UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission File Number: 001-35465
TURTLE BEACH CORPORATION
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
44 South Broadway, 4 Floor
White Plains, New York
(Address of principal executive offices)
th
27-2767540
(I.R.S. Employer
Identification No.)
10601
(Zip Code)
(888) 496-8001
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001
Trading Symbols
HEAR
Name of each exchange on which registered
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting company
☒
☐
☐
☐
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to
previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive
officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2022 was $197,795,766.
The number of shares of Common Stock, $0.001 par value, outstanding on February 28, 2023 was 16,582,958.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report is incorporated herein by reference from the registrant’s definitive proxy statement or annual report on Form 10-K/A to be filed
with the Securities and Exchange Commission within 120 days after the close of the registrant’s fiscal year.
INDEX
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Reserved
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
EXHIBIT INDEX
SIGNATURES
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Statement Regarding Forward-Looking Disclosures
PART I
This Annual Report on Form 10-K (this “Report”) includes, and incorporates by reference, certain forward-looking statements within the meaning
of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. You should not place undue reliance on these statements. Statements that are not historical facts, including statements about our beliefs and
expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by, or that include the words “may,”
“could,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “potential,”
“continue,” and similar expressions. These forward-looking statements reflect the current expectations of Turtle Beach Corporation concerning future
events, and actual results may differ materially from current expectations or historical results. Any such forward-looking statements are subject to various
risks and uncertainties, including without limitation those discussed in the sections of this Report entitled “Business,” “Risk Factors,” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs
and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include,
among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new marketing applications,
the timing and cost of planned capital expenditures, competitive conditions, and general economic conditions. These assumptions could prove inaccurate.
Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those
contained in any forward-looking statement. In addition, even if our actual results are consistent with the forward-looking statements contained in this
Report, those results may not be indicative of results or developments in subsequent periods. Many of these factors are beyond our ability to control or
predict. Such factors include, but are not limited to, the following:
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Our ability to adjust our product pricing in response to inflation of our costs as well as the impacts of macroeconomic inflation on the
demand for our products;
The impact of competitive products, technologies and pricing and our ability to respond to the promotional pricing of our competitors;
Our ability to forecast demand for our products and to manage our supply chain to meet such demand;
Our dependence on the success and availability of third-party platforms and software to drive sales;
Transitions in video gaming console platforms and the potential impact on our business;
Our ability to adapt to new technologies and introduce new products on a timely basis;
Accuracy of estimates of our future revenues, expenses, capital requirements, and our needs for additional financing;
Continued relationships with our largest customers and the emergence of new customers;
The impact of seasonality on our business and discretionary spending by users of our products;
Global business, political, operational, financial and economic conditions;
Manufacturing capacity and/or component supply constraints and difficulties;
The scope of protection we are able to establish and maintain for intellectual property rights covering our technology;
The availability of capital under our revolving credit facility;
Cybersecurity, data security and other information technology risks;
The Company’s marketing efforts, particularly its partnerships with influencers, athletes and esports teams;
Substantial uncertainties inherent in the acceptance of existing and future products;
The difficulty of commercializing and protecting new technology;
Our ability to successfully identify acquisition opportunities that are advantageous to our business and the integration of any businesses we
acquire within our internal control over financial reporting and operations;
The continuing impacts of the pandemic, which may continue to have direct and indirect effects on our employees, customers, supply chain
and the economy and financial markets;
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Our financial performance; and
Other factors discussed under Item 1A - Risk Factors, or elsewhere in this Report.
Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange
Commission (“SEC”), we undertake no obligation to publicly update or revise any forward-looking statements after we file this Report, whether as a result
of any new information, future events or otherwise. Investors, potential investors, and other readers are urged to consider the above mentioned factors
carefully in evaluating the forward‑looking statements and are cautioned not to place undue reliance on such forward‑looking statements. Although we
believe that the expectations, reflected in the forward-looking statements are reasonable, we cannot guarantee future results or performance.
Unless the context indicates otherwise, all references in this Report to “we,” “our,” “us,” “the Company,” and “Turtle Beach” refer to Turtle Beach
Corporation and its wholly-owned subsidiaries. This Report also contains trademarks and trade names that are property of their respective owners.
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Item 1 - Business
Turtle Beach Corporation’s mission is to deliver the ultimate experience to gamers by providing high-quality, high-performance gaming accessories,
including headsets, keyboards, mice, gamepad controllers, simulation hardware, microphones, and more. For nearly 50 years, Turtle Beach has been a
pioneer and key innovator in audio technology, and today it is one of the most recognized brand names in gaming. Headquartered in White Plains, New
York, Turtle Beach was incorporated in the state of Nevada in 2010 and the Company’s stock is traded on the Nasdaq Global Market under the symbol
HEAR.
The Turtle Beach® brand has been the market share leader in console gaming headsets for 13-years running with a vast portfolio of headsets for
Xbox, PlayStation, and Nintendo consoles, as well as for personal computers (PCs) and mobile/tablet devices. Turtle Beach Corporation’s PC peripherals
brand, ROCCAT®, creates PC gaming keyboards, mice and other gaming accessories focused on the PC gaming market. And in 2021, Turtle Beach
expanded the brand beyond gaming headsets and began making game controllers and gaming flight simulation accessories. Turtle Beach also creates high-
quality USB and analog microphones for gamers, streamers, professionals, and students that embrace cutting-edge technology and design.
Gaming Accessories Business
Turtle Beach launched its first gaming headset and the first ever console gaming headset – the X51 – in 2005 and has gone on to become the leading
brand in gaming headsets, as well as a top five overall gaming accessory business in the world. The Company designs and markets a broad assortment of
gaming headsets and audio accessories for Xbox, PlayStation, and Nintendo consoles, as well as for PC and mobile/tablet devices. The Company’s recent
acquisitions expanded Turtle Beach Corporation’s reach into the global markets for PC-specific gaming headsets, keyboards, mice, digital/USB and
analog/XLR microphones for streamers and content creators, and other gaming accessories, and in 2021, the Company further expanded the Turtle Beach
brand with its first game controller and gaming simulation accessories. Turtle Beach products are distributed globally, sold at thousands of storefronts,
including major retailers such as Amazon, Argos, Best Buy, GAME, GameStop, EB Games, Media Markt, Saturn, Target, and Walmart.
The Turtle Beach brand offers gamers a broad assortment of gaming accessory products available at multiple price tiers ranging from $20 to $300+,
with most models compatible with multiple gaming platforms (i.e. – a headset is compatible with Xbox, PlayStation, Nintendo, PC, mobile, etc.). We
believe the price tiers correspond to customer profiles, beginning with entry-level gamers and progressing through casual, enthusiast, core, as well as with
professional streamers, content creators, and esports gamers. Each successive price tier incorporates higher level features, comfort, and finish. For example,
premium headsets typically includes features like larger 50mm speakers, metal headbands, memory foam, powerful amplified 3D surround sound, active
noise-cancellation, and Bluetooth connectivity. Additional features include Mic Monitoring, gaming audio presets like Bass and/or Vocal Boost, Turtle
Beach’s exclusive Superhuman Hearing® sound setting which delivers a competitive advantage, a removable or flip-to-mute microphone, Turtle Beach’s
proprietary ProSpecs™ glasses-friendly technology, and long-lasting rechargeable batteries.
Gaming consoles like the latest Xbox and PlayStation systems have evolved into full home entertainment hubs, and mobile tablet devices have
become mainstream entertainment platforms with gaming on mobile/tablet devices now representing approximately 50% of the global
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gaming market. Turtle Beach continues to evolve its product portfolio to reflect how content is consumed. While each Turtle Beach headset is designed for
a primary platform, such as a specific console or PC, nearly all can be used with multiple platforms, and are compatible with mobile/tablet devices through
a standard 3.5mm jack or Bluetooth connectivity. Additionally, Turtle Beach products are often displayed in multiple in-store sections by retailers. This
includes platform-specific gaming aisles for Xbox, PlayStation, Nintendo, PC, Virtual Reality (VR), and mobile/tablet products, as well as displayed on in-
store kiosks that allow shoppers to experience each headset’s fit, feel, and audio quality, increasing the prominence of the Turtle Beach brand in physical
retail locations, as well as online.
Industry Overview
Turtle Beach operates in a $193 billion global games and accessories market. The global gaming audience now exceeds global cinema and music
markets with over three billion active gamers worldwide. Gaming peripherals, such as headsets, keyboards, mice, microphones, controllers, and simulation
controls are estimated to be an $8.4 billion business globally with about 80% of that market in the Americas and Europe where the Company’s business is
focused.
Competitive esports is a global phenomenon where professional gamers train and compete to win prize money, partner with major brands, and
attract dedicated fans – similar to traditional professional sports. In 2022, there were over 530 million esports viewers in 2022, approximately 50% of
whom considered themselves “esports enthusiasts,” and that number is expected to increase to roughly 650 million viewers by 2025 according to an April
2022 report from Newzoo.
The console and PC gaming accessory markets are also driven by major game launches and long-running franchises that encourage players to
continually buy equipment and accessories. On Xbox, PlayStation, Nintendo Switch and PC, flagship games like Call of Duty, Destiny, Star Wars:
Battlefront, Battlefield, Grand Theft Auto, and battle royale games like Fortnite, Call of Duty Warzone, Apex Legends, and PlayerUnknown’s
Battlegrounds, are examples of major franchises that prominently feature online multiplayer modes that encourage communication and drive increased
demand for gaming headsets. Many of these established franchises launch new titles annually, leading into the holidays and as a result can cause an
additional boost to the normally strong holiday sales for gaming accessories.
Many gamers play online where a gaming headset, which includes a microphone, is required because it allows players to communicate with each
other in real-time, provides a more immersive experience, and delivers a competitive advantage.
Console Headset Market
In 2022, Turtle Beach was the leading console gaming headset manufacturer in the U.S. and other major console markets. Turtle Beach has achieved
these global market shares by delivering high-quality products that often include first-to-market innovations, robust features, superior sound, unmatched
comfort, and top customer support – all key factors that consumers seek when shopping for a gaming headset.
The global market for console gaming headsets, in which Turtle Beach has been the market leader for the past 13 years, is estimated to be
approximately $1.4 billion. PlayStation and Xbox consoles continue to be dominant gaming platforms in North America and Europe for games that drive
headset usage. Consistent with a historical pattern of major new console launches every 7-8 years, Microsoft and Sony launched their latest consoles, Xbox
Series X|S and PlayStation 5, ahead of the 2020 holiday season, and in 2021/2022 demand for the latest Xbox and PlayStation consoles exceeded the
available supply for consumers to purchase. In 2023, the demand for gaming consoles is expected to improve as additional supplies are available, which is
expected to help the overall console market reach single digit percentage growth.
Nintendo has sold over 122.5 million units of its highly popular Nintendo Switch since the platform's release in early 2017. Nintendo continues
adding and expanding its library of games, including an increased number of multiplayer chat-enabled games. Nintendo also sells the Nintendo Switch
Lite, a follow-on product that offers gamers the hand-held only version of their popular gaming console.
PC Accessories Market
The market for PC gaming headsets, mice, and keyboards is estimated to be approximately $3.2 billion. PC gaming continues to be a main gaming
platform in the U.S. and internationally, similarly driven by popular AAA game launches, by popular PC-specific esports leagues, teams, and players,
content creators, and influencers, and with the introduction of cross-platform play – where PC gamers can play online against other gamers playing the
same game on an Xbox, PlayStation, or Nintendo Switch. While most games are available on multiple platforms, gaming on PC offers advantages
including improved graphics, increased speed and precision of mouse/keyboard controls, and the ability for deeper customization. Gaming mice and
keyboards are engineered to provide gamers with high-end performance and a superior gaming experience through features such as fast key and button
response times, improved materials and build quality, comfortable ergonomic designs, programmable keys and buttons, and software suites to customize
and control devices and settings.
PC gaming mice come in a variety of different ergonomic shapes and sizes, are available in both wired and wireless models, offer different sensor
options (optical or laser) and responsiveness, and often feature integrated RGB LED lighting and software to unify the lighting
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with other devices for a visually consistent PC gaming appearance. Similarly, PC gaming keyboards often deliver a competitive advantage by offering
options for ultra-responsive mechanical and optical key switches that feel and sound different, as well as offer customizable lighting.
Our PC gaming headsets, keyboards, and mice span price tiers ranging from low-to-high for entry-level to professional gamers with each successive
price tier adding features and build quality. We seek to infuse differentiation and innovation into our PC products, including our own design for keyboard
and mouse switches, innovative RGB LED lighting, and extensive ergonomic design testing and modeling.
Other Gaming Accessories Market
The market for third-party game controllers is estimated to be approximately $0.5 billion, with the same retail footprint and consumer base that
Turtle Beach gaming headsets compete in. Turtle Beach entered the controller market in 2021 with the Recon Controller, a wired controller for Xbox and
PC that added Turtle Beach-exclusive audio features like Superhuman Hearing and extra buttons/functionality to a proven ergonomic controller design. In
2022, Turtle Beach expanded its controller portfolio with the launch of the REACT-R™ Controller which offers many of the same features as the Recon
Controller, but for a lower price. Additionally, in 2022 Turtle Beach introduced two mobile-focused game controllers – the Recon Cloud Hybrid Controller,
and the Atom Controller.
PC and console flight simulation hardware adds another $0.5 billion to Turtle Beach’s total available market with opportunity for new products. In
2021, Turtle Beach launched the VelocityOne™ Flight Universal Control System for Xbox and PC, and in 2022 the Company expanded the VelocityOne™
line with the VelocityOne™ Rudder pedals and VelocityOne™ Stand, which perfectly pair with the VelocityOne™ Flight control system for the complete,
most immersive flight simulation experience on the market. Turtle Beach also launched the VelocityOne™ Flightstick, which is a single stick joystick
controller for air and space flight combat games. In 2023, Turtle Beach plans to further grow its gaming simulation portfolio with new VelocityOne™
products in flight simulation and other adjacent gaming simulation categories.
Business Strategy
We intend to further build upon Turtle Beach’s brand awareness, innovation, superior audio technology and high-quality products, as well as further
promote and expand the brand in certain geographic regions to increase sales and profitability. The Company's strategy focuses on the following:
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Continue to Advance Our Turtle Beach Brand. We believe that Turtle Beach’s reputation among gamers is a competitive advantage, and that our
success is attributable to our emphasis on creating the highest quality, most innovative products and leveraging our extensive global distribution
footprint to deliver these products to more gamers around the world.
We continue to invest the resources necessary to maintain and expand our capability to manufacture multiple product lines that incorporate the latest
technologies, resulting in more products to serve more price tiers. We will continue to advance the best-selling Turtle Beach gaming audio business
forward with new headsets like the Stealth 700 Gen 2 MAX and Stealth Pro and will continue our expansion into the game controllers and gaming
simulation accessory markets with products like the Atom Controller and VelocityOne Flightstick.
Grow Revenue in New Markets. We intend to increase our available markets by continuing to develop internally, or through partnerships or
acquisitions, products in new gaming accessory categories like game controllers and gaming simulation. As a result, for the first time, almost 25%
of Turtle Beach revenues in 2022 were derived from categories outside console gaming headsets – the market Turtle Beach has led for the past 13
years.
Targeted Geographic Expansion. We will continue efforts for further growth, specifically in key Asian and other select markets as the Company
looks to deliver Turtle Beach products to an even wider audience of global gamers in 2023 and beyond.
Sustainable Products. Our investment in sustainable products is an ongoing and continued focus for Turtle Beach Corporation. In 2022, Turtle
Beach transitioned to using sustainably sourced paper packaging materials for the majority of gaming headsets and eliminated most plastics from
packaging. In March 2023, we launched the Stealth 600 Gen 2 MAX Teal & Pink colorways as our first carbon neutral products, as well as
partnered with Climate Impact Partners’ Million Mangroves program, where we contribute to helping develop new mangrove forests which help
combat carbon.
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To maintain and/or improve our competitive position in our markets we are focused on the following:
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continuing to deliver innovative, high quality gaming headsets that provide superior game and chat audio, premium comfort, and advanced
features designed to help gamers have a deeply immersive experience;
continuing to deliver innovations in speed, precision, RGB LED lighting and form factor in PC gaming keyboards, mice, and other gaming
categories that can leverage those capabilities;
continuing to expand our product lines in game controllers and gaming simulation accessories, reaching into additional categories including
mobile controllers and racing simulation products;
maintaining our position at key retailers with products available in multiple locations throughout retailers;
continuing investments in our ecommerce platforms to drive profitable growth by expanding customer reach, reducing cost-to-serve, and creating
differentiated customer experiences;
maintaining our strategic relationships, and continuing investment in partnerships, which we believe provide the Turtle Beach brand a larger
presence with consumers and create opportunities for retailers to carry our products; and
leveraging high-quality technical support and delivering customer service experience that exceed consumer expectations and develop brand
loyalty.
Intellectual Property
We operate in an industry where innovation, investment in new ideas, and protection of resulting intellectual property rights are critical to success.
With a nearly 50-year history as pioneers in PC and gaming audio, Turtle Beach has a substantial base of IP assets with over 400 patents on current and
future product development.
As a third-party gaming accessory company, certain technology used in gaming consoles requires a license to enable products to connect to that
platform. While PlayStation does not require any license to produce headsets that can connect to their platforms, wireless connections on the Xbox
platforms require the purchase of proprietary chips to integrate into the locked chat audio. The Company believes it currently has the necessary licenses, as
well as the ability to obtain the necessary licenses, to produce compatible products.
Supply Chain and Operations
We have a global network of suppliers that manufacture products to meet the quality standards sought by our customers and our cost objectives. We
have worked closely with component, manufacturing, and global logistic partners to build a supply chain that we consider dependable, scalable, and
efficient to provide high-quality, reliable products employing leading cost management practices. The use of outsourced manufacturing facilities is
designed to take advantage of specific expertise and allow for flexibility and scalability to respond to both seasonality and changing demands for our
products.
We have experienced and may continue to experience increased freight costs and component availability challenges. Further, market conditions have
significantly increased the lead time on many product components, causing us to purchase components earlier than normal to meet forecasted demand,
which, in some cases, led to excess inventories of certain components ordered with long lead times ahead of shifting demand. We expect to continue to
experience challenges impacting our supply chain and logistics operations. As a result, we continue to take proactive steps to limit the impact of these
challenges and are working closely with our manufacturing and freight providers to reduce costs.
We believe we have strong, long-term relationships with our suppliers and that, subject to the discussion in Item 1A,“Risk Factors” and Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” we expect to continue to be
able to obtain a sufficient supply of quality products on satisfactory terms.
Retail Distribution
Our products are sold in over 40 countries by retailers such as Amazon, Argos, Best Buy, GAME, GameStop, EB Games, Media Markt, Saturn,
Target, and Walmart. We often have a broader assortment and more shelf space than competitors at video game and electronics retailers such as Best Buy
and GameStop, which we believe reinforces the brand’s authenticity with gaming enthusiasts, and our presence in mass channel retailers such as Walmart
and Target enable the brand to reach a wider audience of casual gamers. Our established presence on Amazon and other online retail sites, and positive
consumer product ratings on those sites, increases the search visibility of our products and helps to influence both online and in-store sales.
Turtle Beach Europe Limited (“TB Europe”), located in the U.K., serves as a primary sales office for the European market and has strengthened our
international operations with support for sales, marketing, customer service and distribution.
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Our websites, TurtleBeach.com and ROCCAT.com are important focal points for our product sales and marketing efforts, serving as destinations for
consumers to learn about the brands and products, and as a place to maintain ongoing interactivity. Information contained on our websites is not
incorporated by reference herein unless specifically stated therein.
Customers
Our business customer base is comprised primarily of large retailers and distributors, both domestic and international. In 2022, net sales to our major
market channels consisted of $148.7 million to North American retail customers, $58.1 million to European customers, $7.3 million to North American
distributors and $26.1 million to other customers.
Our five largest individual customers accounted for approximately 67% of our gross sales in 2022, 66% of our gross sales in 2021, and 67% of our
gross sales in 2020. During 2022, our four largest customers - Walmart, Target, Amazon, Best Buy - each accounted for between 11% to 23% of our
consolidated net sales.
Seasonality
Our business is seasonal with a significant portion of sales and profits typically occurring around the holiday period. Historically, more than 45% of
revenues are generated during the period from September through December as new products are introduced and consumers engage in holiday shopping. In
addition, launches of major new online multiplayer games, and specific retailer purchasing behavior, can drive significant revenue shifts between months
and quarters in a given year. In the past few years, normal seasonal patterns have been significantly changed due to pandemic-driven shifts in consumer
demand.
Human Capital
As of December 31, 2022, Turtle Beach had 269 employees, of which 245 were full-time salaried employees, with the remaining being contracted
employees.
Corporate Culture
We are focused on creating a corporate culture of integrity and respect, with the goal of working together to drive our business to be creative,
innovative, and competitive. To achieve these objectives, we have adopted and regularly communicate to our employees the following core values:
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Leadership: We take initiative and lead in our respective roles. We lead by example.
Teamwork: We work as a team and value diversity. We win together and lose together.
Excellence: We take pride in our work and seek excellence in everything we do.
Integrity: We are honest, direct, and transparent in all interactions.
Innovation: We innovate to deliver better products and constantly improve every aspect of our company.
Execution: We do what we say we will do and take personal accountability for our commitments.
We seek to create a highly collaborative culture in which employees feel a sense of pride that their input is sought after and valued. We believe
that our culture is a long-term competitive advantage for us, fuels our ability to execute and is a critical underpinning of our employee talent strategy.
We are further committed to developing our employees professionally by leveraging our Intellectual Capital (IC) process. The IC process includes
constructive reviews and various talent and leadership development initiatives conducted by the management team and provided throughout an
employee’s career.
We conduct anonymous employee culture surveys annually to monitor employee engagement and satisfaction, while identifying matters that need
to be addressed and, in 2022, exceeded our employee satisfaction goal across the Company. While we take pride in our strong employee satisfaction, we
are always seeking to ensure our employees feel valued and proud to be a part of the Turtle Beach team.
Diversity and Inclusion
We have always believed diversity in the workplace creates an environment where different perspectives lead to improved creativity, productivity,
team member engagement, and overall employee happiness. To embrace diversity, we:
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Implemented and tracked diversity metrics through our recruiting process; and
Included diversity statements in all job postings on our Turtle Beach Careers website and social media channels, such as LinkedIn.
Compensation and Benefits
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We provide competitive compensation and benefits programs for our employees. In addition to salaries, these programs (which vary by employee
level and by the country where the employees are located) include, among other items, bonuses, equity-based compensation awards, retirement plans,
healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, advocacy resources, flexible work schedules and
employee assistance programs.
Available Information
We make available free of charge on or through our corporate website, http://corp.turtlebeach.com, our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and all amendments to those filings as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Information contained on our website is not
incorporated by reference unless specifically stated therein.
In addition, the SEC maintains a website that contains reports, proxy statements, and other information about issuers, such as Turtle Beach, who file
electronically within the SEC. The address of the website is www.sec.gov.
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Item 1A - Risk Factors
Set forth below is a summary of certain material risks related to an investment in our securities, which should be considered carefully in evaluating
such an investment. Our business, financial condition, operating results and cash flows can be affected by a number of factors, whether currently known or
unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual results of
operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. Any of these
factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, results of operations, cash flows and
common stock price. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business
operations.
These risk factors may be important to understanding any statement in this Form 10-K or elsewhere. The following information should be read in
conjunction with our financial statements and related notes in Part II, Item 8, “Financial Statements and Supplementary Data” and Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report.
Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial
performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results
or trends in future periods. Please also see “Statement Regarding Forward-Looking Disclosures” in the section immediately preceding Item 1 of this
Report.
Risks Related to Our Operations
Our business has and continues to be adversely impacted by inflationary pressures and potential recession concerns.
We are exposed to inflationary pressures including higher labor-related costs and increases in the costs of the goods and services we purchase as
part of the manufacture and distribution of our products and in our operations generally. Since 2021, global supply chain constraints and the continuing
effects of the COVID-19 pandemic (including government measures adopted in response thereto) have resulted in heightened inflationary cost pressures,
and these pressures continued to impact us throughout 2022. Such inflationary pressures have also been and could continue to be exacerbated by higher oil
prices, geopolitical turmoil (including the ongoing conflict in Ukraine), increased logistics costs and economic policy actions and could lead to a
recessionary environment. As interest rates rise to address inflation, such increases have led to, and could lead to further increases in our borrowing costs
over time.
Inflationary pressures can also have a negative impact on demand for the products we sell. Reduced or delayed discretionary spending by
consumers, specifically for consumer electronic goods, in response to inflationary pressures has and could continue to reduce demand for our products,
resulting in reduced sales. Our inability to adequately increase prices to offset increased costs associated with such inflationary pressures, or otherwise
mitigate their impact, will increase our costs of doing business and could further reduce our margins and profitability. In 2022, reduced margins and
profitability stemming from inflationary pressures were considered triggering events and led to interim goodwill and long-lived asset quantitative
impairment tests. If such impacts are prolonged or substantial, they could necessitate similar impairment tests in the future or otherwise have a material
negative effect on our results of operations.
Our brands face significant competition from other consumer electronics companies and this competition could have a material adverse effect on our
financial condition and results of operations.
We compete with other producers of gaming accessories, including video game console manufacturers. Our competitors may undertake more
extensive marketing campaigns, adopt more aggressive pricing policies, or develop more commercially successful products for the PC and video game
platforms than we do. In addition, competitors with large product lines and popular products, in particular the video game console manufacturers, typically
have greater leverage with retailers, distributors and other customers, who may be willing to promote products with less consumer appeal in return for
access to those competitors’ more popular products.
In the event that a competitor reduces prices, we could be forced to respond by lowering our prices to remain competitive. If we are forced to
lower prices, we may be required to “price protect” products that remain unsold in our customers’ inventories at the time of the price reduction. Price
protection results in our issuing a credit to our customers in the amount of the price reduction for each unsold unit in that customer’s inventory. Our price
protection policies, which are customary in the industry, can have a major impact on our profitability.
The manufacture, supply and shipment of our products are subject to supply chain and logistics risks that could adversely impact our financial results.
We face a number of risks related to supply chain management and logistics with respect to our products. We experienced, and may in the future
continue to experience, supply or labor shortages or other disruptions to our supply chain or logistics, which could result in shipping delays and increased
costs, each of which could negatively impact our results, operations, product development, and sales. The extent and
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duration of the impact of these challenges are subject to numerous factors, including the continuing impact of the COVID-19 pandemic, behavioral
changes, wage and price costs, adoption of new or revised regulations, and broader macroeconomic conditions.
We have experienced supply chain disruptions that resulted in significant cost increases for commodities and components used in our products,
as well as component shortages that have negatively affected our sales and results of operations. For example, the market shortage of semiconductors that
persisted during 2020 and 2021 caused disruptions, from both a supply and pricing standpoint. As discussed above, recent inflationary pressures have also
been exacerbated by the lower availability of, and increased prices for, freight and logistics, including air, sea, and ground freight. We may not be able to
pass along these price increases to our customers. While we have taken and continue to take measures to implement cost saving initiatives and procure and
maintain levels of inventory to prioritize product availability amidst global supply chain and logistical challenges, including by working closely with our
suppliers, there can be no assurance that we will be able to continue to do so. Accordingly, any future delays, disruptions, and supply and pricing risks, such
as the ongoing supply chain challenges and disruptions that we expect to continue during 2023, could affect our ability to meet customer demand for our
products, which could have an adverse effect on our business, results of operations and financial condition.
The manufacture, supply and shipment of our products are dependent upon a limited number of third parties, and our success is dependent upon the
ability of these parties to manufacture, supply and ship sufficient quantities of our products to us in a timely fashion, as well as the continued viability
and financial stability of these third parties. In addition, many of our products use components with long order lead times and constrained supply. Any
disruption in supply of these components could materially impact the ability of our third-party manufacturing partners to produce our products.
We rely on third parties to manufacture and manage the logistics of transporting and distributing our products, which subjects us to a number of
risks that have been exacerbated as a result of the ongoing supply chain issues that originated during the COVID-19 pandemic. Our manufacturers’ and
suppliers’ ability to supply products to us is also subject to a number of risks, including the unavailability of raw materials or components, their financial
instability, the destruction of their facilities, work stoppages and any future public health crisis. Any shortage of raw materials or components or an inability
to control costs associated with manufacturing could increase our costs or impair our ability to ship orders in a timely and cost-efficient manner. As a result,
we could experience cancellations of orders, refusal to accept deliveries or a reduction in our prices and margins, any of which could harm our financial
performance and results of operations.
We could be negatively affected if we are not able to engage third parties with the necessary capabilities or capacity on reasonable terms, or if those
we engage with fail to meet their obligations (whether due to financial difficulties, manufacturing constraints, or other reasons). Moreover, there can be no
assurance that such manufacturers and suppliers will not refuse to supply us at prices we deem acceptable, independently market their own competing
products in the future, or otherwise discontinue their relationships with us. Our failure to maintain these existing manufacturing and supplier relationships,
or to establish new relationships on similar terms in the future, could have a material adverse effect on our business, results of operations, financial
condition and liquidity.
In particular, certain of our products have a number of components and subassemblies produced by outside suppliers. In addition, for certain of
these items, we qualify only a single source of supply with long lead times, which can magnify the risk of shortages or result in excess supply or decrease
our ability to negotiate price with our suppliers. Also, if we experience quality problems with suppliers, then our production schedules could be
significantly delayed or costs significantly increased. Each of these factors could have an adverse effect on our business, liquidity, results of operations and
financial position.
In addition, the ongoing effectiveness of our supply chain is dependent on the timely performance of services by third parties shipping products
and materials to and from our warehouse facilities and other locations. If we encounter problems with these shipments, our ability to meet retailer
expectations, manage inventory, complete sales and achieve objectives for operating efficiencies could be materially adversely affected and we may be
required to incur materially higher costs for shipping, including air freight. We have experienced some of these problems in the past and we cannot assure
you that we will not experience similar problems in the future.
The widespread outbreak of an illness, communicable disease, or any other public health crisis could adversely affect our business, results of
operations, and financial condition.
We could be negatively impacted by the widespread outbreak of an illness, communicable disease, or any other public health crisis that results in
economic or trade disruptions, including the disruption of global supply chains. The COVID-19 pandemic negatively impacted the economy on a global,
national, and local level, disrupted global supply chains, and created volatility and disruption of financial markets. Responses from U.S. and international
governmental authorities and companies to reduce the spread of COVID-19 affected economic activity through various containment measures including,
among others, restrictions on retail outlets, business closures, work stoppages, quarantine and work-from-home guidelines, limiting capacity at public
spaces and events, vaccination requirements, or restrictions of global and regional travel. Another outbreak of an illness, a communicable disease, or any
other public health crisis, and any resulting impacts, such as an extended
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period of global supply chain and/or economic disruption, labor shortages, or government-mandated actions in response to such public health crisis could
materially affect our business, results of operations, access to sources of liquidity, and financial condition.
We depend upon the success and availability of third-party gaming platforms and the release and availability of successful game titles to drive sales of
our gaming accessories.
The performance of our gaming accessories business is affected by the continued success of the PC gaming market and third-party gaming
platforms, such as Microsoft’s Xbox consoles and Sony’s PlayStation consoles, as well as video games developed by such manufacturers and other third-
party publishers. Our business could suffer if any of these parties fail to continue to drive the success of these platforms, develop new or enhanced video
game platforms, develop popular game and entertainment titles for current or future generation platforms or produce and timely release sufficient quantities
of such consoles. Further, if a platform is withdrawn from the market or fails to sell, we may be forced to liquidate inventories relating to that platform or
accept returns resulting in significant losses.
The industries in which we operate are subject to competition in an environment of rapid technological change, and if we do not adapt to, and
appropriately allocate our resources among, emerging technologies, our revenues could be negatively affected.
We must make substantial product development and other investments to align our product portfolio and development efforts in response to
market changes in the gaming industry. We must anticipate and adapt our products to emerging technologies in order to keep those products competitive.
When we choose to incorporate a new technology into our products or to develop a product for a new platform or operating system, we are often required
to make a substantial investment prior to the introduction of the product. If we invest in the development of a new technology or a product for a new
platform that does not achieve significant commercial success, our revenues from those products likely will be lower than anticipated and may not cover
our costs. Further, our competitors may develop or adapt to an emerging technology more quickly or effectively than we do, creating products that are
technologically superior to ours, more appealing to consumers, or both.
New and emerging technologies and alternate platforms for gaming, such as mobile devices and virtual reality devices, could make our products,
generally designed for existing console and PC gaming platforms less attractive or, in time, obsolete, which could require us to transition our business
model, such as by developing products for other gaming platforms.
There are numerous steps required to develop a product from conception to commercial introduction and to ensure timely shipment to retail
customers, including designing, sourcing and testing the electronic components, receiving approval of hardware and other third-party licensors, factory
availability and manufacturing and designing the graphics and packaging. Any difficulties or delays in the product development process will likely result in
delays in the contemplated product introduction schedule. It is common in new product introductions or product updates to encounter technical and other
difficulties affecting manufacturing efficiency and, at times, the ability to manufacture the product at all. Although these difficulties can be corrected or
improved over time with continued manufacturing experience and engineering efforts, if one or more aspects necessary for the introduction of products are
not completed as scheduled, or if technical difficulties take longer than anticipated to overcome, the product introductions will be delayed, or in some cases
may be terminated. No assurances can be given that our products will be introduced in a timely fashion, and if new products are delayed, our sales and
revenue growth may be limited or impaired.
A significant portion of our revenue is derived from a few large customers, and the loss of any such customer, or a significant reduction in purchases
by such customer, could have a material adverse effect on our business, financial condition and results of operations.
During 2022, our three largest retail customers accounted for approximately 51% of our gross sales in the aggregate. The loss of, or financial
difficulties experienced by, any of these or any of our other significant customers, including as a result of the bankruptcy of a customer, could have a
material adverse effect on our business, results of operations, financial condition and liquidity. We do not have long-term agreements with these or other
significant customers and our agreements with these customers do not require them to purchase any specific amount of products. Many of our customers
generally purchase from us on a purchase order basis. As a result, agreements with respect to pricing, returns, cooperative advertising or special
promotions, among other things, are subject to periodic negotiation with each customer. No assurance can be given that these or other customers will
continue to do business with us or that they will maintain their historical levels of business. In addition, the uncertainty of product orders can make it
difficult to forecast our sales and allocate our resources in a manner consistent with actual sales, and our expense levels are based in part on our
expectations of future sales. If our expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for
sales shortfalls or ensure adequate product supply to meet customer demand. In addition, financial difficulties experienced by a significant customer could
increase our exposure to uncollectible receivables and the risk that losses from uncollected receivables exceed the reserves we have set aside in anticipation
of this risk or limit our ability to continue to do business with such customers.
If our marketing efforts do not effectively raise the recognition and reputation of our brands, we may not be able to successfully implement our gaming
accessory growth strategy.
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We believe that our ability to extend the recognition and favorable perception of our Turtle Beach and ROCCAT brands is critical to implement
our gaming accessory growth strategy, which includes maintaining our strong position in console gaming headsets and building our brand recognition and
product appeal in PC gaming headsets, keyboards, and mice as well as in additional new categories over time. These efforts cause us to incur significant
costs in marketing; however, these expenditures may not result in an increase in net sales that is sufficient to cover such costs.
If we fail to build and maintain our brands, or if we incur significant expenses in an unsuccessful attempt to build and maintain our brands, our
business and ability to implement our growth strategy may be harmed.
Turtle Beach relies on its partnerships with influencers, athletes and esports teams to expand our market and promote our products, and our marketing
and promotion partners may not perform to our expectations.
Relationships with new and established influencers, athletes and esports teams have been, and will continue to be, important to our success. We
rely on these partners to assist us in generating increased acceptance and use of our product offerings. We have established a number of these relationships,
and our growth depends in part on establishing new relationships and maintaining existing ones. Certain partners may not view their relationships with us
as significant to their own businesses, and they may reassess their commitment to us or decide to partner with our competitors in the future. We cannot
guarantee that any partner will perform their obligations as agreed or that we would be able to specifically enforce any agreement with them. If any partner
does not perform consistent with our agreements, we may be subject to negative or adverse publicity and other reputational risks, including the risk of
unfavorable perception on social media or other platforms. Additionally, our failure to maintain and expand these relationships may adversely impact our
future revenue.
Our net sales and operating income fluctuate on a seasonal basis and decreases in sales or margins during peak seasons could have a disproportionate
effect on our overall financial condition and results of operations.
A significant portion of our annual revenues are generated during the holiday season between September and December. If we do not accurately
forecast demand for products, we could incur additional costs or experience manufacturing delays. Any shortfall in net sales during this period would cause
our annual results of operations to suffer significantly.
Demand for our products depends on many factors such as consumer preferences and the introduction or adoption of game platforms and related
content and can be difficult to forecast. If we misjudge the demand for our products, we could face the following problems in our operations, each of which
could harm our operating results:
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If our forecasts of demand for products are too high, we may accumulate excess inventories of products, which could lead to markdown
allowances or write-offs affecting some or all of such excess inventories. We may also have to adjust the prices of our existing products to
reduce such excess inventories;
If demand for specific products increases beyond what we forecast, our suppliers and third-party manufacturers may not be able to increase
production or obtain required components quickly enough to meet the demand. Our failure to meet market demand may lead to missed
opportunities to increase our base of gamers, damage our relationships with retailers or harm our business; and
The on-going transition to new console platforms increases the likelihood that we could fail to accurately forecast demand for headsets,
microphones, simulation hardware, and other gaming accessories for these platforms.
Our results of operations and financial condition may be adversely affected by global business, political, operational, financial and economic
conditions.
We face business, political, operational, financial and economic risks inherent in international business, many of which are beyond our control,
including:
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higher product component costs and higher transportation and logistics costs driven by increasing rates of inflation globally;
changes in consumer discretionary spending and preferences driven by increasing rates of inflation;
trade restrictions, higher tariffs, currency fluctuations or the imposition of additional regulations relating to import or export of our products,
especially in China, where many of our Turtle Beach products are manufactured, which could force us to seek alternate manufacturing
sources or increase our costs;
difficulties obtaining domestic and foreign export, import and other governmental approvals, permits and licenses, and compliance with
foreign laws, which could halt, interrupt or delay our operations if we cannot obtain such approvals, permits and licenses;
compliance with anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, the U.K. Bribery Act 2010, the European
Union Anti-Corruption Act and other similar laws, or non-compliance with such laws, which could subject us to trade sanctions administered
by the Office of Foreign Assets Control, the U.S. Department of Commerce and equivalent foreign entities;
difficulties encountered by our international distributors or us in staffing and managing foreign operations or international sales, including
higher labor costs and tightening of the overall labor markets;
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compliance by third-party suppliers, manufacturers and their subcontractors with our Manufacturer Code of Conduct and other applicable
compliance policies;
transportation delays and difficulties of managing international distribution channels;
longer payment cycles for, and greater difficulty collecting, accounts receivable;
political and economic instability, including wars (such as the ongoing conflict in Ukraine), terrorism, political unrest, boycotts, curtailment
of trade and other business restrictions, any of which could materially and adversely affect our net sales and results of operations;
public health issues (such as a pandemic); and
natural disasters or adverse or extreme weather conditions.
Any of these factors could reduce our net sales, decrease our gross margins, increase our expenses or reduce our profitability. Should we establish our
own operations in international territories where we currently rely on distributors, we will become subject to greater risks associated with operating outside
of the United States.
The electronics industry in general has historically been characterized by a high degree of volatility and is subject to substantial and unpredictable
variations resulting from changing business cycles. Our operating results will be subject to fluctuations based on general economic conditions, and in
particular conditions that impact discretionary consumer spending. Downturns in the worldwide economy could adversely affect our business. We have and
could continue to experience a reduction in demand for our products or a lengthening of consumer replacement schedules for our products. Sustained
reduced demand for these products could result in further decreases in our average selling prices and product sales. A deterioration of current conditions in
worldwide credit markets could limit our ability to obtain financing. A lack of available credit in financial markets may adversely affect the ability of our
commercial customers to finance purchases and operations and could result in a decrease in orders or spending for our products as well as create supplier
disruptions. We are unable to predict the likely duration and severity of any adverse economic conditions and disruptions in financial markets and the
effects they will have on our business and its financial condition. Difficult economic conditions may also result in a higher rate of losses on our accounts
receivable due to defaults or bankruptcies. As a result, a downturn in the worldwide economy could have a material adverse effect on our business, results
of operations or financial condition.
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate
financial statements or comply with applicable laws and regulations could be adversely impacted.
A material weakness is a deficiency or combination of deficiencies in our internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of our consolidated financial statements would not be prevented or detected on a timely basis. If we experience a
material weakness or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our
financial condition or results of operations. Any failure to maintain effective disclosure controls and internal control over financial reporting could have an
adverse effect on our business, financial condition, and results of operations.
In connection with preparing the financial statements as of and for the year ended December 31, 2022, we identified a material weakness in our
internal control related to the proper design and implementation of certain controls over our income tax provision and management’s review of the income
tax provision. The material weakness in internal controls over the tax provision did not result in any material misstatements in these financial statements or
omissions in our previously reported financial statements.
Although we intend to take remedial actions in response to this control deficiency, there is no assurance that we will be able to prevent a material
error or future control deficiencies (including material weaknesses) from occurring. Our inability to assert that our internal control over financial reporting
is effective could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our
common stock to decline, and we may be subject to investigation, litigation, increases in insurance premiums or regulatory fines and sanctions.
Our business could be negatively affected as a result of actions of activist stockholders.
While we strive to maintain constructive communications with our stockholders, activist stockholders have and may, from time to time, engage in
proxy solicitations or advance shareholder proposals, or otherwise attempt to effect changes and assert influence on our Board and management. Perceived
uncertainties as to the future direction or governance of the Company may cause concern to our current or potential regulators, vendors or strategic
partners, or make it more difficult to execute on our strategy or to attract and retain qualified personnel, which may have a material impact on our business
and operating results.
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Risks Related to our Intellectual Property and Other Legal Matters
Our competitive position will be adversely damaged if our products are found to infringe on the intellectual property rights of others.
Other companies and our competitors may currently own or obtain patents or other proprietary rights that might prevent, limit or interfere with
our ability to make, use or sell our products. Although we do not believe that our products infringe the proprietary rights of any third parties, we have
received notices of alleged infringement in the past and there can be no assurance that infringement or other legal claims will not be asserted against us in
the future or that we will not be found to infringe the intellectual property rights of others. The electronics industry is characterized by vigorous protection
and pursuit of intellectual property rights and positions, resulting in significant and often protracted and expensive litigation. In the event of a successful
claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results could be adversely
affected. Any litigation or claims, whether or not valid, could result in substantial costs and diversion of our resources. An adverse result from intellectual
property litigation could cause us to do one or more of the following:
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cease selling, incorporating or using products or services that incorporate the challenged intellectual property;
obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all;
and/or
redesign products or services that incorporate the disputed technology.
If we take any of the foregoing actions, we could face substantial costs and shipment delays and our business could be seriously harmed. Although we
carry general liability insurance, our insurance may not cover claims of this type or may be inadequate to insure us for all liability that may be imposed.
In addition, it is possible that our customers or end users may seek indemnity from us in the event that our products are found or alleged to infringe
the intellectual property rights of others. Any such claim for indemnity could result in substantial costs to us that could adversely impact our operating
results.
If we are unable to obtain and maintain 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 Turtle Beach brand
name, reputation, product appearance, and technology. Although we have entered into confidentiality and invention assignment agreements with our
employees and contractors, and nondisclosure agreements with selected parties with whom we conduct business to limit access to and disclosure of our
proprietary information, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent
misappropriation of that intellectual property or deter independent third-party development of similar technologies. Monitoring the unauthorized use of
proprietary technology and trademarks is costly, and any dispute or other litigation, regardless of outcome, may be costly and time consuming and may
divert the attention of management and key personnel from our business operations. The steps taken by us may not prevent unauthorized use of proprietary
technology or trademarks. Many features of our products are not protected by patents; we may not have the legal right to prevent others from reverse
engineering or otherwise copying and using these features in competitive products. If we fail to protect or to enforce our intellectual property rights
successfully, our competitive position could suffer, which could adversely affect our financial results.
We are susceptible to counterfeiting of our products, which may harm our reputation for producing high-quality products and force us to incur
expenses in enforcing our intellectual property rights. Such claims and lawsuits can be expensive to resolve, require substantial management time and
resources, and may not provide a satisfactory or timely result, any of which may harm our results of operations. As some of our products are sold
internationally, we are also dependent on the laws of many countries to protect and enforce our intellectual property rights. These laws may not protect
intellectual property rights to the same extent or in the same manner as the laws of the United States.
Further, we are party to licenses that grant us rights to intellectual property, including trademarks, which are necessary or useful to our business.
One or more of our licensors may allege that we have breached our license agreement with them, and seek to terminate our license. If successful, this could
result in our loss of the right to use the licensed intellectual property, which could adversely affect our ability to commercialize our technologies or
products, as well as harm our competitive business position and our business prospects.
Our success also depends in part on our ability to obtain and enforce intellectual property protection of our technology, particularly our patents.
There is no guarantee any patent will be granted on any patent application that we have filed or may file. Claims allowed from existing or pending patents
may not be of sufficient scope or strength to protect the economic value of our technologies. Further, any patent that we may obtain will expire at some
point, and it is possible that it may be challenged, invalidated or circumvented even prior to expiration.
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We may initiate claims or litigation against third parties in the future for infringement of our proprietary rights or to determine the scope and
validity of our proprietary rights or the proprietary rights of our competitors. These claims could result in costly litigation and divert the efforts of our
technical and management personnel. As a result, our operating results could be adversely affected and our financial condition could be negatively
impacted.
We are dependent upon third-party intellectual property to manufacture some of our products.
The performance of certain technology used in new generation consoles, such as integrated voice and chat audio from the Xbox
platforms are improved by a licensed component to ensure compatibility with our products.
While we currently believe that we have the necessary licenses, or can obtain the necessary licenses, in order to produce compatible products,
there is no guarantee that our licenses will be renewed or granted in the first instance in the future. Moreover, if gaming platform manufacturers enter into
license agreements with other companies for their “closed systems” or if we are unable to obtain sufficient quantities of headset adapters or chips, we
would be placed at a competitive disadvantage.
In order for certain of our headsets to connect to the Xbox platforms’ advanced features and controls, a proprietary computer chip or wireless
module is required. As a result, with respect to our products designed for the Xbox platforms, we are currently reliant on Microsoft or their designated
supplier to provide us with sufficient quantities of such chips and/or modules. If we are unable to obtain sufficient quantities of these chips and/or modules,
sales of such Xbox platform compatible headsets and consequently our revenues would be adversely affected.
We are licensed and approved by Microsoft to develop and sell Xbox platform compatible audio products pursuant to a license agreement under
which we have the right to manufacture (including through third-party manufacturers), market and sell audio products for the Xbox platform video game
console. Our current Xbox platform headsets are dependent on this license, and headsets for future Xbox consoles may also be dependent on this license.
Microsoft has the right to terminate that license under certain circumstances set forth in the agreement. Should that license be terminated, our headset
offerings may be limited, which could significantly reduce our revenues. While Sony does not currently require a license for audio products to be
compatible with PlayStation® consoles, they could do so in the future.
While the Company believes it currently has the necessary licenses, or can obtain the necessary licenses to produce compatible products,
Microsoft, Sony and other third-party gaming platform manufacturers may control or limit our ability to manufacture headsets compatible with their
platforms, and could cause unanticipated delays in the release of our products as well as increases to projected development, manufacturing, licensing,
marketing or distribution costs, any of which could negatively impact our business.
Risks Related to Liquidity
We depend upon the availability of capital under our revolving credit facility to finance our operations. Any additional financing that we may need may
not be available on favorable terms, or at all.
In addition to cash flow generated from operations, we have financed our operations with a credit facility (the “Credit Facility”) from Bank of
America. If we are unable to comply with the financial and other covenants contained in the Credit Facility, and are unable to obtain a waiver under the
Credit Facility for such default, Bank of America may declare any outstanding borrowings under the Credit Facility immediately due and payable. A
default on our Credit Facility would have an immediate and material adverse impact on our business, results of operations, and financial condition. We
could be required to obtain additional financing from other sources, and we cannot predict whether or on what terms, if any, additional financing might be
available. If we were required to seek additional financing and were unable to obtain it, we might need to change our business and capital expenditure
plans, which may have a materially adverse effect on our business, financial condition and results of operations. In addition, any debt under the Credit
Facility could make it more difficult to obtain other debt financing in the future. The Credit Facility contains certain financial covenants and other
restrictions that limit our ability, among other things, to incur certain additional indebtedness; pay dividends and repurchase stock; make certain
investments and other payments; enter into certain mergers or consolidations; undergo certain changes of control of our Company or Board of Directors;
engage in sale and leaseback transactions and transactions with affiliates; and encumber and dispose of assets.
If we violate any of these covenants, we will likely be unable to borrow under the Credit Facility. If a default occurs and is not timely cured or
waived, Bank of America could seek remedies against us, including termination or suspension of obligations to make loans and issue letters of credit, and
acceleration of amounts then outstanding under the applicable Credit Facility. No assurance can be given that we will be able to maintain compliance with
these covenants in the future. The Credit Facility is asset based and can only be drawn down in an amount to which eligible collateral exists and can be
negatively impacted by extended collection of accounts receivable, unexpectedly high product returns and slow-moving inventory, among other factors. In
addition, we have granted the lender a first-priority lien against substantially all of our assets, including trade accounts receivable and inventories. Failure
to comply with the operating restrictions or financial covenants could result in the lender terminating or suspending its obligation to make loans and issue
letters of credit to us.
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Additionally, a significant downturn in demand for our products or a reduction in gross margins could have a material impact on our result of
operations, adversely affecting our ability to obtain financing generally.
General Risk Factors
The market price of our common stock may continue to fluctuate significantly.
We cannot predict the prices at which our common stock may trade. The market price of our common stock has and may continue to fluctuate
widely, depending on many factors, some of which may be beyond our control, including but not limited to:
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actual or anticipated fluctuations in our operating results due to factors related to our business;
success or failure of our business strategy;
the success of third-party gaming platforms and certain game titles to drive sales;
our quarterly or annual earnings, or those of other companies in our industry;
changes in earnings estimates by securities analysts or our ability to meet those estimates;
our ability to execute transformation, restructuring and realignment actions;
the operating and stock price performance of other comparable companies;
actions of or engagement with stockholder activists;
comments by securities analysts or other third parties, including in articles, letters and other media;
speculation in the press about the future of our Company or our industry;
overall market fluctuations; and
general economic conditions and other external factors.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These
broad market fluctuations could adversely affect the trading price of our common stock. These fluctuations may also cause short sellers to periodically
enter the market on the belief that we may experience worse results in the future. We cannot predict the actions of market participants and, therefore, can
offer no assurances that the market for our common stock will be stable or appreciate over time.
We have adopted a shareholder rights plan, which, together with provisions in our articles of incorporation and Nevada law, could discourage or
prevent a potential takeover of our Company that might otherwise result in you receiving a premium over the market price for your common stock.
We adopted a shareholder right plan pursuant to which we will distribute one right for each outstanding share of common stock held by
stockholders of record as of April 10, 2023. Because the rights may substantially dilute the stock ownership of a person or group attempting a take-over of
us without the approval of our Board of Directors, even if such a change in control would result in our shareholders receiving a premium for their shares,
the plan could make it more difficult for a third party to acquire us, or a significant percentage of our outstanding capital stock, without first negotiating
with our Board of Directors. Additionally, our articles of incorporation permit our Board of Directors to issue special shares from time to time, with such
rights and preferences as they consider appropriate. Our Board of Directors could authorize the issuance of special shares with terms and conditions and
under circumstances that could have an effect of discouraging a takeover or other transaction.
As a Nevada corporation, we are also subject to certain provisions of the Nevada General Corporation Law that have anti-takeover effects and
may inhibit a non-negotiated merger or other business combination. These provisions are intended to encourage any person interested in acquiring us to
negotiate with, and to obtain the approval of, our Board of Directors in connection with such a transaction. However, certain of these provisions may
discourage a future acquisition of the Company, including an acquisition in which the stockholders might otherwise receive a premium for their shares. As
a result, stockholders who might desire to participate in such a transaction may not have the opportunity to do so.
If we are unable to protect our information systems against service interruption, misappropriation of data, cyber-attacks or other or breaches of
security, our operations could be disrupted, our reputation may be damaged, and we may be financially liable for damages.
We rely heavily on information systems, including a full range of retail, financial, sourcing and merchandising systems, to manage our
operations. We regularly make investments to upgrade, enhance or replace these systems, as well as leverage new technologies to support our growth
strategies. In addition, we have implemented enterprise-wide initiatives that are intended to standardize business processes and optimize
17
performance. Any delays or difficulties in transitioning to new systems or integrating them with current systems or the failure to implement our initiatives
in an orderly and timely fashion could result in additional investment of time and resources, which could impair our ability to improve existing operations
and support future growth, and ultimately have a material adverse effect on our business.
The reliability and capacity of our information systems are critical. Despite preventative efforts, our systems are vulnerable to damage or
interruption from, among other things, natural disasters, technical malfunctions, inadequate systems capacity, human error, power outages, computer
viruses and security breaches. Any disruptions affecting our information systems could have a material adverse impact on our business. In addition, any
failure to maintain adequate system security controls to protect our computer assets and sensitive data, including associate and client data, from
unauthorized access, disclosure or use could damage our reputation with our associates and our clients, exposing us to financial liability, legal proceedings
(such as class action lawsuits), and/or regulatory action. While we have implemented measures to prevent security breaches and cyber incidents, our
preventative measures and incident response efforts may not be entirely effective. As a result, we may not be able to immediately detect any security
breaches, which may increase the losses that we would suffer. Further, remote working arrangements increase the risk of cybersecurity attacks and data
breaches, particularly through phishing attempts, as our employees and third parties with whom we interact leverage our IT infrastructure in previously
unanticipated ways. Finally, our ability to continue to operate our business without significant interruption in the event of a disaster or other disruption
depends, in part, on the ability of our information systems to operate in accordance with our disaster recovery and business continuity plans.
Our reliance on information systems and other technology also gives rise to cybersecurity risks, including security breach, espionage, system
disruption, theft and inadvertent release of information. The occurrence of any of these events could compromise our networks, and the information stored
there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or
proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations, and damage our reputation,
which could adversely affect our business. In addition, as security threats continue to evolve, we may need to invest additional resources to protect the
security of our systems.
We are subject to laws and regulations relating to data privacy, data protection, and other related matters, which are subject to change, and our failure
to comply could negatively affect our business and reputation.
We are subject to a variety of laws and regulations with respect to data privacy, data protection and other related matters, including the California
Consumer Privacy Act, as amended by the California Privacy Rights Act, and the European Union General Data Protection Regulation. These laws and the
regulations associated therewith have evolved significantly in recent years, and future laws and regulations in other jurisdictions in which our business
operates may be enacted. In addition, the application and interpretation of these laws and regulations are often unpredictable and uncertain.
Compliance with existing and emerging data privacy laws, regulations and industry standards could result in increased compliance costs and/or
lead to changes in our business practices and policies, and any failure to abide by these laws, regulations and industry standards could adversely affect our
reputation, lead to public enforcement actions or private litigation against us, require additional investment in resources or personnel, and reduce the
availability of previously useful data, any of which could materially and adversely affect our business, operating results and financial condition
We have been party to stockholder litigation, and in the future could be party to additional stockholder litigation, which could harm our business,
financial condition and operating results.
We have had, and may continue to have, actions brought against us by stockholders, including in connection with the Merger (as defined below), as
further described in Note 13. Commitments and Contingencies, based on past transactions, changes in our stock price or other matters. Any such claims,
whether or not resolved in our favor, could divert our management and other resources from the operation of our business and otherwise result in
unexpected and substantial expenses that would adversely and materially impact our business, financial condition and operating results.
Loss of our key management and other personnel could impact our business.
Our future success depends largely upon the continued service of our executive officers and other key management and technical personnel and
on our ability to continue to attract, retain and motivate qualified personnel. In addition, competition for skilled and non-skilled employees among
technology companies is intense, and the loss of skilled or non-skilled employees or an inability to attract, retain and motivate additional skilled and non-
skilled employees required for the operation and expansion of our business could hinder our ability to conduct research activities successfully, develop new
products, attract customers and meet customer shipments.
18
Our business could be adversely affected by significant movements in foreign currency exchange rates.
We are exposed to fluctuations in foreign currency transaction exchange rates, particularly with respect to the Euro and the British Pound. Any
significant change in the value of currencies of the countries in which we do business relative to the value of the U.S. dollar could affect our ability to sell
products competitively and control our cost structure. Additionally, we are subject to foreign exchange translation risk due to changes in the value of
foreign currencies in relation to our reporting currency, the U.S. dollar. The translation risk is primarily concentrated in the exchange rate between the U.S.
dollar and the British Pound. As the U.S. dollar fluctuates against other currencies in which we transact business, revenue and income could be impacted.
Any acquisitions we pursue could disrupt our business and harm our financial condition and results of operations.
As part of our business strategy, we review and intend to continue to review acquisition opportunities that we believe would be advantageous or
complementary to the development of our business. If we make any acquisitions, we could take any or all of the following actions, any one of which could
adversely affect our business, financial condition, results of operations or share price:
•
•
•
•
•
•
use a significant portion of our available cash;
require a significant devotion of management’s time and resources in the pursuit or consummation of such acquisition;
incur debt, which may not be available to us on favorable terms and may adversely affect our liquidity;
issue equity or equity-based securities that would dilute existing stockholders’ ownership percentage;
assume contingent and other liabilities; and
take charges in connection with such acquisitions.
Acquisitions also entail numerous other risks, including, without limitation: difficulties in assimilating acquired operations, products, technologies
and personnel; unanticipated costs; risks of entering markets in which we have limited or no prior experience; regulatory approvals; unanticipated costs or
liabilities; and potential loss of key employees from either our existing business or the acquired organization. Acquisitions may result in accounting charges
for restructuring and other expenses, amortization of purchased technology and intangible assets and stock-based compensation expense, any of which
could materially and adversely affect our operating results. We may not be able to realize the anticipated synergies, innovation, operational efficiencies, and
benefits of the acquisition or successfully integrate with our existing business the businesses, products, technologies or personnel that we acquire, and our
failure to do so could harm our business and operating results.
Our products may be subject to warranty claims, product liability and product recalls.
We may be subject to product liability or warranty claims that could result in significant direct or indirect costs, or we could experience greater
returns from retailers than expected, which could harm our net sales. The occurrence of any quality problems due to defects in our products could make us
liable for damages and warranty claims in excess of any existing reserves. In addition to the risk of direct costs to correct any defects, warranty claims,
product recalls or other problems, any negative publicity related to the perceived quality of our products could also affect our brand image, decrease retailer
and distributor demand and our operating results and financial condition could be adversely affected. Changes in production levels or processes could result
in increased manufacturing errors, as well as higher component, manufacturing and shipping costs, all of which could reduce our profit margins, result in
prices increases and harm our relationships with retailers and consumers.
We could incur unanticipated expenses in connection with warranty or product liability claims relating to a recall of one or more of our products,
which could require significant expenditures to defend. Additionally, we may be required to comply with governmental requirements to remedy the defect
and/or notify consumers of the problem that could lead to unanticipated expense, and possible product liability litigation against a customer or us.
Changes in laws or regulations or the manner of their interpretation or enforcement could adversely impact our financial performance and restrict our
ability to operate our business or execute our strategies.
We are subject to numerous domestic and foreign laws and regulations, including those related to customs, securities, consumer protection, data
privacy, general employment and employee health and safety. New laws or regulations, changes in existing laws or regulations or the manner of their
interpretation or enforcement, may create uncertainty, increase our cost of doing business and restrict our ability to operate our business or execute our
strategies. This could include, among other things, compliance costs and enforcement under the provisions of the Dodd-Frank Wall Street Reform and
Consumer Protection Act related to disclosure and reporting requirements for companies that use “conflict” minerals originating from the Democratic
Republic of Congo or adjoining countries. Additionally, the California Consumer Privacy Act and EU General Data Protection Regulation have
significantly affected how we are able to market our products. The SEC has also enacted or proposed significant changes to its regulations in recent years
that impact our operations associated with being a public company.
19
We continually evaluate and monitor developments with respect to new and proposed laws, regulations, standards and rules and cannot predict or
estimate the amount of the additional costs we may incur due to these laws, regulations, standards and rules or the timing of such costs. Any such new or
changed laws, regulations, standards and rules may be subject to varying interpretations and as a result, their application in practice may evolve over time
as new guidance is provided by regulatory authorities and governing bodies. This could result in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate
governance and public disclosure. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by
regulatory authorities or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we
may be harmed.
We are subject to various environmental laws and regulations that could impose substantial costs on us and may adversely affect our business,
operating results and financial condition.
Our operations and some of our products are regulated under various federal, state, local and international environmental laws. In addition,
regulatory bodies in many of the jurisdictions in which we operate propose, enact and amend environmental laws and regulations on a regular basis. If we
were to violate or become liable under these environmental laws, we could be required to incur additional costs to comply with such regulations and may
incur fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or
remediation costs. Liability under environmental laws may be joint and several and without regard to comparative fault. The ultimate costs under
environmental laws and the timing of these costs are difficult to predict. Although we cannot predict the ultimate impact of any new environmental laws
and regulations, such laws may result in additional costs or decreased revenue, and could require that we redesign or change how we manufacture our
products, any of which could have a material adverse effect on our business. Additionally, to the extent that our competitors choose not to abide by these
environmental laws and regulations, we may be at a cost disadvantage, thereby hindering our ability to effectively compete in the marketplace.
Our goals and disclosures related to environmental, social and governance (“ESG”) matters have and will likely continue to result in additional
costs and risks to us, which may adversely affect our reputation, employee retention, and willingness of our customers and partners to do business with
us.
Investor advocacy groups, institutional investors, investment funds, proxy advisory services, stockholders, and customers are increasingly focused
on the ESG goals and practices of companies. We are frequently asked by these groups to set ambitious ESG goals and provide new and more robust
disclosure of ESG goals, progress toward ESG goals and other matters of interest to ESG stakeholders. We have set ESG goals and are enhancing related
disclosure of goals, progress, and other matters relating to ESG. Our efforts to accomplish and accurately disclose ESG-related goals and objectives present
numerous operational, reputational, financial, legal, and other risks, any of which could have a negative impact on our business, reputation, and stock price.
Our ability to set and achieve ESG goals and initiatives is subject to numerous risks including, among others: (1) the availability and cost of
limiting, eliminating or tracking our use of carbon-based energy sources and technologies, (2) evolving regulatory requirements affecting ESG standards or
disclosures, including those related to greenhouse gas emissions tracking and disclosure, (3) our ability to partner with providers that can meet our
sustainability, diversity, and other standards, (4) our ability to recruit, develop, and retain diverse talent, (5) the impact of our organic growth and
acquisitions or dispositions of businesses or operations on our ESG goals, and (6) customers’ actual demand for ESG-oriented product offerings, which
may be more expensive and less available than other options.
Standards for tracking and reporting on ESG matters are relatively new, have not been harmonized and continue to be promulgated and evolve.
Our selection of disclosure frameworks that seek to align with various reporting standards may change from time to time, including in response to new
disclosure requirements, and may result in a lack of consistent or meaningful comparative data from period to period. In addition, our processes and
controls may not always comply with evolving standards for identifying, measuring and reporting ESG metrics, our interpretation of reporting standards
may differ from those of others and such standards may change over time, any of which could result in significant revisions to our ESG goals or reported
progress in achieving such goals.
If our ESG practices do not meet evolving investor or other stakeholder expectations and standards or regulatory requirements, then our
reputation, our ability to attract or retain employees and our attractiveness as an investment, business partner or acquiror could be negatively impacted.
Similarly, our failure or perceived failure to pursue or fulfill our goals, targets and objectives or to satisfy various
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reporting standards within the timelines we announce, or at all, could also have similar negative impacts and expose us to government enforcement actions
and private litigation.
Our variable rate indebtedness will subject us to interest rate risk, which could cause our annual debt service obligations to increase significantly.
Borrowings under our Credit Facility will be at variable rates of interest, which expose us to interest rate risk. If interest rates increase, our debt
service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our cash flows could be
adversely affected. An increase in debt service obligations under our variable rate indebtedness could affect our ability to make payments required under
the terms of the agreements governing our indebtedness or our other indebtedness outstanding from time to time.
In July 2017, the Financial Conduct Authority (“FCA”) of the United Kingdom, which regulates the London Interbank Offering Rate
(“LIBOR”), announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. On December 4, 2020, however,
the ICE Benchmark Administration Liamited (“IBA”), which is the administrator that publishes LIBOR, published its consultation of the market on its
intention to cease the publication of all settings of non-U.S. dollar (“USD”) LIBOR and only the one-week and two-month USD LIBOR settings on
December 31, 2021, with the publication of the remaining USD LIBOR settings being discontinued after June 30, 2023, subject to any rights of the FCA to
compel the IBA to continue publication. On March 5, 2021, the IBA and the FCA made public statements regarding the permanent cessation and non-
representativeness of LIBOR and publicly stated that the IBA will permanently cease publication of all settings of non-USD LIBOR and the one-week and
two-month setting of USD LIBOR on December 31, 2021, with the publication of the remaining USD LIBOR setting ceasing on June 30, 2023. While the
FCA, pursuant to its powers under Article 23D(2) of the Benchmark Regulations, is compelled the IBA to publish one-, three- and six-month British pound
(“GBP”) LIBOR on a synthetic basis until December 31, 2022, the FCA stated that such publication is under a "synthetic" methodology that is no longer
representative.
The consequences of the phase out of LIBOR cannot be entirely predicted at this time. An alternative reference rate could be higher or more
volatile than LIBOR prior to its discontinuance, which could result in an increase in the cost of our indebtedness, impact our ability to refinance some or all
of our existing indebtedness or otherwise have a material adverse impact on our business, financial condition and results of operations. Furthermore, there
can be no assurance given as to whether all other USD LIBOR settings will actually be available until June 30, 2023 or whether USD LIBOR will be
replaced by an alternative market benchmark in place of USD LIBOR prior to June 30, 2023.
Item 1B – Unresolved Staff Comments
None.
Item 2 – Properties
The table below describes our principal facilities as of December 31, 2022. Each of these facilities is leased. We believe our existing facilities are
adequate to meet our current needs and that we can renew our existing leases or obtain alternative space on terms that would not have a material impact on
our financial conditions.
Location
White Plains
San Diego
Hamburg
New Taipei City
Basingstoke
Item 3 - Legal Proceedings
State or
Country
NY
CA
DE
TW
U.K.
Principal Business Activity
Corporate Headquarters
Administration
Administration
Administration
Administration
Approx.
Square
Feet
15,800
16,150
8,600
14,800
7,030
Expiration Date
of Lease
2031
2029
2028
2025
2032
The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the amount of any
liability that could arise with respect to these actions cannot be determined with certainty, in the Company’s opinion, any such liability will not have a
material adverse effect on its consolidated financial position, consolidated results of operations or liquidity.
Shareholders Class Action: On August 5, 2013, VTBH and the Company (f/k/a Parametric Sound Corporation) announced that they had entered into the
Merger Agreement pursuant to which VTBH would acquire an approximately 80% ownership interest and existing shareholders would maintain an
approximately 20% ownership interest in the combined company (the “Merger”). Following the announcement, several shareholders filed class action
lawsuits in California and Nevada seeking to enjoin the Merger. The plaintiffs in each
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case alleged that members of the Company’s Board of Directors breached their fiduciary duties to the shareholders by agreeing to a merger that allegedly
undervalued the Company. VTBH and the Company were named as defendants in these lawsuits under the theory that they had aided and abetted the
Company’s Board of Directors in allegedly violating their fiduciary duties. The plaintiffs in both cases sought a preliminary injunction seeking to enjoin
closing of the Merger, which, by agreement, was heard by the Nevada court with the California plaintiffs invited to participate. On December 26, 2013, the
court in the Nevada case denied the plaintiffs’ motion for a preliminary injunction. Following the closing of the Merger, the Nevada plaintiffs filed a second
amended complaint, which made essentially the same allegations and sought monetary damages as well as an order rescinding the Merger. The California
plaintiffs dismissed their action without prejudice, and sought to intervene in the Nevada action, which was granted. Subsequent to the intervention, the
plaintiffs filed a third amended complaint, which made essentially the same allegations as prior complaints and sought monetary damages. On June 20,
2014, VTBH and the Company moved to dismiss the action, but that motion was denied on August 28, 2014. On September 14, 2017, a unanimous en banc
panel of the Nevada Supreme Court granted defendants’ petition for writ of mandamus and ordered the trial court to dismiss the complaint but provided a
limited basis upon which plaintiffs could seek to amend their complaint. Plaintiffs amended their complaint on December 1, 2017, to assert the same claims
in a derivative capacity on behalf of the Company, as a well as in a direct capacity, against VTBH, Stripes Group, LLC, SG VTB Holdings, LLC, and the
former members of the Company’s Board of Directors. All defendants moved to dismiss this amended complaint on January 2, 2018, and those motions
were denied on March 13, 2018. Defendants petitioned the Nevada Supreme Court to reverse this ruling on April 18, 2018. On June 15, 2018, the Nevada
Supreme Court denied defendants’ writ petition without prejudice. The district court subsequently entered a pretrial schedule and set trial for November
2019. On January 18, 2019, the district court certified a class of shareholders of the Company as of January 15, 2014. On October 11, 2019, the parties
notified the district court that they had reached a settlement that would resolve the pending action if ultimately approved by the Court. On January 13,
2020, the district court preliminarily approved the settlement between the plaintiffs and all defendants. A final hearing was held on May 18, 2020, wherein
the Court approved the settlement and entered final judgment.
On May 22, 2020, PAMTP LLC, which purports to hold the claims of eight shareholders who opted out of the class settlement described above, brought
suit against the Company, the Company’s CEO, Juergen Stark, Stripes Group, LLC, SG VTB Holdings, LLC, Kenneth Fox, and former members of the
Company’s Board of Directors in Nevada state court. This opt-out action asserts the same direct claims that were asserted by the class of shareholders
described above. The defendants filed two motions to dismiss this complaint, which were heard on August 10, 2020. The Court denied those motions by
order of August 20, 2020. The case was tried in August 2021 and all remaining defendants, including the Company, prevailed on all counts with final
judgment entered in their favor on September 3, 2021. Plaintiff is appealing that judgment.
Employment Litigation: On April 20, 2017, a former employee filed an action in the Superior Court for the County of San Diego, State of California. The
complaint alleges claims including wrongful termination, retaliation and various other provisions of the California Labor Code. The complaint seeks
unspecified economic and non-economic losses, as well as allegedly unpaid wages, unreimbursed business expenses statutory penalties, interest, punitive
damages and attorneys’ fees. The Company filed a cross-complaint against the former employee on May 25, 2017 for certain activities related to his
employment with the Company. The matter was tried between September 24 and October 7, 2021. On October 8, 2021 a jury rendered a unanimous
verdict in favor of the Company on the employment claims. The Court granted a directed verdict to the Company on its Cross- Complaint against the
former employee. Judgment was entered in favor of the Company on October 27, 2021. On December 20, 2021, the former employee filed a notice of
appeal of the judgment.
Intellectual Property Dispute: On November 24, 2020, ABP Technology Limited issued a claim for trademark infringement in the High Court of England
and Wales against Voyetra Turtle Beach, Inc. (“VTB”) and Turtle Beach Europe Limited (“TB Europe”) relating to the use by VTB and TB Europe of the
sign STEALTH on and in relation to gaming headsets in the UK. On November 16, 2022 the parties entered into a confidential settlement agreement in full
and final settlement of all claims regarding this matter. Accordingly, the High Court claim has been discontinued.
Consumer Class Action: On June 13, 2022, an individual filed a putative class action lawsuit against Voyetra Turtle Beach, Inc. (“VTB”) in the United
States District Court for the Central District of California. The complaint alleged that VTB violated the Telephone Consumer Protection Act, 47 U.S.C. §
227(b), by sending marketing-related text messages to the plaintiff and other members of the public who have registered their telephone numbers on the
national Do-Not-Call Registry. The plaintiff sought to represent a class of all persons in the United States whose telephone numbers were present on the
national Do-Not-Call Registry and received text messages from VTB within the last four years. The plaintiff voluntarily dismissed his claims with
prejudice, and District Judge Fernando Olguin entered an order dismissing the case on January 25, 2023.
The Company will continue to vigorously defend itself in the foregoing matters. However, litigation and investigations are inherently uncertain.
Accordingly, the Company cannot predict the outcome of these matters. The Company has not recorded any accrual at December 31, 2022 for contingent
losses associated with these matters based on its belief that losses, while possible, are not probable. Further, any possible range of loss cannot be reasonably
estimated at this time. The unfavorable resolution of these matters could have a material adverse effect on the Company’s business, results of operations,
financial condition, or cash flows. The Company is engaged in other legal actions, not described
22
above, arising in the ordinary course of its business and, while there can be no assurance, believes that the ultimate outcome of these other legal actions will
not have a material adverse effect on its business, results of operations, financial condition, or cash flows.
Item 4 - Mine Safety Disclosures
Not applicable.
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PART II
Item 5 - Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on the Nasdaq Global Market under the symbol “HEAR.” The number of holders of record of common
stock at February 28, 2023 was 938.
Stock Performance Graph
Notwithstanding any statement to the contrary in any of our previous or future filings with the SEC, the following information relating to the price
performance of our common stock shall not be deemed to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), to be “soliciting material” or subject to Rule 14A of the Exchange Act, or to be incorporated by reference into any of our
filings under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act, in each case whether made before or after the date of this
Report, except to the extent we specifically incorporate it by reference into such filing.
The following graph shows a comparison from December 31, 2017 through December 31, 2022 of the cumulative total return assuming a $100
investment in our common stock, the S&P 500 Index and the S&P 500 Consumer Durables Index. In accordance with the rules of the Securities and
Exchange Commission, the returns are indexed to a value of $100 at December 31, 2017 and assume that all dividends, if any, were reinvested. The
comparisons in this graph below are based on historical data and are not intended to forecast or be indicative of future performance of our common stock.
Dividend Policy
24
We have not paid regular cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of our Board of Directors and will depend on our financial condition, operating results, capital
requirements and such other factors as our Board of Directors deems relevant.
Unregistered Sale of Equity Securities and Issuer Purchases of Equity Securities
On April 9, 2019, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $15.0 million of its common stock.
Any repurchases under the program will be made from time to time on the open market at prevailing market prices. On April 1, 2021, the Board of
Directors approved an extension and expansion of this stock repurchase program up to $25.0 million of its common shares, expiring April 9, 2023. On
March 3, 2023, the Company’s Board of Directors approved a two-year extension of this stock repurchase plan.
For the fourth quarter of 2022, we did not repurchase any shares of common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this Report for
disclosure relating to our equity compensation plans. Such information will be included in our Proxy Statement or an amendment to this Report, which is
incorporated herein by reference.
Item 6 – [Reserved]
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Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. This discussion summarizes
the significant factors affecting our results of operations and the financial condition of our business during each of the fiscal years in the three-year period
ended December 31, 2022.
Turtle Beach Corporation (herein referred to as the “Company,” “we,” “us,” or “our”), headquartered in White Plains, New York, and incorporated
in the state of Nevada in 2010, is a premier audio technology company with expertise and experience in developing, commercializing, and marketing
innovative products across a range of large addressable markets under the Turtle Beach® and ROCCAT® brands.
•
•
Turtle Beach is a worldwide leader of feature-rich headset solutions for use across multiple platforms, including video game and
entertainment consoles, handheld consoles, personal computers (“PC”), tablets and mobile devices.
ROCCAT is a gaming headsets, keyboards, mice, and other accessories brand focused on the personal computer peripherals market.
Business Trends
Console Headset Market
The global market for console headsets is estimated to be approximately $1.4 billion, in which we are the market leader. PlayStation and Xbox
consoles continue to be dominant gaming platforms in North America and Europe for games that drive headset usage. This market experienced
unprecedented growth in 2020 driven by the initial stay-at-home orders when new gamers entered the market, lapsed gamers started playing again, existing
gamers played more, and non-gamers bought headsets for remote learning. In past couple years, this market experienced a decline relative to the 2020 surge
due to weaker retail demand, a slower holiday season from disappointing AAA video game releases and console supply constraints.
Traditionally, the gaming market has grown as new gamers enter and existing gamers upgrade current gaming accessories. The emergence of battle
royale games that are highly social, collaborative, and competitive, contributed to a higher growth in the video game industry and a higher proportion of
gamers using headsets. And given that most of the gaming headset market is driven by replacement and upgrading, this large influx of new gaming headset
users is expected to drive an increase in demand for gaming headsets in future years.
PC Accessories Market
The market for PC gaming headsets, mice, and keyboards is estimated to be approximately $3.2 billion. PC gaming continues to be a main gaming
platform in the U.S. and internationally, driven by big AAA game launches, PC-specific esports leagues, popular teams and players, content creators and
influencers and cross-platform play. While most games are available on multiple platforms, gaming on PC offers advantages including improved graphics,
increased speed and precision of mouse/keyboard controls, and the ability for deeper customization. Gaming mice and keyboards are engineered to provide
gamers with high-end performance and a superior gaming experience through features such as faster response times, improved materials and build quality,
programmable buttons and keys, and software suites to customize and control devices and settings.
PC gaming mice come in a variety of different ergonomic shapes and sizes, are available in both wired and wireless models, offer options for
different sensors (optical and laser) and responsiveness, and often feature integrated RGB LED lighting and software to unify the lighting with other
devices for a visually consistent PC gaming appearance. Similarly, PC gaming keyboards often deliver a competitive advantage by offering options for
mechanical and optical key switches that feel and sound different and offer customizable lighting.
Controllers and Gaming Simulation Markets
In 2022, Turtle Beach further expanded its gaming simulation and gaming controller product lines. For the flight simulation market, Turtle Beach
launched the VelocityOneTM Pedals and VelocityOneTM Stand, which perfectly pair with the VelocityOne FlightTM simulation control system for the
complete, most immersive flight simulation experience on the market. Turtle Beach also launched the VelocityOneTMFlightstick, which is a single stick
joystick controller for air and space flight combat games. For the gamepads/controllers market, Turtle Beach added new colorways for its original Recon
Controller, as well as launched the lower-cost REACT-R controller, and mobile-focused Recon Cloud and Atom controller offerings. These markets
increase Turtle Beach’s total addressable market by $1 billion, with third-party game controllers at roughly $500 million and PC/console flight simulation
hardware at roughly $500 million in the global market.
26
Seasonality
Our gaming accessories business is seasonal with a significant portion of sales and profits typically occurring around the holiday period.
Historically, more than 45% of revenues are generated during the period between September and December as new products are introduced and consumers
engage in holiday shopping. In addition, launches of major new online multiplayer games, and specific retailer purchasing behavior, can drive significant
revenue shifts between months and quarters in a given year. In the past few years, normal seasonal patterns have been significantly changed due to
pandemic-driven shifts in consumer demand.
In connection with the seasonality of the business, historically the Company’s borrowings on the revolving credit facility increase as a result of the
holiday inventory build leading up to year-end and decline on gross receipts during the first quarter of the following year.
Supply Chain and Operations
We have a global network of suppliers that manufacture products to meet the quality standards sought by our customers and our cost objectives. We
have worked closely with component, manufacturing, and global logistic partners to build a supply chain that we consider dependable, scalable, and
efficient to provide high-quality, reliable products employing leading cost management practices. The use of outsourced manufacturing facilities is
designed to take advantage of specific expertise and allow for flexibility and scalability to respond to both seasonality and changing demands for our
products.
We have experienced and may continue to experience increased freight costs and component availability challenges. Further, market conditions have
significantly increased the lead time on many product components, causing us to purchase components earlier than normal to meet forecasted demand,
which, in some cases, led to excess inventories of certain components ordered with long lead times ahead of shifting demand. We expect to continue to
experience challenges impacting our supply chain and logistics operations. As a result, we continue to take proactive steps to limit the impact of these
challenges and are working closely with our manufacturing and freight providers to reduce costs.
We believe we have strong, long-term relationships with our suppliers and that, subject to the discussion in Item 1A, “Risk Factors” and Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” we expect to continue to be
able to obtain a sufficient supply of quality products on satisfactory terms.
Results of Operations
Management Overview
In 2022, we continued our position as the number one console gaming headset provider and, believe that the gaming market is a great market to be a
leader in, despite the difficult year, driven by a slowdown in consumer demand, retail channel inventory reductions, heavy competitive discounting, a
strong dollar and continued global logistics and supply chain challenges, including high freight rates. Against this backdrop, we delivered net revenue of
$240.2 million, proactively reduced operating expenses by 7% and limited the net loss to $59.5 million, inclusive of $34.5 million related to certain non-
recurring charges.
Despite the macro circumstances that impacted the industry throughout 2022, we are well-positioned for the inevitable market turnaround and
remain encouraged as the global gaming market is projected to continue to add gamers. Our industry-leading console headsets continued to expand and
perform well, as our Stealth 600 wireless headset was the best-selling headset series in 2022 per NPD, and we launched two new modes, the Vulcan 2 Mini
and the Vulcan 2 Max, with groundbreaking first-to-market features, including the world's first dual LED smart keys, in the iconic Vulcan product line.
We exceeded 20% of our revenues in categories outside the console gaming headset category, in which we have been a leader for over ten years, and
looking forward, will continue to enhance our PC gaming portfolio of headsets, keyboards, and mice to increase our share in the PC accessories market and
grow the game controller and gaming simulation categories that we entered in 2021. As a result, we believe our brand leadership and diverse product
portfolio positions us for continued success including growth and a return to positive EBITDA in 2023 as the gaming and macro environments continue to
improve.
27
Key Performance Indicators and Non-GAAP Measures
Management routinely reviews key performance indicators including revenue, operating income and margins, and earnings per share, among others.
In addition, we believe certain other measures provide useful information to management and investors about us and our financial condition and results of
operations for the following reasons: (i) they are measures used by our Board of Directors and management team to evaluate our operating performance;
(ii) they are measures used by our management team to make day-to-day operating decisions; (iii) the adjustments made are often viewed as either non-
recurring or not reflective of ongoing financial performance and/or have no cash impact on operations; and (iv) the metrics are used by securities analysts,
investors and other interested parties as a common operating performance measure to compare results across companies in our industry by adjusting for
potential differences caused by variations in capital structures (affecting relative interest expense), and the age and book value of facilities and equipment
(affecting relative depreciation and amortization expense). These metrics, however, are not measures of financial performance under accounting principles
generally accepted in the United States of America (“GAAP”) and given the limitations of these metrics as analytical tools, should not be considered a
substitute for gross profit, gross margins, net income (loss) or other consolidated income statement data as determined in accordance with GAAP. We
consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key
performance indicators:
•
•
Adjusted EBITDA is defined as net income (loss) before interest, taxes, depreciation and amortization, stock-based compensation (non-cash)
and certain non-recurring special items that we believe are not representative of core operations.
Cash Margin is defined as gross margin excluding depreciation, amortization, and stock-based compensation.
Adjusted EBITDA
Adjusted EBITDA (and a reconciliation to net income, the nearest GAAP financial measure) for the years ended December 31, 2022, 2021 and 2020
are as follows:
Net income (loss)
Interest expense
Depreciation and amortization
Stock-based compensation
Income tax expense
Inventory and component related reserves
Impairment charge
Restructuring expense
Acquisition-related settlement
Change in fair value of contingent consideration
Business transaction expense
Proxy contest and other
Adjusted EBITDA
2022
Year Ended
December 31,
2021
(in thousands)
2020
$
$
(59,546 ) $
1,220
5,816
7,984
5,093
9,763
1,896
556
—
—
—
8,471
(18,747 ) $
17,721 $
383
5,313
7,656
2,428
—
—
—
—
(1,928 )
78
4,934
36,585 $
38,746
467
5,248
5,549
13,711
—
—
—
(1,702 )
(1,121 )
550
—
61,448
Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021
Net loss for the year ended December 31, 2022 was $59.5 million, including the deferred tax asset valuation allowance of $18.4 million and after-
tax non-recurring costs of $16.2 million, compared to a net income of $17.7 million in the prior year.
For the year ended December 31, 2022, Adjusted EBITDA was ($18.7) million compared to $36.6 million, for the year ended December 31, 2021.
Net income (loss) and Adjusted EBITDA were losses compared to the prior years due to a decrease in revenue as a result of macroeconomic conditions, as
well as increased freight costs and volume-driven fixed cost deleveraging, partially offset by lower operating expenses.
Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020
Net income for the year ended December 31, 2021 was $17.7 million compared to net income of $38.7 million in the prior year.
28
For the year ended December 31, 2021, Adjusted EBITDA was $36.6 million compared to $61.4 million, for the year ended December 31, 2020.
Net income and Adjusted EBITDA decreased reflecting higher freight and supply chain costs, annualized run-rate increases in operating expenses due to
larger size of the business, and growth investments.
Financial Results
The following table sets forth the Company’s statements of operations for the periods presented:
Net revenue
Cost of revenue
Gross profit
Gross margin
Operating expenses
Operating income (loss)
Interest expense
Other non-operating expense (income), net
Income (loss) before income tax
Income tax expense
Net income (loss)
Net Revenue and Gross Profit
2022
Year Ended
December 31,
2021
(in thousands)
240,166 $
190,979
49,187
20.5 %
100,667
(51,480 )
1,220
1,753
(54,453 )
5,093
(59,546 ) $
366,354 $
237,971
128,383
35.0 %
107,952
20,431
383
(101 )
20,149
2,428
17,721 $
$
$
2020
360,093
226,305
133,788
37.2 %
84,621
49,167
467
(3,757 )
52,457
13,711
38,746
The following table summarizes net revenue and gross profit for the periods presented:
Net Revenue
Gross Profit
Gross Margin
Cash Margin (1)
2022
Year Ended
December 31,
2021
(in thousands)
2020
$
$
240,166 $
49,187 $
20.5 %
21.6 %
366,354 $
128,383 $
35.0 %
35.6 %
360,093
133,788
37.2 %
38.1 %
(1) Excludes non-cash charges of $2.8 million for 2022, $1.9 million for 2021, and $3.3 million for 2020.
Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021
Net revenue for the year ended December 31, 2022 was $240.2 million, a $126.2 million, or 34.4%, decrease from $366.4 million in the record prior
year period reflecting lower customer demand as a result of a challenging macroeconomic environment, channel inventory compression and increased
promotional spend.
For the year ended December 31, 2022, gross profit as a percentage of net revenue decreased to 20.5% from 35.0% in the prior year. The decrease
was primarily due to a $9.8 million charge for potential excess components and product inventory relating to pandemic driven supply chain and logistic
impacts, higher freight and warehouse costs to ensure product supply, higher promotional spend driven by more aggressive competitive pricing actions to
reduce channel inventory levels and volume-driven fixed cost deleveraging.
Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020
Net revenue for the year ended December 31, 2021 increased $6.3 million, or 1.7% from 2020 driven by PC accessories growth and the entry into
gaming controllers and flight simulation hardware, which offset the weaker console headset demand mostly due to weaker retail traffic, a slower holiday
season from disappointing AAA video game releases and console supply constraints.
29
For the year ended December 31, 2021, gross profit as a percentage of net revenue decreased to 35.0% from 37.2% in the prior year. The decrease
was primarily due to higher freight costs and more normalized holiday promotional activity.
Operating Expenses
Selling and marketing
Research and development
General and administrative
Other intangible asset impairment
Acquisition integration costs
Total operating expenses
Selling and Marketing
2022
Year Ended
December 31,
2021
(in thousands)
$
47,090 $
19,123
32,558
1,896
—
58,883 $
17,490
31,501
—
78
$
100,667 $
107,952 $
2020
46,779
12,265
25,027
—
550
84,621
Selling and marketing expense for the year ended December 31, 2022 totaled $47.1 million, or 19.6% as a percentage of net revenue, compared to
$58.9 million, or 16.1% as a percentage of net revenue, for the prior year. This decrease was primarily due to lower revenue-based expenses, reduction of
marketing initiatives to align with lower consumer demand and strategic priorities.
Selling and marketing expense for the year ended December 31, 2021 totaled $58.9 million, or 16.1% as a percentage of net revenue, compared to
$46.8 million, or 13.0% as a percentage of net revenue, for the year ended December 31, 2020. This increase was primarily due to marketing initiatives to
support product portfolio expansion, expansion of geographies, and entry into new product categories.
Research and Development
For the year ended December 31, 2022, we invested $19.1 million in research and development, as we continued to invest in new product categories
and portfolio expansion to support strategic growth initiatives.
For the years ended December 31, 2021 and 2020, we expended $17.5 million and $12.3 million, respectively. For the year 2021, this increase was
attributable to additional resources and infrastructure to support product expansion including new category introductions.
General and Administrative
General and administrative expenses for the year ended December 31, 2022 increased $1.1 million to $32.6 million compared to $31.5 million for
the year ended December 31, 2021. Excluding certain non-recurring fees related to the proxy contest in both years with respect to the 2022 annual meeting
of stockholders ($2.2 million) and other litigation costs, expenses decreased $1.1 million primarily due to lower personnel costs and professional fees.
General and administrative expenses for the year ended December 31, 2021 increased $6.5 million to $31.5 million compared to $25.0 million for
the year ended December 31, 2020. The year-over-year increase was primarily due to increased professional fees and the inclusion of acquired Neat
Microphones-related headcount, partially offset by lower variable compensation costs.
Income Taxes
Income tax expense for the year ended December 31, 2022 was $5.1 million at an effective tax rate of (9.4)% compared to income tax expense of
$2.4 million for the year ended December 31, 2021 at an effective tax rate of 12.1%. The effective tax rate was primarily impacted by the establishment of
a valuation allowance on our net U.S. deferred tax assets as well as state income tax.
Income tax expense for the year ended December 31, 2021 was $2.4 million at an effective tax rate of 12.1% compared to income tax expense of
$13.7 million for the year ended December 31, 2020 at an effective tax rate of 26.1%. The effective tax rate was primarily impacted by tax benefits
attributable to stock option exercises and restricted stock vestings, Research and Development (“R&D”) credits and the reduced tax rate on our Foreign
Derived Intangible Income (“FDII”). These tax benefits were partially offset by the impact of disallowed compensation and state income tax expense.
During 2021, we substantially completed a federal R&D study for the 2018-2020 tax years, recognizing tax
30
benefits of $0.5 million net of reserves. An estimate of $0.2 million R&D credits, net of reserves, was included for 2021. In addition, we completed an
analysis of our foreign sales and recognized a tax benefit of $1.0 million on our FDII.
Other Non-Operating Expense (Income)
Other non-operating expense totaled $1.8 million for the year ended December 31, 2022, due to negative effect of exchange rates as it relates to our
European operations, compared to other non-operating income of $0.1 million for the year ended December 31, 2021, which included a $1.9 million fair
value of contingent consideration reversal.
Other non-operating income totaled $0.1 million for the year ended December 31, 2021, including a $1.9 million fair value of contingent
consideration reversal, compared to other non-operating income of $3.8 million for the year ended December 31, 2020, which included a $1.7 million
acquisition-related settlement gain and $1.2 million fair value of contingent consideration reversal.
Liquidity and Capital Resources
Our primary sources of working capital are cash flow from operations and availability of capital under our revolving credit facility. We have funded
operations and acquisitions in recent periods with operating cash flows and proceeds from debt and equity financings.
The following table summarizes our sources and uses of cash:
Cash and cash equivalents at beginning of period
Net cash provided by (used for) operating activities
Net cash used for investing activities
Net cash provided by (used for) financing activities
Effect of foreign exchange on cash
Cash and cash equivalents at end of period
Operating activities
2022
Year Ended
December 31,
2021
(in thousands)
$
$
37,720 $
(41,846 )
(3,549 )
19,706
(635 )
11,396 $
46,681 $
(327 )
(8,121 )
(56 )
(457 )
37,720 $
2020
8,249
51,049
(5,663 )
(7,412 )
458
46,681
Cash used for operating activities for the year ended December 31, 2022 was $41.8 million, a decrease of $41.5 million as compared to cash used
for operating activities totaling $0.3 million for the year ended December 31, 2021. The increase in the cash used for operations is primarily the result of
lower gross receipts due to lower demand and retailers compressing channel inventories.
Cash used for operating activities for the year ended December 31, 2021 was $0.3 million, a decrease of $51.4 million as compared to cash provided
by operating activities of $51.0 million for the year ended December 31, 2020. The decrease is primarily the result of lower operating results increased
inventory levels in response to supply chain and logistic headwinds.
Investing activities
Cash used for investing activities was $3.5 million for the year ended December 31, 2022, which was related to certain capital investments,
compared to $8.1 million in 2021, which included $2.5 million related to the Neat Microphones acquisition.
Cash used for investing activities was $8.1 million for the year ended December 31, 2021, which consisted of capital expenditures related to in-store
advertising displays and new product manufacturing tooling, as well as $2.5 million related to the Neat Microphones acquisition, compared to $5.7 million
in 2020, which consisted of capital expenditures primarily related to in-store advertising displays, new product manufacturing tooling and internal system
upgrades.
31
Financing activities
Net cash provided by financing activities was $19.7 million during the year ended December 31, 2022 compared to net cash used for financing
activities of $0.1 million and net cash used for financing activities of $7.4 million during the years ended December 31, 2021 and 2020, respectively.
Financing activities during the year ended December 31, 2022 consisted primarily of revolving credit facility borrowings.
Financing activities in 2021 included stock option exercise proceeds of $5.3 million and repurchases of common stock of $4.9 million.
Financing activities in 2020 included net repayments on our revolving credit facility of $15.7 million, offset by $4.3 million received from the sale
of equity securities and proceeds from exercise of stock options of $4.2 million.
Management assessment of liquidity
Management believes that our current cash and cash equivalents, the amounts available under our revolving credit facility and cash flows derived
from operations will be sufficient to meet anticipated short-term and long-term funding for working capital and capital expenditures including amounts to
develop new products, fund future stock repurchases and to pursue strategic opportunities. Significant assumptions underlie this belief, including, among
other things, that there will be no material adverse developments in our business, liquidity or capital requirements.
In addition, the Company monitors the capital markets on an ongoing basis and may consider raising capital if favorable market conditions develop.
Foreign cash balances at December 31, 2022 and December 31, 2021 were $6.5 million and $10.2 million, respectively.
Revolving Credit Facility
On March 5, 2018, Turtle Beach and certain of its subsidiaries entered into an amended and restated loan, guaranty and security agreement (the
“Credit Facility”) with Bank of America, N.A. (“Bank of America”), as administrative agent, collateral agent and security trustee for Lenders (as defined
therein), which replaced the then existing asset-based revolving loan agreement. The Credit Facility was amended on each of December 17, 2018, May 31,
2019, and March 10, 2023. The Credit Facility, as amended, expires on April 1, 2025 and provides for a line of credit of up to $80 million inclusive of a
sub-facility limit of $15 million for TB Europe, a wholly-owned subsidiary of Turtle Beach. In addition, the Credit Facility provides for a $40 million
accordion feature.
On March 10, 2023, the Company entered into a Third Amendment to Amended and Restated Loan, Guaranty and Security Agreement (the “Third
Amendment”), by and among the Company, VTB, TBC Holding Company LLC, TB Europe, VTBH, the financial institutions party thereto from time to
time and Bank of America, as administrative agent, collateral agent and security trustee for the lenders.
The Third Amendment provides for, among other things: (i) extending the maturity date of the Credit Facility from March 5, 2024 to April 1, 2025;
(ii) updating the interest rate and margin terms; (iii) removing the FILO Loan facility; (iv) updating the sub-facility limit for TB Europe to $15 million; (v)
increasing our undrawn commitment fee by 0.125%; and (vi) transitioning the reference interest rates from LIBOR to BSBY, SONIA and EUIBOR, as
applicable.
The maximum credit availability for loans and letters of credit under the Credit Facility is governed by a borrowing base determined by the
application of specified percentages to certain eligible assets, primarily eligible trade accounts receivable and inventories, and is subject to discretionary
reserves and revaluation adjustments. The Credit Facility may be used for working capital, the issuance of bank guarantees, letters of credit and other
corporate purposes.
Amounts outstanding under the Credit Facility bear interest at a rate equal to (i) a rate published by Bank of America or the U.S. Bloomberg Short-
Term Bank Yield Index (“BSBY”) rate for loans denominated in U.S. Dollars, (ii) the Sterling Overnight Index Average Reference Rate (“SONIA”) for
loans denominated in Sterling, (iii) and the Euro Interbank Offered Rate (“EUIBOR”) for loans denominated in Euros, plus in each case, an applicable
margin, which is between 0.50% to 2.50% for base rate loans and UK base rate loans, and 1.50% and 3.50% for U.S. BSBY rate loans, U.S. BSBY daily
floating rate loans and UK alternative currency loans. In addition, Turtle Beach is required to pay a commitment fee on the unused revolving loan
commitment at a rate ranging from 0.375% to 0.50%, and letter of credit fees and agent fees. As of December 31, 2022, interest rates for outstanding
borrowings were 8.75% for base rate loans and 6.50% for LIBOR rate loans, which reference interest rates were still in effect prior to the Libor Transition
Amendments discussed below.
The Company is subject to financial covenant testing if certain availability thresholds are not met or certain other events occur (as defined in the
Credit Facility). The Credit Facility requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as
of the last day of each fiscal quarter.
32
The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions,
including our ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and
consolidations, engage in sale leaseback transactions and transactions with affiliates and encumber and dispose of assets. Obligations under the Credit
Facility are secured by a security interest and lien upon substantially all of the Company’s assets.
As of December 31, 2022, the Company was in compliance with all the financial covenants under the Credit Facility, as amended, and excess
borrowing availability was approximately $36.8 million. As of December 31, 2022, there was $19.1 million in outstanding borrowings under the Credit
Facility.
In 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR
rates. LIBOR’s administrator ceased publishing one-week and two-month U.S. Dollar LIBOR immediately after the LIBOR publication on December 31,
2021, and is scheduled to cease publication of the remaining U.S. Dollar LIBOR tenors immediately after the publication on June 30, 2023. In January
2023, the Company and Bank of America entered into LIBOR Transition Amendments with respect to the Credit Facility, including the sub-facility for TB
Europe. These amendments replaced applicable LIBOR rates for interest, fees, commissions and other amounts based on LIBOR with successor rates
based on BSBY, SONIA and EURIBOR, as applicable.
Contractual Obligations
Our principal commitments primarily consist of obligations for minimum payment commitments to lessors for office space and the revolving credit
facility. As of December 31, 2022, we had operating lease obligations totaling $10.3 million which represents our obligations to make payments under non-
cancelable lease agreements for our facilities. See Part II, Item 7,“Management’s Discussion and Analysis of Financial Condition and Results of
Operations –Liquidity and Capital Resources–Revolving Credit Facility” above for more information regarding obligations under our revolving credit
facility.
(in thousands)
Contractual Obligations: (1)
Operating lease obligations (2)
Long term debt (3)
Total
Payments Due by Period
Total
Less Than
One Year
1 - 3 Years
3 - 5 Years
More Than
Five Years
$
$
10,369 $
19,053
29,422 $
1,325 $
19,053
20,378 $
4,287 $
—
4,287 $
2,516
—
2,516 $
2,241
—
2,241
(1) Contractual obligations exclude tax liabilities of $3.0 million related to uncertain tax positions because we are unable to make a reasonably reliable
estimate of the timing of settlement, if any, of these future payments.
(2) Operating lease agreements represent obligations to make payments under non-cancelable lease agreements for its facilities.
(3) The Credit Facility, as amended, expires on April 1, 2025 and provides for a line of credit of up to $80 million inclusive of a sub-facility limit of $15
million for TB Europe, a wholly-owned subsidiary of Turtle Beach. Interest payments are not reflected under the Credit Facility because the amount
that will be borrowed in future years is uncertain.
Critical Accounting Estimates
Our discussion and analysis of our results of operations and capital resources are based on our consolidated financial statements, which have been
prepared in conformity with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. Management bases its
estimates, assumptions, and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances.
Different assumptions and judgments would change the estimates used in the preparation of the condensed consolidated financial statements, which,
in turn, could change the results from those reported. Management evaluates its estimates, assumptions, and judgments on an ongoing basis.
Based on the above, we have determined that our most critical accounting policies are those related to revenue recognition and sales return reserve,
inventory valuation, asset impairment, and income taxes.
33
Revenue Recognition and Sales Return Reserve
Net revenue consists primarily of revenue from the sale of gaming headsets and accessories to wholesalers, retailers and to a lesser extent, on-line
customers. Our products function on a standalone basis (in connection with a readily available gaming console, personal computer, or stereo) and are not
sold with additional services or rights to future goods or services. Revenue is recorded for a contract through the following steps: (i) identifying the contract
with the customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to
the performance obligations; and (v) recognizing revenue when or as each performance obligation is satisfied.
Each contract at inception is evaluated to determine whether the contract should be accounted for as having one or more performance obligations.
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally, this occurs at a point in time when the risk
and title to the product transfers to the customer. Our standard terms of delivery are included in our contracts of sale, order confirmation documents, and
invoices. The Company excludes sales taxes collected from customers from “Net Revenue” in its Consolidated Statements of Operations.
Certain customers may receive cash-based incentives (including cash discounts, quantity rebates, and price concessions), which are accounted for as
variable consideration. Provisions for sales returns are recognized in the period the sale is recorded based upon our prior experience and current trends.
These revenue reductions are established by the Company based upon management’s best estimates at the time of sale following the historical trend,
adjusted to reflect known changes in the factors that impact such reserves and allowances, and the terms of agreements with customers. We do not expect to
have significant changes in our estimates for variable considerations.
Inventory Valuation
Inventories are valued at the lower of weighted average cost or market, at the individual item level. Market is determined based on the estimated net
realizable value, which is generally the selling price. Inventory levels are monitored to identify slow-moving items and markdowns are used to increase
sales of such products. Physical inventory counts are performed annually in January and estimates are made for any shortage between the date of the
physical inventory count and the balance sheet date.
Asset Impairment
Historically, we have had significant long-lived tangible and intangible assets, including goodwill with indefinite lives, which are susceptible to
valuation adjustments as a result of changes in various factors or conditions. We assess the potential impairment of intangible and fixed assets whenever
events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question. Goodwill and indefinite-
lived intangible assets are assessed at least annually, but also whenever events or changes in circumstances indicate the carrying values may not be
recoverable. Factors we consider important, which could trigger an impairment of such assets include significant underperformance relative to historical or
projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for our overall business; significant
negative industry or economic trends; significant decline in our stock price for a sustained period; and a decline in our market capitalization below net book
value.
Management estimates future pre-tax cash flows based on historical experience, knowledge, and market data. Estimates of future cash flows require
that we make assumptions and apply judgment, including forecasting future sales and expenses and estimating useful lives of the assets. These estimates
can be affected by factors such as future product development and economic conditions that can be difficult to predict, as well as other factors such as those
outlined in Item 1A, “Risk Factors.” If the expected future cash flows related to the long-lived assets are less than the assets’ carrying value, an impairment
loss would be recognized for the difference between estimated fair value and carrying value.
There are inherent assumptions and estimates used in developing future cash flows requiring management judgment including projecting revenues,
interest rates and the cost of capital. Many of the factors used in assessing fair value are outside our control and it is reasonably likely that assumptions and
estimates will change in future periods. These changes can result in future impairments.
Income Taxes
We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are
recognized based on the differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates and laws expected to be in effect when the differences are expected to reverse. The effect of a
change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Inherent in the measurement
of these deferred balances are certain judgments and interpretations of existing tax law and other published guidance as applied to our operations. Our
effective tax rate considers our judgment of expected tax liabilities in the various jurisdictions within which we are subject to tax.
The determination of the need for a valuation allowance on deferred tax assets requires management to make assumptions and to apply judgment,
including forecasting future earnings, taxable income, and the mix of earnings in the jurisdictions in which we operate.
34
The tax effects of uncertain tax positions taken or expected to be taken in income tax returns are recognized only if they are “more likely-than-not”
to be sustained on examination by the taxing authorities based on the technical merits as of the reporting date. The tax benefits recognized in the financial
statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate
settlement. We recognize estimated accrued interest and penalties related to uncertain tax positions in income tax expense.
There have been no material changes to the critical accounting policies and estimates. See Note 1, “Summary of Significant Accounting Policies,” in
the notes to the consolidated financial statements for a complete discussion of recent accounting pronouncements. We are currently evaluating the impact of
certain recently issued guidance on our financial condition and results of operations in future periods.
35
Item 7A - Qualitative and Quantitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. The
Company’s market risk exposure is primarily a result of fluctuations in interest rates, foreign currency exchange rates and inflation.
The Company has used derivative financial instruments, specifically foreign currency forward and option contracts, to manage exposure to foreign
currency risks, by hedging a portion of its forecasted expenses denominated in British Pounds expected to occur within a year. The effect of exchange rate
changes on foreign currency forward and option contracts is expected to offset the effect of exchange rate changes on the underlying hedged item. The
Company does not use derivative financial instruments for speculative or trading purposes. As of December 31, 2022, we do not have any derivative
financial instruments.
Foreign Currency Exchange Risk
The Company has exchange rate exposure, primarily, with respect to the British Pound and Euro. As of December 31, 2022 and 2021, our monetary
assets and liabilities which are subject to this exposure are immaterial, therefore the potential immediate loss to us that would result from a hypothetical
10% change in foreign currency exchange rates would not be expected to have a material impact on our earnings or cash flows. This sensitivity analysis
assumes an unfavorable 10% fluctuation in the exchange rates affecting the foreign currencies in which monetary assets and liabilities are denominated and
does not take into account the offsetting effect of such a change on our foreign currency denominated revenues.
Inflation Risk
The Company is exposed to market risk due to inflationary pressures, including higher labor-related costs and increases in the costs of the goods
and services we purchase as part of the manufacture and distribution of our products, increased costs from supply chain and logistic headwinds and in our
operations generally. Such inflationary pressures have been and could continue to be exacerbated by higher oil prices, geopolitical turmoil, and economic
policy actions. Inflationary pressures can also have a negative impact on demand for the products we sell. Reduced or delayed discretionary spending by
consumers in response to inflationary pressures has reduced consumer demand for our products, resulting in reduced sales. In 2022, we have experienced a
higher rate of inflation than in recent years resulting in higher cost of goods, selling expenses, and general and administrative expenses. Such increases
have had and may continue to have a negative impact on the Company’s profit margins if selling prices of products do not increase with the increased costs.
36
Item 8 - Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (BDO USA, LLP New York, New York, PCAOB #243)
Consolidated Financial Statements:
Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021 and 2020
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2022, 2021 and 2020
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2022, 2021 and 2020
Notes to Consolidated Financial Statements
Supplemental Schedule - Schedule II Valuation and Qualifying Accounts
37
Page
38
40
41
42
43
44
45
75
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Turtle Beach Corporation
White Plains, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Turtle Beach Corporation (the “Company”) as of December 31, 2022, and 2021, the
related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2022, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022, and 2021, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s
internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 29, 2023 expressed an adverse opinion
thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Sales Returns
As described in Notes 1 and 4 to the consolidated financial statements, the Company provides certain customers the option to return goods back to the
Company. Provisions for sales returns are recorded in the period of the sale under the expected value method and are based on the Company’s prior
experience and current trends. As of December 31, 2022, the Company had accrued an allowance for sales returns of approximately $7.8 million.
We identified the assessment of the allowance for certain sales returns as a critical audit matter. Auditor judgment was required to evaluate certain
assumptions which had a higher degree of measurement uncertainty. Key assumptions included the determination of the sales return rate and the period of
sales for which the sales return rate should be applied. Auditing these elements involved especially challenging auditor judgment due to the nature and
extent of audit effort required to address these matters.
The primary procedures we performed to address this critical audit matter included:
38
•
•
•
Evaluating the expected return period for a sample of returned goods, which was based on newly released products and the time of first
receipt of the returned goods.
Assessing the Company’s historical ability to estimate the sales return rate by comparing historical estimated sales return allowance to
actual returns received.
Evaluating the Company’s key assumptions by comparing the allowance for sales returns recorded at year-end to actual returns subsequent
to year-end.
Allowance for Cash-Based Incentives
As described in Note 1 to the consolidated financial statements, the Company provides certain customers cash-based incentives including price
concessions. All cash-based incentives are recorded in the period of the sale under the expected value method and are based on the Company’s prior
experience and current trends. As of December 31, 2022, the Company had accrued an allowance for cash-based incentives of approximately $29.5 million,
which includes the allowance for price concessions.
We identified the assessment of the allowance for price concessions as a critical audit matter. Auditor judgment was required to evaluate the assumption
which had a higher degree of measurement uncertainty related to the volume of sales to which these price concessions would be applied. Auditing this
element involved especially challenging auditor judgment due to the nature and extent of audit effort required to address this matter.
The primary procedures we performed to address this critical audit matter included:
•
•
Assessing the Company’s historical ability to estimate the assumption by comparing prior year estimated price concessions to actual
subsequent credits issued.
Evaluating the Company’s assumption by comparing the allowance for price concessions recorded at year-end to actual credits issued
subsequent to year-end.
Goodwill Impairment Assessment
As described in Notes 1 and 6 to the consolidated financial statements, the Company has goodwill of $10.7 million as of December 31, 2022. The
Company evaluates goodwill for impairment either through a qualitative or quantitative approach at least annually, or more frequently if an event occurs or
circumstances change that indicate the carrying value of a reporting unit may not be recoverable. The Company performed quantitative assessments as of
November 1, 2022 and December 31, 2022. Under the quantitative approach, the Company made various estimates and assumptions to determine the
estimated fair value of the reporting unit based on an equal weighting between the income approach, specifically, the discounted cash flow method, and the
market approach, specifically, the guideline public company method.
We identified the projected revenue growth rates and the discount rate used in the determination of the fair value of the reporting unit as a critical audit
matter. The principal considerations for our determination included the subjectivity and judgment required to determine projected revenue growth rates and
the discount rate used to determine the fair value of the reporting unit. Auditing these elements involved especially challenging auditor judgment due to the
nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•
•
Assessing the reasonableness of the projected revenue growth rates by: (i) comparing the Company’s revenue growth rates to industry
reports, (ii) performing sensitivity analyses of the projected revenue growth rates used in the discounted cash flow model and evaluating the
potential effect of changes in these assumptions.
Utilizing professionals with specialized skills and knowledge to assist in: (i) evaluating the appropriateness of the valuation models used by
management, (ii) testing the mathematical accuracy of the Company’s calculations, and (iii) evaluating the reasonableness of the discount
rate used in the discounted cash flow model for the determination of the fair value of the reporting unit.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2014.
New York, New York
March 29, 2023
39
Turtle Beach Corporation
Consolidated Statements of Operations
$
$
$
$
2022
Year ended December 31,
2021
(in thousands, except per-share data)
2020
240,166 $
190,979
49,187
47,090
19,123
32,558
1,896
100,667
(51,480 )
1,220
1,753
(54,453 )
5,093
(59,546 ) $
366,354 $
237,971
128,383
58,883
17,490
31,579
—
107,952
20,431
383
(101 )
20,149
2,428
17,721 $
(3.62 ) $
(3.62 ) $
1.11
0.97
$
$
16,450
16,450
15,915
18,251
360,093
226,305
133,788
46,779
12,265
25,577
—
84,621
49,167
467
(3,757 )
52,457
13,711
38,746
2.62
2.37
14,801
16,365
Net revenue
Cost of revenue
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Goodwill and other intangible asset impairment
Total operating expenses
Operating income (loss)
Interest expense
Other non-operating expense (income), net
Income (loss) before income tax
Income tax expense
Net income (loss)
Net income (loss) per share:
Basic
Diluted
Weighted average number of shares:
Basic
Diluted
See accompanying Notes to the Consolidated Financial Statements
40
Turtle Beach Corporation
Consolidated Statements of Comprehensive Income (Loss)
Net income
Other comprehensive income (loss):
Foreign currency translation adjustment
Other comprehensive income (loss)
Comprehensive income (loss)
2022
Year ended December 31,
2021
(in thousands)
2020
$
(59,546 ) $
17,721 $
38,746
(1,521 )
(1,521 )
(61,067 ) $
(462 )
(462 )
17,259 $
473
473
39,219
$
See accompanying Notes to the Consolidated Financial Statements
41
Turtle Beach Corporation
Consolidated Balance Sheets
Current Assets:
ASSETS
Cash and cash equivalents
$
Accounts receivable, less allowances of $37,455 and $34,728 in 2022 and 2021, respectively
Inventories
Prepaid expenses and other current assets
Total Current Assets
Property and equipment, net
Deferred income taxes
Goodwill
Intangible assets, net
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Revolving credit facility
Accounts payable
Other current liabilities
Total Current Liabilities
Income tax payable
Other liabilities
Total Liabilities
Commitments and Contingencies
Stockholders’ Equity
Common stock, $0.001 par value - 25,000,000 shares authorized; 16,569,173 and
16,168,147 shares issued and outstanding as of December 31, 2022 and 2021, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$
$
$
$
$
$
$
December 31,
2022
December 31,
2021
(in thousands, except par value and share amounts)
11,396
43,336
71,252
9,196
135,180
6,362
-
10,686
2,612
8,547
163,387
19,053
19,846
25,433
64,332
2,076
8,038
74,446
17
206,916
(116,598 )
(1,394 )
88,941
163,387
$
$
$
$
$
$
$
$
37,720
35,953
101,933
17,506
193,112
6,955
5,899
10,686
5,788
8,065
230,505
-
40,475
37,693
78,168
3,774
7,194
89,136
16
198,278
(57,052 )
127
141,369
230,505
See accompanying Notes to the Consolidated Financial Statements
42
Turtle Beach Corporation
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of intangible assets
Amortization of debt financing costs
Stock-based compensation
Deferred income taxes
Change in sales returns reserve
Provision for doubtful accounts
Provision for obsolete inventory
Loss on disposal of property and equipment
Loss on impairment of intangible assets
Decrease in fair value of contingent consideration
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
Inventories
Accounts payable
Prepaid expenses and other assets
Income taxes payable
Other liabilities
Net cash provided by (used for) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment
Acquisition of a business, net of cash acquired
Net cash used for investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving credit facilities
Repayment of revolving credit facilities
Proceeds from sale of equity securities
Proceeds from exercise of stock options and warrants
Repurchase of common stock
Repurchase of common stock to satisfy employee tax withholding obligations
Net cash provided by (used for) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents - beginning of period
Cash and cash equivalents - end of period
SUPPLEMENTAL DISCLOSURE OF INFORMATION
Cash paid for interest
Cash paid for income taxes, net of refunds
Accrual for purchases of property and equipment
2022
Year Ended December 31,
2021
(in thousands)
2020
$
(59,546 ) $
17,721 $
38,746
4,578
1,238
189
7,984
6,202
(1,180 )
(23 )
4,829
—
1,896
—
(4,845 )
22,100
(23,350 )
6,045
727
(8,690 )
(41,846 )
(3,549 )
—
(3,549 )
91,945
(72,892 )
—
653
—
—
19,706
(635 )
(26,324 )
37,720
11,396 $
979 $
(2,380 ) $
390 $
4,052
1,261
189
7,656
1,119
(2,236 )
468
1,609
—
—
(1,928 )
9,682
(32,240 )
(2,793 )
(6,091 )
(5,571 )
6,775
(327 )
(5,621 )
(2,500 )
(8,121 )
120,858
(120,858 )
—
5,289
(4,882 )
(463 )
(56 )
(457 )
(8,961 )
46,681
37,720 $
194 $
6,561 $
1,189 $
4,359
889
189
5,549
468
2,418
215
5,085
42
—
(1,121 )
(1,755 )
(30,675 )
18,668
(4,108 )
4,178
7,902
51,049
(5,663 )
—
(5,663 )
323,593
(339,248 )
4,373
4,195
—
(325 )
(7,412 )
458
38,432
8,249
46,681
309
8,041
1,351
$
$
$
$
See accompanying Notes to the Consolidated Financial Statements
43
Turtle Beach Corporation
Consolidated Statement of Stockholders’ Equity
Common Stock
Additional
Paid-In
Accumulated
Accumula
ted
Other
Compreh
ensive
Income
(Loss)
Shares
Amount
Capital
Deficit
(in thousands)
Balance at December 31, 2019
Net income
Other comprehensive income, net of tax
Issuance of restricted stock
Repurchase of common stock and retirement of related treasury shares
Proceeds of sales of equity securities
Stock options exercised
Stock-based compensation
Balance at December 31, 2020
Net income
Other comprehensive income, net of tax
Issuance of restricted stock
Settlement of deferred stock
Repurchase of common stock and retirement of related treasury shares
Common stock buyback
Stock options exercised
Stock-based compensation
Balance at December 31, 2021
Net loss
Other comprehensive loss, net of tax
Issuance of restricted stock
Stock options exercised
Stock-based compensation
Balance at December 31, 2022
14,488 $
—
—
157
(25 )
238
618
—
15,475 $
—
—
244
6
(15 )
(169 )
626
—
16,168 $
—
—
311
90
—
16,569 $
14 $
—
—
1
—
—
—
—
15 $
—
—
—
—
—
—
1
—
16 $
—
—
—
1
—
17 $
176,776 $
—
—
—
(325 )
4,373
4,195
5,549
190,568 $
—
—
—
111
(463 )
(4,882 )
5,288
7,656
198,278 $
—
—
—
654
7,984
206,916 $
(113,519 ) $
38,746
—
—
—
—
—
—
(74,773 ) $
17,721
—
—
—
—
—
—
—
(57,052 ) $
116 $
—
473
—
—
—
—
—
589 $
—
(462 )
—
—
—
—
—
—
127 $
(59,546 )
—
—
—
—
—
(1,521 )
—
—
—
(116,598 ) $ (1,394 ) $
See accompanying Notes to the Consolidated Financial Statements
44
Total
63,387
38,746
473
1
(325 )
4,373
4,195
5,549
116,399
17,721
(462 )
—
111
(463 )
(4,882 )
5,289
7,656
141,369
(59,546 )
(1,521 )
—
655
7,984
88,941
Note 1. Summary of Significant Accounting Policies
Turtle Beach Corporation
Notes to Consolidated Financial Statements
Turtle Beach Corporation (“Turtle Beach” or the “Company”), headquartered in White Plains, New York and incorporated in the state of Nevada in 2010, is
a premier audio and gaming technology company with expertise and experience in developing, commercializing, and marketing innovative products across
a range of large addressable markets under the Turtle Beach® and ROCCAT® brands. Turtle Beach is a worldwide leader of feature-rich headset solutions
for use across multiple platforms, including video game and entertainment consoles, handheld consoles, personal computers (“PC”), tablets and mobile
devices. ROCCAT is a gaming keyboards, mice and other accessories brand focused in the PC peripherals market.
VTB Holdings, Inc. (“VTBH”), a wholly-owned subsidiary of Turtle Beach Corporation and the owner of Voyetra Turtle Beach, Inc. (“VTB”), was
incorporated in the state of Delaware in 2010. VTB, the owner of Turtle Beach Europe Limited (“TB Europe”), was incorporated in the state of Delaware
in 1975 with operations principally located in White Plains, New York.
Basis of Presentation
The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”) and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair
presentation of the financial position, results of operations, and cash flows for the periods presented. All intercompany accounts and transactions have been
eliminated in consolidation.
Uses of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to use estimates and assumptions
that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as
the reported amounts of revenue and expenses during the reporting period. The significant estimates and assumptions used by management affect: sales
return reserve, allowances for cash discounts, warranty reserve, valuation of inventory, valuation of long-lived assets, goodwill and other intangible assets,
depreciation and amortization of long-lived assets, valuation of deferred tax assets, determination of fair value of stock-based awards, stock warrants and
share-based compensation. The Company evaluates estimates and assumptions on an ongoing basis using historical experience and other factors and
adjusts those estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision,
actual results could differ from these estimates, and those differences could be material to the consolidated financial statements.
Revenue Recognition and Sales Return Reserve
Net revenue consists primarily of revenue from the sale of gaming headsets and accessories to wholesalers, retailers and to a lesser extent, on-line
customers. These products function on a standalone basis (in connection with a readily available gaming console, personal computer, or stereo) and are not
sold with additional services or rights to future goods or services. Revenue is recorded for a contract through the following steps: (i) identifying the contract
with the customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to
the performance obligations; and (v) recognizing revenue when or as each performance obligation is satisfied.
Each contract at inception is evaluated to determine whether the contract should be accounted for as having one or more performance obligations. The
Company's business activities were determined to be a single performance obligation with revenue recognized when obligations under the terms of a
contract with its customer are satisfied; generally, this occurs at a point in time when the risk and title to the product transfers to the customer. The
Company's standard terms of delivery are included in its contracts of sale, order confirmation documents, and invoices. The Company excludes sales taxes
collected from customers from “Net Revenue” in its Consolidated Statements of Operations.
45
Certain customers may receive cash-based incentives (including cash discounts, quantity rebates, and price concessions), which are accounted for as
variable consideration based upon the expected value method. Provisions for sales returns are recognized in the period the sale are based upon the expected
value method and is recorded based upon the Company's prior experience and current trends. These revenue reductions are established by the Company
based upon management’s best estimates at the time of sale following the historical trend, adjusted to reflect known changes in the factors that impact such
reserves and allowances, and the terms of agreements with customers. As of December 31, 2022 and 2021, the Company had an allowance for cash-based
incentives of $29.5 million and $25.6 million, respectively, and an allowance for sales returns of $7.8 million and $9.0 million, respectively, and does not
expect to have significant changes in its estimates for variable considerations.
Cost of Revenue and Operating Expenses
The following table illustrates the primary costs classified in each major expense category:
Cost of Revenue
Operating Expenses
Cost to manufacture products;
Freight costs associated with moving product from suppliers to distribution centers
and to customers;
Costs associated with the movement of merchandise through customs;
Costs associated with material handling and warehousing;
Global supply chain personnel costs; and
Product royalty costs.
Payroll, bonus, and benefit costs;
Costs incurred in the research and development of new products and enhancements
to existing products;
Depreciation related to demonstration units;
Legal, finance, information systems and other corporate overhead costs; and
Sales commissions, advertising, and marketing costs.
Product Warranty Obligations
The Company provides for product warranties in accordance with the contract terms given to various customers by accruing estimated warranty costs at the
time of revenue recognition. Warranties are generally fulfilled by replacing defective products with new products.
Marketing Costs
Costs associated with the production of advertising, such as print and other costs, as well as costs associated with communicating advertising that has been
produced, such as magazine ads, are expensed when the advertising first appears in public. Advertising costs were approximately $4.9 million, $9.7 million
and $8.5 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The Company also incurs co-operative advertising costs that represent reimbursements to customers for shared marketing expenses for sale of its products.
These reimbursements are recorded as reductions of net revenue based on a percentage of sales for all periods presented. Co-operative advertising
reimbursements were approximately $4.1 million, $7.6 million and $6.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Deferred Financing Costs
Deferred financing costs represent costs incurred in conjunction with the Company’s debt financing activities and are capitalized and amortized over the
life of the related financing arrangements. If the debt is retired early, the related unamortized deferred financing costs are written off in the period the debt
is retired as part of the net carrying value of the debt, and any gains or losses are recorded in the statement of operations under the caption “Other non-
operating expense (income), net.”
Stock-Based Compensation
Compensation costs related to stock options, restricted stock grants and performance-based restricted share units are calculated based on the fair value of
the stock-based awards on the date of grant, net of estimated forfeitures. The grant date fair value of awards is determined using the Black-Scholes option-
pricing model and the related stock-based compensation is recognized on a straight-line basis over the period in which an employee is required to provide
service in exchange for the award, which is generally four years.
The Company estimates its forfeiture rate based on an analysis of actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based
on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from any forfeiture rate adjustment would be
recognized in the period of adjustment and if the actual number of future forfeitures differs from estimates, the Company might be required to record
adjustments to stock-based compensation expense.
46
For stock-based awards issued to non-employees, including consultants, compensation expense is based on the fair value of the awards calculated using the
Black-Scholes option-pricing model over the service performance period.
Exit and Disposal Costs
Management-approved restructuring activities are periodically initiated to achieve cost savings through reduced operational redundancies and to position
the Company strategically in the market in response to prevailing economic conditions and associated customer demand. Costs associated with
restructuring actions can include severance, infrastructure charges to vacate facilities or consolidate operations, contract termination costs and other related
charges. For involuntary separation plans, a liability is recognized when it is probable and reasonably estimable. For one-time termination benefits, such as
additional severance pay or benefit payouts, and other exit costs, such as lease termination costs, the liability is measured and recognized initially at fair
value in the period in which the liability is incurred, with subsequent changes to the liability recognized as adjustments in the period of change.
Net Earnings (Loss) per Common Share
Basic earnings (loss) per share is calculated by dividing net income (loss) associated with common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per share assumes the issuance of additional shares of common stock by the
Company upon exercise of all outstanding stock options, stock warrants and contingently issuable securities if the effect is dilutive, in accordance with the
treasury stock method.
Cash Equivalents
Cash and short-term highly liquid investments with original maturity dates of three months or less at time of purchase and no redemption restrictions are
considered cash and cash equivalents.
Inventories
Inventories consist primarily of finished goods and related component parts and are stated at the lower of weighted average cost or market value (estimated
net realizable value) using the first in, first out (“FIFO”) method. The Company maintains an inventory allowance for returned goods, slow-moving and
unused inventories based on the historical trend and estimates. Inventory write-downs, once established, are not reversed as they establish a new cost basis
for the inventory. Inventory write-downs are included as a component of cost of revenues in the accompanying consolidated statements of operations.
Property and Equipment, net
Property and equipment are presented at cost less accumulated depreciation and amortization. Repairs and maintenance expenditures are expensed as
incurred. Depreciation and amortization are computed on a straight-line basis over the following estimated useful lives:
Machinery and equipment
Software and software development
ERP Software
Furniture and fixtures
Tooling
Leasehold improvements
Demonstration units and convention booths
Demonstration headsets
Estimated Life
3 years
2-3 years
5 years
5 years
2 years
Term of lease or economic life of asset, if shorter
2 years
1 year
Valuation of Long-Lived and Intangible Assets and Goodwill
At acquisition, we estimate and record the fair value of purchased intangible assets, which primarily consists of in-process research and development,
customer relationships, trademarks and trade names, and patents. The fair values of these intangible assets are estimated based on the Company’s
assessment. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill and
certain other intangible assets having indefinite lives are not amortized to earnings, but instead are subject to periodic testing for impairment. Intangible
assets determined to have definite lives are amortized over their remaining useful lives.
Long-lived and intangible assets are assessed for potential impairment whenever events or changes in circumstances indicate that full recoverability of net
asset balances through future cash flows is in question. Goodwill and indefinite-lived intangible assets are assessed at least annually, but also whenever
events or changes in circumstances indicate the carrying values may not be recoverable. Factors that could trigger an impairment review include (a)
significant underperformance relative to historical or projected future operating results; (b) significant changes in the manner of use of the acquired assets
or the strategy for the Company’s overall business; (c) significant negative industry or
47
economic trends; (d) significant decline in the Company’s stock price for a sustained period; and (e) a decline in the Company’s market capitalization
below net book value.
Assessment for possible impairment is based on the Company’s ability to recover the carrying value of the long-lived asset from the expected future pre-tax
cash flows. The expected future pre-tax cash flows are estimated based on historical experience, internal knowledge, and market data. Estimates of future
cash flows require the Company to make assumptions and to apply judgment, including forecasting future sales and expenses and estimating the useful
lives of assets. If the expected future cash flows related to the long-lived assets are less than the assets’ carrying value, an impairment charge is recognized
for the difference between estimated fair value and carrying value.
When performing the Company’s evaluation of goodwill for impairment, if it concludes qualitatively that it is more likely that the fair value of the
reporting unit is less than its carrying amount, the Company performs its annual goodwill impairment test by comparing the fair value of a reporting unit
with its carrying amount. If the carrying amount exceeds the fair value a goodwill impairment charge would be recorded for the amount by which the
reporting unit’s carrying amount exceeds its fair value. In addition, identifiable intangible assets having indefinite lives are reviewed for impairment on an
annual basis using a methodology consistent with that used to evaluate goodwill.
The Company conducted its annual impairment assessment on November 1, 2022, and compared the fair value of our reporting unit to the carrying value.
Goodwill is potentially impaired when the net book value of the reporting unit exceeds its estimated fair value. Fair values were established based on an
equal weighting between the income approach, specifically the discounted cash flow method and the market approach, specifically the guideline public
company method. For the purposes of the discounted cash flow analysis, the future cash flows were estimated and discounted at a cost of capital of 12.5%
reflecting the respective inherent business risk of the reporting unit. This methodology has not changed since the adoption of the provisions under ASC
350.
The determination of the cash flows under this method is based on the businesses’ strategic plans and long-range planning forecasts, which change from
year to year. The revenue growth rates included in the forecasts represent best estimates based on current and forecasted market conditions. Profit margin
assumptions are projected for the reporting unit based on the current cost structure and anticipated net cost increases/reductions. There are inherent
uncertainties related to these assumptions, including changes in market conditions, and management judgment is necessary in applying them in the fair
value analysis of the reporting unit. In addition to the foregoing, market multiples were also used to estimate the fair value of the reporting unit based on
earnings multiples determined from available public information of comparable companies. While we believe we have made reasonable estimates and
assumptions to calculate the fair value of our reporting unit, it is possible a material change could occur. If actual results are not consistent with
management’s estimates and assumptions, goodwill and other intangible assets may then be determined to be overstated and a charge would need to be
taken against net earnings.
Due to various factors, including the net loss recorded in the fourth quarter of 2022, the Company performed valuation analyses as of December 31, 2022.
Similar to the annual impairment assessment, we applied consistent methodology in order to assess the fair value of our reporting unit. For the purposes of
the year-end discounted cash flow analysis, the future cash flows were estimated and discounted at an updated cost of capital of 13%. No goodwill
impairment charges have been required during 2022, 2021 or 2020.
During the fourth quarter of 2022, the Company made the decision to increasingly leverage the Turtle Beach brand across our product portfolio including
PC products over time. Due to this decision, the Company prepared an impairment calculation to determine the present value of the ROCCAT tradename
asset using the relief from royalty method. As a result of the present value calculation, the Company recorded an impairment charge of $0.8 million for the
ROCCAT tradename intangible asset.
During the fourth quarter of 2022, as part of the 2023 annual operating and strategic plan process, the Company made the decision to transition microphone
products to the Turtle Beach brand. As a result of this decision, there was no longer a basis for carrying the remaining net intangible assets related to the
Neat brand. In the fourth quarter 2022, the Company recorded an impairment charge of $1.1 million related to the remaining Neat net intangible assets.
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability method. Under the asset and liability method, deferred tax assets and
liabilities are recognized based on the differences between the financial statement carrying value of existing assets and liabilities and their respective tax
bases based on enacted tax laws and statutory tax rates applicable to the periods in which the Company expects the temporary differences to reverse. The
Company had elected to record a “deferred charge” for basis differences relating to intra-entity profits as recognition as a deferred tax asset is prohibited.
A valuation allowance is established for deferred tax assets when management anticipates that it is more likely than not that all, or a portion, of these assets
would not be realized. In determining whether a valuation allowance is warranted, all positive and negative evidence and all sources of taxable income such
as prior earnings history, expected future earnings, carryback and carryforward periods and tax strategies are considered to estimate if sufficient future
taxable income will be generated to realize the deferred tax asset. The assessment of the adequacy of a valuation allowance is based on estimates of taxable
income by jurisdiction and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates, or
these estimates are adjusted in future periods for current trends or expected changes in assumptions, the Company may need to modify the level of
valuation allowance which could materially impact the Company's business, financial condition, and results of operations.
48
The tax effects of uncertain tax positions taken or expected to be taken in income tax returns are recognized only if they are “more likely-than-not” to be
sustained on examination by the taxing authorities based on the technical merits as of the reporting date. The tax benefits recognized in the financial
statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate
settlement. The Company recognizes estimated accrued interest and penalties related to uncertain tax positions in income tax expense.
The Company and its domestic subsidiaries file a consolidated federal income tax return, while the Company’s foreign subsidiary files in its respective
local jurisdictions.
Leases
The Company determines if an arrangement is a lease at inception. For operating leases, right-of-use (“ROU”) assets, sundry payables and accrued
expenses, and noncurrent operating lease liabilities are reported on the consolidated balance sheet for leases with a term longer than twelve months.
Finance leases are reported on our consolidated balance sheets in property, plant and equipment, current portion of other debt, and long-term debt.
Operating lease ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the total lease
payments over the lease term. The ROU assets represent the right to use an underlying leased asset over the existing lease term, and the corresponding lease
liabilities represent our obligation to make lease payments arising from the lease agreement. As most of our leases do not provide for an implicit rate, we
use our secured incremental borrowing rate based on the information available when determining the present value of our lease payments. The lease terms
may include options to terminate, or extend, our lease when it is reasonably certain that we will execute the option. Lease agreements may contain lease
and non-lease components, which are generally accounted for separately. Operating lease expense is recognized on a straight-line basis over the lease term.
Business Combinations
The Company allocates the purchase price of acquisitions to the tangible and intangible assets acquired, liabilities assumed, and non-controlling interests in
the acquiree based on their estimated fair value at the acquisition date. The excess of the acquisition price over those estimated fair values is recorded as
goodwill. Changes to the acquisition date provisional fair values prior to the expiration of the measurement period, a period not to exceed 12 months from
date of acquisition, are recorded as an adjustment to the associated goodwill. Acquisition-related expenses and restructuring costs, if any, are recognized
separately from the business combination and are expensed as incurred.
Fair Value of Financial Instruments
The Company determines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The Company uses a hierarchical structure to prioritize the inputs used to measure fair value into three broad
levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), then to quoted market
prices for similar assets or liabilities in active or inactive markets (Level 2) and gives the lowest priority to unobservable inputs (Level 3).
Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, revolving line of credit, long-term debt and warrants
reported as a financial instrument obligation. Cash equivalents are stated at amortized cost, which approximated fair value as of the consolidated balance
sheet dates due to the short period of time to maturity; and accounts receivable and accounts payable are stated at their carrying value, which approximates
fair value due to the short time to the expected receipt or payment. The revolving line of credit is stated at the carrying value as the stated interest rate
approximates market rates currently available to the Company, which are considered Level 2 inputs.
The Company did not have any non-financial assets or non-financial liabilities recognized at fair value on a recurring basis at December 31, 2022 and
2021.
Foreign Currency Translation
Balance sheet accounts of the Company’s foreign subsidiaries are translated at the exchange rate in effect at the end of each period. Statement of operations
accounts are translated using the weighted average of the prevailing exchange rates during each period. Gains or losses resulting from foreign currency
transactions are included in the Company’s Consolidated Statements of Operations under the caption “Other non-operating expense (income), net” whereas
translation adjustments are reflected in the Consolidated Statements of Comprehensive Income (Loss) under the caption “Foreign currency translation
adjustment.”
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments in cash, cash equivalents and
accounts receivables. The Company is exposed to credit risk and liquidity risk in the event of default by the financial
49
institutions or issuers of investments in excess of FDIC insured limits. The Company performs periodic evaluations of the relative credit standing of these
financial institutions and limits the amount of credit exposure with any institution.
Accounts receivable are unsecured and represent amounts due based on contractual obligations of customers. Our five largest individual customers
accounted for approximately 67% of our gross sales in 2022, 66% of our gross sales in 2021, and 67% of our gross sales in 2020. During 2022, our four
largest customers - Walmart, Target, Amazon, Best Buy - each accounted for between 10% to 23% of our consolidated gross sales. Additionally, as of
December 31, 2022, the Company had three customers with open receivables greater than 10% of the total receivable balance.
Concentrations of credit risk with respect to accounts receivable are mitigated by performing ongoing credit evaluations of customers to assess the
probability of collection based on a number of factors, including past transaction experience with the customer, evaluation of their credit history, limiting
the credit extended, and review of the invoicing terms of the contract. In addition, the Company has credit insurance in place through a third-party insurer
against defaults by certain other domestic and international customers, subject to policy limits. The Company generally does not require customers to
provide collateral to support accounts receivable. The Company has recorded an allowance for doubtful accounts for those receivables that were
determined not to be collectible.
Foreign cash balances at December 31, 2022 and 2021 were $6.5 million and $10.2 million, respectively.
Segment Information
The company operates in a single reportable segment and two reporting unit structure. The entire business is managed by a single management team whose
chief operating decision maker is the Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of
allocating resources and evaluating financial performance.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial
Instruments,” amending the accounting for the impairment of financial instruments, including trade receivables. Under previous guidance, credit losses
were recognized when the applicable losses had a probable likelihood of occurring and this assessment was based on past events and current conditions.
The amended guidance eliminates the “probable” threshold and requires an entity to use a broader range of information, including forecast information
when estimating expected credit losses. Generally, this should result in a more timely recognition of credit losses. The requirements of the amended
guidance should be applied using a modified retrospective approach except for debt securities, which require a prospective transition approach. We adopted
this guidance as of January 1, 2020. The adoption of this guidance did not have a material impact on the Company's financial condition and results of
operations.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on
Financial Reporting (ASU 2020-04).” In 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or
compelling banks to submit the London Interbank Offered Rate (“LIBOR”), a benchmark interest rate referenced in a variety of agreements, after 2021. In
December 2022, the FASB issued ASU No. 2022-06, “Deferral of the Sunset Date of Reference Rate Reform (Topic 848).” Topic 848 provides optional
expedients and exceptions for applying GAAP to transactions affected by reference rate (e.g., LIBOR) reform if certain criteria are met, for a limited period
of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The ASU deferred the
sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The ASU is effective as of December 21, 2022 through December 31, 2024. The
Company does not expect the new guidance to have a material impact on their financial position, results of operations or liquidity.
Note 2. Acquisitions
Neat Microphones
On January 12, 2021, the Company acquired certain assets related to the Neat Microphones business (“Neat Microphones”) of Stray Electrons LLC, a
California limited liability company for a purchase price of $2.5 million and up to $2.3 million in potential earn-outs based on revenues and earnings
targets for the year ended December 31, 2021, as provided in the asset purchase agreement. The closing payment was funded from cash. In addition,
business transaction costs incurred in connection with the acquisition of $0.3 million for the year ended December 31, 2021, were recorded as a component
of “General and administrative” expenses in the Company’s Consolidated Statements of Operations. Neat Microphones creates, manufactures, and sells
high-quality digital USB and analog microphones that embrace cutting-edge technology and design.
50
The goodwill from the acquisition of Neat Microphones, which is fully deductible for tax purposes, consists largely of synergies and economies of scale
expected from adding the operations of Neat Microphones’ and the Company’s existing business and supply channels. The fair value of Neat Microphones’
identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all expected future cash flows either
through the use of the multi-period excess earnings method or the relief-from-royalty method. Some of the more significant assumptions inherent in the
development of intangible asset values include: the amount and timing of projected future cash flows, the discount rate selected to measure the risks
inherent in the future cash flows, the assessment of the intangible asset’s life cycle, as well as other factors. The following table summarizes key
information underlying intangible assets related to the Neat Microphones acquisition:
(In thousands)
Customer relationships
Tradenames
Developed technology
Total
Life
2 Years
10 Years
7 Years
$
$
Amount
440
380
1,100
1,920
No payments were made under the contingent earn-out provisions of the asset purchase agreement as certain revenue targets were not achieved, and as
such, the $1.9 million fair value of contingent consideration recorded related to the potential $2.3 million in earn-outs has been fully released as of
December 31, 2021.
Note 3. Fair Value Measurement
The Company follows a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize
the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•
•
•
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active, or other
inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable
inputs.
Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt instruments and certain warrants. As of December
31, 2022 and 2021, the Company has not elected the fair value option for any financial assets and liabilities for which such an election would have been
permitted.
The following is a summary of the carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2022 and 2021:
Financial Assets and Liabilities:
Cash and cash equivalents
Credit Facility
December 31, 2022
December 31, 2021
Reported
Fair Value
Reported
Fair Value
(in thousands)
$
$
11,396 $
19,053 $
11,396 $
19,053 $
37,720 $
— $
37,720
—
Cash equivalents are stated at amortized cost, which approximates fair value as of the consolidated balance sheet dates, due to the short period of time to
maturity; and accounts receivable and accounts payable are stated at their carrying value, which approximates fair value due to the short time to the
expected receipt or payment. The carrying value of the Credit Facility equals fair value as the stated interest rate approximates market rates currently
available to the Company, which is considered a Level 2 input.
Note 4. Allowance for Sales Returns
The following table provides the changes in the Company’s sales return reserve, which is classified as a reduction of accounts receivable:
51
Balance, beginning of period
Reserve accrual
Recoveries and deductions, net
Balance, end of period
Note 5. Composition of Certain Financial Statement Items
Inventories
Inventories consist of the following:
2022
Year ended December 31,
2021
in thousands
2020
$
$
8,997 $
15,574
(16,754 )
7,817 $
11,233 $
21,506
(23,742 )
8,997 $
8,815
21,193
(18,775 )
11,233
Finished goods
Raw materials
Total inventories
December 31,
2022
December 31,
2021
$
$
(in thousands)
70,407 $
845
71,252 $
101,446
487
101,933
The Company recorded $3.2 million and $5.2 million of inventory impairment related charges for the three and twelve months ended December 31, 2022,
respectively, primarily due to the buildup of excess inventory in the distribution channels.
Property and Equipment, net
Property and equipment, net consists of the following:
Machinery and equipment
Software and software development
Furniture and fixtures
Tooling
Leasehold improvements
Demonstration units and convention booths
Total property and equipment, gross
Less: accumulated depreciation and amortization
Total property and equipment, net
December 31,
2022
December 31,
2021
(in thousands)
2,373 $
2,396
1,713
9,901
2,050
15,379
33,812
(27,450 )
6,362 $
2,255
2,404
1,257
7,855
1,794
14,493
30,058
(23,103 )
6,955
$
$
Depreciation and amortization expense on property and equipment for the years ended December 31, 2022, 2021 and 2020 was $4.6 million, $4.1 million
and $4.4 million, respectively.
Other Current Liabilities
Other current liabilities consist of the following:
Accrued employee expenses
Accrued marketing
Accrued royalty
Accrued tax-related payables
Accrued freight
Accrued expenses
Total other current liabilities
December 31,
2022
December 31,
2021
(in thousands)
4,171 $
4,147
2,527
4,159
1,746
8,683
25,433 $
4,114
3,723
11,582
3,459
6,251
8,564
37,693
$
$
52
Other non-operating expense (income), net
Other non-operating expense (income), net consists of the following:
Acquisition-related settlement
Change in fair value of contingent consideration
Other non-operating expense (income)
Total other non-operating expense (income),net
Note 6. Goodwill and Other Intangible Assets
Acquired Intangible Assets
2022
Year Ended
December 31,
2021
(in thousands)
2020
$
$
— $
—
1,753
1,753 $
— $
(1,928 )
1,827
(101 ) $
(1,702 )
(1,121 )
(934 )
(3,757 )
Acquired identifiable intangible assets, and related accumulated amortization, as of December 31, 2022 and 2021 consist of:
Customer relationships
Tradenames
Developed technology
Foreign currency
Total Intangible Assets
Customer relationships
Tradenames
Developed technology
Foreign currency
Total Intangible Assets
Gross
Carrying
Value
December 31, 2022
Accumulated
Amortization
(in thousands)
Net Book
Value
8,085 $
3,066
1,884
(1,375 )
11,660 $
6,750 $
2,147
1,495
(1,344 )
9,048 $
1,335
919
389
(31 )
2,612
Gross
Carrying
Value
December 31, 2021
Accumulated
Amortization
(in thousands)
Net Book
Value
8,355 $
3,066
1,884
(896 )
12,409 $
6,315 $
730
440
(865 )
6,620 $
2,040
2,336
1,444
(32 )
5,788
$
$
$
$
In connection with the October 2012 acquisition of TB Europe, the acquired intangible asset related to customer relationships is being amortized over an
estimated useful life of thirteen years with the amortization being included within sales and marketing expense.
In May 2019, the Company completed its acquisition of the business and assets of ROCCAT. The acquired intangible assets relating to developed
technology, customer relationships, and trade name are subject to amortization. In January 2021, the Company completed its acquisition of the business and
assets relating to the Neat Microphones business. The acquired intangible assets relating to developed technology, customer relationships, and trade name
are subject to amortization. Refer to Note 2, “Acquisitions” for additional information related to Neat Microphones’ identifiable intangible assets.
During the fourth quarter of 2022, the Company made the decision to increasingly leverage the Turtle Beach brand across our product portfolio including
PC products over time. Due to this decision, the Company prepared an impairment calculation to determine the present value of the ROCCAT tradename
asset using the relief from royalty method. As a result of the present value calculation, the Company recorded an impairment charge of $0.8 million for the
ROCCAT tradename intangible asset.
During the fourth quarter of 2022, as part of the 2023 annual operating and strategic plan process, the Company made the decision to transition microphone
products to the Turtle Beach brand. As a result of this decision, there was no longer a basis for carrying the remaining net
53
intangible assets related to the Neat brand. In the fourth quarter 2022, the Company recorded an impairment charge of $1.1 million related to the remaining
Neat net intangible assets.
Amortization expense related to definite lived intangible assets was $1.2 million, $1.3 million and $0.9 million for the years ended December 31, 2022,
2021 and 2020, respectively.
As of December 31, 2022, estimated annual amortization expense related to definite lived intangible assets in future periods is as follows:
2023
2024
2025
2026
Thereafter
Total
(in thousands)
$
$
1,045
1,003
425
170
-
2,643
All goodwill is attributable to the gaming accessories reporting unit. Changes in the carrying values of goodwill for twelve months ended December 31,
2022 are as follows:
Balance as of January 1, 2022
No Activity
Balance as of December 31, 2022
Note 7. Credit Facilities and Long-Term Debt
(in thousands)
10,686
-
10,686
$
$
The Company had $19.1 million outstanding related to its revolving credit facility as of December 31, 2022 and no outstanding balance as of December 31,
2021.
Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was $1.2 million, $0.4 million and $0.5 million
for the years ended December 31, 2022, 2021 and 2020, respectively.
Amortization of deferred financing costs was $0.2 million for each of the years ended December 31, 2022, 2021 and 2020, respectively.
Revolving Credit Facility
On March 5, 2018, Turtle Beach and certain of its subsidiaries entered into an amended and restated loan, guaranty and security agreement (the “Credit
Facility”) with Bank of America, N.A. (“Bank of America”), as administrative agent, collateral agent and security trustee for Lenders (as defined therein),
which replaced the then existing asset-based revolving loan agreement. The Credit Facility was amended on each of December 17, 2018, May 31, 2019,
and March 10, 2023. The Credit Facility, as amended, expires on April 1, 2025 and provides for a line of credit of up to $80 million inclusive of a sub-
facility limit of $15 million for TB Europe, a wholly-owned subsidiary of Turtle Beach. In addition, the Credit Facility provides for a $40 million accordion
feature.
On March 10, 2023, the Company entered into a Third Amendment to Amended and Restated Loan, Guaranty and Security Agreement (the “Third
Amendment”), by and among the Company, VTB, TBC Holding Company LLC, TB Europe, VTBH, the financial institutions party thereto from time to
time and Bank of America, as administrative agent, collateral agent and security trustee for the lenders.
The Third Amendment provides for, among other things: (i) extending the maturity date of the Credit Facility from March 5, 2024 to April 1, 2025; (ii)
updating the interest rate and margin terms; (iii) removing the FILO Loan facility; (iv) updating the sub-facility limit for TB Europe to $15 million; (v)
increasing our undrawn commitment fee by 0.125%; and (vi) transitioning the reference interest rates from LIBOR to BSBY, SONIA and EUIBOR, as
applicable.
The maximum credit availability for loans and letters of credit under the Credit Facility is governed by a borrowing base determined by the application of
specified percentages to certain eligible assets, primarily eligible trade accounts receivable and inventories, and is subject to
54
discretionary reserves and revaluation adjustments. The Credit Facility may be used for working capital, the issuance of bank guarantees, letters of credit
and other corporate purposes.
Amounts outstanding under the Credit Facility bear interest at a rate equal to (i) a rate published by Bank of America or the U.S. Bloomberg Short-Term
Bank Yield Index (“BSBY”) rate for loans denominated in U.S. Dollars, (ii) the Sterling Overnight Index Average Reference Rate (“SONIA”) for loans
denominated in Sterling, (iii) and the Euro Interbank Offered Rate (“EUIBOR”) for loans denominated in Euros, plus in each case, an applicable margin,
which is between 0.50% to 2.50% for base rate loans and UK base rate loans, and 1.50% and 3.50% or U.S. BSBY rate loans, U.S. BSBY daily floating
rate loans and UK alternative currency loans. In addition, Turtle Beach is required to pay a commitment fee on the unused revolving loan commitment at a
rate ranging from 0.375% to 0.50%, and letter of credit fees and agent fees. As of December 31, 2022, interest rates for outstanding borrowings were
8.75% for base rate loans and 6.50% for LIBOR rate loans, which reference interest rates were still in effect prior to the Libor Transition Amendments.
The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met or certain other events occur (as defined in the
Credit Facility). The Credit Facility requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as
of the last day of each fiscal quarter.
The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit the Company's ability to take certain actions,
including its ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and
consolidations, engage in sale leaseback transactions and transactions with affiliates and encumber and dispose of assets. Obligations under the Credit
Facility are secured by a security interest and lien upon substantially all of the Company's assets.
As of December 31, 2022, the Company was in compliance with all the financial covenants under the Credit Facility, as amended, and excess borrowing
availability was approximately $36.8 million.
Note 8. Income Taxes
The provision (benefit) for income taxes consists of the following:
Federal:
Current
Deferred
Total Federal
State and Local:
Current
Deferred
Total State and Local
Foreign
Current
Deferred
Total Foreign
Total
2022
Year Ended
December 31,
2021
(in thousands)
2020
$
$
(579 ) $
4,667
4,088
(762 )
1,602
840
255
(90 )
165
5,093 $
(511 ) $
701
190
769
346
1,115
1,051
72
1,123
2,428 $
8,518
714
9,232
3,476
(221 )
3,255
1,249
(25 )
1,224
13,711
55
The reconciliation between the provision (benefit) for income taxes and the expected provision (benefit) for income taxes at the U.S. federal statutory rate
is as follows:
U.S. Operations
Foreign Operations
Income (loss) before income taxes
Federal statutory rate
Provision (benefit) for income taxes at federal statutory rate
State taxes, net of federal benefit
Foreign tax rate differential
Change in valuation allowance
Excess tax benefit recognized
Foreign Derived Intangible Income (a)
Foreign tax credit
R&D Credit (b)
Global intangible low taxed income
Prior year adjustment
Change in unrecognized tax benefits
Section 162(m)
Other
Provision for income taxes
2022
Year Ended
December 31,
2021
(in thousands)
2020
$
$
(53,947 ) $
(506 )
(54,453 )
21 %
(11,435 )
(2,098 )
90
18,353
(232 )
—
—
(400 )
325
—
(382 )
395
477
5,093 $
15,146 $
5,003
20,149
21 %
4,231
812
(60 )
—
(2,159 )
(976 )
(770 )
(878 )
530
—
673
634
391
2,428 $
46,970
5,487
52,457
21 %
11,016
1,434
4
(2 )
(413 )
—
(568 )
—
586
16
969
414
255
13,711
(a) The Company completed an analysis of its export sales during 2021. The FDII benefit is for the 2020 and 2021 tax years.
(b) The Company completed a Research and Development credit analysis study during 2021. The R&D credit benefit is for the 2018 through 2021 tax
years.
The tax effects of significant items comprising the Company’s deferred tax assets (liabilities) are as follows:
Allowance for doubtful accounts
Fixed assets
Goodwill
Employee benefits
Intangible assets
Inventories
Lease liability
Net operating loss
Research and development expenses
Right of use asset
Sales reserves
Unrecognized tax benefits
Other
Valuation allowance
Net deferred tax assets (liabilities)
December 31,
2022
December 31,
2021
(in thousands)
4 $
(897 )
(1,268 )
2,254
1,573
2,846
2,227
7,354
3,835
(2,010 )
1,501
470
852
18,741
(19,244 )
(503 ) $
4
(250 )
(1,162 )
1,980
1,053
1,559
1,655
1,271
—
(1,547 )
1,520
575
(68 )
6,590
(891 )
5,699
$
$
At December 31, 2022, the Company had $24.6 million of indefinite lived federal net operating loss carryforwards and $34.6 million of state net operating
loss carryforwards, which will begin to expire in 2029. As of December 31, 2022, $23.9 million of federal net operating losses are carried forward as
indefinite-lived net operating losses. As of December 31, 2022, the Company has federal research and development credit carryforwards of $0.3 million,
which will expire in 2042 if unutilized, and state research and development credit carryforwards of $0.4 million, which carryforward until exhausted.
Utilization of these operating loss carryforwards and credits may be subject to an annual limitation based on changes in ownership, as defined by Section
382 & 383 of the Internal Revenue Code of 1986, as amended.
56
As required by the authoritative guidance on accounting for income taxes the Company evaluates the realizability of deferred tax assets on a jurisdictional
basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a
portion of the deferred taxes will not be realized. The Company considers all positive and negative evidence in determining if, based on the weight of such
evidence, a valuation allowance is required. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more
likely than not realizable, the Company establishes a valuation allowance. The significant current year pre-tax loss, coupled with cumulative book losses
projected in early future years, is significant negative evidence considered by the Company in recording an $18.4 million increase to the valuation
allowance as of December 31, 2022.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
Gross unrecognized tax benefit, beginning of period
Additions based on tax positions related to the current year
Additions related to tax positions in a prior year
Settlements related to tax positions in a prior period
Decreases based on tax positions in a prior period
Gross unrecognized tax benefit, end of period
December 31,
2022
December 31,
2021
$
$
(in thousands)
3,415 $
150
158
(321 )
(400 )
3,002 $
3,090
573
—
—
(248 )
3,415
The Company recognizes only those tax positions that meet the more-likely-than-not recognition threshold, and establishes tax reserves for uncertain tax
positions that do not meet this threshold. The Company settled uncertain tax positions in certain jurisdictions, of approximately $0.3 million for the year
ended December 31, 2022; none were settled for the year ended December 31, 2021. To the extent these unrecognized tax benefits are ultimately
recognized, approximately $2.7 million will impact the Company’s effective tax rate and $0.3 million will be offset by a valuation allowance in future
periods. The Company is filing for relief provisions in certain jurisdictions and based on such anticipated filings, it is reasonably possible that amounts of
unrecognized tax benefits could decrease by $0.7 million within the next twelve months. Interest and penalties associated with income tax matters are
included in the provision for income taxes. As of December 31, 2022, the Company had uncertain tax positions of $2.9 million, inclusive of $0.8 million of
interest and penalties.
The Company is not currently under examination by federal, state or foreign taxing jurisdictions. Further, at any given time, multiple tax years may be
subject to examination by various taxing authorities. The recorded amounts of income tax are subject to adjustment upon examination, changes in
interpretation and changes in judgment utilized in determining estimates.
The Company considers the earnings of its foreign entities to be permanently reinvested outside the United States based on estimates that future cash
generation will be sufficient to meet future domestic cash needs. Accordingly, deferred taxes have not been recorded for the undistributed earnings of the
Company's foreign subsidiaries. As a result of the Tax Cuts and Jobs Act (“TCJA”) and the current U.S. taxation of deemed repatriated earnings, the
additional taxes that might be payable upon repatriation of foreign earnings are not significant.
The TCJA introduced a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a measure to tax certain intercompany
payments under the base erosion anti-abuse tax “BEAT” regime. For the years ended December 31, 2022 and 2021, the Company did not generate
intercompany transactions that met the BEAT threshold but does have to include GILTI relating to the Company's foreign subsidiaries. The Company
elected to account for GILTI as a current period cost.
The Company files U.S., state, and foreign income tax returns in jurisdictions with various statutes of limitations. Below is a summary of the filing
jurisdictions and open tax years:
U.S. Federal
U.S. State and Local
Non-U.S.
Open Years
2019 - 2021
2018 - 2021
2019 - 2021
On August 16, 2022, the Inflation Reduction Act was signed into law. The Inflation Reduction Act includes various tax provisions, which are effective for
tax years beginning on or after January 1, 2023. For tax years beginning after December 31, 2021, the Tax Cuts & Jobs Act of 2017 eliminated the option to
deduct research and development expenditures as incurred and instead required taxpayers to capitalize and amortize them over five or 15 years beginning in
2022. The Company included the impact of the research and development expenditures in its December 31, 2022 tax expense. The Inflation Reduction Act
includes a 1% excise tax on publicly traded US corporations for the value of its stock repurchased after December 31, 2022. The Company does not expect
the impact of the excise tax to be material to its financial statement. The Company will continue to monitor possible future impact of changes in tax
legislation.
57
Note 9. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share of common stock attributable to common stockholders:
Year Ended
December 31,
2021
(in thousands, except per-share data)
2022
2020
Net income (loss)
$
(59,546 ) $
17,721 $
38,746
Weighted average common shares outstanding — Basic
Plus incremental shares from assumed conversions:
Dilutive effect of restricted stock
Dilutive effect of stock options
Dilutive effect of warrants
Weighted average common shares outstanding — Diluted
Net income (loss) per share:
Basic
Diluted
16,450
15,915
14,801
—
—
—
16,450
438
1,348
550
18,251
$
$
(3.62 ) $
(3.62 ) $
1.11 $
0.97 $
235
917
412
16,365
2.62
2.37
Incremental shares from stock options and restricted stock awards are computed by the treasury stock method. The weighted average shares listed below
were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were
otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and
vesting of restricted stock, reduced by the repurchase of shares with the proceeds from the assumed exercises, unrecognized compensation expense for
outstanding awards and the estimated tax benefit of the assumed exercises.
Stock options
Unvested restricted stock awards
Total
Note 10. Equity and Stock-Based Compensation
Stock Repurchase Activity
2022
Year Ended
December 31,
2021
(in thousands)
2020
1,669
1,449
3,118
721
294
1,015
813
136
949
On April 9, 2019, the Board of Directors authorized a stock repurchase program to acquire up to $15.0 million of its common stock. Any repurchases under
the program will be made from time to time on the open market at prevailing market prices. On April 1, 2021, the Company’s Board of Directors approved
an extension and expansion of this repurchase program to acquire up to $25 million of its common shares, expiring April 9, 2023. On March 3, 2023, the
Company’s Board of Directors approved a two year extension of the stock repurchase plan. As of December 31, 2022, the Company has repurchased 0.5
million shares of its common stock for a total cost of $7.4 million.
Stock-Based Compensation
On October 30, 2013, the Board of Directors adopted, and on December 27, 2013, the stockholders approved, the 2013 Stock-Based Incentive
Compensation Plan (the “2013 Plan”), that became effective upon consummation of the Merger (as defined below) on January 15, 2014 and was
subsequently amended at the 2019 annual meeting of stockholders and at the 2021 annual meeting of stockholders. The Company’s stock-based
compensation program is a broad-based program designed to attract and retain employees while also aligning employees’ interests with the interests of the
Company's stockholders. In addition, members of the Board of Directors participate in the stock-based compensation program in connection with their
service on the board.
Stock option awards outstanding under the 2013 Plan are time-based and granted at exercise prices which are equal to the market value of the Company’s
common stock on the grant date and expire no later than ten years from the date of grant, but only to the extent they have vested. The options generally vest
as specified in the option agreements subject, in some instances, to acceleration in certain circumstances. The restrictions on restricted stock generally lapse
over a three-year period from the date of the grant. In the event a participant terminates
58
employment with the Company, any vested stock options, and any restricted stock still subject to restrictions are generally forfeited if they are not exercised
within 90 days.
The following table presents the stock activity and the total number of shares available for grant as of December 31, 2022:
Balance at December 31, 2021
Options cancelled
Restricted stock granted
Forfeited/ Expired restricted stock added back
Performance-Based restricted stock unearned
Performance-Based restricted stock granted
Balance at December 31, 2022
(in thousands)
998
71
(507 )
147
8
(167 )
550
Total estimated stock-based compensation expense for employees and non-employees, related to all of the Company's stock-based awards, was comprised
as follows:
Cost of revenue
Selling and marketing
Research and development
General and administrative
Total stock-based compensation
2022
Year ended December 31,
2021
(in thousands)
2020
$
$
433 $
2,028
1,444
4,079
7,984 $
343 $
1,746
1,379
4,188
7,656 $
927
1,148
664
2,810
5,549
Forfeitures on option grants are estimated at 10% based on evaluation of historical and expected future turnover for non-executives and 0% for executives.
Stock-based compensation expense was recorded net of estimated forfeitures, such that expense was recorded only for those stock-based awards that are
expected to vest. The Company reviews this assumption periodically and will adjust it if it is not representative of future forfeiture data and trends within
employee types (executive vs. non-executive).
The associated tax benefit recognized in the Consolidated Statements of Operations for the fiscal years ended December 31, 2022 and 2021 was
approximately $0.2 million and $2.2 million, respectively.
Stock Option Activity
Outstanding at December 31, 2021
Granted
Exercised
Forfeited
Outstanding at December 31, 2022
Vested and expected to vest at December 31, 2022
Exercisable at December 31, 2022
Options Outstanding
Number of
Shares
Underlying
Outstanding
Options
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
1,739,240 $
-
(90,245 )
(71,450 )
1,577,545 $
1,571,949 $
1,283,196 $
7.72
-
7.22
9.71
7.66
7.73
7.55
7.02 $
25,542,823
5.81 $
2,465,015
5.80 $
2,460,325
5.49 $
2,252,404
Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding,
in-the-money options. The aggregate intrinsic value of option exercises was $0.8 million and $13.6 million for the years ended December 31, 2022 and
2021, respectively.
As of December 31, 2022, total unrecognized compensation cost related to non-vested stock options granted to employees was $1.2 million, which is
expected to be recognized over a remaining weighted average vesting period of 1.2 years.
59
Determination of Fair Value
Option valuation models require the input of highly subjective assumptions, including expected stock price volatility. The Black-Scholes option pricing
model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. The fair value of
options granted under the 2013 Plan was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Expected term (in years)
Risk-free interest rate
Expected volatility
Dividend rate
-
-
-
-
Each of these inputs is subjective and generally requires significant judgment to determine. The risk-free rate is based on a zero-coupon U.S. Treasury rate
in effect at the time of grant with maturity dates that coincide with the expected life of the options. The expected life of the options is based on a simplified
weighted average taking into account the vesting conditions and contractual life of the award. Since the Company had a limited trading history for its
common stock, the expected volatility was derived from the historical stock volatilities of several unrelated public companies within the Company’s
industry that are considered to be comparable to the Company’s business over a period equivalent to the expected term of the stock option grants.
No options were granted during the year ended December 31, 2022.
The weighted average grant date fair value of options granted during the years ended December 31, 2021 and 2020 was $14.89 and $3.82, respectively. The
total estimated fair value of employee options vested during the three years ended December 31, 2022 was $4.2 million, $2.6 million and $1.7 million,
respectively.
Restricted Stock Activity
Nonvested restricted stock at December 31, 2021
Granted
Vested
Shares forfeited
Nonvested restricted stock at December 31, 2022
Weighted
Average
Grant Date
Fair Value
Per Share
16.81
20.64
16.19
19.79
18.75
Shares
788,454 $
506,715
(282,588 )
(147,135 )
865,446 $
As of December 31, 2022 total unrecognized compensation cost related to the nonvested restricted stock awards granted was $12.1 million, which is
expected to be recognized over a remaining weighted average vesting period of 2.1 years.
Performance-Based Restricted Share Units
As of December 31, 2022, the Company had 249,674 performance-based restricted share units outstanding. The vesting of performance-based restricted
share units is determined over a three-year period based on (i) the amount by which revenue growth exceeds a defined baseline market growth each year
and (ii) the achievement of specified tiers of adjusted EBITDA as a percentage of net revenue each year, with the ability to earn and vest into such units
ranging from 0% to 200%. Included in the Company's share-based compensation was expense recognized for the Company's performance-based restricted
share unit awards of $0.0 million and $1.0 million in 2022 and 2021, respectively.
Note 11. Stockholders’ Equity
At-the-Market Common Stock Issuance
On August 7, 2020, the Company entered into an ATM Equity Offering Sales Agreement (the “Sales Agreement”) with BofA Securities, Inc.
(the “Sales Agent”). Pursuant to the terms of the Sales Agreement, the Company may sell from time to time through the Sales Agent shares of
the Company’s common stock, par value $0.001 per share, having an aggregate offering price of up to $30 million. The Company intends to use the net
proceeds from the offering, after deducting the Sales Agent’s commissions and the Company’s offering expenses, to support its strategic growth plans, as
well as for general corporate purposes.
60
During the year ended December 31, 2020, the Company sold a total of 237,813 shares of its common stock under the Sales Agreement in the open market
at an average gross selling price of $18.39 per share for net proceeds of $4.4 million. During the years ended December 31, 2022 and 2021, the Company
had no sales of its common stock under the Sales Agreement.
Note 12. Segment Information
The Company operates in a single reportable segment and two reporting unit structure. The entire business is managed by a single management team whose
chief operating decision maker is the Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of
allocating resources and evaluating financial performance.
The following table represents total net revenue based on where customers are physically located:
North America
Europe and Middle East
Asia Pacific
Total net revenues
2022
Year Ended
December 31,
2021
(in thousands)
2020
$
$
163,605 $
58,917
17,644
240,166 $
244,430 $
99,685
22,239
366,354 $
262,170
83,880
14,043
360,093
The following table represents property and equipment, net based on physical location:
United States
International
Total
Note 13. Commitments and Contingencies
Litigation
Year Ended
December 31,
2022
2021
(in thousands)
5,045 $
1,317
6,362 $
6,053
902
6,955
$
$
The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the amount of any liability that
could arise with respect to these actions cannot be determined with certainty, in the Company’s opinion, any such liability will not have a material adverse
effect on its consolidated financial position, consolidated results of operations or liquidity.
Shareholders Class Action: On August 5, 2013, VTB Holdings, Inc. (“VTBH”) and the Company (f/k/a Parametric Sound Corporation) announced that
they had entered into the Merger Agreement pursuant to which VTBH would acquire an approximately 80% ownership interest and existing shareholders
would maintain an approximately 20% ownership interest in the combined company (the “Merger”). Following the announcement, several shareholders
filed class action lawsuits in California and Nevada seeking to enjoin the Merger. The plaintiffs in each case alleged that members of the Company’s Board
of Directors breached their fiduciary duties to the shareholders by agreeing to a merger that allegedly undervalued the Company. VTBH and the Company
were named as defendants in these lawsuits under the theory that they had aided and abetted the Company’s Board of Directors in allegedly violating their
fiduciary duties. The plaintiffs in both cases sought a preliminary injunction seeking to enjoin closing of the Merger, which, by agreement, was heard by the
Nevada court with the California plaintiffs invited to participate. On December 26, 2013, the court in the Nevada case denied the plaintiffs’ motion for a
preliminary injunction. Following the closing of the Merger, the Nevada plaintiffs filed a second amended complaint, which made essentially the same
allegations and sought monetary damages as well as an order rescinding the Merger. The California plaintiffs dismissed their action without prejudice, and
sought to intervene in the Nevada action, which was granted. Subsequent to the intervention, the plaintiffs filed a third amended complaint, which made
essentially the same allegations as prior complaints and sought monetary damages. On June 20, 2014, VTBH and the Company moved to dismiss the
action, but that motion was denied on August 28, 2014. On September 14, 2017, a unanimous en banc panel of the Nevada Supreme Court granted
defendants’ petition for writ of mandamus and ordered the trial court to dismiss the complaint but provided a limited basis upon which plaintiffs could seek
to amend their complaint. Plaintiffs amended their complaint on December 1, 2017 to assert the same claims in a derivative capacity on behalf of the
Company, as a well as in a direct capacity, against VTBH, Stripes Group, LLC, SG VTB Holdings, LLC, and the former members of the Company’s Board
of Directors. All defendants moved to dismiss this amended complaint on January 2, 2018, and those motions were denied on March 13, 2018. Defendants
petitioned the Nevada Supreme Court to reverse this ruling on
61
April 18, 2018. On June 15, 2018, the Nevada Supreme Court denied defendants’ writ petition without prejudice. The district court subsequently entered a
pretrial schedule and set trial for November 2019. On January 18, 2019, the district court certified a class of shareholders of the Company as of January 15,
2014. On October 11, 2019, the parties notified the district court that they had reached a settlement that would resolve the pending action if ultimately
approved by the Court. On January 13, 2020, the district court preliminarily approved the settlement between the plaintiffs and all defendants. A final
hearing was held on May 18, 2020, wherein the Court approved the settlement and entered final judgment.
On May 22, 2020, PAMTP LLC, which purports to hold the claims of eight shareholders who opted out of the class settlement described above, brought
suit against the Company, the Company’s CEO, Juergen Stark, Stripes Group, LLC, SG VTB Holdings, LLC, Kenneth Fox, and former members of the
Company’s Board of Directors in Nevada state court. This opt-out action asserts the same direct claims that were asserted by the class of shareholders
described above. The defendants filed two motions to dismiss this complaint, which were heard on August 10, 2020. The Court denied those motions by
order of August 20, 2020. The case was tried in August 2021 and all remaining defendants, including the Company, prevailed on all counts with final
judgment entered in their favor on September 3, 2021. Plaintiff is appealing that judgment.
Employment Litigation: On April 20, 2017, a former employee filed an action in the Superior Court for the County of San Diego, State of California. The
complaint alleges claims including wrongful termination, retaliation and various other provisions of the California Labor Code. The complaint seeks
unspecified economic and non-economic losses, as well as allegedly unpaid wages, unreimbursed business expenses statutory penalties, interest, punitive
damages and attorneys’ fees. The Company filed a cross-complaint against the former employee on May 25, 2017 for certain activities related to his
employment with the Company. The matter was tried between September 24 and October 7, 2021. On October 8, 2021 a jury rendered a unanimous
verdict in favor of the Company on the employment claims. The Court granted a directed verdict to the Company on its Cross- Complaint against the
former employee. Judgment was entered in favor of the Company on October 27, 2021. On December 20, 2021, the former employee filed a notice of
appeal of the judgment.
Intellectual Property Dispute: On November 24, 2020, ABP Technology Limited (ABP) issued a claim for trademark infringement in the High Court of
England and Wales against Voyetra Turtle Beach, Inc. (“VTB”) and Turtle Beach Europe Limited (“TB Europe”) relating to the use by VTB and TB
Europe of the sign STEALTH on and in relation to gaming headsets in the UK. On November 16, 2022 the parties entered into a confidential settlement
agreement in full and final settlement of all claims regarding this matter. Accordingly, the High Court claim has been discontinued.
Consumer Class Action: On June 13, 2022, an individual filed a putative class action lawsuit against Voyetra Turtle Beach, Inc. (“VTB”) in the United
States District Court for the Central District of California. The complaint alleged that VTB violated the Telephone Consumer Protection Act, 47 U.S.C. §
227(b), by sending marketing-related text messages to the plaintiff and other members of the public who have registered their telephone numbers on the
national Do-Not-Call Registry. The plaintiff sought to represent a class of all persons in the United States whose telephone numbers were present on the
national Do-Not-Call Registry and received text messages from VTB within the last four years. The plaintiff voluntarily dismissed his claims with
prejudice, and District Judge Fernando Olguin entered an order dismissing the case on January 25, 2023.
The Company will continue to vigorously defend itself in the foregoing unresolved matters. However, litigation and investigations are inherently uncertain.
Accordingly, the Company cannot predict the outcome of these matters. The Company has not recorded any accrual at December 31, 2022 for contingent
losses associated with these matters based on its belief that losses, while possible, are not probable. Further, any possible range of loss cannot be reasonably
estimated at this time. The unfavorable resolution of these matters could have a material adverse effect on the Company’s business, results of operations,
financial condition, or cash flows. The Company is engaged in other legal actions, not described above, arising in the ordinary course of its business and,
while there can be no assurance, believes that the ultimate outcome of these other legal actions will not have a material adverse effect on its business,
results of operations, financial condition, or cash flows.
Warranties
The Company warrants products against certain manufacturing and other defects. These product warranties are provided for specific periods of time
depending on the nature of the product. Warranties are generally fulfilled by replacing defective products with new products. The following table provides
the changes in our product warranties, which are included in other current liabilities:
62
Warranty, beginning of period
Warranty costs accrued
Settlements of warranty claims
Warranty, end of period
Operating Leases – Right of Use Assets
2022
Year ended December 31,
2021
(in thousands)
2020
$
$
856 $
380
(618 )
618 $
1,039 $
674
(857 )
856 $
742
1,336
(1,039 )
1,039
The Company adopted ASU 2016-02, Leases, on January 1, 2019. The Company determines whether an arrangement is a lease at inception. The Company
leases office spaces that provide for future minimum rental lease payments under non-cancelable operating leases that have remaining lease terms of one
year to nine years, and do not contain any material residual value guarantees or material restrictive covenants.
The components of the right-of-use assets and lease liabilities were as follows:
Balance Sheet Classification
December 31, 2022
(in thousands)
Right-of-use assets
Lease liability obligations, current
Lease liability obligations, noncurrent
Total lease liability obligations
Weighted-average remaining lease term (in years)
Weighted-average discount rate
Other assets
Other current liabilities
Other liabilities
$
$
$
7,998
1,069
7,533
8,602
6.8
4.3 %
During the year ended December 31, 2022, the Company recognized approximately $1.4 million of lease costs in operating expenses and approximately
$1.2 million of operating cash flows from operating leases.
Approximate future minimum lease payments for the Company’s right of use assets over the remaining lease periods as of December 31, 2022:
2023
2024
2025
2026
2027
Thereafter
Total minimum payments
Less: Imputed interest
Total
(in thousands)
1,289
1,437
1,451
1,361
1,383
3,181
10,102
(1,500 )
8,602
$
$
Note 14. Selected Quarterly Financial Data – Unaudited
Fiscal 2022
Quarter
Net Revenue
Gross Profit
Net Income (Loss)
Earnings (Loss) Per Share
Basic
Diluted
First
Second
Third
Fourth
(in thousands, except per share data)
46,662 $
14,029
(6,476 )
41,300 $
7,882
(17,826 )
51,304 $
7,258
(12,011 )
100,900
20,018
(23,233 )
(0.40 ) $
(0.40 ) $
(1.08 ) $
(1.08 ) $
(0.73 ) $
(0.73 ) $
(1.40 )
(1.40 )
$
$
$
63
Fiscal 2021
Quarter
First
Second
Third
Fourth
Net Revenue
Gross Profit
Net Income (Loss)
Earnings (Loss) Per Share
Basic
Diluted
Note 15. Subsequent Event
$
$
$
(in thousands, except per share data)
93,053
$
34,855
8,838
78,564
$
28,710
1,721
85,307 $
29,273
2,623
109,430
35,545
4,539
0.57 $
0.49 $
0.11 $
0.09 $
0.16 $
0.14 $
0.28
0.25
On March 28, 2023, the Company announced that its Board of Directors has approved the adoption of a limited duration stockholder rights plan.
64
Item 9 - Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A - Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), are designed to ensure that (1) information required to be disclosed in reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC rules and forms; and (2) that such information is accumulated and
communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required
disclosures.
At the conclusion of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision of our Chief
Executive Officer (our principal executive officer, or PEO) and our Chief Financial Officer (our principal financial officer, or PFO), of the effectiveness of
the design and operation of our disclosure controls and procedures. Based upon that evaluation, our PEO and PFO concluded that our disclosure controls
and procedures, as defined in Rule 13a-15(e) of the Exchange Act, were not effective as of December 31, 2022.
Notwithstanding the material weakness in the internal controls over the tax provision discussed below, our management, including our Chief
Executive Officer and our Chief Financial Officer, concluded that the consolidated financial statements in this Annual Report on Form 10-K fairly present,
in all material respects, the Company's financial condition, results of operations and cash flows for the periods presented, in conformity with accounting
principles generally accepted in the United States of America.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or
15d-15(f) of the Exchange Act). Our internal control system was designed to provide reasonable assurance to our management and Board of Directors
regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Because of these inherent limitations, internal control over
financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Management has identified the following material weakness in the Company’s internal control over financial reporting.
We identified a material weakness in internal control related to the proper design and implementation of certain controls over our income tax
provision and management’s review of the income tax provision. The Company utilizes a third-party to assist in the preparation of its quarterly tax
provision. Specifically, the Company did not sufficiently design and implement controls related to the completeness and accuracy of certain aspects of its
tax provision including, the impact of tax law changes on the current and deferred tax provision, the recognition and measurement of certain deferred tax
assets and liabilities, uncertain tax positions, balance sheet classification of tax accounts, and the completeness and accuracy income tax disclosures.
The material weakness in the internal controls over the tax provision did not result in any material misstatements in these financial statements or
omissions in our previously reported financial statements.
Because of the material weakness in the internal controls over the tax provision described above, our management has concluded that as of
December 31, 2022, our system of internal control over financial reporting was not effective based on the framework and criteria established in Internal
Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
BDO USA, LLP, the independent registered public accounting firm that audited the Company’s financial statements included in this Report, has also
audited the Company’s internal control over financial reporting as of December 31, 2022 as stated in its report which appears following Item 9C of this
Annual Report on Form 10-K.
65
Management’s Remediation Plan
Our management, with the oversight of the audit committee of our board of directors, is in the process of designing and implementing a remediation
plan and is taking steps to remediate the material weakness in the internal controls over the tax provision. We are committed to continually improving our
internal controls over financial reporting and remediating the material weakness in the internal controls over the tax provision during fiscal year 2023.
Management plans on implementing several remedial actions to improve our internal controls around our accounting for income taxes processes,
procedures and controls, including:
•
•
•
Management, with the assistance of a third party, will perform an evaluation of the processes and procedures around the Company’s tax
provision processes, internal control design gaps, and recommend process enhancements.
Implementing enhancements and process improvements, including the design and implementation of well defined controls and related
control attributes regarding tax law changes, deferred taxes, uncertain tax positions and income tax disclosures.
Develop a detailed timeline of the tax provision calculation, to ensure that sufficient time is allocated to complete the process as designed.
The material weakness in the internal controls over the tax provision will not be considered remediated until such time as management designs and
implements effective controls that operate for a reasonable period of time and concludes, through testing, that these controls are effective. We will continue
to monitor the effectiveness of our remediation plan and will make the changes we determine to be appropriate.
Changes in Internal Control over Financial Reporting
Other than the material weakness in the internal controls over the tax provision discussed above, there have been no changes in our internal control
over financial reporting during the three months ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B - Other Information
None.
Item 9C - Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
66
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Turtle Beach Corporation
White Plains, New York
Opinion on Internal Control over Financial Reporting
We have audited Turtle Beach Corporation’s (the “Company’s”) internal control over financial reporting as of December 31, 2022, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
“COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December
31, 2022, based on the COSO criteria.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after
the date of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss),
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and schedule (collectively
referred to as “the financial statements”) and our report dated March 29, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Item 9A, “Management’s Report on Internal Control over Financial Reporting.” Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material
weakness regarding management’s failure to design and implement controls over the preparation and review of the annual income tax provision has been
identified and described in management’s assessment. This material weakness was considered in determining the nature, timing, and extent of audit tests
applied in our audit of the 2022 financial statements, and this report does not affect our report dated March 29, 2023 on those financial statements.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
67
/s/ BDO USA, LLP
New York, New York
March 29, 2023
68
Item 10 - Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is incorporated herein by reference to the information in our Definitive Proxy Statement to be filed with the
SEC within 120 days after the end of the Company’s fiscal year ended December 31, 2022 in connection with our 2022 Annual Meeting of Stockholders
(the “2022 Proxy Statement”) or an amendment to this Report filed within the same time period (the “Amendment”), in either case, set forth under the
captions “Election of Directors,” “Management Information,” “Corporate Governance” and, if applicable, “Delinquent Section 16(a) Reports.”
We have adopted a code of business conduct and ethics that applies to our Chief Executive Officer and Chief Financial Officer. This code of
business conduct and ethics is available on the Company’s website, corp.turtlebeach.com. The information on our website is not a part of or incorporated
by reference into this Report. If the Company makes any amendments to this code other than technical, administrative or other non-substantive
amendments, or grants any waivers, including implicit waivers, from a provision of this code to the Company’s Chief Executive Officer or Chief Financial
Officer, the Company will disclose the nature of the amendment or waiver, its effective date and to whom it applies by posting such information on the
Company’s website at corp.turtlebeach.com.
Item 11 - Executive Compensation
The information required by this Item is incorporated herein by reference to the information in our 2022 Proxy Statement or the Amendment set
forth under the captions “Corporate Governance” and “Executive Compensation.”
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to the information in our 2022 Proxy Statement or the Amendment set
forth under the captions “Executive Compensation” and “Security Ownership of Certain Beneficial Owners and Management.”
Item 13 - Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the information in our 2022 Proxy Statement or the Amendment set
forth under the captions “Corporate Governance” and “Executive Compensation.”
Item 14 - Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to the information in our 2022 Proxy Statement or the Amendment set
forth under the caption “Audit and Non-Audit Fees.”
69
Item 15 - Exhibits and Financial Statement Schedules
a.
List of documents filed as part of this Report:
PART IV
1.
The following Consolidated Financial Statements of the Company:
Report of Independent Registered Public Accounting Firm (BDO USA, LLP New York, New York, PCAOB #243);
Consolidated Statements of Operations for the Fiscal Years Ended December 31, 2022, 2021 and 2020;
Consolidated Statements of Comprehensive Income (Loss) for the Fiscal Years Ended December 31, 2022, 2021 and 2020;
Consolidated Balance Sheets as of December 31, 2022 and 2021;
Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended December 31, 2022, 2021 and 2020;
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2021, 2021 and 2020; and
Notes to the Consolidated Financial Statements.
2.
The following financial schedule and related report for the years 2022, 2021 and 2020:
Schedule II - Valuation and Qualifying Accounts; and
All other schedules have been omitted because they are not applicable, not required or the information has been otherwise supplied in the
financial statements or notes thereto.
b.
The exhibits listed in the Exhibit Index attached hereto are filed as part of this Annual Report and incorporated herein by reference.
c.
Not applicable.
Item 16 - Form 10-K Summary
None.
70
Exhibits
2.1*
3.1
3.2
4.1
4.2
Agreement and Plan of Merger, dated August 5, 2013, among the Company, Merger Sub and VTBH (Incorporated by reference to Exhibit
2.1 to the Company’s Current Report on Form 8-K originally filed with the Securities and Exchange Commission on August 5, 2013).
Articles of Incorporation of Turtle Beach Corporation, as amended (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly
Report on Form 10-Q originally filed with the Securities and Exchange Commission on August 6, 2018).
Bylaws, as amended, of Turtle Beach Corporation (Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K originally filed
with the Securities and Exchange Commission on June 20, 2019).
Form of Turtle Beach Corporation stock certificate (Incorporated by reference to Exhibit 4.1 to the Company's Form 10/A filed with the
Securities and Exchange Commission on July 27, 2010.)
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities and Exchange Act of 1934 (Incorporated by
reference to Exhibit 4.7 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13,
2020).
10.1
Second Amendment and Joinder to Amended and Restated Loan, Guaranty and Security Agreement, dated as of May 31, 2019, by and
among Turtle Beach Corporation, Voyetra Turtle Beach, Inc., TBC Holding Company LLC, Turtle Beach Europe Limited, VTB Holdings,
Inc., the financial institutions party thereto and Bank of America, N.A., as administrative agent, collateral agent and securitytrustee for the
lenders (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 6, 2019).
10.2
10.3†
Third Amendment to Amended and Restated Loan, Guaranty and Security Agreement, dated March 10, 2023, by and among Turtle Beach
Corporation, Voyetra Turtle Beach, Inc., TBC Holding Company LLC, Turtle Beach Europe Limited, VTB Holdings, Inc., the financial
institutions party thereto and Bank of America, N.A., as administrative agent, collateral agent and security trustee for the lenders
(Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 15, 2023).
Amended and Restated Turtle Beach Corporation 2013 Stock-Based Incentive Compensation Plan, as amended (Incorporated by reference
to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q originally filed with the Securities and Exchange Commission on August
9, 2019).
10.4†
Form of Performance Stock Unit Agreement under the Amended and Restated Turtle Beach Corporation 2013 Stock-Based Incentive
Compensation Plan (Incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 2, 2022).
10.5†
Form of Restricted Stock Agreement under the Amended and Restated Turtle Beach Corporation 2013 Stock-Based Incentive
Compensation Plan (Incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 2, 2022).
10.6†
Turtle Beach Corporation Annual Incentive Bonus Plan (Incorporated by reference to Annex F to the Company’s Definitive Proxy
Statement on Schedule 14A originally filed with the Securities and Exchange Commission on December 3, 2013).
10.7†
VTB Holdings, Inc. 2011 Phantom Equity Appreciation Plan (Incorporated by reference to Exhibit 10.13 to the Company’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on May 12, 2014).
10.8†
Offer Letter, dated as of August 13, 2012, between Voyetra Turtle Beach, Inc. and Juergen Stark (Incorporated by reference to Exhibit
10.14 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 12, 2014).
Offer Letter, dated as of August 2, 2021, between Voyetra Turtle Beach, Inc. and Juergen Stark (Incorporated by reference to Exhibit 10.1
10.9†
to the Company’s Report on Form 8-K with the Securities and Exchange Commission on August 4, 2021).
10.10†
Stock Option Agreement, dated as of May 20, 2015, by and between the Company and Juergen Stark (Incorporated by reference to Exhibit
10.28 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2016).
10.11†
Offer Letter, dated as of September 16, 2013, by and between Voyetra Turtle Beach, Inc. and John Hanson (Incorporated by reference to
Exhibit 10.26 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 12, 2014).
71
10.12†
Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 30, 2015).
10.13†
Turtle Beach Corporation Amended and Restated Retention Plan, dated November 18, 2021 (Incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 19, 2021).
10.14†
Turtle Beach Corporation 2022 Retention Plan Document (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission August 8, 2022).
10.15†
Letter Agreement, dated November 19, 2021, between Turtle Beach Corporation and John Hanson (Incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 19, 2021).
10.16
Cooperation Agreement, dated May 13, 2022, by and among Turtle Beach Corporation, The Donerail Group LP, and the other parties
thereto (Incorporated by reference to Exhibit 10.1 to the Company’s 8-K filed with the Securities and Exchange Commission May 17,
2022).
21**
Subsidiaries of the Company.
23.1**
Consent of BDO USA, LLP.
31.1**
Certification of Juergen Stark, Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**
Certification of John T. Hanson, Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by
Juergen Stark, Principal Executive Officer and John Hanson, Principal Financial Officer.
Extensible Business Reporting Language (XBRL) Exhibits
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded
within the Inline XBRL document. **
101.SCH
Inline XBRL Taxonomy Extension Schema Document**
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document**
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document**
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document**
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document**
104
*
**
†
Cover Page Interactive Data File (embedded within the Inline XBRL document)
All exhibits and schedules to the Agreement and Plan of Merger have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The
Company will furnish the omitted exhibits and schedules to the SEC upon request by the SEC.
Filed herewith.
Management contract or compensatory plan.
72
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 29, 2023
By:
TURTLE BEACH CORPORATION
/s/ JOHN T. HANSON
John T. Hanson
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 29, 2023
Date: March 29, 2023
Date: March 29, 2023
Date: March 29, 2023
Date: March 29, 2023
Date: March 29, 2023
Date: March 29, 2023
Date: March 29, 2023
Date: March 29, 2023
Date: March 29, 2023
/s/ JUERGEN STARK
Juergen Stark, Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ JOHN T. HANSON
John T. Hanson, Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
/s/ WILLIAM E. KEITEL
William E. Keitel, Lead Independent Director
/s/ GREGORY BALLARD
Gregory Ballard, Director
/s/ TERRY JIMENEZ
Terry Jimenez, Director
/s/ KATHERINE L. SCHERPING
Katherine L. Scherping, Director
/s/ BRIAN STECH
Brian Stech, Director
/s/ JULIA W. SZE
Julia W. Sze, Director
/s/ MICHELLE WILSON
Michelle Wilson, Director
/s/ ANDREW WOLFE
Andrew Wolfe, Director
73
74
Turtle Beach Corporation
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2022, 2021 and 2020
Description
Balance - Begin
Additions
Deductions / Other
Balance - End
(in thousands)
Year Ended December 31, 2022:
Allowance for sales returns
Allowance for cash discounts
Allowance for doubtful accounts
Year Ended December 31, 2021:
Allowance for sales returns
Allowance for cash discounts
Allowance for doubtful accounts
Year Ended December 31, 2020:
Allowance for sales returns
Allowance for cash discounts
Allowance for doubtful accounts
8,997 $
25,629
102
15,574 $
29,714 $
(23 ) $
11,233 $
18,649
15
21,506 $
15,794 $
468 $
8,815 $
15,979
146
21,193 $
21,847
0
$
$
$
75
(16,754 ) $
(25,798 )
14
$
(23,742 ) $
(8,814 )
(381 )
$
(18,775 ) $
(19,177 )
(131 )
$
7,817
29,545
93
37,455
8,997
25,629
102
34,728
11,233
18,649
15
29,897
List of Subsidiaries of
Turtle Beach Corporation
Exhibit 21
VTB Holdings, Inc.
Voyetra Turtle Beach, Inc.
TBC Holding Company LLC
Turtle Beach Europe Limited
TB Germany GmbH
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
Turtle Beach Corporation
White Plains, New York
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-225106) and Form S-8 (No. 333-193982, No.
333-230691 and No. 333-233179) of Turtle Beach Corporation of our reports dated March 29, 2023, relating to the consolidated financial statements and
schedule, and the effectiveness of Turtle Beach Corporation’s internal control over financial reporting, which appear in this Annual Report on Form 10-K.
Our report on the effectiveness of internal control over financial reporting expresses an adverse opinion on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2022.
/s/ BDO USA, LLP
New York, New York
March 29, 2023
Exhibit 31.1
I, Juergen Stark, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Turtle Beach Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date:
March 29, 2023
By:
/s/ JUERGEN STARK
Juergen Stark
Chief Executive Officer and President
Exhibit 31.2
I, John T. Hanson, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Turtle Beach Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date:
March 29, 2023
By:
/s/ JOHN T. HANSON
John T. Hanson
Chief Financial Officer, Treasurer and Secretary
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Turtle Beach Corporation (the “Company”) on Form 10-K for the year ended December 31, 2022 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), we, Juergen Stark, Chief Executive Officer of the Company, and John T. Hanson,
Chief Financial Officer of the Company, certify to our knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: March 29, 2023
Date: March 29, 2023
By:
By:
/s/ JUERGEN STARK
Juergen Stark
Chief Executive Officer and President
(Principal Executive Officer)
/s/ JOHN T. HANSON
John T. Hanson
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer)