What changed in this filing

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Item 1A. Risk Factors

2022-08-26 compared with 2021-08-20 · 86 added, 43 removed, 161 unchanged (44% of the section changed)

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In addition, the Company’s cash flow is also dependent, to some extent, upon the ability to maintain operating margins.

Weakening consumer demand, including due to recessionary and inflationary concerns, could adversely impact the Company’s cash flow and profitability.

We are dependent on the proper functioning of our critical facilities, our contract manufacturers in China, our supply chain and distribution networks and the financial stability of our customers, all of which have been negatively impacted by the COVID-19 pandemic in a manner that may have a materially adverse effect on our business, financial condition or results of operations.

Our ability to produce products may be materially adversely impacted by COVID-19.

The COVID-19 pandemic continues to impact worldwide economic activity, and has had a corresponding effect on our sales activity.

As the virus and variants thereof continue to spread globally, the impact of this pandemic has been and will likely continue to be extensive in many aspects of society, and has resulted in and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world.

With the ongoing effect of the COVID-19 pandemic in the United States and other countries, it is unclear how economic activity and workflows will continue to be impacted and for how long.

Many employers require their employees to work from home or not come into their offices or facilities.

Our actions continue to evolve in response to new government measures and scientific knowledge regarding COVID-19.

To date, these protocols have not resulted in a decrease in the production capabilities of our facility.

However, if the manufacturing capabilities of this facility are adversely impacted as a result of COVID-19, whether by a decrease in productivity caused by precautionary measures or by one or more employees becoming ill, it may not be possible for us to timely produce relevant products at required levels or at all.

A reduction or interruption in any of our manufacturing processes could have a material adverse effect on our business, results of operations, financial condition and cash flows.

We also might be unable to obtain certain supplies, product components, or equipment from our suppliers and vendors due to constraints created by COVID-19.

For instance, we have observed delays in certain suppliers’ deliveries of materials necessary for our contract manufacturers to manufacture our products.

Additionally, travel restrictions and stay-at-home orders or similar mandates of foreign and domestic governments have prevented US based employees from visiting suppliers’ facilities as part of our quality control processes.

These impacts may delay our launch of new products, adversely affect our ability to deliver customers’ orders timely or in the requested quantities and inhibit our ability to ensure the quality of supplies used in our products.

The Company has closely monitored the impact of COVID-19 (including the emergence of variants) to protect the health and safety of its employees and customers.

Business plans are being continuously updated and executed to maintain supply of the Company’s products to our customers throughout the world.

While the impacts of COVID-19 on our business have moderated, there still remains uncertainty around the pandemic.

As a result of the COVID-19 pandemic, uncertainty with respect to its economic effects has impacted not only our operating results but also the global economy.

The extent and nature of government actions to ease restrictions are varied based upon the current extent and severity of the COVID-19 pandemic within their respective countries and localities.

In the prior year, the Company saw a surge in demand for communication headsets in the education market that did not repeat at the same level in fiscal year 2022.

Also, certain retail businesses throughout the Company’s markets, particularly in certain European markets due to the spread of the Omicron subvariant BA.2, have seen continued disruption.

The Company expects the negative sales impacts caused by this disruption to continue until markets more fully re-open and consumer spending returns to normal.

The ultimate magnitude of the COVID-19 pandemic, including the extent of its impact on the Company’s business, financial position, results of operations or liquidity, cannot be reasonably estimated at this time due to the rapid development and fluidity of the situation.

The Company’s future results will be determined by the effectiveness of vaccines, rollout of vaccine boosters, the duration of the pandemic, impact of variants, its geographic spread, further business disruptions and the overall impact on the economy throughout the globe.

To protect the safety, health and well-being of employees, customers, and suppliers, the Company continues to maintain several preventive measures while also meeting the needs of global customers.

They include increased frequency of cleaning and disinfecting of facilities, social distancing practices, remote working when possible, restrictions on business travel, holding certain events virtually and limitations on visitor access to facilities.

The Company is committed to continuing to execute these plans and will remain in close contact with its supply chain to monitor future possible implications, especially on production facilities.

Company profits can suffer from interruption in its supply chain, including disruptions and price volatility in shipping products from China and Taiwan to the U.S.

and from the Company’s warehouse in Milwaukee to its customers.

The Company uses contract manufacturing facilities in the People’s Republic of China and Taiwan.

The Company is at risk of business interruptions due to natural disaster, war, disease and government intervention through tariffs or trade restrictions, which lately have become of increased concern in these areas.

Therefore, any interruptions in the supply chain for any of these reasons could directly impact the Company’s profits in a material, negative way.

Recovery of a single facility through replacement of a supplier in the event of a disaster or suspension of supply could take an estimated six to twelve months.

The Company is also at risk if trade restrictions are imposed on the Company’s products based upon country of origin.

In addition, the Company may not be able to pass along most increases in tariffs and freight charges to the Company’s customers, which would directly affect profits.

We have experienced supply chain and shipping interruptions and constraints, volatility in demand for our products caused by sudden

and significant changes in production levels by our suppliers, and disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements such as raw materials or other product components,

transportation, work force, force majeure events.

The increased cost of freight and extended transit time for our products has resulted

in backorders.

The ultimate impact of these supply chain interruptions on our business, results of operations, and cash flows remain

uncertain and could materially adversely affect our results of operations, financial condition, cash flows, prospects and the trading

prices of our common stock.

The Company’s supply chain is primarily in southern China.

Since late fiscal year 2021, the Company has experienced issues related to the availability of containers and routings to move products in a cost effective and time efficient manner.

There have also been impacts to the movement of new product introductions and costs.

The Company is monitoring the situation closely and the supply chain team has modified business plans, which include, but are not limited to:

(1) increasing the investment in inventory;

(2) being alert to potential short supply situations;

(3) assisting suppliers with acquisition of critical components;

and (4) utilizing alternative sources and/or air freight.

The latest COVID-19 resurgence resulted in another shut-down of several major ports in China, thus impacting manufacturing of our products and shipments from our suppliers.

Additionally, recently there has been increasing geopolitical tension between China and Taiwan that may affect future shipments from Taiwan-based suppliers.

The Company is at risk of lower sales due to delays in receiving and shipping products due to interruptions in its supply chain.

Any resulting price volatility will directly affect profits.

Our sales may be materially adversely impacted by COVID-19 .

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The method and timing of these meetings and the ability of our customers to make in-person sales have been altered due to stay-at-home orders and travel restrictions relating to COVID-19.

The extent to which virtual meetings and interactions continue to be used or preferred in lieu of in-person interactions may significantly change business practices for us and our customers, even as COVID-19 restrictions and safety measures subside.

This limitation on the ability of our sales personnel and our customers to maintain their customary interaction with customers and consumers may negatively affect demand for our products and have a material adverse effect on our results of operations, financial condition and cash flows.

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The inability to compete effectively against new and existing competitors could have an adverse effect on our net sales and results of operations, preventing us from achieving future growth.

If we are unable to obtain intellectual property rights and/or enforce those rights against third parties who are violating those rights, including by obtaining a favorable outcome in litigation in which we are currently engaged, our business could suffer.

If we are unable to obtain intellectual property rights and/or enforce those rights against third parties who are violating those rights, our business could suffer.

We rely on various intellectual property rights, including patents, trademarks, trade secrets and trade dress to protect our brand name, reputation, product appearance and technology.

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As a result, if we are unable to successfully protect our intellectual property rights, or resolve any conflicts effectively, our results of operations may be harmed.

In order to enforce our intellectual property rights, we recently filed complaints against certain parties alleging infringement on patents relating to our wireless audio technology.

All litigation is uncertain, and there can be no assurance that any of this litigation will be decided in our favor.

Regardless of the merits of the claims, litigation may be expensive, time-consuming and disruptive to our operations and distracting to management.

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Similarly, if we settle such legal proceedings, it may negatively affect how we operate our business.

Recently, in connection with its ongoing intellectual property enforcement program, which includes lawsuits alleging infringement of patents relating to its wireless audio technology, the Company has granted licenses covering certain Company patents.

Some complaints we have filed remain outstanding.

As all litigation is uncertain, there can be no assurance that any of this remaining or future litigation will be decided in our favor.

We may be adversely affected by the financial condition of our retailers and distributors.

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One of our customer’s accounts for a significant amount of our net sales, and the loss of, or reduced purchases from, this or other customers could have a material adverse effect on our operating results.

Our largest fiscal year 2021 customer, Ingram Micro, accounted for more than 18% and 10% of our net sales in fiscal years 2021 and 2020, respectively.

Our largest fiscal year 2022 customer, Amazon Seller Central, accounted for more than 13% and 3% of our net sales in fiscal years 2022 and 2021, respectively.

We do not have long-term contracts with any of our customers and all of our customers generally purchase from us on a purchase order basis.

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If certain customers, individually or in the aggregate, choose to no longer sell our products, to slow their rate of purchase of our products or to decrease the number of products they purchase, our results of operations would be adversely affected.

Company profits can suffer from interruption in its supply chain.

The Company uses contract manufacturing facilities in the People’s Republic of China, Taiwan and South Korea.

Therefore, any interruptions in the supply chain for any of these reasons could directly impact the Company’s profits in a material, negative way.

Recovery of a single facility through replacement of a supplier in the event of a disaster or suspension of supply could take an estimated six to twelve months.

The Company is also at risk if trade restrictions are imposed on the Company’s products based upon country of origin.

In addition, the Company may not be able to pass along most increases in tariffs and freight charges to the Company’s customers, which would directly affect profits.

Company sales and profits can suffer from disruptions and price volatility in shipping its products from China to the US and from its warehouse in Milwaukee to its customers.

We have experienced and expect to continue to experience disruptions in shipping products and volatility in cost of shipping products.

These disruptions include inability to obtain containers in a timely manner, difficulty in getting confirmation from forwarders, and delayed placement on cargo ships.

There have also been substantial increases in transit times resulting from congested ports on the west coast of the U.S.

as well as in the Chicago rail yards.

The Company uses air freight as necessary to meet customer demands.

The costs to ship product have increased considerably in the last few months and we expect this to continue.

The Company is at risk of lower sales due to delays in receiving and shipping products.

The price volatility will directly affect profits.

Our products may experience quality problems from time to time that can result in decreased sales and operating margin and harm to our reputation.

From time to time, our products may contain design and manufacturing defects.

There can be no assurance we will be able to detect and fix all defects in the hardware we sell.

Failure to do so could result in lost revenue, significant warranty and other expenses, and harm to our reputation.

We offer products that can be affected by design and manufacturing defects.

Defects can also exist in components used for our products.

Component defects could make the Company’s products unsafe and create a risk of property damage and personal injury.

There can be no assurance the Company will be able to detect and fix all issues and defects in the products it offers.

Failure to do so can result in widespread technical and performance issues affecting the Company’s products.

In addition, the Company can be exposed to product liability claims, recalls, product replacements or modifications, write-offs of inventory, property, plant and equipment, and/or intangible assets, and significant warranty and other expenses, including litigation costs and regulatory fines.

Quality problems can also adversely affect the experience for users of the Company’s products, and result in harm to the Company’s reputation, loss of competitive advantage, poor market acceptance, reduced demand for products, delay in new product introductions and lost sales.

An information systems interruption or breach in security could adversely affect us.

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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.

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 cyber-attacks targeting businesses.

Cyber-attacks are becoming more sophisticated and frequent, and in some cases have caused significant harm.

Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, customers, or others to disclose information or unwittingly provide access to systems or data.

While we devote resources to security measures to protect our systems and data, these measures cannot provide absolute security.

Changes in tax laws and unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.

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We regularly assess all of these matters to determine the adequacy of our tax provision.

If our tax strategies are ineffective or we are not in compliance with domestic and international tax laws, our financial position, operating results and cash flows could be adversely affected.

Our business, financial condition and results of operations may be adversely impacted by the effects of inflation.

Inflation has the potential to adversely affect our business, financial condition and results of operations by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers.

There have been recent inflationary cost increases in our commodities, packaging materials and transportation costs.

Other inflationary pressures could affect wages, the cost and availability of components and materials, and our ability to meet customer demand.

Inflation may further exacerbate other risk factors, including customer demand, supply chain disruptions, and risks of international operations and the recruitment and retention of talent.

During fiscal 2022, we have experienced inflationary cost increases in our commodities, packaging materials and transportation costs.

These increases have been partially mitigated by pricing actions implemented in the third quarter of the current fiscal year, as well as working with a dedicated freight forwarding partner to minimize freight rate increases.

Risks Related to our International Operations

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To the extent such actions inhibit our transactions with contract manufacturing facilities and suppliers in China, our business may be materially adversely affected.

Our international operations could be adversely impacted by Russia’s invasion of Ukraine

Financial and credit markets around the world experienced volatility following the invasion of Ukraine by Russia in February 2022.

response to the invasion, the United States, United Kingdom and European Union, along with others, imposed significant new sanctions and export controls against Russia, Russian banks and certain Russian individuals and may implement additional sanctions

or take further punitive actions in the future.

The full economic and social impact of the sanctions imposed on Russia (as well as

possible future punitive measures that may be implemented), as well as the counter measures imposed by Russia, remains uncertain.

The invasion of Ukraine by Russia and the sanctions imposed in response to this conflict have increased global economic and political uncertainty.

In accordance with Executive Order 14071 signed on April 6, 2022, the Company suspended sales into Russia.

Also, given the current humanitarian crisis in Ukraine and the population seeking refuge in other countries, sales to Ukraine have been impacted.

Neither Russia nor Ukraine constitutes a significant portion of the business – in the aggregate less than 4% of net sales for the year ended June 30, 2022, with no sales to Russia or Ukraine in the current quarter.

We are uncertain, however, of the impact it will have on our results of operations for the future.

We continue to monitor the conflict and will report on its impact as necessary as developments occur.

We may be subject to risks related to doing business in, and having counterparties based in, foreign countries.

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 currency exchange restrictions and currency fluctuations;

 war or terrorist attack;

 war, such as the invasion of Ukraine by Russia, or terrorist attack;

 local outbreak of disease, such as COVID-19;

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Our stock is subject to substantial price volatility.

Additionally, the Company, the technology industry, and the stock market as a whole have experienced extreme stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to companies'

operating performance.

Factors such as the depth and liquidity of the market for our common stock, investor perceptions of us and our business, actions by institutional shareholders, strategic actions by us, litigation, changes in accounting standards, policies, guidance, interpretations and principles, additions or departures of key personnel and our results of operations, financial performance and future prospects may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from realizing the liquidity of their shares.

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On January 28, 2021, the intra-day sales price of our common stock fluctuated between a reported low sale price of $25.00 and a reported high sales price of $127.45.

Additionally, the trading volume in shares of our common stock during the three months ended June 30, 2021 ranged from a low of 193,400 shares on May 12, 2021 to a high of 19.4 million on June 2, 2021.

Additionally, the trading volume in shares of our common stock can vary widely.

For example, during the fiscal year ended June 30, 2022, daily trading volume ranged from a low of 15,600 shares on June 24, 2022 to a high of 12.2 million on October 13, 2021.

Our market capitalization, as implied by various trading prices, has recently reflected valuations that diverge significantly from those seen prior to recent volatility and that are significantly higher than our market capitalization prior to the recent increase, and to the extent these valuations reflect trading dynamics unrelated to our financial performance or prospects, purchasers of our common stock could incur substantial losses if there are declines in market prices driven by a return to earlier valuations.

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A “short squeeze” due to a sudden increase in demand for shares of our common stock that largely exceeds supply has led to, and may continue to lead to, extreme price volatility in shares of our common stock.

Recently, securities of certain companies have experienced significant and extreme volatility in stock price due to a sudden increase in demand for stock resulting in aggregate short positions in the stock exceeding the number of shares available for purchase, forcing investors with short exposure to pay a premium to repurchase shares for delivery to share lenders.

In the recent past, securities of certain companies have experienced significant and extreme volatility in stock price due to a sudden increase in demand for stock resulting in aggregate short positions in the stock exceeding the number of shares available for purchase, forcing investors with short exposure to pay a premium to repurchase shares for delivery to share lenders.

This is known as a “short squeeze.” These short squeezes have led to the price per share of those companies to trade at a significantly inflated rate that is disconnected from the underlying value of the company.

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The Koss family, including certain members of our management, own a significant percentage of our stock, and as a result, the trading price for our shares may be depressed and they can take actions that may be adverse to the interests of our stockholders.

Michael Koss, our President and Chief Executive Officer, beneficially owned 4,175,801 shares of our common stock as of August 1, 2021, representing 46.6% of shares outstanding on such date, including shares held by a family corporation and trusts over which Mr.

Koss shares voting and dispositive power with John C.

Koss Jr., our Vice President of Sales.

Michael Koss, our President and Chief Executive Officer, beneficially owned 4,233,410 shares of our common stock as of August 1, 2022, representing 44.5% of shares outstanding on such date, including shares held by a voting trust over which Mr.

Koss holds sole voting and dispositive power.

This significant concentration of share ownership may adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in companies with a controlling stockholder group.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors