Financial Analysis

17. EMPLOYEE BENEFIT PLANS The Company amended and restated its Koss Employee Stock Ownership Trust (KESOT) effective July 1, 2023 and received approval from the Board of Directors on July 26, 2023. Substantially all domestic employees are participants in the KESOT under which an annual contribution in either cash or common stock may be made at the discretion of the Board of Directors. All contributions to date have been fully allocated to employees company contribution accounts. No contributions were made for the years ended June 30, 2026 or 2025. The Company maintains a retirement savings plan under Section 401(k) of the Internal Revenue Code. This plan covers all employees of the Company who have completed one full fiscal quarter of service. Matching contributions can be made at the discretion of the Board of Directors. For fiscal years 2026 and 2025, the matching contribution was 25 % of employee contributions to the plan. Vesting of Company contributions occurs immediately. Company contributions were $ 83,750 and $ 79,240 during 2026 and 2025, respectively. …

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"9. CREDIT FACILITY 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 and 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 extend the expiration to October 31, 2022, and 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 Companys assets in connection with the Companys 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 June 30, 2026, the Company was in compliance with all covenants related to the Credit Agreement. As of June 30, 2026 and 2025, there were no outst …

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2026 2025 United States $ 10,869,826 $ 8,968,799 Export 2,150,947 3,655,371 Net Sales $ 13,020,773 $ 12,624,170

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13. STOCK OPTIONS In July 2023, pursuant to the recommendation of the Board of Directors, the shareholders approved the creation of the Koss Corporation 2023 Equity Incentive Plan (the 2023 Plan). Concurrently with the adoption of the new plan, the Koss Corporation 2012 Omnibus Incentive Plan (the 2012 Plan) was terminated. The Compensation Committee of the Board of Directors administers the 2023 Plan and provides for the granting of various stock-based incentive awards to eligible participants, primarily officers and certain key employees of the Company. 2,000,000 shares of common stock were authorized for issuance under the 2023 Plan, plus any shares subject to awards remaining outstanding under the 2012 Plan that expired or are otherwise forfeited, canceled, or terminated. The Companys Board of Directors will determine the terms and conditions under which an option will become exercisable but expects that stock options granted under the 2023 Plan will vest over a three -to- five -year period from the date of grant. An option will expire no more than ten years from its grant date, with the exception of incentive stock options held by a 10% stockholder, which will expire no more than five years from the grant date. As with the 2012 Plan, pursuant to the 2023 Plan, new shares will be issued upon exercise of stock options. The fair value of each stock option grant under the 2023 Plan was estimated as of the date of grant using the Black-Scholes pricing model. The resulting com …

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8. INCOME TAXES The Company accounts for income taxes utilizing the liability method under ASC 740, Income Taxes. The liability method measures the expected income tax impact of future taxable income and deductions implicit in the Consolidated Balance Sheets. The income tax provision in 2026 and 2025 consisted of the following: Years Ended June 30, 2026 2025 Current: Federal $ 2,892 $ 5,570 State 8,000 11,912 Deferred Total income tax provision (benefit) $ 10,892 $ 17,482 During the years ended June 30, 2026 and 2025, the federal tax provisions of $ 2,892 and $ 5,570 , respectively, consisted entirely of the uncertain tax position related to research and development (R&D) costs taken in a prior year. The Company recognizes the tax benefits of uncertain tax positions only if it is more likely than not that the position will be sustained upon examination by taxing authorities. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense. Generally accepted accounting principles in the United States (GAAP) prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. Due to positive taxable income in prior years, a significant portion of the Companys federal R&D tax credits were taken, including carryovers. The claim for research and development (R&D) tax credits continues to be a highly scrutinized …

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20. LEGAL MATTERS As of June 30, 2026, the Company is involved in the following matters described below: 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 filed complaints against certain parties alleging infringement on the Companys patents relating to its wireless audio technology. In the event that a monetary award or judgment is received by the Company in connection with these complaints, all or portions of such amounts, such as contingent legal fees, will be due to third parties. The Company may incur additional fees and costs related to these lawsuits, however, timing and impact on its Consolidated Financial Statements is uncertain. Depending on the response to and the underlying results of the enforcement program, the Company may continue to litigate its claims, enter into licensing arrangements or reach some other outcome potentially advantageous to its competitive position . In early fiscal 2020, the Company was notified by One-E-Way, Inc. (One-E-Way) that some of the Company's wireless products may infringe on certain One-E-Way patents. A Supplemental Notice of Infringement was served on the Company on March 18, 2025 and the complaint was resolved in September 2025. The matter was resolved at a cost of $ 22,200 and had been adequately accrued as of the end of the prior fiscal year. On November 20, 2025, the Company resolved its lawsuit against PE …

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15. LEASES The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is controlled by five equal ownership interests in trusts held by the five beneficiaries of the former Chairmans revocable trust and includes current stockholders of the Company. On May 24, 2022, the lease was renewed for a period of five years , ending June 30, 2028 (the Extended Term), and is being accounted for as an operating lease. The lease extension maintained the rent at a fixed rate of $ 380,000 per year and included an option to renew at an increased rate of $ 397,000 for an additional five years ending June 30, 2033 (the Second Extended Term). The negotiated increase in rent slated for 2028 will be the first increase in rent since 1996. The Company is responsible for all property maintenance, insurance, taxes, and other normal expenses related to ownership. The Company used its incremental borrowing rate as of the date of renewal, May 24, 2022, to recalculate the net present value of the operating lease ROU asset and liability. Both the Extended Term and the Second Extended Term renewal options were included in the calculation of the ROU asset and liability as the Company believes it is reasonably certain to exercise both rights to renew. The non-lease components of the agreement related to common area maintenance charges are accounted for separately. Supplemental information related to operating lease expense and valuation of the operating lease ROU asset and liabilit …

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements In December 2023, FASB issued Accounting Standards Update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU focuses on income tax disclosures around effective tax rates and cash income taxes paid and requires consistent categories and greater disaggregation of information in the rate reconciliation, income taxes paid disaggregated by jurisdiction and certain other amendments. The new guidance was adopted prospectively as of July 1, 2025 and ASU 2023-09 does not mandate retrospective disclosure. Given the ASU relates solely to disclosure requirements, adoption does not have a material impact on the Companys financial position, results of operations or cash flows. See Note 8 for further information. Recently Issued Accounting Pronouncements Not Yet Adopted In March2024, FASB issued ASU2024-03, Income Statement Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic220 40): Disaggregation of Certain Income Statement Expenses, which was subsequently amended by ASU2025-01 in January2025 to clarify and refine certain requirements. The ASU requires public business entities to disclose in the notes to the financial statements the amounts of employee compensation, depreciation, amortization, and inventory costs included in each relevant income statement line item. The guidance also requires disclosure of other expense categories if they are …

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16. RELATED PARTY TRANSACTIONS The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is controlled by five equal ownership interests in trusts held by the five beneficiaries of the former chairmans revocable trust and includes current stockholders of the Company. The lease is described more fully in Note 15. …

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3. REVENUE RECOGNITION The Company disaggregates its net sales by geographical location as it believes it best depicts how the nature, timing and uncertainty of net sales and cash flows are affected by economic factors. The following table summarizes net sales by geographical location: 2026 2025 United States $ 10,869,826 $ 8,968,799 Export 2,150,947 3,655,371 Net Sales $ 13,020,773 $ 12,624,170 Deferred revenue relates primarily to consumer and customer warranties. These constitute future performance obligations, and the Company defers revenue related to these future performance obligations. The Companys deferral rate is 3 % for domestic sales and 8 % for export sales based upon warranty experience. The Company recognized revenue, which was included in the deferred revenue liability at the beginning of the periods, of $ 242,644 and $ 230,192 in the years ended June 30, 2026 and 2025, respectively, for performance obligations related to consumer and customer warranties. The deferred revenue liability was $ 349,171 as of June 30, 2 024 . The Company estimates that the deferred revenue performance obligations are satisfied within 1 to 3 years and therefore uses the same time frame for recognition of the deferred revenue. …

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19. SEGMENT INFORMATION The Company has a single reportable segment, the design, manufacture and sale of headphones and related accessories, which reflects the manner in which the Companys Chief Executive Officer, who is the Companys CODM, regularly reviews financial information to manage the business, allocate resources and assess performance. The headphones are sold through retailers and distributors both domestically and internationally, as well as direct-to-consumer. The CODM regularly reviews revenue, certain significant expense categories, net income and select balance sheet items in evaluating segment performance. The significant segment expense categories and other segment items provided to the CODM and included in the measure of segment profit or loss are presented below. Years Ended June 30, 2026 2025 Net sales $ 13,020,773 $ 12,624,170 Cost of goods sold 7,568,362 7,850,572 Gross profit margin 41.9 % 37.8 % Selling, general and administrative expenses: New product certification and compliance testing 54,376 226,719 Legal and professional expense 1,132,874 999,359 Deferred compensation expense 235,831 133,330 Other selling, general and administrative expenses 5,541,781 5,151,313 Selling, general and administrative expenses 6,964,862 6,510,721 Net loss ( 391,464 ) ( 874,831 ) Segment net loss includes interest income, other income, interest expense and income taxes. The CODM also reviews the following balance sheet items at period-end as part of performance monitorin …

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5.CREDIT FACILITYOn May14, 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 May14, 2019 under which the Company granted the Lender a security interest in substantially all of the Companys assets in connection with the Companys 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 December 31, 2025, the Company was in compliance with all covenants related to the Credit Agreement. As of December 31, 2025 andJune 30, 2025, there were no outstanding borrowings on the facility. …

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Three Months Ended Six Months Ended December31, December31, 2025 2024 2025 2024United States$ 2,249,103 $ 2,181,541 $ 5,570,841 $ 4,348,905Export 612,276 1,375,545 1,361,316 2,410,049Net Sales$ 2,861,379 $ 3,557,086 $ 6,932,157 $ 6,758,954 …

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4.INCOME TAXESThe Company utilizes the liability method of accounting for income taxes. The liability method measures the expected income tax impact of future taxable income and deductions implicit in the condensed consolidated balance sheets. The Companys income tax expense for the three and six months ended December 31, 2025 and 2024 consisted of the following: Three Months Ended Six Months Ended December31, December31, 2025 2024 2025 2024Federal$ $ $ $ State 2,760 2,760 5,520 5,520Foreign Total income tax provision$ 2,760 $ 2,760 $ 5,520 $ 5,520 All income is derived from domestic operations. For the three and six months ended December 31, 2025, respectively, the effective tax rate was less than 1% and 1.7%, respectively. The effective tax rate for the three and six months ended December 31, 2024 was 2.8% and 1.7%, respectively. 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 effective tax rate for the current quarter differs from the U.S. federal statutory rate of 21% primarily due to: State income taxes, net of federal benefitOfficer life insuranceNon-deductible meals and entertainment expenseResearch and development tax creditsNondeductible stock options expenseChanges in valuation allowances on deferred tax assetsThe Company will provide the enhanced annual disclosures required by ASU 2023-09, including the …

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11.LEGAL MATTERSAs of December 31, 2025, the Company is involved in the matters described below: The Company maintains a program focused on enforcing its intellectual property and, in particular, certain patents in its patent portfolio. As part of this program, the Company filed complaints against certain parties alleging infringement on the Companys patents relating to its wireless audio technology. In the event that a monetary award or judgment is received by the Company in connection with these complaints, all or portions of such amounts, such as contingent legal fees, will be due to third parties. The Company may incur additional fees and costs related to these lawsuits, however, timing and impact on its condensed financial statements is uncertain. Depending on the response to and the underlying results of the enforcement program, the Company may continue to litigate its claims, enter into licensing arrangements or reach some other outcome potentially advantageous to its competitive position. The ultimate resolution of these matters is not determinable unless otherwise noted. On November 20, 2025, the Company resolved its lawsuit against PEAG, LLC d/b/a JLab Audio and granted a license covering certain of its patents. Gross proceeds of $250,000 were recognized and recorded as other income during the three and six months ended December 31, 2025. Total contingent legal fees and related expenses of $250,000 offset these proceeds and were recorded as a selling, general and ad …

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H) RECENT ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements In December 2023, FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU focuses on income tax disclosures around effective tax rates and cash income taxes paid and requires consistent categories and greater disaggregation of information in the rate reconciliation, income taxes paid disaggregated by jurisdiction and certain other amendments. The new guidance was adopted prospectively as of July 1, 2025 and ASU 2023-09 does not mandate retrospective disclosure. Given the ASU relates solely to disclosure requirements, adoption does not have a material impact on the Companys financial position, results of operations or cash flows. See Note 4 for further information. Recently Issued Accounting Pronouncements Not Yet Adopted In March2024, FASB issued ASU2024-03, Income Statement Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic220 40): Disaggregation of Certain Income Statement Expenses, which was subsequently amended by ASU2025-01 in January2025 to clarify and refine certain requirements. The ASU requires public business entities to disclose in the notes to the financial statements the amounts of employee compensation, depreciation, amortization, and inventory costs included in each relevant income statement line item. The guidance also requires disclosure of other expense categories if they are significant to an understanding of t …

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8.RELATED PARTY TRANSACTIONS The Company leases its facility in Milwaukee, Wisconsin from Koss Holdings, LLC, which is controlled by five equal ownership interests in trusts held by the five beneficiaries of a former chairmans revocable trust and includes current stockholders of the Company. On May 24, 2022, the lease was renewed for a period of five years, ending June 30, 2028, and is being accounted for as an operating lease. The lease extension maintained the rent at a fixed rate of $380,000 per year and included an option to renew at an increased rate of $397,000 for an additional five years ending June 30, 2033. The negotiated increase in rent slated for 2028 will be the first increase in rent since 1996. The Company is responsible for all property maintenance, insurance, taxes and other normal expenses related to ownership. …

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6.REVENUE RECOGNITIONThe Company disaggregates its net sales by geographical location as it believes it best depicts how the nature, timing and uncertainty of net sales and cash flows are affected by economic factors. The following table summarizes net sales by geographical location: Three Months Ended Six Months Ended December31, December31, 2025 2024 2025 2024United States$ 2,249,103 $ 2,181,541 $ 5,570,841 $ 4,348,905Export 612,276 1,375,545 1,361,316 2,410,049Net Sales$ 2,861,379 $ 3,557,086 $ 6,932,157 $ 6,758,954 Deferred revenue relates primarily to consumer and customer warranties. These constitute future performance obligations, and the Company defers revenue related to these future performance obligations. Effective July 1, 2023, the Company increased its deferral rates from 2.4% to 3% for domestic sales and decreased its deferral rate from 10% to 8% for export sales to reflect recent warranty experience. In the six months ended December 31, 2025 and 2024, the Company recognized revenue, which was included in the deferred revenue liability at the beginning of those periods of $153,935 and $141,787, respectively, for performance obligations related to consumer and customer warranties.The Company estimates that the deferred revenueperformance obligations aresatisfied within one year to three years and therefore uses that same timeframe for recognition of the deferred revenue. …

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10.SEGMENT INFORMATION The Company has a single reportable segment, the design, manufacture and sale of headphones and related accessories, which reflects the manner in which the Companys Chief Executive Officer, who is the Companys chief operating decision maker (CODM), regularly reviews financial information to manage the business, allocate resources and assess performance. The headphones are sold through retailers and distributors both domestically and internationally, as well as direct-to-consumer. The CODM regularly reviews revenue, certain significant expense categories, net income and select balance sheet items in evaluating segment performance. The significant segment expense categories and other segment items provided to the CODM and included in the measure of segment profit or loss are presented below. Three Months Ended Six Months Ended December31, December31, 2025 2024 2025 2024Net sales $ 2,861,379 $ 3,557,086 $ 6,932,157 $ 6,758,954Cost of goods sold 2,030,573 2,152,129 4,472,659 4,181,071Gross profit margin 29.0% 39.5% 35.5% 38.1%Selling, general and administrative expenses: New product certification and compliance testing 14,619 3,229 27,651 90,970Legal and professional expense 418,239 273,411 647,373 557,302Deferred compensation expense (income) 59,364 (62,710) 220,249 134,665Other selling, general and administrative expenses 1,353,162 1,332,811 2,624,843 2,573,863Selling, general and administrative expenses 1,845,384 1,546,741 3,520,116 3,356,800Net income ( …

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1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESA)BASIS OF PRESENTATIONThe condensed consolidated balance sheets as of December 31, 2025 and June 30, 2025, the condensed consolidated statements of operations for the three and six months ended December 31, 2025 and 2024, the condensed consolidated statements of cash flows for the six months ended December 31, 2025and 2024, and the condensed consolidated statements of stockholders' equity for thethree and six months ended December 31, 2025 and 2024, have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) and have not been audited. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The operating results for any interim period are not necessarily indicative of the operating results that may be experienced for the full fiscal year.Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2025.The preparation of financial statements in conformity with U. …

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