were 35.5%, a decrease of 290 basis points from the margin of 38.4% for the same nine-month period in the prior year. The adverse impact of significant International Emergency Economic Powers Act (IEEPA) and reciprocal tariffs, some as high as 145%, on inventory brought in and sold throughout the year, along with sales of inventory brought in at higher freight rates, were the main reasons for the margin erosion for both periods. A favorable mix of higher margin domestic distributor and DTC sales, coupled with sales of some obsolete and excess reserved inventory, helped to partially offset some of the negative impacts.

Previous report

During the third quarter of fiscal 2026, freight rates decreased. Peak season surcharges dropped off and a confluence of vessel overcapacity, weakened global demand, as well as the failure of the typical pre-Chinese New Year demand surge to materialize all contributed to lower shipping costs. The Company does, however, expect an increase in ocean rates during the fourth quarter due to another peak season surcharge that will come into effect. The Company continues its relationship with a dedicated freight forwarder and renewed the contract at the end of April. Given the elimination of IEEPA and reciprocal tariffs and anticipated lower rates in the future, the Company has decided to cease its relationship with the bonded warehouse. The inventory at the bonded warehouse will be completely withdrawn by the end of fiscal year 2026. Ongoing monitoring of supply chain and tariff developments will help the Company adapt and maintain product availability.

Previous report

Over the past nine months, U.S. tariff policy on China-produced goods has remained a significant factor affecting the Company’s cost structure and supply chain decisions. The Company is currently subject to certain tariff rates on products manufactured in China that are now lower than those previously imposed and should remain fairly stable throughout the fiscal year. Future changes in trade policy, however, could result in significantly higher duties. On February 20, 2026, the federal courts ruled that the broad tariffs imposed under IEEPA were illegal and exceeded the President’s statutory authority. Soon after, President Trump invoked a 10% global tariff using Section 122 of the Trade Act of 1974. Also following the invalidation of the IEEPA and reciprocal tariffs, the Court of International Trade (CIT) ruled that the duties paid are unlawful and initiated a massive refund process. The Company may seek reliquidation and refunds via claims made in the Custom Border Patrol’s (CBP) new Consolidated Administration and Processing of Entries (CAPE) portal as soon as it is ready to begin accepting claims. While refunds are expected, they are not guaranteed and timing of the refund is currently expected to take 60-90 days. The government can appeal or cause delays, with full restitution potentially taking months or years. As such, the Company has not recorded any receivables related to the potential refunds amid the uncertainty. Given the volatility of the tariff landscape and the substantial amount of product coming from China, the Company continues to closely monitor the latest updates and their impact on operations, planning efforts and financial conditions.

Previous report

Selling, general, and administrative expenses of $1,722,000 for the three months ended March 31, 2026 increased $118,000, or 7.4%, in comparison to $1,604,000 for the same period in the prior year. The primary reasons for the increase were higher legal fees, increased commissions on larger sales turnover, and additional salary and a bonus accrual for a new headcount. For the nine months ended March 31, 2026, selling, general and administrative expenses were $5,242,000 versus $4,960,000 for the nine-month period ended March 31, 2025, an increase of $282,000, or 5.7%. The primary cause of the increase is $250,000 in legal fees and expenses incurred as a result of litigation related to patent defense that was resolved during the second quarter of fiscal year 2026 and directly offset by non-recurring licensing proceeds as noted below. A decrease in other legal fees was offset by higher sales commissions in addition to an increase in the deferred compensation expense year over year, as a result of both declining interest rates used to calculate the related liability and an increase in the annual payments under the plan given an additional year of service was completed.

Previous report

Other income for the nine months ended March 31, 2026 consisted entirely of $250,000 in non-recurring licensing proceeds. There was no other income recorded for the three months ended March 31, 2026 or the three- and nine-month periods ended March 31, 2025.

Previous report

Tariffs -On February 20, 2026, in Learning Resources, Inc. v. Trump, the Supreme Court ruled that the IEEPA does not authorize the president to impose tariffs, declaring them unconstitutional and invalidating previous punitive tariffs on Chinese goods. Shortly after the ruling, President Trump announced a temporary 10% global tariff on imports under Section 122 of the Trade Act, which he has threatened to raise to 15%. These tariffs can be imposed for up to 150 days and are designed to address the U.S. trade deficit and related imbalances. As a result of the determination that IEEPA and reciprocal tariffs were unlawful, the Company is legally entitled and is expected to receive refunds of those tariffs. The Company continues to monitor the status of the claims process as it is currently under development and the refunds face significant legal and operational hurdles. These dynamics have contributed to variability in input costs and required the Company to actively manage supplier relationships, pricing strategies, and inventory planning. The

Previous report

Inflationary Cost Environment and the Impact on Consumer Confidence –Global inflation has been persistent despite earlier declines, particularly affecting input costs. While the Federal Reserve has initiated rate cuts during the fiscal year, elevated inflation from tariffs may restrict the ability to significantly lower interest rates, resulting in a higher-for-longer environment. In addition, the conflicts in the Middle East have contributed to sustained elevated interest rates and volatile energy costs. Consumer confidence continued to decline steadily due to concerns over high prices, increased energy costs, tariffs and a softening labor market. Consumers may still put off making purchase decisions and cut back on overall spending, which could impact the Company’s sales volumes.

Previous report

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

Previous report

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.

Previous report

Cash from the exercise of stock options during the nine-month period ended March 31, 2026 provided the majority of the cash from financing activities, offset slightly by principal payments on a finance lease for a new reach truck leased for the warehouse at the beginning of the year. A total of 10,000 shares of common stock were issued as a result of employee stock option exercises under grants that were still outstanding from the Company’s 2012 Omnibus Incentive Plan. For the nine months ended March 31, 2025, an aggregate of 76,000 shares of common stock were issued as a result of employee stock option exercises under grants outstanding from the Company’s 2012 Omnibus Incentive Plan.

Previous report

Following the transfer, the securities remain highly liquid and available to support working capital needs, strategic initiatives, and other general corporate purposes. The transfer did not impact the Company’s cash position or results of operations, other than the recognition of an unrealized loss in other comprehensive loss related to marking the securities to fair value.

Previous report

Management believes existing cash, cash equivalents, investments in short-term U.S. Treasury securities, cash generated from operations and available borrowings under its credit facility will be sufficient to meet the Company’s anticipated operating and capital expenditure requirements for at least the next twelve months and the foreseeable future.