Fiscal 2025 Period Results Compared with Fiscal 2024 Period

Net Sales:

• Net sales for the three months ended March 31, 2025 were $2,781,000, an increase of $143,000 or 5.4% compared to the same period in the prior year. This was driven by increased sales to a certain segment of domestic distributors and recurring orders from two custom OEM customers, partially offset by lower sales from other domestic distributors.
• Sales for the nine months ended March 31, 2025 were $9,540,000, an increase of $168,000 or 1.8% compared to the same period in the prior year. Higher sales to European and Asian distributors, a custom headphone order to a new customer, and increased direct-to-consumer sales were mostly offset by lower sales in other market segments.

Export Sales:

• Export sales for the three months ended March 31, 2025 were $612,000, a slight increase of $30,000 or 5.1% over the same period in the prior year, driven by higher sales to Asian distributors.
• Export sales for the nine months ended March 31, 2025 were $3,022,000, an increase of $976,000 or 47.7% over the same period in the prior year. This was due to a 41% increase in sales to European distributors and a 67% increase in sales to Asian markets.

Domestic Sales:

• Domestic sales for the three months ended March 31, 2025 increased by $114,000 or 5.5% compared to the same period in the prior year, driven by sales of custom therapeutic listening headphones and custom elements to OEM customers, partially offset by declines in other domestic distributor and e-tailer sales.
• Domestic sales for the nine months ended March 31, 2025 were $6,518,000, down $808,000 or 11.0% compared to the same period in the prior year, mainly due to a 57% decline in sales to the education market and lower sales to domestic distributors, the music and books sector, and e-tailers.

Gross Margin:

• Gross margin for the three months ended March 31, 2025 was 39.0%, an increase of 710 basis points compared to the same period in the prior year. This was largely due to the adverse impact in the prior year of selling through inventory purchased at higher freight costs, as well as a decrease in the reserve for excess and obsolete inventory.
• Gross margin for the nine months ended March 31, 2025 was 38.4%, an increase of 620 basis points over the same period in the prior year, also driven by the adverse impact in the prior year of selling through higher-cost inventory.

Expenses:

• Selling, general and administrative expenses for the three months ended March 31, 2025 increased $152,000 or 10.5% compared to the same period in the prior year, mainly due to new product certification and compliance testing, as well as higher online advertising spend.
• Selling, general and administrative expenses for the nine months ended March 31, 2025 increased $388,000 or 8.5% compared to the same period in the prior year, driven by the same factors as the quarterly increase, as well as expenditures related to modifying existing NetSuite functionality.

Taxes:

• An immaterial federal income tax expense was booked during the three and nine months ended March 31, 2025 due to an amendment of the 2022 fiscal year tax return.
• The effective tax rate for the three and nine months ended March 31, 2025 was 1.9% and 1.8%, respectively, and is expected to continue to be reduced by utilization of net operating loss carryforwards.

Recent Trends and Outlook

The company faces several macroeconomic and geopolitical challenges that are impacting and will continue to impact its business, including:

• Tariffs: Newly enacted tariffs have significantly increased the company’s expected duty costs for products manufactured in China, up to 145%. This is expected to increase inflation in the short term and impact consumer sentiment.
• Inflationary Cost Environment: Higher interest rates, energy costs, and inflation are leading to a decline in consumer confidence, which could impact the company’s sales volumes.
• Supply Chain Disruption: Reliance on third-party supply chains, primarily in China and Taiwan, exposes the company to risks from pandemic restrictions, geopolitical unrest, labor shortages, and component procurement failures.
• Cyberattacks: The growing threat of sophisticated cyberattacks poses risks to the company’s information systems and data security.

Despite these challenges, the company believes its financial position remains strong, with $2.9 million in cash and cash equivalents, $10.1 million in short-term investments, and $5.0 million in available credit facilities as of March 31, 2025. The company will continue to monitor the evolving situation and adapt its operations and strategies as necessary.