ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with our financial statements and the notes thereto included in this Report under Item 8 Financial Statements and Supplementary Data. The results shown herein are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Please see the section entitled “Cautionary Note Regarding Forward-Looking Information” above for more information regarding the risks associated with forward-looking information.
Overview
The Company is engaged in the manufacturing, marketing, sale and distribution of high-tech, innovative hearing and audio enhancement and protection products that provide cutting-edge solutions for people with varied applications across many industries and professional quality hair and skin care products under various trademarks and brands.
We have two reportable segments: hair and skin care, and hearing enhancement and protection. In addition, we have recently incorporated a wholly owned subsidiary with the intent to offer marketing services. This new subsidiary is expected to support third-party clients by leveraging our direct-to-consumer expertise to deliver performance-driven marketing solutions.
Through our hearing enhancement and protection segment, we design, innovate, engineer, manufacture, market and service specialized systems in hearing enhancement, hearing protection, wireless audio, and communication. Through our hair and skin care segment, we manufacture, market, sell, and distribute professional quality hair and skin care products.
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Our overall business strategy is to establish market awareness of our products through our direct-to-consumer campaigns. Our strategy centers on driving growth by expanding market share within existing channels and developing new ones through both online and traditional platforms. Our primary focus is optimizing our e-commerce strategies, building sales teams to meet the needs of distribution channels, and enhancing value through strategic partnerships. The Company is also working to expand its offline retail presence and enter into new international markets. We believe the increase in awareness will allow us to increase distribution and gain customers through our distribution partners’ retail establishments, with the goal of helping us achieve growth in market share and diversify our sales channels; however, we cannot provide any assurances that such increases will occur, or that we will realize the anticipated benefits of our actions.
Business Update
The Company entered into a strategic supply arrangement with a national membership-based retail chain, marking a significant milestone in our wholesale channel expansion strategy. Under this agreement, the retailer placed a substantial initial purchase order that is expected to be fulfilled across the first and early second quarter of fiscal 2026. While there can be no assurances that additional purchase orders will be placed or as to the timing of the fulfillment of any orders, this development is anticipated to drive meaningful revenue growth and enhance brand visibility across a broader customer base.
In June 2025, the Company expanded its leadership team by hiring a senior contractor to lead growth initiatives in our hair and skin care division. This individual brings extensive experience in brand development and channel expansion. His appointment reflects our commitment to scaling this business segment and capitalizing on emerging industry growth.
In May 2025, we received prominent media recognition in leading military publications—including Military Times, Air Force Times, Marine Corps Times, and Navy Times—highlighting our advanced hearing protection and enhancement technology and elevating brand credibility among professional and tactical audiences.
In the fourth quarter of fiscal 2025, the Company experienced a temporary disruption in operations as a result of newly imposed international tariffs that affected our supply chain. While these external factors led to an increase in cost of goods sold and contributed to softer-than-expected sales during the quarter, management implemented a series of internal operational efficiencies that successfully mitigated the broader financial impact.
We continue to make steady progress on our supply chain transition strategy, which is intended to build a more resilient and responsive supply chain, in response to elevated U.S. tariffs and broader geopolitical risks. Key operational milestones are being met as planned, including the ongoing relocation of senior manufacturing leadership to the United States and early-stage development of domestic production capabilities. We believe these initiatives will position us well to navigate the evolving trade environment and support long-term competitiveness. We remain focused on execution and expect to provide additional updates as key phases of our domestic manufacturing build-out progress are completed.
While we continue to experience near-term cost pressure related to imported components, our mitigation strategies — including selective sourcing adjustments and pricing initiatives — remain on track. We believe the majority of the tariff-related impact was concentrated in the fourth quarter, and we do not expect a material ongoing effect into fiscal 2026 based on the tariffs currently in place. If tariff rates change or other changes in trade policy are implemented, the expected impact on our operations could change.
On July 4, 2025, legislation commonly referred to as The One Big Beautiful Bill Act of 2025 (the “OBBBA”) was enacted in the U.S. The OBBBA makes permanent the extension of certain provisions of the Tax Cuts and Jobs Act that were set to expire at the end of 2025. Additionally, the OBBBA makes changes to certain U.S. corporate tax provisions. The legislation has multiple effective dates, with certain provisions effective in 2025 and others implemented through 2027. We are currently assessing the impact of the OBBBA on our consolidated financial statements.
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Results of Operations
Our results of operations are summarized below.
Fiscal Year
Ended
May 31,
Fiscal Year
Ended
May 31,
Sales, net
Cost of sales
Gross profit
Total operating expenses
Income from operations
Net income after tax
We calculate EBITDA by taking net income calculated in accordance with accounting principles generally accepted in the United States (“GAAP”), and adjusting for income taxes, interest income or expense, and depreciation and amortization. We calculate adjusted EBITDA as EBITDA, further adjusted for stock-based compensation. Adjusted EBITDA is also presented as a percentage of revenue, which is calculated by dividing the non-GAAP Adjusted EBITDA for a period by revenue for the same period. Other companies may calculate EBITDA and adjusted EBITDA differently, limiting the usefulness of these measures for comparative purposes. We believe that these non-GAAP measures of financial results provide useful information regarding certain financial and business trends relating to our financial condition and results of operations, and management considers EBITDA and adjusted EBITDA important indicators in evaluating our business on a consistent basis across various periods for trend analyses. These non-GAAP financial measures exclude significant expenses and income that are required by GAAP to be recorded in our financial statements and are subject to inherent limitations as they reflect the exercise of judgments by management about which expenses and income are excluded or included in determining these non-GAAP financial measures. Investors should review the reconciliation of these non-GAAP financial measures to the comparable GAAP financial measure included below. Investors should not rely on any single financial measure to evaluate our business.
Fiscal Year
Ended May 31,
Fiscal Year
Ended May 31,
Net income (GAAP)
Provision (benefit) for income taxes
Interest income, net
Depreciation and amortization
Total EBITDA (Non-GAAP)
Adjustments:
Stock-based compensation
Total Adjusted EBITDA (Non-GAAP)
Sales, net (GAAP)
Adjusted EBITDA as a percentage of Sales, net (Non-GAAP)
Net sales for the year ended May 31, 2025 decreased by $1,241,017 or 4.5%, as compared to the year ended May 31, 2024. This decrease was primarily due to reduced advertising expenditure, which adversely affected direct to consumer sales, partially offset by an increase in sales through our distribution channels. The net effect in the reduction of advertising expense was a positive impact to operating income. Additionally, the year-over-year decline in revenue during the fourth quarter was partially attributable to a temporary disruption in operations related to international tariff changes, which impacted product availability and timing of sales.
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Cost of sales includes primarily the cost of products, freight-in costs, and depreciation related to fixed assets that are used in the production and distribution process to bring goods to their saleable condition and location. For the year ended May 31, 2025, the overall cost of sales increased by $294,116 or 4.0%, as compared to the year ended May 31, 2024. Cost of sales as a percentage of net revenues for the year ended May 31, 2025 was 29.0% as compared to 26.6% for the year ended May 31, 2024. The increase in cost of sales, as a percentage of sales, was primarily attributable to an increase in sales to distributors in both our hair and skin care products and our hearing enhancement and protection segments, bearing lower margins in addition to elevated input and logistics costs resulting from tariff-related supply chain disruption in the fourth quarter.
Gross profit decreased by $1,535,133 or 7.6% from $20,176,701 in the year ended May 31, 2024 to $18,641,568 for the year ended May 31, 2025. Gross profit as a percentage of sales for the year ended May 31, 2025 was 71.0%, as compared to 73.4% for the year ended May 31, 2024. The decrease in the gross profit margin for year ended May 31, 2025 was primarily attributable to an increase in cost of sales as a percentage of revenue, and an increase in discounts as a percentage of revenue.
Operating expenses consisted of marketing and selling expenses, compensation and related taxes, professional and consulting fees, and general and administrative costs. Operating expenses decreased by $1,193,118 or 6.4% from $18,673,321 in the year ended May 31, 2024 to $17,480,203 in the year ended May 31, 2025. Operating expenses as a percentage of net revenues for the year ended May 31, 2025 was 66.6% compared to 67.9% for the year ended May 31, 2024. Included in operating expenses were non-cash stock-based compensation of $1,108,934 and $267,183 in the years ended May 31, 2025 and May 31, 2024, respectively. The decrease in operating expenses was primarily due to a net decrease in advertising expenses, and a forgiveness of accounts payable amounting to approximately $220,000 partially offset by an increase of stock-based compensation of $841,751. Furthermore, professional and consulting fees decreased in the fourth quarter of 2025 as management implemented cost optimization measures in response to changes in U.S. trade policy as part of the Company’s efforts to mitigate potential adverse impacts and enhance operational resilience.
Income from operations for the year ended May 31, 2025, was $1,161,365 compared to income of $1,503,380 for the year ended May 31, 2024. The decrease in income from operations of $342,015 or 22.8% was primarily related to an increase in stock-based compensation expense partially offset by significantly lower advertising costs, along with a non-recurring gain from the forgiveness of approximately $220,000 in accounts payable.
For the year ended May 31, 2025, provision for income tax expense was $453,828. For the year ended May 31, 2024, we had an income tax benefit of $220,205.
As a result of the above, we reported a net income of $854,988 and $2,003,134 for the years ended May 31, 2025 and May 31, 2024, respectively.
Adjusted EBITDA increased by $427,444 or 21.3% from $2,002,889 for the year ended May 31, 2024 to $2,430,333 for the year ended May 31, 2025. Adjusted EBITDA as a percentage of sales, net for the years ended May 31, 2025 and May 31, 2024, was 9.3% and 7.3%, respectively. Adjusted EBITDA increased primarily due to a substantial reduction in advertising expense, which outweighed the associated decline in revenue, and was further supported by a one-time gain from the forgiveness of approximately $220,000 in accounts payable.
Basic and diluted earnings per share for the year ended May 31, 2025 were approximately $0.13 and $0.10, respectively, compared to $0.57 and $0.21 in the prior years. The prior-year EPS included a one-time gain of $1,329,588 related to preferred stock redemption; excluding that non-recurring benefit, the year-over-year decline in EPS was more moderate and corresponds to the lower net income in full year ended May 31, 2025.
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Liquidity and Capital Resources
We are currently engaged in product sales and development. Although we earned net income and have cash provided by operations in the fiscal years ended May 31, 2025 and 2024, we have experienced operating losses in prior periods. We expect to continue generating net income and positive cash flow in the fiscal year ending May 31, 2026. Based on our current cash balances and anticipated operating cash flows, we believe we have sufficient liquidity to meet working capital needs for at least one year from the issuance date of the accompanying consolidated financial statements.
We plan to manage expenses relative to expected revenue and may reinvest near-term cash to support revenue growth. Following the acquisition of A&A’s assets in June 2022, we have generated sufficient cash to support our operations and required debt payments, and we expect this to continue, although we cannot provide any assurance. Management remains focused on expanding product lines and our customer base to drive revenue. However, future cash demands may exceed historical levels. If needed, we may seek additional capital, although there is no assurance that financing will be available on acceptable terms or at all. Subject to these uncertainties, we believe we have sufficient capital and liquidity to fund operations for at least one year from the issuance date of the accompanying consolidated financial statements.
In fiscal year 2025, we entered into two new operating lease agreements: one for a corporate office in Beverly Hills, California, and another for a warehouse facility in American Fork, Utah. These leases began in the second quarter of fiscal 2025 and are scheduled to run through January 2029 and September 2027, respectively. The total initial lease liability and corresponding right-of-use asset recognized was approximately $767,000. As of May 31, 2025, the total lease liability was approximately $617,000, with a weighted average remaining lease term of 3.3 years and a discount rate of 13.1%. Lease costs totaled approximately $193,000 in fiscal 2025 and are recorded in general and administrative expenses. Future lease payments are expected to be funded through operating cash flows. We believe our current liquidity is sufficient to meet these obligations.
Cash Flows for the fiscal years ended May 31, 2025 and 2024
The following table provides detailed information about our net cash flows:
For the
Fiscal Year
Ended
May 31,
For the
Fiscal Year
Ended
May 31,
Cash Flows
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Operating Activities
Net cash provided by operating activities for the year ended May 31, 2025, was $1,928,661, compared to $2,677 for the year ended May 31, 2024. This improvement primarily resulted from our strategic decision to increase inventory levels as of May 31, 2024 to accommodate new product variations and packaging aimed at expanding into new markets. Inventory sold during the year ended May 31, 2025 contributed positively to cash flows. Additionally, cash flow improved due to the substantial decrease in advertising expense which had an immediate impact on cash flows, and a forgiveness of accounts payable during the year ended May 31, 2025, resulting in an improvement of operating cash flows of approximately $220,000, partially offset by timing of net changes in operating assets and liabilities excluding inventory.
Investing Activities
Net cash flows used in investing activities for the year ended May 31, 2025 was $394,298 due to the purchase of intangibles relating to increased product testing and property and equipment for the Company’s business. For the year ended May 31, 2024, net cash flows used in investing activities were $160,525, primarily attributable to the cash used in the purchase of property and equipment primarily relating to our expansion into new product lines.
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Financing Activities
Net cash flows used in financing activities for the year ended May 31, 2025 was $18,385 compared to $1,420,958 used in financing activities for the year ended May 31, 2024. The decrease in financing activities related primarily to repurchases of preferred stock amounting to $1,246,490 in the year ended May 31, 2024 that did not occur in the year ended May 31, 2025.
As of May 31, 2025, we had a secured Economic Injury Disaster Loan outstanding, administered pursuant to the CARES Act in the principal amount of $140,229, with a maturity date of May 18, 2050. The Company continues to pay interest and principal on the loan.
We are dependent on our product sales to fund our operations and may require additional capital in the future, such as pursuant to the sale of additional common stock, preferred stock, debt securities or entering into credit agreements or other borrowing arrangements with institutions or private individuals, to maintain operations, which may not be available on favorable terms, or at all, and could require us to sell certain assets or discontinue or curtail our operations. If the current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult to obtain, more costly and more dilutive. Our officers and directors have made no written commitments with respect to providing a source of liquidity in the form of cash advances, loans, and/or financial guarantees. We do not have any plans to seek additional financing at this time and anticipate that our existing cash equivalents and cash provided by operations will be sufficient to meet our working capital requirements. However, if the need arises for additional cash, there can be no assurance that we will be able to raise the capital we need for our operations on terms, or at all. We may not be to obtain additional capital or generate sufficient revenues to fund our operations. to secure any necessary financing in a timely manner and on terms could have a material effect on our growth strategy, financial performance and stock price and could require us to or our business plans. If we are at raising sufficient funds, for whatever reason, to fund our operations, we may be to operations. If we to raise funds, we expect that we will be required to seek protection from creditors under applicable laws.
Off-Balance Sheet Arrangements
As of May 31, 2025, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results, and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The critical accounting policies and practices used by the Company for the year ended May 31, 2025 financial statements relate to the policies and practices the Company uses to account for:
Accounts receivable and allowance for doubtful accounts
The Company has a policy of providing an allowance for doubtful accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to bad debt expense and included in the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
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Revenue recognition
We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers . Revenue is recognized when control of the product is transferred to the customer, typically upon shipment. In determining the transaction price, we consider discounts, promotional incentives, and expected returns. These estimates require judgment based on historical experience and current market conditions. Changes in customer behavior or promotional strategies could impact the timing and amount of revenue recognized.
Goodwill
Goodwill represents the excess of the consideration paid over the fair value of net assets acquired in a business combination. We evaluate goodwill for impairment at least annually during the fourth quarter, or more frequently if circumstances or events suggest potential impairment. Throughout the year, we monitor for indicators that might trigger an interim impairment review. Our testing may begin with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit exceeds its carrying value. If a quantitative test is performed, fair value is estimated based on the amount a market participant would pay in a hypothetical sale of the reporting unit. When the fair value exceeds the carrying value, goodwill is considered to be not impaired. If the carrying value exceeds fair value, an impairment charge is recorded for the amount of the excess, limited to the total carrying amount of goodwill.
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