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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, 2023
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 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, 2023 was $196,646,827.
The number of shares of Common Stock, $0.001 par value, outstanding on February 29, 2024 was 17,605,444.
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 1C.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Cybersecurity
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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The impacts of broader macroeconomic conditions, such as inflation on the demand for our products and our ability to adjust our
product pricing in response to higher product component, transportation, and logistics costs;
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;
Substantial uncertainties inherent in the acceptance of existing and future products;
Our dependence on the success and availability of third-parties to manufacture and manage the logistics of transporting and
distributing our products;
Manufacturing capacity and/or component supply constraints and difficulties;
Our dependence on the success and availability of third-party gaming platforms and the release and availability of successful gaming
titles
Transitions in consoles and alternative gaming platforms and the potential impact on our business;
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;
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 Company’s marketing efforts, particularly its partnerships with influencers, athletes and esports teams;
The impact of seasonality on our business and discretionary spending by users of our products;
Global business, political, operational, financial and economic outlook and conditions;
The scope of protection we are able to obtain and maintain for intellectual property rights covering our technology;
The difficulty of commercializing and protecting new technology;
The availability of capital under our revolving credit facility;
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Cybersecurity, data security and other information technology risks;
The impact of widespread outbreak of an illness, communicable disease, or any other public health crisis that may have short or long-
term direct and indirect effects on our employees, customers, supply chain and the economy and financial markets;
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, controllers, flight and racing 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 14-years running with a vast portfolio of headsets
designed to be compatible with the latest Xbox, PlayStation, and Nintendo consoles, as well as for personal computers (PCs) and mobile/tablet devices.
Turtle Beach Corporation’s PC product portfolio includes headsets, gaming keyboards, mice and other gaming accessories focused on the PC gaming
platform. Recently, Turtle Beach expanded its brand beyond gaming headsets and began making game controllers, gaming flight simulation and racing
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. In 2024, Turtle Beach Corporation is moving all forward-looking accessories under its best-selling Turtle Beach brand.
All forward-looking products for console, PC, and multiplatform gaming headsets, mice, keyboards, microphones and other PC gaming peripherals, game
controllers, and flight/racing simulation accessories will be unified under one of the industry’s most recognized brand names.
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 its reach with the
launch of the first Turtle Beach game controllers for Xbox and Windows PCs, and flight simulation accessories. Turtle Beach’s XBO VelocityOne™ flight
control system was the best selling model in 2023 and, in 2024, Turtle Beach has also officially entered the racing simulation gaming accessory market
with the brand’s first product, VelocityOne™ Race. 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
$650+. Most Turtle Beach gaming headset models are compatible with multiple gaming platforms (i.e. – the headset can be used with Xbox, PlayStation,
Nintendo, PC, mobile devices, 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
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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 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 an overall $190 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.
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 2023, 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 14 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.
Nintendo has sold over 132.5 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 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.
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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.
Gamepad/Controllers Market
The market for gamepad controllers is estimated to be approximately $0.5 billion, and shares the same retail footprint and consumer base that Turtle
Beach gaming headsets compete in. Controllers now come in various ergonomic shapes, sizes, and colors. Gamers can even further customize their
controllers with unique thumbsticks and better grips/textures, weights, and more. Game controllers also range in price from ~$40 to $300+ for ultra
premium options, with premium controllers featuring improved materials, cooling, swappable parts and more. Turtle Beach entered the controllers market
in 2021 with the introduction of its wired Recon™ Controller for Xbox and PC. Turtle Beach then launched the lower-cost wired REACT-R™ Controller in
2022, as well as introduced the mobile focused Recon™ Cloud and Atom™ controllers. In 2023, Turtle Beach launched its first wireless controller for
Xbox and PC, the premium Stealth™ Ultra controller. Turtle Beach’s controllers not only provide the same responsive, quality controls as first party
controllers, but also offer Turtle Beach’s signature gaming audio experience when gamers connect a wired headset to the controller.
Gaming Simulation Accessories Market
The market for gaming simulation accessories is estimated to be approximately $1.2 billion. Flight and racing simulation gaming are more dominant
on higher-end PCs able to deliver the most realistic visuals. However, jumps in visual quality made possible in the latest consoles/games have made flight
simulation gaming on Xbox more accessible. In 2020, Microsoft redefined the graphics flight sim gamers can expect while playing with the launch of the
latest generation of its Flight Sim games and, in subsequent years, Microsoft expanded the game to Xbox Series X|S1, Xbox One, lower-end gaming PCs,
and mobile via Xbox Cloud.
Long-running popular flight sim games like Flight Simulator 2024, X-Plane, and others allow pilots to learn to fly and pilot various aircraft through
picture-perfect skies and scenery, with typical flight sim accessories including yokes and pedals, combat flightsticks, and HOTAS (Hands-On Throttle And
Stick) controllers. The flight sim market is niche, but with a dedicated, older fanbase willing to spend more on accessories to create the ultimate flight
simulation setups, with a variety of expert pilots and creators showcasing their latest content on YouTube and other mediums. Turtle Beach launched the
original VelocityOne Flight universal control system in 2021, followed by the VelocityOne™ Rudder and VelocityOne™ Stand in 2022, the VelocityOne™
Flightstick in 2023, and the VelocityOne™ Flightdeck HOTAS controller in 2024
Racing simulation gaming follows a similar trajectory as flight simulation gaming. The audience of racing sim gamers is also niche, dedicated,
slightly older and willing to spend more on creating high-end racing simulation setups predominantly on PC, but also on consoles. There are also a variety
of long-running, successful racing game franchises including Forza, Assetto Corsa, and more that allow drivers to get behind the wheel and experience the
rush of racing. Typical racing simulation accessories include wheel and pedal setups, swappable steering wheels, shifters, handbrakes and more, ranging in
price from a few hundred dollars to thousands of dollars for the most involved simulators. Racing simulation fans also regularly create content and share
with the community. Turtle Beach introduced its first VelocityOne™ Race racing simulation wheel and pedals setup in 2024, with additional racing sim
accessory launches planned for the future.
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 Pro and Stealth 700 Gen 2 MAX and will continue expanding our game controllers and gaming
simulation accessory markets with products like the Stealth™ Ultra controller and VelocityOne™ Flightdeck and VelocityOne™ Race simulation
accessories.
Continued Product Line Expansion and Revenue Growth in Controllers/Simulation 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. We intend to grow revenues from categories outside console gaming headsets – the market Turtle Beach has led for the past 14
years.
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Targeted Geographic Expansion. We will continue efforts for further growth, specifically in select markets as the Company looks to deliver Turtle
Beach products to an even wider audience of global gamers in 2024 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.
To maintain and/or improve our competitive position in our markets we continue to focus on the following:
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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;
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;
expand our product lines in game controllers and gaming simulation accessories, reaching into additional categories including mobile controllers
and racing simulation products;
grow our position at key retailers with products available in multiple locations throughout retailers;
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
leverage high-quality technical support and deliver a customer service experience that exceed consumer expectations and drive 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. While the semiconductor availability and freight costs significantly improved in 2023 compared to 2022; we continue to closely monitor
component availability and freight cost including global supply chain threats within the post-pandemic business environment.
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, GameStop, 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
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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.
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 2023, net sales to our major
market channels consisted of $165.9 million to North American retail customers, $58.0 million to European customers, $11.9 million to North American
distributors and $22.0 million to other customers.
Our five largest individual customers accounted for approximately 69% of our gross sales in 2023, 67% of our gross sales in 2022, and 66% of our
gross sales in 2021. During 2023, our four largest customers - Walmart, Target, Amazon, Best Buy - each accounted for between 10% to 25% of our
consolidated gross 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.
Human Capital
As of December 31, 2023, Turtle Beach had 252 employees, of which 223 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 2023, 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
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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
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 and 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 affecting our costs and demand for the products we sell. In recent years, our business has been affected
by global supply chain constraints and unfavorable changes in economic or political conditions in the countries and markets where we operate, resulting in
heightened inflationary cost pressures. Such inflationary pressures have also been and could continue to be exacerbated by higher oil prices, geopolitical
turmoil (including the ongoing conflicts between Russia and Ukraine and in Israel, Palestine and surrounding areas and the upcoming U.S. presidential
election), increased logistics costs and economic policy actions and could lead to a recessionary environment. Adverse changes in interest rates 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. If such impacts are prolonged or
substantial, they could necessitate 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 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, geopolitical turmoil and broader macroeconomic conditions.
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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. 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, 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 ongoing supply chain issues. 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. For example, 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 mitigate the effects of a public health crisis may affect 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. A future outbreak of an
illness, a communicable disease, or any other public health crisis, and any resulting impacts, such as an extended 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.
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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 2023, our five largest retail customers accounted for approximately 69% 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.
We believe that our ability to extend the recognition and favorable perception of our brand 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 controllers,
simulation and 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.
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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 customers, 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 and concerns about global economic
outlook;
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;
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;
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political and economic instability, including wars (such as the ongoing conflicts between Russia and Ukraine and in Israel and Palestine and
surrounding areas), 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.
Effective internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud. Any inability to
provide reliable financial reports or prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires, among other things, that we evaluate
our systems and processes and test our internal controls over financial reporting to allow management and our independent registered public accounting
firm, as applicable, to report on the effectiveness of our internal control over financial reporting. If we are not able to remediate any identified material
weakness or otherwise comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if we or our independent registered public accounting
firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, investors could lose confidence in the
accuracy and completeness of our financial reports, the market price of our common stock could decline and we could be subject to sanctions,
investigations by the Nasdaq Stock Market, LLC, the SEC or other regulatory authorities, or shareholder litigation.
In addition, failure to maintain effective internal controls could result in financial statements that do not accurately reflect our financial condition or
results of operations. There can be no assurance that we will be able to maintain a system of internal controls that fully complies with the requirements of
the Sarbanes-Oxley Act of 2002 or that our management and independent registered public accounting firm will continue to conclude that our internal
controls are effective.
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.
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
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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.
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.
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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 effect 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.
Additionally, a significant downturn in demand for our products or a reduction in gross margins could have an adverse effect on our result of
operations and on our ability to obtain financing generally.
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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.
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 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, extreme weather conditions, technical malfunctions, inadequate systems capacity, human error,
malfeasance, power outages, computer viruses and security breaches. Any disruptions affecting our information systems could have a material adverse
effect 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) by affected individuals, customers, manufacturers or business partners, 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.
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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, other state privacy laws within the United States, 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 and disclosures 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 11. 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.
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 the price of our common stock:
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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
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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.
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.
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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 progress toward 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 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.
On March 10, 2023, we entered into the Third Amendment to our Credit Facility. Among other things, the Third Amendment transitioned the
reference interest rates from the London Interbank Offering Rate (“LIBOR”) 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 (collectively, the “alternative reference
rates”), as applicable.
The change from LIBOR to the alternative reference rates could expose our borrowings to less favorable rates. If the change to the alternative
reference rates results in increased interest rates or if our lenders have increased costs due to the change, then our debt that uses benchmark rates could be
affected and, in turn, our cash flows and interest expense could be adversely impacted. 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
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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.
Item 1B – Unresolved Staff Comments
None.
Item 1C – Cybersecurity
The Company recognizes the importance of developing, implementing, and maintaining cybersecurity measures to ensure the security of our
information systems and networks and the confidentiality, availability, and integrity of our data.
Risk management and strategy
Turtle Beach uses a risk-based approach to cybersecurity, utilizing industry-standard frameworks and methodologies to assess and manage risks.
The Company has processes for assessing, identifying, and managing material risks from cybersecurity threats. These processes have been integrated into
the Company’s overall risk management processes and include an incident response plan to assess and remediate cybersecurity attacks.
The incident response plan provides guidance in identifying, assessing, investigating, remediating, and reporting any confirmed or suspected: (i)
compromise of physical, network or system security; (ii) unauthorized access or acquisition of personal information or proprietary information; or (iii)
material noncompliance with Company information privacy and security policies and procedures. The plan and associated processes have flexibility to
ensure a tailored response based on the circumstances of the incident.
From time to time, the Company engages third party experts to assess the Company’s cybersecurity controls and processes. For example, in 2021,
the Company engaged an information security consultant to conduct and external, design-focused assessment using the National Institute of Standards and
Technology framework to evaluate the Company’s cybersecurity controls. The Company’s management used the assessment to assist them in evaluating
the Company’s cybersecurity controls, and its Company’s policies and procedures to further align them with industry standards.
The Company also has processes to identify and oversee cybersecurity threats associated with its use of third-party service providers. These
processes include diligence of third-party cybersecurity risk through SOC-2 audits and use of independent vendors who provide cybersecurity ratings.
In addition, the Company maintains an insurance policy which specifically provides coverage for qualifying information security breaches.
The Company has not experienced a material information security breach in the last five years, nor has it incurred any expenses or penalties or paid
any settlements related thereto. The Company is not currently facing any cybersecurity threats reasonably likely to materially affect the Company or its
business strategy, results of operations or financial condition.
Governance
Cybersecurity is an important part of the Board’s risk oversight. Although the full Board retains responsibility for cybersecurity oversight, the Audit
Committee of the Board (the “Audit Committee”) has authority to immediately assess and manage a cybersecurity incident
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if one were to occur. The Company’s senior management briefs the Audit Committee and the Board periodically on cybersecurity matters and would
promptly brief the Audit Committee if a cybersecurity incident occurred.
The Company’s management has day-to-day responsibility for managing cybersecurity risks. The management team includes our Chief Financial
Officer, who has cybersecurity expertise through prior leadership positions in networking and software businesses, and our Senior Director of Information
Technology, who has formal data security training and certifications.
In addition to using industry-standard tools to monitor cybersecurity risks, management receives direct reporting of cybersecurity threats from our
employees, who are trained annually on cyber security risks and reporting.
Item 2 – Properties
The table below describes our principal facilities as of December 31, 2023. 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, 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 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.
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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 former Chief Executive Officer, 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. On November 14, 2023, the court of appeal issued its opinion affirming the judgment in favor of the Company. On the Company’s
Cross-Complaint, the court directed the Company to elect either punitive or statutory treble damages, but otherwise affirmed.
Insolvency Dispute in Germany: On February 15, 2024, TBC Holding Company LLC (“TBCH”), a wholly-owned subsidiary of Turtle Beach Corporation,
was served with a lawsuit that was brought to the German Higher Regional Court in Stade by the insolvency administrator of KJE Europe GmbH, a
company registered and existing under the laws of Germany. In his complaint, the insolvency administrator claims that TBCH is liable to reimburse any
payments received by the TBCH under a certain settlement agreement with KJE Europe GmbH dated June 30, 2020. TBCH does not believe the claims
have merit and intends to defend itself in this proceeding. TBCH will file its statement of defense to the complaint by April 30, 2024.
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, 2023 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.
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 29, 2024 was 810.
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, 2018 through December 31, 2023 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, 2018 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.
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Dividend Policy
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 2023, 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, 2023.
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 gaming 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
Turtle Beach is 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 14 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 increased as additional supplies became available, which resulted in
our improved market share.
Nintendo has sold over 132.5 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, 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.
Gamepad/Controllers Market
The market for gamepad controllers is estimated to be approximately $0.5 billion, and shares the same retail footprint and consumer base that Turtle
Beach gaming headsets compete in. Controllers now come in various ergonomic shapes, sizes, and colors. Gamers can even further customize their
controllers with unique thumbsticks and better grips/textures, weights, and more. Game controllers also range in price from ~$40 to $300+ for ultra
premium options, with premium controllers featuring improved materials, cooling, swappable parts and more. Turtle Beach entered the controllers market
in 2021 with the introduction of its wired Recon™ Controller for Xbox and PC. Turtle Beach then launched the lower-cost wired REACT-R™ Controller in
2022, as well as introduced the mobile focused Recon™ Cloud and Atom™ controllers. In 2023, Turtle Beach launched its first wireless controller for
Xbox and PC, the premium Stealth™ Ultra controller. Turtle Beach’s controllers not only provide the same responsive, quality controls as first party, but
also offer Turtle Beach’s signature gaming audio experience when gamers connect a wired headset to the controller.
26
Gaming Simulation Accessories Market
The market for gaming simulation accessories is estimated to be approximately $1.2 billion. Flight and racing simulation gaming are more dominant
on higher-end PCs able to deliver the most realistic visuals. However, jumps in visual quality made possible in the latest consoles/games have made flight
simulation gaming on Xbox more accessible. In 2020, Microsoft redefined the graphics flight sim gamers can expect while playing with the launch of the
latest generation of its Flight Sim games and, in subsequent years, Microsoft expanded the game to Xbox Series X|S1, Xbox One, lower-end gaming PCs,
and mobile via Xbox Cloud.
Long-running popular flight sim games like Flight Simulator 2024, X-Plane, and others allow pilots to learn to fly and pilot various aircraft through
picture-perfect skies and scenery, with typical flight sim accessories including yokes and pedals, combat flightsticks, and HOTAS (Hands-On Throttle And
Stick) controllers. The flight sim market is niche, but with a dedicated, older fanbase willing to spend more on accessories to create the ultimate flight
simulation setups, with a variety of expert pilots and creators showcasing their latest content on YouTube and other mediums. Turtle Beach launched the
original VelocityOne Flight universal control system in 2021, followed by the VelocityOne™ Rudder and VelocityOne™ Stand in 2022, the VelocityOne™
Flightstick in 2023, and the VelocityOne™ Flightdeck HOTAS controller in 2024
Racing simulation gaming follows a similar trajectory as flightl simulation gaming. The audience of racing sim gamers is also niche, dedicated,
slightly older and willing to spend more on creating high-end racing simulation setups predominantly on PC, but also on consoles. There are also a variety
of long-running, successful racing game franchises including Forza, Assetto Corsa, and more that allow drivers to get behind the wheel and experience the
rush of racing. Typical racing simulation accessories include wheel and pedal setups, swappable steering wheels, shifters, handbrakes and more, ranging in
price from a few hundred dollars to thousands of dollars for the most involved simulators. Racing simulation fans also regularly create content and share
with the community. Turtle Beach introduced its first VelocityOne™ Race racing simulation wheel and pedals setup in 2024, with additional racing sim
accessory launches planned for the future.
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
27
Management Overview
In 2023, we continued our position as the number one console gaming headset provider and, showcased strong operational and financial execution
with increased revenues, earnings and adjusted EBITDA compared to a year ago.
Despite the console gaming market being down slightly, we delivered net revenue of $258.1 million as our industry-leading console headsets,
including the launch of the Stealth Pro multi-platform headset into the top price tier, continued to drive both revenue growth and market share gains.
Additionally, our simulation product related revenue increased due to product expansion, led by our Velocity One flight simulator, which became the
market share leader in 2023.
As a result of the execution against our strategic pillars and ongoing cost management initiatives, the overall operating environment improved
throughout the year, demonstrated by improved margins due to lower freight and more normalized promotional spend.
Looking forward, demand for gaming accessories is normalizing higher than pre-pandemic levels and we believe the replacement cycle for
pandemic accessory purchases will drive ongoing demand into 2024. We expect our brand to continue leading the headset category with new, innovative
console gaming headsets as demonstrated by the nearly $1 billion in U.S. retail sales that three of our top sellers, Stealth 600, Stealth 700 and Recon 70,
have collectively delivered since their respective launches. In addition, we exceeded 20% of our revenues in categories outside the console gaming headset
category and, as we continue to launch exciting new products across these categories, we believe there are further opportunities to extend our growth in PC
gaming, simulation, and controllers.
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, net
Other non-operating expense (income), net
Income (loss) before income tax
Income tax expense
Net income (loss)
2023
Year Ended
December 31,
2022
(in thousands)
258,122 $
182,618
75,504
29.3 %
91,947
(16,443 )
504
394
(17,341 )
338
(17,679 ) $
240,166 $
190,979
49,187
20.5 %
100,667
(51,480 )
1,220
1,753
(54,453 )
5,093
(59,546 ) $
$
$
2021
366,354
237,971
128,383
35.0 %
107,952
20,431
383
(101 )
20,149
2,428
17,721
Net Revenue and Gross Profit
Comparison of the Year Ended December 31, 2023 to the Year Ended December 31, 2022
Net revenue for the year ended December 31, 2023 was $258.1 million, an $18.0 million, or 7.5%, increase from $240.2 million in the prior year
period driven by revenue and share gains for both the console headset gaming and simulation products.
For the year ended December 31, 2023, as a result of lower freight and promotional spending, gross profit as a percentage of net revenue increased
to 29.3% compared to 20.5% in the comparable prior year period, which included $9.8 million of pandemic-related excess components and product
inventory impairment charges.
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.
28
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.
Operating Expenses
Selling and marketing
Research and development
General and administrative
Other intangible asset impairment
Acquisition integration costs
Total operating expenses
Selling and Marketing
2023
Year Ended
December 31,
2022
(in thousands)
$
$
43,489 $
17,137
31,321
—
—
91,947 $
47,090 $
19,123
32,558
1,896
—
100,667 $
2021
58,883
17,490
31,501
—
78
107,952
Selling and marketing expense for the year ended December 31, 2023 totaled $43.5 million, or 16.8% as a percentage of net revenue, compared to
$47.1 million, or 19.6% as a percentage of net revenue, for the prior year. This decrease was primarily due to lower headcount and the alignment of
marketing to support demand and product launches.
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 year ended December 31, 2021. This decrease was primarily due to lower revenue-based
expenses, reduction of marketing initiatives to align with lower consumer demand and strategic priorities.
Research and Development
For the year ended December 31, 2023, we invested $17.1 million in research and development, compared to $19.1 million for the year ended
December 31, 2022, which reflects certain expense management, including lower headcount and costs associated with our product portfolio plans.
For the years ended December 31, 2022 and 2021, we invested $19.1 million and $17.5 million, respectively, as we continued to invest in new
product categories and portfolio expansion to support strategic growth initiatives.
General and Administrative
General and administrative expenses for the year ended December 31, 2023 decreased $1.2 million to $31.3 million compared to $32.6 million for
the year ended December 31, 2022. Excluding certain non-recurring executive compensation, proxy contest and shareholders' litigation costs, expenses
decreased $2.7 million primarily due lower non-cash stock-based compensation, employee expenses and certain corporate legal costs.
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.
Income Taxes
Income tax expense for the year ended December 31, 2023 was $0.3 million at an effective tax rate of (1.9)% compared to income tax expense of
$5.1 million for the year ended December 31, 2022 at an effective tax rate of (9.4%). The effective tax rate was primarily impacted by foreign taxes, state
taxes and interest on uncertain tax positions. In 2022 the Company recorded a valuation allowance on its deferred tax assets.
29
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.
Other Non-Operating Expense (Income)
Other non-operating expense totaled $0.4 million and $1.8 million for the years ended December 31, 2023 and 2022, respectively, 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.
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 measures 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 other 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 believe that the presentation of Adjusted EBITDA, 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, is appropriate to provide
additional information to investors about our operating profitability adjusted for certain non-cash items, non-routine items that we do not expect to continue
at the same level in the future, as well as other items that are not core to our operations. Further, we believe Adjusted EBITDA provides a meaningful
measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance
against that of other peer companies using similar measures. However, Adjusted EBITDA is not a measure of financial performance under 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.
Adjusted EBITDA
Adjusted EBITDA (and a reconciliation to Net income (loss), the nearest GAAP financial measure) for the years ended December 31, 2023, 2022
and 2021 are as follows:
Net income (loss)
Interest expense
Depreciation and amortization
Stock-based compensation (1)
Income tax expense
Impairment charge (2)
Restructuring expense (3)
CEO transition related costs (4)
Change in fair value of contingent consideration
Business transaction expense (5)
Proxy contest and other (6)
Adjusted EBITDA
2023
Year Ended
December 31,
2022
(in thousands)
2021
(17,679 ) $
504
4,839
11,983
338
—
1,061
2,874
—
653
1,921
6,494 $
(59,546 ) $
1,220
5,816
7,984
5,093
1,896
556
—
—
—
7,092
(29,889 ) $
17,721
383
5,313
7,656
2,428
—
—
—
(1,928 )
78
4,934
36,585
$
$
30
(1)
(2)
(3)
(4)
(5)
(6)
Increase in stock-based compensation in the year-ended December 31, 2023 over the comparable prior year period primarily driven by $4.0
million charge related to the accelerated vesting of equities of the Company's former Chief Executive Officer.
Impairment charge includes costs related to impairment of intangible assets. See Note 5 to our condensed consolidated financial statements
included elsewhere in this Annual Report.
Restructuring charges are expenses that are paid in connection with reorganization of our operations. These costs primarily include severance
and related benefits.
Chief Executive Officer transition related expense includes one-time costs associated with the separation of its former executive. Such costs
included severance, bonus, medical benefits and the tax impact of vesting of stock-based compensation.
Business transaction expense includes one-time costs in connection with acquisition-related activities including professional fees such as
legal and accounting along with other certain integration related costs of the acquisitions.
Proxy contest and other primarily includes (a) one-time legal and other professional fee associated with proxy challenges presented by certain
shareholder activists and (b) the settlement of an intellectual property lawsuit in 2022.
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
2023
Year Ended
December 31,
2022
(in thousands)
$
$
11,396 $
27,044
(2,159 )
(17,846 )
291
18,726 $
37,720 $
(41,846 )
(3,549 )
19,706
(635 )
11,396 $
2021
46,681
(327 )
(8,121 )
(56 )
(457 )
37,720
Cash provided by operating activities for the year ended December 31, 2023 was $27.0 million, an increase of $68.9 million as compared to cash
used for operating activities totaling $41.8 million for the year ended December 31, 2022. The increase is primarily the result of lower working capital
driven by reductions in inventory levels, higher gross receipts and expense management initiatives.
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
provided by operating activities of $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.
Investing activities
Cash used for investing activities was $2.2 million for the year ended December 31, 2023, which was related to certain capital investments,
compared to $3.5 million in 2022.
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 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.
31
Financing activities
Net cash used for financing activities was $17.8 million during the year ended December 31, 2023 compared to net cash provided by financing
activities of $19.7 million and net cash used for financing activities of $0.1 million during the years ended December 31, 2022 and 2021, respectively.
Financing activities during the year ended December 31, 2023 consisted primarily of $19.1 million revolving credit facility net repayments and $1.0
million of common stock repurchases, partially offset by $2.3 million of stock option exercise proceeds.
Financing activities in 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.
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, or strategic opportunities that require
additional capital.
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, 2023 and December 31, 2022 were $8.0 million and $6.5 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 provided 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, and (iii) 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 BSBY rate loans, 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, 2023, interest rates for outstanding borrowings were 11.00%
for base rate loans and 8.90% for SONIA rate loans.
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, 2023, the Company was in compliance with all the financial covenants under the Credit Facility, as amended, and excess
borrowing availability was approximately $60.6 million.
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, 2023, we had operating lease obligations totaling $9.8 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
$
$
9,830 $
—
9,830 $
1,463 $
—
1,463 $
4,209 $
—
4,209 $
1,917
—
1,917 $
2,241
—
2,241
(1) Contractual obligations exclude tax liabilities of $2.3 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. 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” on the 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 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. Cash-based incentive allowances are based on historical and
expected performance of the customers, types and levels of promotions including any contractual commitments, claims received and forecasted economic
trends in comparison to historical trends. Sales return reserves are based on historical and current return activity and forecasted economic trends in
comparison to historical trends. As of December 31, 2023 and 2022, the Company had an allowance for cash-based incentives of $28.6 million and $29.5
million, respectively, and an allowance for sales returns of $8.4 million and $7.8 million, respectively. These amounts are recorded as a reduction of
accounts receivable on the consolidated balance sheets.
Inventory Valuation
Inventories consist primarily of finished goods and related component parts and are stated at the lower of cost or 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 revenue on the consolidated statements of operations.
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, and the reversal pattern of deferred tax assets and liabilities.
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.
34
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, 2023, 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, 2023 and 2022, 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 affecting our costs and demand for the products we sell. In recent years, our
business has been affected by global supply chain constraints and unfavorable changes in economic or political conditions in the countries and markets
where we operate. Such inflationary pressures have been and could continue to be exacerbated by higher oil prices, geopolitical turmoil, and economic
policy actions and could lead to a recessionary environment.
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 2023, we continued to experience 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.
35
Item 8 - Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP, New York, New York, PCAOB #42)
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, 2023, 2022 and 2021
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2023, 2022 and 2021
Notes to Consolidated Financial Statements
Supplemental Schedule - Schedule II Valuation and Qualifying Accounts
36
Page
37
39
40
41
42
43
44
45
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Turtle Beach Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Turtle Beach Corporation (the Company) as of December 31, 2023, the related
consolidated statement of operations, comprehensive income (loss), stockholders’ equity and cash flows for the period ended December 31, 2023, and the
related notes and financial statement schedule listed in the Index at Item 15(a) (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, 2023, and the
results of its operations and its cash flows for the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
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, 2023, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 13, 2024 expressed an unqualified
opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial
statements 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 the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit 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 financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures
to assess the risks of material misstatement of the 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 financial statements. Our audit also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides 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 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 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.
Description of the Matter
Revenue Recognition: Cash-Based Incentive Programs
As described in Note 1 of the consolidated financial statements, the Company provides cash-based
incentive programs, including cash discounts, quantity rebates and price concessions, which results in
variable consideration. As of December 31, 2023, the Company has recognized an allowance for cash-
based incentives of $28.6 million in accounts receivable on the consolidated balance sheet.
Auditing the Company’s measurement of variable consideration related to cash-based incentives is
complex because the calculation is determined based on significant management estimates. These
estimates are based on historical and expected performance of the customer, types and levels of
promotions, claims received from the customers and forecasted economic trends in comparison to
historical trends, when applicable. Changes in these assumptions can have a significant impact on the
amount of the revenue recognized.
37
How We Addressed the Matter in Our Audit
Description of the Matter
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls
over the Company’s process to estimate variable consideration related to its cash-based incentive
programs. For example, we tested controls over management’s review of significant assumptions, such
as forecasted sales and claims activity, management’s validation of the completeness and accuracy of
the data used in making their estimates, and controls over retrospective review analysis.
Among other audit procedures, we tested the Company's retrospective review of cash-based incentives
reserves, evaluated the assumptions by comparing them to historical trends and third-party information,
and performed transactional testing of customer claim activity.
Revenue Recognition: Sales Return Reserve
As described in Note 1 and Note 3 of the consolidated financial statements, the Company provides
certain customers product return rights, which results in variable consideration. As of December 31,
2023, the Company has recognized an allowance for sales returns of $8.4 million in accounts receivable
on the consolidated balance sheet.
Auditing the measurement of variable consideration related to sales returns is complex because the
calculation is determined based on significant management estimates. These estimates are based on
historical and current return activity trends and forecasted economic trends in comparison to historical
trends, when applicable. Changes in these assumptions can have a significant impact on the amount of
the revenue recognized.
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls
over the Company’s process to estimate variable consideration related to its allowance for sales returns.
For example, we tested controls over management’s review of significant assumptions, such as
historical return rates, management’s validation of the completeness and accuracy of the data used in
making their estimates, and other controls over retrospective review analysis.
Among other audit procedures, we tested the Company's retrospective review of the allowance for sales
returns, evaluated the assumptions by comparing them to historical trends, and performed transactional
testing of sales returns. Additionally, we tested whether the introduction of new products or new
customer contracts could have a material impact on the allowance for sales returns at period end.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 2023.
New York, New York
March 13, 2024
38
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 sheet of Turtle Beach Corporation (the “Company”) as of December 31, 2022, the related
consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the two 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 the results of its operations and
its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United
States of America.
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 Public Company Accounting Oversight Board
(United States) (“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.
/s/ BDO USA, LLP
We served as the Company’s auditor from 2014 to 2023
New York, New York
March 29, 2023
39
Turtle Beach Corporation
Consolidated Statements of Operations
$
$
$
$
2023
Year ended December 31,
2022
(in thousands, except per-share data)
2021
258,122 $
182,618
75,504
43,489
17,137
31,321
—
91,947
(16,443 )
504
394
(17,341 )
338
(17,679 ) $
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 ) $
(1.03 ) $
(1.03 ) $
(3.62 )
(3.62 )
$
$
17,135
17,135
16,450
16,450
366,354
237,971
128,383
58,883
17,490
31,579
—
107,952
20,431
383
(101 )
20,149
2,428
17,721
1.11
0.97
15,915
18,251
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, net
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 (loss)
Other comprehensive income (loss):
Foreign currency translation adjustment
Other comprehensive income (loss)
Comprehensive income (loss)
2023
Year ended December 31,
2022
(in thousands)
2021
$
(17,679 ) $
(59,546 ) $
17,721
545
545
(17,134 ) $
(1,521 )
(1,521 )
(61,067 ) $
(462 )
(462 )
17,259
$
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 $37,052 and $37,455 in 2023 and 2022, respectively
Inventories
Prepaid expenses and other current assets
Total Current Assets
Property and equipment, net
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; 17,531,702 and 16,569,173 shares
issued and outstanding as of December 31, 2023 and 2022, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
December 31,
2023
December 31,
2022
(in thousands, except par value and share amounts)
$
$
$
$
$
$
$
$
18,726 $
54,390
44,019
7,720
124,855 $
4,824
10,686
1,734
7,868
149,967 $
- $
26,908
29,424
56,332 $
1,546
7,012
64,890 $
18
220,185
(134,277 )
(849 )
85,077 $
149,967 $
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
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
Inventory recorded to net realizable value
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 exercise of stock options and warrants
Repurchase of common stock
Repurchase of common stock to satisfy employee tax withholding obligations
Debt financing costs
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
Year Ended December 31,
2023
2022
(in thousands)
2021
$
(17,679 ) $
(59,546 ) $
17,721
3,830
1,009
141
11,983
(44 )
632
(3 )
810
—
—
(5,757 )
27,336
1,772
1,437
(283 )
1,860
27,044
(2,159 )
—
(2,159 )
210,210
(229,263 )
2,261
(974 )
—
(80 )
(17,846 )
291
7,330
11,396
18,726
$
500
$
63
$
133
$
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
$
$
$
$
See accompanying Notes to the Consolidated Financial Statements
43
Turtle Beach Corporation
Consolidated Statement of Stockholders’ Equity
Common Stock
Additional
Paid-In
Accumulate
d
Shares
Amount
Capital
Deficit
Accumulate
d
Other
Comprehen
sive
Income
(Loss)
Total
15,476 $
—
—
244
6
(15 )
(169 )
626
—
16,168 $
—
—
311
90
—
16,569 $
—
—
534
(86 )
515
—
17,532 $
15 $
—
—
—
—
—
—
1
—
16 $
—
—
—
1
—
17 $
—
—
—
—
1
—
18 $
(in thousands)
190,568 $
—
—
—
111
(74,773 ) $
17,721
—
—
—
(463 )
(4,882 )
5,288
7,656
198,278 $
—
—
—
654
7,984
—
—
—
—
(57,052 ) $
(59,546 )
—
—
—
—
206,916 $ (116,598 ) $
—
—
—
(974 )
2,260
11,983
(17,679 )
—
—
—
—
—
220,185 $ (134,277 ) $
589 $
—
(462 )
—
—
116,399
17,721
(462 )
—
111
—
(463 )
—
(4,882 )
—
5,289
7,656
—
127 $ 141,369
—
(1,521 )
—
—
—
(1,394 ) $
—
545
—
—
—
—
(849 ) $
(59,546 )
(1,521 )
—
655
7,984
88,941
(17,679 )
545
—
(974 )
2,261
11,983
85,077
Balance at December 31, 2020
Net income
Other comprehensive loss, 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
Net loss
Other comprehensive income, net of tax
Issuance of restricted stock
Common stock buyback
Stock options exercised
Stock-based compensation
Balance at December 31, 2023
See accompanying Notes to the Consolidated Financial Statements
44
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 on 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 financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) 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, probability of performance shares vesting and forfeiture rates utilized in
issuing stock-based compensation awards. 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” on the 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. Provisions for sales returns are recognized in the period of the sale and are recorded based upon the Company's prior experience and
current trends. Cash-based incentive allowances are based on historical and expected performance of the customers, types and levels of promotions
including any contractual commitments, claims received and forecasted economic trends in comparison to historical trends. Sales return reserves are based
on historical and current return activity and forecasted economic trends in comparison to historical trends. As of December 31, 2023 and 2022, the
Company had allowances for cash-based incentives of $28.6 million and $29.5 million, respectively, and allowances for sales returns of $8.4 million and
$7.8 million, respectively. These amounts are recorded as a reduction of accounts receivable on the consolidated balance sheets.
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 $3.9 million, $4.9 million
and $9.7 million for the years ended December 31, 2023, 2022 and 2021, 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. Co-operative advertising reimbursements were
approximately $5.6 million, $4.1 million and $7.6 million for the years ended December 31, 2023, 2022 and 2021, 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 utilizing the effective interest method. 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 on the consolidated
statements 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 stock options 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. The grant date fair value of restricted stock grants is determined based on the grant date value of the
Company’s common stock and 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 grant date fair value of performance-based
46
restricted share units is calculated in the same manner as restricted stock grants with the exception that the Company recognizes compensation expense
when it is probable that the performance condition will be achieved.
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 cost or 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 revenue on the 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
Furniture and fixtures
Tooling
Leasehold improvements
Demonstration units and convention booths
Estimated Life
3 years
2-5 years
5 years
2 years
Term of lease or economic life of asset, if shorter
1-2 years
Valuation of Long-Lived and Intangible Assets and Goodwill
At acquisition, the Company estimates and records the fair value of purchased intangible assets, which primarily consists of in-process research and
development, customer relationships, trademarks and trade names, and patents. 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 definite-lived 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. When impairment indicators are present, 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. There were no impairment indicators on the Company’s long-lived and definite-lived intangible assets in 2023.
47
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 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. 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, 2023, and compared the fair value of the reporting unit to the carrying value.
No goodwill impairment charges have been required during 2023, 2022 or 2021. In the current year, the Company does not have any indefinite-lived
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.
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” on the consolidated
statement of operations.
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. 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. 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
the 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 the obligation to make lease payments arising from the lease agreement. As most of the Company’s leases do not provide for an implicit
rate, the Company utilizes the 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 the Company 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
48
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 and revolving line of credit. 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.
The Company did not have any non-financial assets or non-financial liabilities recognized at fair value on a recurring basis at December 31, 2023.
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 on the Company’s consolidated statements of operations under the caption “Other non-operating expense (income), net” whereas
translation adjustments are reflected on 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 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. The Company's five largest individual
customers accounted for approximately 69% of our gross sales in 2023, 67% of our gross sales in 2022, and 66% of our gross sales in 2021. During 2023,
the Company's four largest customers - Walmart, Target, Amazon, Best Buy - each accounted for between 10% to 25% of consolidated gross sales.
Additionally, as of December 31, 2023, these customers had 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, 2023 and 2022 were $8.0 million and $6.5 million, respectively.
Segment Information
The company operates in a single reportable segment, referred to as gaming accessories. 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 December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09) intended to
enhance the transparency and decision usefulness of income tax disclosures. The amendments in this ASU address investor requests
49
for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and
income taxes paid information. The amendments in the ASU are effective for fiscal years beginning after December 15, 2024, on a prospective basis. Early
adoption is permitted. The Company does not expect the new guidance to have a material impact on their financial position, results of operations or
liquidity.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU No.
2023-07). ASU 2023-07 requires that an entity disclose significant segment expenses, a description of “other segment items,” and the title and position of
the chief operating decision maker along with an explanation of how the reported segment profit or loss is assessed and allocated. The amendments in the
ASU are effective for fiscal years beginning after December 15, 2023, and interim periods after December 15, 2024 and will be applied retrospectively for
all prior periods presented in the financial statements. The Company will adopt this standard in the year required and intends to make all necessary
disclosures.
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 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
authoritative accounting guidance did not have a material impact on their financial position, results of operations or liquidity.
Note 2. 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 and the revolving line of credit. As of December 31, 2023
and 2022, 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, 2023 and 2022:
Financial Assets and Liabilities:
Cash and cash equivalents
Credit Facility
December 31, 2023
December 31, 2022
Reported
Fair Value
Reported
Fair Value
(in thousands)
$
$
18,726 $
— $
18,726 $
— $
11,396 $
19,053 $
11,396
19,053
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.
Note 3. 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 on the
consolidated balance sheets:
50
Balance, beginning of period
Reserve accrual
Recoveries and deductions, net
Balance, end of period
Note 4. Composition of Certain Financial Statement Items
Inventories
Inventories consist of the following:
Finished goods
Raw materials
Total inventories
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
2023
Year ended December 31,
2022
in thousands
2021
$
$
7,817 $
16,254
(15,622 )
8,449 $
8,997 $
15,574
(16,754 )
7,817 $
11,233
21,506
(23,742 )
8,997
December 31,
2023
December 31,
2022
(in thousands)
43,579 $
440
44,019 $
70,407
845
71,252
December 31,
2023
December 31,
2022
(in thousands)
2,597 $
2,438
1,700
11,250
1,988
15,767
35,740
(30,916 )
4,824 $
2,373
2,396
1,713
9,901
2,050
15,379
33,812
(27,450 )
6,362
$
$
$
$
Depreciation and amortization expense on property and equipment for the years ended December 31, 2023, 2022 and 2021 was $3.8 million, $4.6 million
and $4.1 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,
2023
December 31,
2022
(in thousands)
3,944 $
3,335
5,275
5,206
2,917
8,747
29,424 $
4,171
4,147
2,527
4,159
1,746
8,683
25,433
$
$
51
Other non-operating expense (income), net
Other non-operating expense (income), net consists of the following:
Change in fair value of contingent consideration
Other non-operating expense (income)
Total other non-operating expense (income),net
Note 5. Goodwill and Other Intangible Assets
Intangible Assets
2023
Year Ended
December 31,
2022
(in thousands)
2021
$
$
— $
394
394 $
— $
1,753
1,753 $
(1,928 )
1,827
(101 )
Identifiable intangible assets, and related accumulated amortization, as of December 31, 2023 and 2022 consist of:
Customer relationships
Tradenames
Developed technology
Foreign currency
Total Intangible Assets (1)
Customer relationships
Tradenames
Developed technology
Foreign currency
Total Intangible Assets
Gross
Carrying
Value
December 31, 2023
Accumulated
Amortization
(in thousands)
Net Book
Value
8,085 $
3,066
1,884
(1,159 )
11,876 $
7,214 $
2,607
1,613
(1,292 )
10,142 $
871
459
271
133
1,734
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
$
$
$
$
(1)
The accumulated amortization includes $1.9 million of accumulated impairment charges as of December 31, 2023.
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.
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 fair 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.
52
Amortization expense related to definite lived intangible assets was $1.0 million, $1.2 million and $1.3 million for the years ended December 31, 2023,
2022 and 2021, respectively.
As of December 31, 2023, estimated annual amortization expense related to definite lived intangible assets in future periods is as follows:
2024
2025
2026
Thereafter
Total
(in thousands)
$
$
1,006
425
170
-
1,601
All goodwill is attributable to the gaming accessories reporting unit. Changes in the carrying values of goodwill for twelve months ended December 31,
2023 are as follows:
Balance as of January 1, 2023
No Activity
Balance as of December 31, 2023
Note 6. Credit Facilities and Long-Term Debt
(in thousands)
10,686
-
10,686
$
$
The Company had no outstanding balance related to its revolving credit facility as of December 31, 2023.
Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was $0.6 million, $1.2 million and $0.4 million
for the years ended December 31, 2023, 2022 and 2021, respectively.
Amortization of deferred financing costs was $0.1 million for the year ended December 31, 2023, and $0.2 million for each of the years ended December
31, 2022 and 2021, 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 provided 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, and (iii) 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 BSBY rate loans, BSBY daily floating rate loans
and UK alternative currency loans. In addition, Turtle Beach is required to pay a commitment fee on
53
the unused revolving loan commitment at a rate ranging from 0.375% to 0.50%, and letter of credit fees and agent fees. During 2023, interest rates for
outstanding borrowings were 11.00% for base rate loans and 8.90% for SONIA rate loans.
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, 2023, the Company was in compliance with all the financial covenants under the Credit Facility, as amended, and excess borrowing
availability was approximately $60.6 million.
Note 7. 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
2023
Year Ended
December 31,
2022
(in thousands)
2021
$
$
4 $
8
12
(539 )
17
(522 )
848
—
848
338 $
(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
54
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
Foreign tax credit
Research and development credit
Global intangible low taxed income
Change in unrecognized tax benefits
Section 162(m)
Other
Provision for income taxes
2023
Year Ended
December 31,
2022
(in thousands)
2021
$
$
(20,116 ) $
2,775
(17,341 )
21 %
(3,642 )
(385 )
135
2,850
287
—
(96 )
(558 )
858
(330 )
1,237
(18 )
338 $
(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
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,
2023
December 31,
2022
$
(in thousands)
4 $
(764 )
(1,402 )
2,789
1,614
1,434
1,977
8,372
6,154
(1,754 )
1,524
311
1,376
21,635
(22,094 )
$
(459 ) $
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 )
At December 31, 2023, the Company had $26.2 million of indefinite lived federal net operating loss carryforwards and $48.0 million of state net operating
loss carryforwards, which will begin to expire in 2029. As of December 31, 2023, the Company has federal research and development credit carryforwards
of $0.8 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.
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
55
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 2022 pre-tax
loss, coupled with cumulative book losses projected in early future years, was significant negative evidence considered by the Company in recording an
$18.4 million increase to the valuation allowance as of December 31, 2022. The valuation allowance is retained for the year ended December 31, 2023,
with an increase to the valuation allowance of $2.8 million.
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,
2023
December 31,
2022
(in thousands)
3,002 $
128
—
(32 )
(814 )
2,284 $
3,415
150
158
(321 )
(400 )
3,002
$
$
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 $0.1 million for the year
ended December 31, 2023 and $0.3 million for the year ended December 31, 2022. To the extent these unrecognized tax benefits are ultimately recognized,
approximately $2.0 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. As of December 31, 2023, the Company had uncertain tax positions of $2.9
million, inclusive of $0.6 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 $16.1 million of 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. All other outside basis differences not related
to earnings were impractical to account for at this period of time and are currently considered as being permanent in duration.
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, 2023 and 2022, 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
2020 - 2022
2019 - 2022
2020 - 2022
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, 2023 and 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
did not incur excise tax on stock repurchased for the year ended December 31, 2023. The Company will continue to monitor possible future impact of
changes in tax legislation.
56
Note 8. 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,
2022
(in thousands, except per-share data)
2023
2021
Net income (loss)
$
(17,679 ) $
(59,546 ) $
17,721
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
17,135
16,450
15,915
—
—
—
17,135
—
—
—
16,450
$
$
(1.03 ) $
(1.03 ) $
(3.62 ) $
(3.62 ) $
438
1,348
550
18,251
1.11
0.97
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 9. Equity and Stock-Based Compensation
Stock Repurchase Activity
2023
Year Ended
December 31,
2022
(in thousands)
2021
1,374
1,404
2,778
1,669
1,449
3,118
721
294
1,015
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, 2023, the Company has repurchased 0.6
million shares of its common stock for a total cost of $8.4 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”), which was subsequently amended at the 2019 annual meeting of stockholders and at the 2021 annual meeting of
stockholders to increase the total number of shares of common stock authorized for grant. 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
57
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, 2023:
Balance at December 31, 2022
Plan Amendment
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, 2023
(in thousands)
550
1,049
21
(520 )
28
94
(163 )
1,059
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
2023
Year ended December 31,
2022
(in thousands)
2021
$
$
824 $
2,475
1,870
6,814
11,983 $
433 $
2,028
1,444
4,079
7,984 $
343
1,746
1,379
4,188
7,656
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).
On May 1, 2023, the Company announced that the Company and Juergen Stark, Chairman, Chief Executive Officer and President of the Company, agreed
that Mr. Stark would not continue as Chairman, Chief Executive Officer and President of the Company, with his employment to terminate effective as of
the close of business on June 30, 2023. On May 2, 2023, the Company entered into a separation agreement with Mr. Stark, resulting in an acceleration of
the total stock-based compensation associated with equity awards granted to him. During the year ended December 31, 2023, the Company recorded a total
of $4.0 million in stock-based compensation expenses and related payroll that would not have been recognized if Mr. Stark had not announced his
retirement.
The associated tax benefit recognized on the consolidated statements of operations for the fiscal years ended December 31, 2023, 2022 and 2021 was
approximately $0.3 million, $0.2 million and $2.2 million, respectively.
Stock Option Activity
Outstanding at December 31, 2022
Granted
Exercised
Forfeited
Outstanding at December 31, 2023
Vested and expected to vest at December 31, 2023
Exercisable at December 31, 2023
Options Outstanding
Number of
Shares
Underlying
Outstanding
Options
Weighted-
Average
Exercise
Price
1,577,545 $
-
(515,089 )
(21,004 )
1,041,452 $
1,040,873 $
984,120 $
7.66
-
4.39
16.45
9.10
9.22
9.23
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
5.81 $
2,465,015
4.22 $
3,137,285
4.22 $
3,136,393
4.09 $
2,975,342
58
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 $3.3 million, $0.8 million and $13.6 million for the years ended December 31,
2023, 2022 and 2021, respectively.
As of December 31, 2023, total unrecognized compensation cost related to non-vested stock options granted to employees was $0.4 million, which is
expected to be recognized over a remaining weighted average vesting period of 0.4 years.
No options were granted during the years ended December 31, 2023 and 2022. The weighted average grant date fair value of options granted during the
year ended December 31, 2021 was $14.89. The total estimated fair value of employee options vested during the three years ended December 31, 2023 was
$1.0 million, $4.2 million and $2.6 million, respectively.
Restricted Stock Activity
Nonvested restricted stock at December 31, 2022
Granted
Vested
Shares forfeited
Nonvested restricted stock at December 31, 2023
Weighted
Average
Grant Date
Fair Value
Per Share
18.75
9.98
16.36
15.83
14.76
Shares
865,446 $
519,533
(591,801 )
(28,236 )
764,942 $
As of December 31, 2023, total unrecognized compensation cost related to the nonvested restricted stock awards granted was $8.3 million, which is
expected to be recognized over a remaining weighted average vesting period of 2.2 years.
Performance-Based Restricted Share Units
As of December 31, 2023, the Company had 162,672 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 $1.7 million in 2023 and $1.0 million in 2021. There was no stock-based compensation expense recorded in 2022 as the performance
conditions were not achieved.
Note 10. Segment Information
The Company operates in a single reportable segment. 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
2023
Year Ended
December 31,
2022
(in thousands)
2021
$
$
186,279 $
62,015
9,828
258,122 $
163,605 $
58,917
17,644
240,166 $
244,430
99,685
22,239
366,354
59
The following table represents property and equipment, net based on physical location:
United States
International
Total
Note 11. Commitments and Contingencies
Litigation
Year Ended
December 31,
2023
2022
$
$
(in thousands)
3,888 $
936
4,824 $
5,045
1,317
6,362
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 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 former Chief Executive Officer, 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,
60
2021. On December 20, 2021, the former employee filed a notice of appeal of the judgment. On November 14, 2023, the court of appeal issued its opinion
affirming the judgment in favor of the Company. On the Company’s Cross-Complaint, the court of appeal directed the Company to elect either punitive or
statutory treble damages, but otherwise affirmed.
Insolvency Dispute in Germany: On February 15, 2024, TBC Holding Company LLC (“TBCH”), a wholly-owned subsidiary of Turtle Beach Corporation,
was served with a lawsuit that was brought to the German Higher Regional Court in Stade by the insolvency administrator of KJE Europe GmbH, a
company registered and existing under the laws of Germany. In his complaint, the insolvency administrator claims that TBCH is liable to reimburse any
payments received by the TBCH under a certain settlement agreement with KJE Europe GmbH dated June 30, 2020. TBCH does not believe the claims
have merit and intends to defend itself in this proceeding. TBCH will file its statement of defense to the complaint by April 30, 2024.
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, 2023 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:
Warranty, beginning of period
Warranty costs accrued
Settlements of warranty claims
Warranty, end of period
Operating Leases – Right of Use Assets
The components of the right-of-use assets and lease liabilities were as follows:
2023
Year ended December 31,
2022
(in thousands)
2021
$
$
618 $
721
(669 )
670 $
856 $
380
(618 )
618 $
1,039
674
(857 )
856
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
Balance Sheet Classification
December 31, 2023
(in thousands)
Other assets
Other current liabilities
Other liabilities
$
$
$
7,006
1,251
6,481
7,732
5.8
4.3 %
During the year ended December 31, 2023, the Company recognized approximately $1.5 million of lease costs in operating expenses and approximately
$1.3 million of operating cash flows from operating leases.
61
Approximate future minimum lease payments for the Company’s right of use assets over the remaining lease periods as of December 31, 2023:
2024
2025
2026
2027
2028
Thereafter
Total minimum payments
Less: Imputed interest
Total
(in thousands)
$
$
1,437
1,451
1,361
1,383
1,201
1,980
8,813
(1,081 )
7,732
Note 12. Selected Quarterly Financial Data – Unaudited
Fiscal 2023
Quarter
Net Revenue
Gross Profit
Net Income (Loss)
Earnings (Loss) Per Share
Basic
Diluted
Fiscal 2022
Net Revenue
Gross Profit
Net Income (Loss)
Earnings (Loss) Per Share
Basic
Diluted
Note 13. Subsequent Event
Merger Agreement
$
$
$
$
$
$
First
Second
Third
Fourth
(in thousands, except per share data)
51,444 $
14,139
(6,705 )
47,982 $
11,872
(15,920 )
59,158 $
17,689
(3,606 )
(0.40 ) $
(0.40 ) $
(0.93 ) $
(0.93 ) $
(0.21 ) $
(0.21 ) $
99,538
31,804
8,552
0.49
0.47
First
Second
Third
Fourth
Quarter
(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 )
On March 13, 2024, Turtle Beach entered into an acquisition agreement (the “PDP Merger Agreement”) pursuant to which we acquired all the issued and
outstanding equity of Performance Design Products, LLC (“PDP”), for consideration valued at $118 million, structured as a merger between a subsidiary of
Turtle Beach and FSAR Holdings, Inc., the parent of PDP (the “PDP Transaction”). PDP was a privately held gaming accessories leader that designs and
distributes video game accessories, including controllers, headsets, power supplies, cases, and other accessories. Consideration for the transaction consisted
of issuance of 3.45 million shares of our common stock (the “Stock Consideration”) and approximately $79.9 million in cash, subject to customary post-
closing adjustments.
In connection with the PDP Merger Agreement, we simultaneously entered into a Stockholder Agreement with the holders of the Stock Consideration,
pursuant to which such equityholders received two demand registration rights and the right to annually designate one candidate for our Board of Directors
for so long as such holders continue to hold 10% or more of the outstanding shares of our common stock. Such equityholders also agreed to take certain
actions to further support our ongoing operations, including to vote in favor of the Board’s directorship nominees and refrain from engaging in solicitations
or proxies in opposition to such nominees.
Term Loan Facility
On March 13, 2024, the Company entered into a new financing agreement (the “Term Loan Financing Agreement”) by and among the Company, Voyetra
Turtle Beach, Inc., a Delaware corporation, as borrower (“VTB”), VTB Holdings, Inc., a Delaware corporation, as holdings (“VTBH”), each subsidiary of
the Company listed as a guarantor on the signature pages thereto, the lenders from time to time party thereto, and Blue Torch Finance, LLC, a Delaware
limited liability company, as administrative agent and collateral agent (“Blue Torch”), pursuant to which
62
Blue Torch made a loan to VTB in the aggregate amount of $50 million (the “Term Loan Facility”), the proceeds of which were used to (a) fund a portion
of the purchase price in the PDP Transaction; (b) repay certain existing indebtedness of PDP, (c) for general corporate purposes; and (d) to pay fees and
expenses related to such transactions. The Term Loan Facility will amortize in a monthly amount equal to 0.208333% during the first two years and
0.416667% during the third year and may be prepaid at any time subject to a prepayment premium during the first year of the interest payments payable
during the first year plus 3.00%. The Term Loan Facility is secured by substantially all of the assets of the Company and its subsidiaries which are party to
the Term Loan Facility.
The Term Loan Facility (a) will mature on March 13, 2027; (b) will bear interest at a rate equal to (i) a base rate plus 7.25% per annum for Reference Rate
Loans and Secured Overnight Financing Rate (“SOFR”) plus 8.25% per annum for SOFR Loans if the total net leverage ratio is greater than or equal to
2.25x and (ii) a base rate plus 6.75% per annum for Reference Rate Loans and SOFR plus 7.75% per annum for SOFR Loans if the total net leverage ratio
is less than 2.25x; and (c) is subject to certain affirmative, negative and financial covenants, including a minimum liquidity covenant and a quarterly total
net leverage ratio covenant.
Amendment to Credit Facility
On March 13, 2024, the Company entered into a Fourth Amendment to the Credit Facility (the “Fourth Amendment”). The Fourth Amendment provides
for, among other things: (i) permitting the PDP Transaction; (ii) revising the calculation of the US Borrowing Base to include certain assets of PDP
acquired in connection with the PDP Transaction equal to the lesser of (a) the sum of the 50% of the value of eligible US accounts and inventory of PDP,
(b) $15,000,000, and (c) 30% of the aggregate Revolver Commitments; (iii) extending the maturity date of the Credit Facility from April 1, 2025 to March
13, 2027; and (iv) updating the interest rate and margin terms such that the loans will bear interest at a rate equal to (i) SOFR, (ii) the US Base Rate, (iii)
the Sterling Overnight Index Average Reference Rate (“SONIA”) for loans denominated in Sterling, and (iv) the Euro Interbank Offered Rate (“EUIBOR”)
for loans denominated in Euros, plus in each case, an applicable margin, which is between 0.50% and 2.50% for Base Rate Loans and 1.75% and 3.50% for
Term SOFR Loans, SONIA Rate Loans and EUIBOR Loans.
63
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 effective as of December 31, 2023.
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.
We assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023. In making this assessment, we
used the framework and criteria established in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on our assessment using those criteria, we concluded that, as of December 31, 2023, our internal control over financial
reporting was effective.
Ernst & Young 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, 2023 as stated in its report which appears following Item 9C of this
Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the period covered that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses
constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be
identified during this process.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Accordingly, even effective disclosure
controls and procedures can only provide reasonable assurance of achieving their control objectives. Also, projections of any evaluation of the effectiveness
of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Item 9B - Other Information
During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading
arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
64
Item 9C - Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Turtle Beach Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Turtle Beach Corporation’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO
criteria). In our opinion, Turtle Beach Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
balance sheet of the Company as of December 31, 2023, the related consolidated statement of operations, comprehensive income (loss), stockholders’
equity and cash flows for the period ended December 31, 2023, and the related notes and financial statement schedule listed in the Index at Item 15(a) and
our report dated March 13, 2024 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 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 the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit 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, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
/s/ ERNST & YOUNG LLP
New York, New York
March 13, 2024
66
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, 2023 in connection with our 2024 Annual Meeting of Stockholders
(the “2024 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 2024 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 2024 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 2024 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 2024 Proxy Statement or the Amendment set
forth under the caption “Audit and Non-Audit Fees.”
67
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 (ERNST & YOUNG LLP New York, New York, PCAOB #42);
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, 2023, 2022 and 2021;
Consolidated Statements of Comprehensive Income (Loss) for the Fiscal Years Ended December 31, 2023, 2022 and 2021;
Consolidated Balance Sheets as of December 31, 2023 and 2022;
Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended December 31, 2023, 2022 and 2021;
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2023, 2022 and 2021; and
Notes to the Consolidated Financial Statements.
2.
The following financial schedule and related report for the years 2023, 2022 and 2021:
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.
68
Exhibits
2.1*
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).
3.1
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).
3.2**
Bylaws, as amended, of Turtle Beach Corporation.
3.3
4.1
4.2
Certificate of Designation of Series A Junior Participating Preferred Stock of Turtle Beach Corporation (Incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 29, 2023).
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 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 June 6, 2019).
10.2
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).
10.3†
Turtle Beach Corporation 2023 Stock-Based Incentive Compensation Plan, as amended. (Incorporated by reference to Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q originally filed with the Securities and Exchange Commission on August 7, 2023).
10.4†
Form of Performance Stock Unit Agreement under the Turtle Beach Corporation 2023 Stock-Based Incentive Compensation Plan
(Incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 7, 2023).
10.5†
Form of Restricted Stock Agreement under the Turtle Beach Corporation 2023 Stock-Based Incentive Compensation Plan (Incorporated by
reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August
7, 2023).
10.6
Form of Deferred Stock Award Agreement under the Turtle Beach Corporation 2023 Stock-Based Incentive Compensation Plan
(Incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 7, 2023).
10.7†
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).
10.8†
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).
10.9
Separation Letter Agreement and Release, dated as of May 1, 2023, by and between Turtle Beach Corporation and Juergen Stark
(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 May 2, 2023).
10.10
Letter Agreement, dated June 20, 2023, by and between Turtle Beach Corporation and Cris Keirn (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 22, 2023).
69
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).
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 Current Report on Form 8-K filed with the Securities and Exchange
Commission May 17, 2022).
10.17
Waiver of Replacement Rights Agreement, dated June 17, 2023, 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 Current Report on Form 8-K filed with the Securities and
Exchange Commission June 23, 2023).
21**
Subsidiaries of the Company.
23.1**
Consent of ERNST & YOUNG LLP.
23.2**
Consent of BDO USA, P.C.
31.1**
Certification of Cris Keirn, 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 Cris
Keirn, Principal Executive Officer and John Hanson, Principal Financial Officer.
97.1**
Compensation Recoupment Policy of Turtle Beach Corporation.
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**
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.
70
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 13, 2024
By:
TURTLE BEACH CORPORATION
/s/ JOHN T. HANSON
John T. Hanson
Chief Financial Officer and Treasurer
(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 13, 2024
Date: March 13, 2024
Date: March 13, 2024
Date: March 13, 2024
Date: March 13, 2024
Date: March 13, 2024
Date: March 13, 2024
Date: March 13, 2024
Date: March 13, 2024
/s/ CRIS KEIRN
Cris Keirn, Interim CEO & SVP Global Sales
(Principal Executive Officer)
/s/ JOHN T. HANSON
John T. Hanson, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
/s/ GREGORY BALLARD
Gregory Ballard, Director
/s/ TERRY JIMENEZ
Terry Jimenez, Chairman and Director
/s/ KATHERINE L. SCHERPING
Katherine L. Scherping, Director
/s/ JULIA W. SZE
Julia W. Sze, Director
/s/ MICHELLE WILSON
Michelle Wilson, Director
/s/ ANDREW WOLFE
Andrew Wolfe, Director
/s/ WILLIAM WYATT
William Wyatt, Director
71
Turtle Beach Corporation
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2023, 2022 and 2021
Description
Balance - Begin
Additions
Deductions / Other
Balance - End
Year Ended December 31, 2023:
Allowance for sales returns
Allowance for cash discounts
Allowance for doubtful accounts
(in thousands)
$
7,817 $
29,545
93
16,254 $
27,673 $
3 $
Valuation allowance for deferred tax assets
$
19,244 $
2,850 $
Year Ended December 31, 2022:
Allowance for sales returns
Allowance for cash discounts
Allowance for doubtful accounts
Valuation allowance for deferred tax assets
Year Ended December 31, 2021:
Allowance for sales returns
Allowance for cash discounts
Allowance for doubtful accounts
$
$
$
8,997 $
25,629
102
15,574 $
29,714 $
(23 ) $
— $
19,244 $
11,233 $
18,649
15
21,506 $
15,794
468
72
(15,622 ) $
(28,630 )
(81 )
$
— $
(16,754 ) $
(25,798 )
14
$
— $
(23,742 ) $
(8,814 )
(381 )
$
8,449
28,588
15
37,052
22,094
7,817
29,545
93
37,455
19,244
8,997
25,629
102
34,728
Exhibit 3.2
BYLAWS (AS AMENDED)
OF
TURTLE BEACH CORPORATION
(A NEVADA CORPORATION)
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of Turtle Beach Corporation (the “Corporation”) in the State of Nevada shall be
in such location as the directors determine in the State of Nevada.
Section 2. Other Offices. The Corporation shall also have and maintain an office or principal place of business at such place as
may be fixed by the Corporation’s Board of Directors (the “Board”), and may also have offices at such other places, both within and without
the State of Nevada as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE II
CORPORATE SEAL
Section 3. Corporate Seal. The corporate seal shall consist of a die bearing the name of the Corporation and the inscription,
“Corporate Seal-Nevada.” Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS’ MEETINGS
Section 4. Place of Meetings. Meetings of the stockholders of the Corporation shall be held at such place, either within or without
the State of Nevada, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the
Corporation required to be maintained pursuant to Section 2 hereof.
Section 5. Annual Meeting.
(a) The annual meeting of the stockholders of the Corporation, for the purpose of election of directors and for such other business as
may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the
meeting in accordance with these Bylaws, the Corporation’s Articles of Incorporation (the “Articles of Incorporation”), the Nevada Revised
Statutes, and other applicable law. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting
(or any supplement thereto) given by or at the direction of the Board of Directors; (B) otherwise properly brought before the meeting by or at
the direction of the Board of Directors; or (C) otherwise properly brought before the meeting by a stockholder Present in Person at the
meeting who (i) is a stockholder of record of shares of the Corporation’s capital stock at the time of giving the notice provided for in this
paragraph (b), (ii) is a stockholder of record of shares of the Corporation’s capital stock as of the record date for the determination of
stockholders entitled to notice of and to vote at the meeting in question, (iii)
1
is a stockholder of record of shares of the Corporation’s capital stock at the time of the meeting, (iv) is entitled to vote at the meeting, and (v)
complies with the requirements set forth in this paragraph (b) in all applicable respects. Except with respect to proposed nominations of
persons for election to the Board, which must be made in compliance with the provisions of Section 5, paragraph (c) of these Bylaws and
except for stockholder proposals submitted for inclusion in the Corporation’s proxy statement pursuant to, and in compliance with, Rule 14a-
8 (and the interpretations thereunder) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and which proposals are not
excludable under Rule 14a-8 of the Exchange Act, whether pursuant to a no-action letter from the Staff of the Securities and Exchange
Commission’s Division of Corporation Finance or a determination of a federal court of competent jurisdiction, and which are included in the
notice of meeting given by or at the direction of the Board and the Corporation’s proxy statement pursuant to Rule 14a-8 of the Exchange
Act, the foregoing clause (C) shall be the exclusive means for a stockholder to propose business to be brought before an annual meeting of
stockholders. In addition to the other requirements set forth in this paragraph (b), for any proposal of business to be considered at an annual
meeting of stockholders, it (i) must be a proper subject for action by stockholders of the Corporation under these Bylaws, the Articles of
Incorporation, the Nevada Revised Statutes and other applicable law, and (ii) must not relate to a matter that is expressly reserved for action
by the Board under these Bylaws, the Articles of Incorporation, the Nevada Revised Statutes or other applicable law. For business to be
properly brought before an annual meeting by a stockholder pursuant to this paragraph (b), the stockholder must have given (i) timely and
proper notice thereof in writing to the Secretary of the Corporation (the “Proposal Notice”) and (ii) provided any updates or supplements to
the Proposal Notice at the times and in the forms required by this paragraph (b). To be timely, a Proposal Notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not later than the close of business on the sixtieth (60th) day nor
earlier than the close of business on the ninetieth (90th) day prior to the first anniversary of the preceding year’s annual meeting; provided,
however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more
than thirty (30) days from the date contemplated at the time of the previous year’s proxy statement, notice by the stockholder to be timely
must be so received not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close
of business on the later of the sixtieth (60th) day prior to such annual meeting or, in the event public announcement of the date of such annual
meeting is first made by the Corporation fewer than seventy (70) days prior to the date of such annual meeting, the close of business on the
tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Corporation.
Notwithstanding the foregoing, in connection with any annual meeting of stockholders to be held after January 1, 2025, to be timely, a
Proposal Notice must be delivered to or mailed and received at the principal executive offices of the Corporation not later than the close of
business on the ninetieth (90th) day nor earlier than the close of business on the one hundred and twentieth (120th) day prior to the first
anniversary of the preceding year’s annual meeting; provided, however, that in the event that no annual meeting was held in the previous year
or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous
year’s proxy statement, notice by the stockholder to be timely must be so received not earlier than the close of business on the one hundred
twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such
annual meeting or, in the event public announcement of the date of such annual meeting is first made by the Corporation fewer than ninety
(90) days prior to the date of such annual meeting, the close of business on the tenth (10th) day following the day on which public
announcement of the date of such meeting is first made by the Corporation. In no event shall any adjournment or postponement of an annual
meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of a Proposal Notice as
described above. For purposes of these Bylaws, “Notice Deadline” shall mean the last date for a stockholder to deliver a Proposal Notice or a
Nominating Notice (as defined below) in accordance with the provisions of this paragraph (b). To be in proper written form, a Proposal
Notice shall set forth: (i) the name and address, as they appear on the
2
Corporation’s books, of the stockholder proposing to bring business before the Corporation’s annual meeting of stockholders (each, a
“Proponent”) and any Stockholder Associated Person; (ii) (A) the class or series and number of shares of capital stock of the Corporation
which are owned, directly or indirectly, beneficially (within the meaning of Rule 13d-3 under the Exchange Act) and/or of record, by such
Proponent or any Stockholder Associated Person, provided that such Proponent or Stockholder Associated Person shall in all events be
deemed to beneficially own any shares of any class or series of the Corporation’s equity securities as to which such Proponent or Stockholder
Associated Person has a right to acquire beneficial ownership at any time in the future, whether such right is exercisable immediately, only
after the passage of time or only upon the satisfaction of certain conditions precedent, (B) any derivative positions held or beneficially held
by the Proponent and any Stockholder Associated Person and whether and a description in reasonable detail of the extent to which any
hedging or other transaction or series of transactions has been entered into by or on behalf of, or any other proxy, agreement, arrangement or
understanding has been made or relationship exists, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price
changes for, or provide a right to vote or increase or decrease the voting power of, such Proponent or any Stockholder Associated Person with
respect to the Corporation’s securities, and (C) a representation that the Proponent is a beneficial owner of stock of the Corporation entitled to
vote at such meeting and intends to be Present in Person at the meeting to propose such business; (iii) as to each matter the Proponent
proposes to bring before the meeting, (A) a reasonably detailed description of the business desired to be brought before the meeting, (B) the
text of the proposed business (including the text of any resolutions proposed for consideration and in the event such business includes a
proposal to amend these Bylaws, the Articles of Incorporation or any policy of the Corporation, the text of the proposed amendment), and (C)
a reasonably detailed description of the reasons for conducting such business at the meeting; (iv) a reasonably detailed description of any
interest, direct or indirect, monetary or non-monetary, of the Proponent or any Stockholder Associated Person in the proposed business
described in the Proposal Notice, including any anticipated benefit therefrom to be received by the Proponent or any Stockholder Associated
Person; (v) a description in reasonable detail of any pending, or to the knowledge of the Proponent or any Stockholder Associated Person,
threatened legal proceeding in which any Proponent or Stockholder Associated Person is a party or participant involving the Corporation or
any officer, director, affiliate, associate, or employee of the Corporation; (vi) a description in reasonable detail of any relationship (including
any direct or indirect interest in any agreement, arrangement or understanding, whether written or oral and whether formal or informal)
between the Proponent or any Stockholder Associated Person and the Corporation or any director, officer, affiliate, associate, or employee of
the Corporation (naming such director, officer, affiliate, associate, or employee) or with any competitor of the Corporation or any affiliate or
associate of such competitor; (vii) a description in reasonable detail of any contacts and discussions between the Proponent or any
Stockholder Associated Person and any officer, director, or employee of the Corporation (naming such officer, director, or employee and
listing the dates and describing the nature of such contacts and discussions); (viii) a reasonably detailed description of any relationship,
agreement, arrangement or understanding, written or oral, direct or indirect, with respect to the business proposed to be brought before the
annual meeting by the Proponent, between or among any Proponent or any Stockholder Associated Person and any other person or entity
(naming each such person or entity), including without limitation any agreements, arrangements and understandings that would be required to
be disclosed pursuant to Item 5 or Item 6 of Schedule 13D if a Schedule 13D relating to the Corporation was filed with the Securities and
Exchange Commission (“SEC”) by such Proponent or Stockholder Associated Person pursuant to the Exchange Act (regardless of whether
the requirement to file a Schedule 13D is applicable to such Proponent or Stockholder Associated Person); (ix) a description in reasonable
detail of any direct or indirect interest of the Proponent or any Stockholder Associated Person that is or may reasonably be considered to be
competitive or in conflict with the Corporation, or any affiliate or associate of the Corporation (naming such affiliate or associate); (x) a
description of, including the class, series and number of, shares of any competitor of the Corporation directly or indirectly beneficially
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owned (within the meaning of Rule 13d-3 under the Exchange Act) and/or held of record by such Proponent or any Stockholder Associated
Person (including any shares of any class or series of any such competitor of the Corporation as to which such Proponent or any Stockholder
Associated Person has a right to acquire beneficial ownership in any time in the future, whether such right is exercisable immediately, only
after the passage of time or only upon the satisfaction of certain conditions precedent); (xi) a description in reasonable detail of any plans or
proposals of the Proponent or any Stockholder Associated Person relating to the Corporation that would be required to be disclosed by such
Proponent or Stockholder Associated Person pursuant to Item 4 of Schedule 13D if a Schedule 13D relating to the Corporation was filed with
the SEC by such Proponent or Stockholder Associated Person pursuant to the Exchange Act (regardless of whether the requirement to file a
Schedule 13D with the SEC is applicable to such Proponent or Stockholder Associated Person) together with a description of any
agreements, arrangements or understandings (whether written or oral and whether formal or informal) that relate to such plans or proposals
and naming all the parties to any such agreements, arrangements or understandings; (xii) all other information relating to (A) the proposed
business described in the Proposal Notice, (B) the Proponent, or (C) any Stockholder Associated Person that would be required to be
disclosed in a proxy statement or other filing required to be filed with the SEC in connection with a contested solicitation of proxies in which
the Proponent or any Stockholder Associated Persons are participants in a solicitation subject to Section 14 of the Exchange Act; and (xiii) a
representation whether the Proponent or any Stockholder Associated Person intends or is part of a group which intends to deliver a proxy
statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding shares required to approve or adopt the
proposed business or otherwise to solicit proxies from stockholders in support of such proposed business.
(i) A Proponent shall update and supplement its Proposal Notice as necessary, from time to time, so that the information
provided or required to be provided in such Proposal Notice pursuant to this paragraph (b) shall be true, correct and complete in all respects
not only prior to the Notice Deadline but also at all times thereafter and prior to the meeting, and such update and supplement shall be
received by the Secretary of the Corporation not later than the earlier of (A) five (5) business days following the occurrence of any event,
development or occurrence that would cause the information provided in the Proposal Notice to be not true, correct and complete in all
respects, or (B) ten (10) business days prior to the publicly disclosed date of the meeting at which such proposed business contained therein
are to be considered; provided, however, that should any such event, development or occurrence take place within ten (10) business days
prior to such meeting, such update and supplement shall be received by the Secretary of the Corporation not later than one (1) business day
following any such event, development or occurrence. For the avoidance of doubt, the updates required pursuant to this paragraph (b) do not
cause a Proposal Notice that was not true, correct and complete in all respects and in compliance with this paragraph (b) when first delivered
to the Corporation prior to the Notice Deadline to thereafter be in proper form in accordance with this paragraph (b).
(ii) Upon written request by the Secretary of the Corporation, the Board or any duly authorized committee thereof, any
Proponent who has submitted a Proposal Notice to the Corporation shall provide, within five (5) business days of delivery of such request (or
such other period as may be specified in such request), written verification, in a form and manner, including, if requested, an executed and
notarized affidavit, satisfactory in the reasonable discretion of the Board or any duly authorized committee thereof to demonstrate the
accuracy of any information submitted by such Proponent in the Proposal Notice delivered pursuant to this paragraph (b). If a Proponent fails
to provide such written verification within such period and in the form requested, the information as to which written verification was
requested shall be deemed not to have been provided in accordance with this paragraph (b).
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(iii) Notwithstanding anything in these Bylaws to the contrary, no business (other than the election of directors, which
shall be governed by Section 5, paragraph (c) of these Bylaws) shall be conducted at any annual stockholders’ meeting except in accordance
with the requirements set forth in this paragraph (b). The chairman of the meeting shall, if the facts warrant, determine, in consultation with
counsel (who may be the Corporation’s internal counsel), and declare to the meeting that business was not properly brought before the
meeting in accordance with the requirements set forth in these Bylaws, and if he or she should so determine, he or she shall so declare to the
meeting and any such proposed business not properly brought before the meeting shall not be transacted.
(iv) Notwithstanding the foregoing provisions of this paragraph (b), the disclosures required by this paragraph (b) shall not
include any disclosures with respect to the ordinary course of business activities of any broker, dealer, commercial bank, or trust company
who is deemed a Proponent or Stockholder Associated Person solely as a result of being the stockholder directed to prepare and submit a
Proposal Notice required by these Bylaws on behalf of a beneficial owner of the shares held of record by such broker, dealer, commercial
bank, or trust company and who is not otherwise affiliated or associated with such beneficial owner.
(v) Notwithstanding the foregoing provisions of this paragraph (b), a Proponent shall also comply with any and all
applicable requirements of the Exchange Act, the SEC, the Nevada Revised Statutes and other applicable law with respect to the matters set
forth in this paragraph (b), any solicitation of proxies contemplated by the Proponent in connection with its submission of a Proposal Notice
to the Corporation, and any filings made with the SEC in connection therewith.
(vi) Nothing in these Bylaws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the
Corporation’s proxy statement pursuant to, and subject to the limitations and requirements of, Rule 14a-8 under the Exchange Act and the
SEC’s and the SEC Staff’s interpretations, guidance and no-action letter determinations relating thereto.
(vii) For a Proposal Notice to comply with the requirements of this paragraph (b), each of the requirements of this
paragraph (b) shall be directly and expressly responded to and a Proposal Notice must clearly indicate and expressly reference which
provisions of this paragraph (b) the information disclosed is intended to be responsive to. Any global cross-references shall be disregarded
and information disclosed in the Proposal Notice in response to any provision of this paragraph (b) shall not be deemed responsive to any
other provision hereof unless it is expressly cross-referenced to such other provision and it is clearly apparent how such information is
responsive to such other provision.
(viii) For a Proposal Notice to comply with the requirements of this paragraph (b), it must set forth in writing directly
within the body of the Proposal Notice, rather than being incorporated by reference from any pre-existing document or writing, including, but
not limited to, any documents publicly filed with the SEC, all the information required to be included therein as set forth in this paragraph
(b), and each of the requirements of this paragraph (b) shall be directly responded to in a manner that makes it clearly apparent how the
information provided is specifically responsive to any requirements of this paragraph (b).
(ix) A Proponent submitting the Proposal Notice, by its delivery to the Corporation, represents and warrants that all
information contained therein, as of the Notice Deadline, is true, accurate and complete in all respects, contains no false or misleading
statements and such Proponent acknowledges that it intends for the Corporation and the Board to rely on such information as (i) being true,
accurate and complete in all respects and (ii) not containing any false or misleading statements. If the information submitted pursuant to this
paragraph (b) by such Proponent shall not be true, correct and
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complete in all respects prior to the Notice Deadline, such information shall be deemed not to have been provided in accordance with this
paragraph (b).
(x) Notwithstanding the foregoing provisions of this paragraph (b), unless otherwise required by applicable law, if the
Proponent is not Present in Person at the annual meeting of stockholders to present the proposed business, such proposed business shall be
disregarded, notwithstanding that proxies in respect of such vote may have been received by the Corporation. In addition, business proposed
to be brought before an annual meeting by a Proponent may not be brought before an annual meeting if such Proponent takes action contrary
to the representations made in the Proposal Notice applicable to such business or if (i) when submitted to the Corporation prior to the Notice
Deadline, the Proposal Notice applicable to such business contained an untrue statement of a fact or omitted to state a fact necessary to make
the statements therein not misleading, or (ii) after being submitted to the Corporation, the Proposal Notice applicable to such business was
not updated or supplemented by the Proponent in accordance with these Bylaws to cause the information provided in the Proposal Notice to
be true, correct and complete in all respects.
(xi) A Proponent submitting a Proposal Notice pursuant to this paragraph (b), by its delivery to the Corporation,
acknowledges that it understands that nothing contained therein shall be considered confidential or proprietary information and that neither
the Corporation, the Board, nor any agents or representatives thereof shall be restricted, in any manner, from publicly disclosing or using any
of the information contained in a Proposal Notice.
(xii) Nothing in this paragraph (b) shall be deemed to give any stockholder the right to have any proposal included in any
proxy statement prepared by the Corporation, and, to the extent any such right exists under the Exchange Act or other applicable law or
governmental regulation, such right shall be limited to the right expressly provided under such applicable law or governmental regulation.
Notwithstanding any notice of the meeting or proxy statement sent to stockholders on behalf of the Corporation, a stockholder must
separately comply with this paragraph (b) to propose business at any annual meeting. If a stockholder’s proposed business is the same or
relates to business brought by the Corporation and included in the Corporation’s meeting notice, proxy statement or any supplement thereto,
such stockholder is nevertheless still required to comply with this paragraph (b) and deliver its own separate and timely Proposal Notice to
the Secretary of the Corporation that complies in all respects with the requirements of this paragraph (b).
(c) Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders only
(i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation (a “Nominating Stockholder”) Present in
Person at the Meeting who (A) is a stockholder of record of the Corporation’s capital stock at the time of giving the notice provided for in
this paragraph (c), (B) is a stockholder of record of the Corporation’s capital stock as of the record date for the determination of stockholders
entitled to notice of and to vote at the meeting in question, (C) is a stockholder of record of shares of the Corporation’s capital stock at the
time of the meeting, (D) is entitled to vote at the meeting, and (E) complies with the notice procedures set forth in this paragraph (c) in all
applicable respects. The foregoing clause (ii) shall be the exclusive means for a stockholder to propose any nomination of a person or persons
for election to the Board at a stockholders’ meeting. Without qualification, for a stockholder to propose a nomination of a person or persons
for election to the Board at a stockholders’ meeting, the stockholder must (A) provide timely notice thereof in writing and in proper form to
the Secretary of the Corporation containing the information with respect to such stockholder and its proposed candidates for nomination for
election to the Board as required to be set forth by this paragraph (c) (collectively, the “Nominating Notice”), and (B) provide any updates or
supplements to such Nominating Notice at the times and in the forms required by this paragraph (c). To
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be timely, a Nominating Notice must be delivered to the Secretary of the Corporation within the time periods specified by paragraph (b) of
this Section 5 for timely delivery of a Proposal Notice and must be delivered no later than the Notice Deadline. To be in proper written form,
a Nominating Notice shall set forth: (A) the name and address, as they appear on the Corporation’s books, of the Nominating Stockholder and
any Stockholder Associated Person; (B) all information as to the Nominating Stockholder, each person whom the Nominating Stockholder
proposes to nominate for election or re-election as a director (each, a “Stockholder Nominee”), and each Stockholder Associated Person that
would be required to be disclosed in a proxy statement or other filing required to be filed by the Nominating Stockholder with the SEC in
connection with a contested solicitation of proxies for the election of directors pursuant to Regulation 14A under the Exchange Act, including
such person’s written consent to being named in the proxy statement of the Nominating Stockholder as a nominee of the Nominating
Stockholder and to serving as a director of the Corporation if elected; (C) (i) the class or series and number of shares of capital stock of the
Corporation which are owned, directly or indirectly, beneficially (within the meaning of Rule 13d-3 under the Exchange Act) and/or of
record, by the Nominating Stockholder or any Stockholder Associated Person, provided that such Nominating Stockholder or Stockholder
Associated Person shall in all events be deemed to beneficially own any shares of any class or series of the Corporation’s equity securities as
to which such Nominating Stockholder or Stockholder Associated Person has a right to acquire beneficial ownership at any time in the future,
whether such right is exercisable immediately, only after the passage of time or only upon the satisfaction of certain conditions precedent, (ii)
any derivative positions held or beneficially held by such Nominating Stockholder or any Stockholder Associated Person and whether and
the extent to which any hedging or other transaction or series of transactions has been entered into by or on behalf of, or any other proxy,
agreement, arrangement or understanding has been made or relationship exists, the effect or intent of which is to mitigate loss to, manage risk
or benefit of share price changes for, or provide a right to vote or increase or decrease the voting power of, such Nominating Stockholder or
any Stockholder Associated Person with respect to the Corporation’s securities, and (iii) a representation that such Nominating Stockholder is
a stockholder of record of stock of the Corporation entitled to vote at such meeting and intends to be Present in Person at the meeting to
propose such nomination; (D) a reasonably detailed description of any agreement, arrangement or understanding, written or oral, or any
direct or indirect relationship the Nominating Stockholder or any Stockholder Associated Person may have with any Stockholder Nominee,
including but not limited to, those pursuant to which the nomination is proposed to be made, or with any other person or persons (naming
such person or persons) with respect to such nomination (E) a description in reasonable detail of any relationship (including any direct or
indirect interest in any agreement, arrangement or understanding, whether written or oral and whether formal or informal) between the
Nominating Stockholder or any Stockholder Associated Person and the Corporation or any director, officer, or other employee of the
Corporation (naming such director, officer, or other employee); (F) a description in reasonable detail of any contacts and discussions between
the Nominating Stockholder or any Stockholder Associated Person and any officer, director, or employee of the Corporation (naming such
officer, director, or employee and listing the dates and describing the nature of such contacts and discussions); (G) a description in reasonable
detail of any interest, direct or indirect, monetary or non-monetary, of the Nominating Stockholder or any Stockholder Associated Person in
having any Stockholder Nominee elected to the Board, including any anticipated benefit therefrom to be received by the Nominating
Stockholder or any Stockholder Associated Person; (H) a description in reasonable detail of any pending, or to the knowledge of the
Nominating Stockholder or any Stockholder Associated Person, threatened legal proceeding in which any Nominating Stockholder or
Stockholder Associated Person is a party or participant involving the Corporation or any officer, director, affiliate, associate, or employee of
the Corporation; (I) as to each Stockholder Nominee, (1) all information that would be required to be set forth in a Nominating Notice
pursuant to this paragraph (c) if such Stockholder Nominee was a Nominating Stockholder; (2) a list of all other publicly-traded companies,
whether or not currently publicly-traded or currently in existence, where such Stockholder Nominee had
7
been proposed as a candidate for election to a board of directors by the Nominating Stockholder; (3) a description in reasonable detail of any
and all agreements, arrangements and/or understandings (whether written or oral and formal or informal) between such Stockholder Nominee
and any person or entity (naming such person or entity) in connection with such Stockholder Nominee’s service or action as a proposed
candidate and, if elected, as a member of the Board; (4) to the extent that such Stockholder Nominee has been convicted of any past criminal
offenses involving a felony, fraud, dishonesty or a breach of trust or duty, a description in reasonable detail of such offense and all legal
proceedings relating thereto; (5) to the extent that such Stockholder Nominee has been determined by any governmental authority or self-
regulatory organization to have violated any federal or state securities or commodities laws, including but not limited to, the Securities Act of
1933, as amended, the Exchange Act or the Commodity Exchange Act, a description in reasonable detail of such violation and all legal
proceedings relating thereto; (6) to the extent that such Stockholder Nominee has ever been suspended or barred by any governmental
authority or self-regulatory organization from engaging in any profession or participating in any industry, or has otherwise been subject to a
disciplinary action by a governmental authority or self-regulatory organization that provides oversight over the Stockholder Nominee’s
current or past profession or an industry that the Stockholder Nominee has participated in, a description in reasonable detail of such action
and the reasons therefor; (7) a description in reasonable detail of any and all litigation, whether or not judicially resolved, settled or
dismissed, relating to the Stockholder Nominee’s past or current service on the board of directors (or similar governing body) of any
corporation, limited liability company, partnership, trust or any other entity where a legal complaint filed in any state or federal court located
within the United States alleges that the Stockholder Nominee committed any act constituting (i) a breach of fiduciary duties, (ii) misconduct,
(iii) fraud, (iv) breaches of confidentiality obligations, and/or (v) a breach of the entity’s code of conduct applicable to directors; (8) the
amount of any equity securities beneficially owned by such Stockholder Nominee in any company that is a direct competitor of the
Corporation or its operating subsidiaries if such beneficial ownership by such nominee, when aggregated with that of all other Stockholder
Nominees, the Nominating Stockholder and all Stockholder Associated Persons, is five percent (5%) or more of the class of equity securities
of such company, (9) the Stockholder Nominee’s written representation and agreement in the form required by the Corporation (which form
the Nominating Stockholder shall request in writing from the Secretary and which the Secretary shall provide to such Nominating
Stockholder within ten (10) days after receiving such request) that (i) such Stockholder Nominee is not and will not become a party to any
agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such
Stockholder Nominee, if elected as a director of the Corporation, will act or vote on any issue or question (a “Voting Commitment”) that has
not been disclosed to the Corporation or any Voting Commitment that could limit or interfere with such Stockholder Nominee’s ability to
comply, if elected as a director of the Corporation, with such Stockholder Nominee’s fiduciary duties under applicable law, (ii) such
Stockholder Nominee is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than
the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as
a director or nominee that has not been disclosed to the Corporation, (iii) such Stockholder Nominee will, if elected as a director, comply
with applicable law, the rules of any securities exchanges upon which the Corporation’s securities are listed, all applicable publicly disclosed
corporate governance, ethics, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Corporation,
and any other of the Corporation’s policies and guidelines applicable to directors (which will be provided to such Stockholder Nominee
within five (5) business days after the Secretary receives any written request therefor from such Stockholder Nominee), and applicable
fiduciary duties under state law; (iv) such Stockholder Nominee intends to serve as a director for the full term for which such Stockholder
Nominee is standing for election; (J) a reasonably detailed description of any agreement, arrangement or understanding, written or oral, or
any direct or indirect relationship, with respect to the nomination proposed to be brought before the meeting by the Nominating Stockholder,
between or among any
8
Nominating Stockholder or any Stockholder Associated Person and any other person or entity (naming each such person or entity), including
without limitation any agreements, arrangements and understandings that would be required to be disclosed pursuant to Item 5 or Item 6 of
Schedule 13D if a Schedule 13D relating to the Corporation was filed with the SEC by such Nominating Stockholder or Stockholder
Associated Person pursuant to the Exchange Act (regardless of whether the requirement to file a Schedule 13D is applicable to such
Nominating Stockholder or Stockholder Associated Person); (K) a description in reasonable detail of any plans or proposals of the
Nominating Stockholder, any Stockholder Associated Person or any Stockholder Nominee relating to the Corporation that would be required
to be disclosed by such Nominating Stockholder, Stockholder Associated Person or Stockholder Nominee pursuant to Item 4 of Schedule
13D if a Schedule 13D relating to the Corporation was filed with the SEC by such Nominating Stockholder, Stockholder Associated Person
or Stockholder Nominee pursuant to the Exchange Act (regardless of whether the requirement to file a Schedule 13D with the SEC is
applicable to such Nominating Stockholder, Stockholder Associated Person or Stockholder Nominee) together with a description of any
agreements, arrangements or understandings (whether written or oral and whether formal or informal) that relate to such plans or proposals
and naming all the parties to any such agreements, arrangements or understandings; (L) a description in reasonable detail of all direct and
indirect compensation, reimbursement, indemnification, benefits and other agreements, arrangements and understandings (written or oral and
formal or informal and whether monetary or non-monetary) during the past three years, and any other relationships, between or among a
Nominating Stockholder, a Stockholder Associated Person, if any, and a Stockholder Nominee, including all information that would be
required to be disclosed pursuant to Items 403 and 404 promulgated under Regulation S-K (or any such successor rule) if such Nominating
Stockholder or Stockholder Associated Person was the “registrant” for purposes of such Items and the Stockholder Nominee was a director or
executive of such registrant; (M) a representation that the Nominating Stockholder and/or the Stockholder Associated Person, if any, intends
or is part of a group that intends to deliver a proxy statement and/or form of proxy to holders of at least 67% percent of the voting power of
the Corporation’s outstanding capital stock entitled to vote in the election of directors to solicit proxies from stockholders in support of such
nomination; (N) a fully completed Director’s Questionnaire on the form supplied by the Corporation within thirty (30) calendar days
following written request from the Nominating Stockholder, executed by the Stockholder Nominee; (O) all other information required under
Rule 14a-19 under the Exchange Act; and (P) such other information as the Corporation may require, including by completion of
supplemental questionnaires, to determine, among other things, the eligibility of the Stockholder Nominee to serve as a director of the
Corporation or whether such Stockholder Nominee would be independent under applicable SEC and stock exchange rules and the
Corporation’s publicly disclosed corporate governance guidelines.
(i) A Nominating Stockholder shall further update and supplement its Nominating Notice to provide evidence that the
Nominating Stockholder has solicited proxies from holders of at least 67% of the voting power of the Corporation’s outstanding capital stock
entitled to vote in the election of directors, and such update and supplement be delivered to, or mailed to and received by, the Secretary at the
principal executive offices of the Corporation not later than five (5) business days after the stockholder files a definitive proxy statement in
connection with the annual meeting or special meeting, as applicable.
(ii) A Nominating Stockholder shall update and supplement its Nominating Notice as necessary, from time to time, so that
the information provided or required to be provided in such notice pursuant to this paragraph (c) shall be true, correct and complete in all
respects not only prior to the Notice Deadline but also at all times thereafter and prior to the meeting, and such update and supplement shall
be received by the Secretary of the Corporation not later than the earlier of (A) five (5) business days following the occurrence of any event,
development or occurrence that would cause the information provided in the Nominating Notice to be not true, correct and complete in all
respects, or (B) ten (10)
9
business days prior to the publicly disclosed date of the meeting at which such nominations contained therein are to be considered; provided,
however, that should any such event, development or occurrence take place within ten (10) business days prior to such meeting, such update
and supplement shall be received by the Secretary of the Corporation not later than one (1) business day following any such event,
development or occurrence. For the avoidance of doubt, the updates required pursuant to this paragraph (c) do not cause a Nominating Notice
that was not true, correct and complete in all respects and in compliance with this paragraph (c) when first delivered to the Corporation prior
to the Notice Deadline to thereafter be in proper form in accordance with this paragraph (c).
(iii) Upon written request by the Secretary of the Corporation, the Board or any duly authorized committee thereof, any
Nominating Stockholder who has submitted a Nominating Notice to the Corporation shall provide, within five (5) business days of delivery
of such request (or such other period as may be specified in such request), written verification, in a form and manner, including, if requested,
an executed and notarized affidavit, satisfactory in the reasonable discretion of the Board or any duly authorized committee thereof to
demonstrate the accuracy of any information submitted by such stockholder in the Nominating Notice delivered pursuant to this paragraph
(c). If a Nominating Stockholder fails to provide such written verification within such period and in the form requested, the information as to
which written verification was requested shall be deemed not to have been provided in accordance with this paragraph (c).
(iv) Any Stockholder Nominee shall, as required by the Board or a committee thereof, sit for an interview with one or
more directors or their representatives, which interview may, in the discretion of the Board or any such committee thereof be conducted by
means of remote communication, and such proposed nominee shall make himself or herself available for any such interview within ten (10)
days following the date of any request therefor from the Board or any committee thereof. Refusal by a Stockholder Nominee to participate in
such interview will render the nomination ineffective for failure to satisfy the requirements of these Bylaws. The Stockholder Nominee shall,
as required by the Board or any committee thereof, consent to and cooperate with a background screening conducted by a background
screening company selected by the Board or any such committee thereof with experience in conducting background screenings of public
company directors. Refusal by a Stockholder Nominee to cooperate with such a background screening will render the nomination ineffective
for failure to satisfy the requirements of these Bylaws.
(v) No person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the
procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine, in consultation with counsel
(who may be the Corporation’s internal counsel), and declare to the meeting that the proposed nomination was not made in accordance with
the requirements set forth in these Bylaws, and if he or she should so determine, he or she shall so declare to the meeting and the defective
nomination shall be disregarded.
(vi) Notwithstanding the foregoing provisions of this paragraph (c), the disclosures required by this paragraph (c) shall not
include any disclosures with respect to the ordinary course of business activities of any broker, dealer, commercial bank, or trust company
who is deemed a Nominating Stockholder or Stockholder Associated Person solely as a result of being the stockholder directed to prepare
and submit a Nominating Notice required by these Bylaws on behalf of a beneficial owner of the shares held of record by such broker, dealer,
commercial bank, or trust company and who is not otherwise affiliated or associated with such beneficial owner.
(vii) Notwithstanding the foregoing provisions of this paragraph (c), a Nominating Stockholder shall also comply with any
and all applicable requirements of the Exchange Act, including,
10
but not limited to, the requirements of Regulation 14A, including Rule 14a-19, the SEC, the Nevada Revised Statutes and other applicable
law with respect to the matters set forth in this paragraph (c), any solicitation of proxies contemplated by the Nominating Stockholder in
connection with its submission of a Nominating Notice to the Corporation, and any filings made with the SEC in connection therewith. If any
proposed nomination was not made in compliance with this paragraph (c) or the solicitation in support of a Stockholder Nominee was not
conducted in compliance with Rule 14a-19 under the Exchange Act then, except as otherwise provided by law, the chairman of the meeting
shall have the power and duty to declare that such Stockholder Nomination shall be disregarded.
(viii) For a Nominating Notice to comply with the requirements of this paragraph (c), each of the requirements of this
paragraph (c) shall be directly and expressly responded to and a Nominating Notice must clearly indicate and expressly reference which
provisions of this paragraph (c) the information disclosed is intended to be responsive to. Any global cross-references shall be disregarded
and information disclosed in the Nominating Notice in response to any provision of this paragraph (c) shall not be deemed responsive to any
other provision hereof unless it is expressly cross-referenced to such other provision and it is clearly apparent how such information is
responsive to such other provision.
(ix) For a Nominating Notice to comply with the requirements of this paragraph (c), it must set forth in writing directly
within the body of the Nominating Notice, rather than being incorporated by reference from any pre-existing document or writing, including,
but not limited to, any documents publicly filed with the SEC, all the information required to be included therein as set forth in this paragraph
(c), and each of the requirements of this paragraph (c) shall be directly responded to in a manner that makes it clearly apparent how the
information provided is specifically responsive to any requirements of this paragraph (c).
(x) A Nominating Stockholder submitting the Nominating Notice, by its delivery to the Corporation, represents and
warrants that all information contained therein, as of the Notice Deadline, is true, accurate and complete in all respects, contains no false or
misleading statements and such Nominating Stockholder acknowledges that it intends for the Corporation and the Board to rely on such
information as (i) being true, accurate and complete in all respects and (ii) not containing any false or misleading statements. If the
information submitted pursuant to this paragraph (c) by such Nominating Stockholder shall not be true, correct and complete in all respects
prior to the Notice Deadline, such information shall be deemed not to have been provided in accordance with this paragraph (c).
(xi) If either the Nominating Stockholder or Stockholder Nominee is determined to have any direct or indirect interest that
is or may reasonably be considered to be competitive or in conflict with the Corporation, or any affiliate or associate of the Corporation (a
“Conflict”), such determination made in the reasonable discretion of at least a majority of the then serving directors, to the fullest extent
permitted by law, no Stockholder Nominee nominated by such Nominating Stockholder in the case where such Nominating Stockholder is so
determined to have a Conflict, or any such Stockholder Nominee in the case where only the Stockholder Nominee is so determined to have a
Conflict, shall be qualified to serve as a director or be eligible to be nominated to serve as a director.
(xii) Notwithstanding the foregoing provisions of this paragraph (c), unless otherwise required by applicable law, if the
Nominating Stockholder is not Present in Person at the stockholders’ meeting to present a nomination, such nomination shall be disregarded,
notwithstanding that proxies in respect of such vote may have been received by the Corporation. In addition, nominations proposed to be
brought before a stockholders’ meeting by a Nominating Stockholder may not be brought before a meeting if such Nominating Stockholder
takes action contrary to the representations made in the Nominating Notice applicable to such nominations or if (i) when submitted to the
Corporation prior to the
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Notice Deadline, the Nominating Notice applicable to such nominations contained an untrue statement of a fact or omitted to state a fact
necessary to make the statements therein not misleading, or (ii) after being submitted to the Corporation, the Nominating Notice applicable to
such nominations was not updated or supplemented by the Nominating Stockholder in accordance with these Bylaws to cause the
information provided in the Nominating Notice to be true, correct and complete in all respects.
(xiii) A Nominating Stockholder submitting a Nominating Notice pursuant to this paragraph (c), by its delivery to the
Corporation, acknowledges that it understands that nothing contained therein shall be considered confidential or proprietary information and
that neither the Corporation, the Board, nor any agents or representatives thereof shall be restricted, in any manner, from publicly disclosing
or using any of the information contained in a Nominating Notice.
(xiv) Notwithstanding any notice of the meeting, proxy statement or supplement thereto sent to stockholders on behalf of
the Corporation, a stockholder must separately comply with this paragraph (c) to propose any nominations at any stockholders’ meeting,
including delivering its own separate and timely Nominating Notice to the Secretary of the Corporation that complies in all respects with the
requirements of this paragraph (c).
stockholders may not exceed the number of directors to be elected at such meeting.
(xv) The number of Stockholder Nominees a Nominating Stockholder may nominate for election at a meeting of
(d) Certain Definitions.
(i) A person shall be deemed to be “Acting in Concert” with another person if such person knowingly acts (whether or not
pursuant to an express agreement, arrangement or understanding) in concert with, or towards a common goal relating to the leadership,
management, governance, board composition, strategic direction, value enhancement plans, or control of the Corporation in parallel with,
such other person where (A) each person is conscious of the other person’s conduct or intent and this awareness is an element in their
decision-making processes and (B) at least two additional factors suggest that such persons knowingly intend to act in concert or in parallel
towards a common goal relating to the management, governance or control of the Corporation, which such additional factors may include,
without limitation, exchanging information (whether publicly or privately), attending meetings, conducting discussions, or making or
soliciting invitations to act in concert or in parallel; provided, that a person shall not be deemed to be Acting in Concert with any other person
solely as a result of (a) the solicitation or receipt of revocable proxies or consents from such other person in response to a solicitation made
pursuant to, and in accordance with, Section 14(a) of the Exchange Act by way of a proxy or consent solicitation statement filed with the
SEC on Schedule 14A or (b) the fact that two or more unaffiliated persons collectively act to petition (or have an agreement, arrangement or
understanding to collectively act to petition) a court pursuant to and in accordance with Nevada Revised Statutes Section 78.345 to order the
Corporation to hold an election of directors. A person Acting in Concert with another person shall be deemed to be Acting in Concert with
any third party who is also Acting in Concert with such other person.
calendar day, whether or not such day is a business day.
(ii) “Close of business” shall mean 5:00 p.m., local time, at the principal executive offices of the Corporation on any
possession, direct or indirect, of the power to direct or cause the direction of the
(iii) “Control” (including the terms “controlling,” “controlled by” and “under common control with”) means the
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management and policies of a person, whether through the ownership of voting securities, by contract or otherwise.
person is not an individual, a qualified representative of such person, appear in person at such stockholders’ meeting.
(iv) “Present in Person” shall mean that the Proponent or the Nominating Stockholder, as the case may be, or, if such
(v) “Public Announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the Corporation with the SEC pursuant to Section 13, 14 or
15(d) of the Exchange Act.
(vi) A “qualified representative” of any stockholder means a person who is a duly authorized officer, manager or partner
of such stockholder (including, as applicable, a Proponent or a Nominating Stockholder) or has been authorized by a writing executed by
such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy with respect to the specific
matter to be considered at the meeting of stockholders and such person must produce such writing or electronic transmission, or a reliable
reproduction (to the reasonable satisfaction of the chairman of the meeting) of the writing or electronic transmission, at the meeting of
stockholders prior to the taking of action by such person on behalf of the stockholder.
(vii) “Stockholder Associated Person” means with respect to any Proponent or Nominating Stockholder, (i) any other
beneficial owner of stock of the Corporation owned of record or beneficially by such Proponent or Nominating Stockholder, (ii) any Affiliate
or Associate (within the meaning of Rule 12b-2 under the Exchange Act) of such Proponent or Nominating Stockholder or beneficial owner,
(iii) any participant (as defined in paragraphs (a)(ii)-(vi) of Instruction 3 to Item 4 of Schedule 14A) with such Proponent or Nominating
Stockholder in any solicitation contemplated by the Proposal Notice or the Nominating Notice, (iv) each person who may be deemed to be a
member of a “group” (as such term is used in Rule 13d-5 under the Exchange Act) with any such Proponent or Nominating Stockholder or
beneficial owner (or their respective Affiliates and Associates) relating to the equity securities of the Corporation, regardless of whether such
person is disclosed as a member of a “group” in a Schedule 13D or an amendment thereto filed with the SEC relating to the Corporation, and
(v) any person that directly, or indirectly through one or more intermediaries, controls, is controlled by, is under common control with, or is
Acting in Concert with such Proponent or Nominating Stockholder or beneficial owner or a Stockholder Associated Person of such
Proponent or Nominating Stockholder or beneficial owner.
Section 6. Special Meetings. Special meetings of the stockholders of the Corporation may only be called, for any purpose or
purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the Board of Directors for adoption), and shall be held at such place,
on such date, and at such time as the Board of Directors, shall determine.
Section 7. Notice of Meetings. Except as otherwise provided by law or the Articles of Incorporation, written notice of each meeting
of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled
to vote at such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and
purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such
meeting, and will be waived by any stockholder by their attendance thereat in person or by proxy, except when the stockholder attends a
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meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all
respects as if due notice thereof had been given.
Section 8. Quorum. At all meetings of stockholders, except where otherwise provided by statute or by the Articles of
Incorporation, or by these Bylaws, the presence, in person or by proxy duly authorized, of the holder or holders of not less than fifty percent
(50%) of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum,
any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a
majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called
or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Articles of Incorporation or these Bylaws, all
action taken by the holders of a majority of the votes cast, excluding abstentions, at any meeting at which a quorum is present shall be valid
and binding upon the Corporation; provided, however, that directors shall be elected by a plurality of the votes of the shares present in person
or represented by proxy at the meeting and entitled to vote on the election of directors. Where a separate vote by a class or classes or series is
required, except where otherwise provided by the statute or by the Articles of Incorporation or these Bylaws, a majority of the outstanding
shares of such class or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter and, except where otherwise provided by the statute or by the Articles of Incorporation or these Bylaws, the
affirmative vote of the majority (plurality, in the case of the election of directors) of the votes cast, including abstentions, by the holders of
shares of such class or classes or series shall be the act of such class or classes or series.
Section 9. Adjournment and Notice of Adjourned Meetings. Any meeting of stockholders, whether annual or special, may be
adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes, excluding
abstentions. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business
which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a
new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 10. Voting Rights. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders,
except as otherwise provided by law, only persons in whose names shares stand on the stock records of the Corporation on the record date, as
provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote shall have the
right to do so either in person or by an agent or agents authorized by a proxy granted in accordance with Nevada law. An agent so appointed
need not be a stockholder. No proxy shall be voted after six (6) months from its date of creation unless the proxy provides for a longer period,
which may not exceed seven (7) years from the date of its creation. Any person or entity who attempts to vote the shares of a stockholder
pursuant to a proxy that states that it is irrevocable must, at the time such person or entity submits a proxy to vote such shares, deliver to the
Secretary of the Corporation (i) documentary evidence or other proof demonstrating that such proxy is coupled with an interest sufficient in
law to support an irrevocable power within the meaning of Nevada Revised Statutes Section 78.355 and (ii) a representation that such proxy
will continue to be coupled with such an interest at the time such shares are voted at the meeting. If (x) any such person or entity fails to
provide such documentary evidence or other proof or to
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make the representation required by this Section 10 in the manner specified herein, or (y) the Board determines in good faith that the
evidence or other proof so furnished is insufficient to demonstrate that such person or entity has an interest sufficient in law to support an
irrevocable power, the Corporation shall not be required to recognize such person or entity as the holder of an irrevocable proxy.
Section 11. Joint Owners of Stock. If shares or other securities having voting power stand of record in the names of two (2) or
more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two
(2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the
contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their
acts with respect to voting shall have the following effect: (a) if only one (1) votes, their act binds all; (b) if more than one (1) votes, the act
of the majority so voting binds all; and (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may
vote the securities in question proportionally.
Section 12. List of Stockholders. The Secretary shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each
stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole
time thereof and may be inspected by any stockholder who is present.
Section 13. Action Without Meeting.
(a) No action shall be taken by the stockholders except at an annual or special meeting of stockholders called in accordance with
these Bylaws, or by the written consent of the stockholders in accordance with Chapter 78 of the Nevada Revised Statutes.
(b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a
meeting, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is
adopted by the Board, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is
adopted by the Board. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall,
by written notice to the Secretary, request that the Board fix a record date. The Board shall promptly, but in all events within ten (10) calendar
days after the date on which such written notice is received, adopt a resolution fixing the record date (unless a record date has previously
been fixed by the Board pursuant to the first sentence of this Section 13(b)). If no record date has been fixed by the Board pursuant to the first
sentence of this Section 13(b) or otherwise within ten (10) calendar days after the date on which such written notice is received, the record
date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board is
required by applicable law, shall be the first date after the expiration of such ten (10) day time period on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in Nevada, its
principal place of business, or to any officer or agent of the Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. If no record date has been fixed by the Board pursuant to the first sentence of this Section 13(b), the record date
for determining stockholders entitled to consent to corporate action
15
in writing without a meeting if prior action by the Board is required by applicable law shall be at the close of business on the date on which
the Board adopts the resolution taking such prior action.
(c) In the event of the delivery, in the manner provided by this Section 13 and applicable law, to the Corporation of written consent
or consents to take corporate action and/or any related revocation or revocations, the Corporation shall engage independent inspectors of
elections for the purpose of performing promptly a ministerial review of the validity of the consents and revocations. For the purpose of
permitting the inspectors to perform such review, no action by written consent and without a meeting shall be effective until such inspectors
have completed their review, determined that the requisite number of valid and unrevoked consents delivered to the Corporation in
accordance with this Section 13 and applicable law have been obtained to authorize or take the action specified in the consents, and certified
such determination for entry in the records of the Corporation kept for the purpose of recording the proceedings of meetings of stockholders.
Nothing contained in this Section 13(c) shall in any way be construed to suggest or imply that the Board or any stockholder shall not be
entitled to contest the validity of any consent or revocation thereof, whether before or after such certification by the independent inspectors,
or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto,
and the seeking of injunctive relief in such litigation).
Section 14. Organization.
(a) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent,
the Chief Executive Officer, or, if the Chief Executive Officer is absent, a chairman of the meeting chosen by a majority in interest of the
stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in their absence, an Assistant Secretary
directed to do so by the Chief Executive Officer, shall act as secretary of the meeting.
(b) To the maximum extent permitted by law, the Board of Directors of the Corporation shall be entitled to make such rules or
regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the
proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and
procedures for maintaining order at the meeting and the safety of those present, limitations on attendance at and participation in such meeting
to stockholders of record of the Corporation and their duly authorized and constituted proxies and such other persons as the chairman shall
permit and, as a condition to recognizing any such participant, requiring such participant to provide the chairman of the meeting with
evidence of their name and affiliation, whether they are a stockholder or a proxy for a stockholder, and the class and series and number of
shares of each class and series of capital stock of the Corporation which are owned beneficially and/or or record by such stockholder,
restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or
comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot.
Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required
to be held in accordance with rules of parliamentary procedure.
(c) Stockholders may participate in a meeting of the stockholders by means of a telephone conference or similar method of
communication by which all individuals participating in the meet can hear each other. Participation in a meeting pursuant to this section
constitutes presence in person at the meeting.
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Section 15. Number, Tenure and Qualification.
ARTICLE IV
DIRECTORS
(a) The authorized number of directors of the Corporation shall be not less than one (1) nor more than twelve (12) as fixed from
time to time by resolution of the Board of Directors; provided that no decrease in the number of directors shall shorten the term of any
incumbent directors.
(b) Each director who is elected as provided in this Section 15 shall serve until his or her successor is duly elected and qualified.
(c) Directors shall be elected at each annual meeting of the stockholders. In an uncontested election of Directors at any meeting of
the stockholders, provided a quorum is present, a nominee for Director shall be elected to the Board of Directors if the votes validly cast for
such nominee’s election exceed the votes validly cast against such nominee’s election in such election (with “absentions” and “broker
nonvotes” not counted as a vote cast either for or against such nominee’s election). In a contested election of Directors at any meeting of
stockholders, provided a quorum is present, each Director will be elected by a plurality vote of the votes validly cast at such election. An
election of Directors will be considered “contested” if, as of the record date for the applicable meeting of stockholders, there are more
nominees for election than positions on the Board of Directors to be filled by election at such meeting. All other elections of Directors will
be considered “uncontested.” If Directors are to be so elected by a plurality of the votes validly cast, stockholders shall not be permitted to
vote against a nominee.
(d) Directors need not be stockholders unless so required by the Articles of Incorporation. Each director must be a natural person at
least 18 years of age. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter
as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws.
Section 16. Powers. The powers of the Corporation shall be exercised, its business conducted and its property controlled by the
Board of Directors, except as may be otherwise provided by statute or by the Articles of Incorporation.
Section 17. Vacancies. Unless otherwise provided in the Articles of Incorporation, any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in
the number of directors, shall unless the Board of Directors determines by resolution that any such vacancies or newly created directorships
shall be filled by stockholder vote, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a
quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the
full term of the director for which the vacancy was created or occurred and until such director’s successor shall have been elected and
qualified. A vacancy in the Board of Directors shall be deemed to exist under this Bylaw in the case of the death, removal or resignation of
any director.
Section 18. Resignation. Any director may resign at any time by delivering their written resignation to the Secretary, such
resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of
Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors
shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies, the vote
17
thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office for the
unexpired portion of the term of the director whose place shall be vacated and until their successor shall have been duly elected and qualified.
Section 19. Removal. Subject to the Articles of Incorporation, any director may be removed by the affirmative vote of the holders
of a majority of the outstanding shares of the Corporation then entitled to vote, with or without cause. The Board of Directors of the
corporation, by majority vote, may declare vacant the office of a director who has been convicted of a felony or who has been declared
incompetent by an order of a court of competent jurisdiction.
Section 20. Meetings.
(a) Annual Meetings. The annual meeting of the Board of Directors shall be held immediately after the annual meeting of
stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and
such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it.
(b) Regular Meetings. Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the
office of the Corporation required to be maintained pursuant to Section 2 hereof. Unless otherwise restricted by the Articles of Incorporation,
regular meetings of the Board of Directors may also be held at any place within or without the State of Nevada which has been designated by
resolution of the Board of Directors or the written consent of all directors.
(c) Special Meetings. Unless otherwise restricted by the Articles of Incorporation, special meetings of the Board of Directors may
be held at any time and place within or without the State of Nevada whenever called by the Chairman of the Board, the Chief Executive
Officer or any two of the directors.
(d) Telephone Meetings. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by
means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting by such means shall constitute presence in person at such meeting.
(e) Notice of Meetings. Notice of the time and place of all special meetings of the Board of Directors shall be delivered: (i) orally
(in person or by telephone) or in writing through personal delivery or electronic transmission (by a form consented to by the recipient), in
either case at least twenty-four (24) hours before the date and time of the meeting; or (ii) through registered or certified mail (postage
prepaid), return receipt requested, at least three (3) days before the date of the meeting. Unless otherwise indicated in the notice thereof, any
and all business may be transacted at a special meeting of the Board of Directors. Notice of any meeting may be waived in writing at any
time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called
or convened.
(f) Waiver of Notice. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however
called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present
and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice. All such waivers shall be filed
with the corporate records or made a part of the minutes of the meeting.
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Section 21. Quorum and Voting.
(a) Unless the Articles of Incorporation requires a greater number and except with respect to indemnification questions arising
under Section 42 hereof, for which a quorum shall be one-third of the exact number of directors fixed from time to time in accordance with
the Articles of Incorporation, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time
to time by the Board of Directors in accordance with the Articles of Incorporation provided, however, at any meeting whether a quorum be
present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the
Board of Directors, without notice other than by announcement at the meeting.
(b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the
affirmative vote of a majority of the directors present, unless a different vote be required by law, the Articles of Incorporation or these
Bylaws.
Section 22. Action Without Meeting. Unless otherwise restricted by the Articles of Incorporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all
members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with
the minutes of proceedings of the Board of Directors or committee.
Section 23. Fees and Compensation. Directors shall be entitled to such compensation for their services as may be approved by the
Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for
attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing
herein contained shall be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent,
employee, or otherwise and receiving compensation therefor.
Section 24. Committees.
(a) Executive Committee. The Board of Directors may by resolution passed by a majority of the whole Board of Directors appoint
an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted
by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation, including without limitation the power or authority to declare a
dividend, to authorize the issuance of stock and to adopt a certificate of ownership and merger, and may authorize the seal of the Corporation
to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the
Articles of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of
shares of stock adopted by the Board of Directors fix the designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number
of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation’s property and
assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the bylaws of the
Corporation.
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(b) Other Committees. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, from time
to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist
of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the
resolution or resolutions creating such committees, but in no event shall such committee have the powers denied to the Executive Committee
in these Bylaws.
(c) Term. Each member of a committee of the Board of Directors shall serve a term on the committee coexistent with such
member’s term on the Board of Directors. The Board of Directors, subject to the provisions of subsections (a) or (b) of this Bylaw may at any
time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee
member shall terminate on the date of their death or voluntary resignation from the committee or from the Board of Directors. The Board of
Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee
vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may
designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present
at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or disqualified member.
(d) Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other
committee appointed pursuant to this Section 24 shall be held at such times and places as are determined by the Board of Directors, or by any
such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need
be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such
committee, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of
the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of
Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived
in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends
such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a
quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act
of such committee.
Section 25. Organization. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not
been appointed or is absent, the Chief Executive Officer, or if the Chief Executive Officer is absent, the most senior Vice President, or, in the
absence of any such officer, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The
Secretary, or in their absence, an Assistant Secretary directed to do so by the Chief Executive Officer, shall act as secretary of the meeting.
Section 26. Election. The Board of Directors shall elect and appoint a Chief Executive Officer, a President, a Secretary and a
Treasurer at its annual meeting or at such other time or times as the Board of
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ARTICLE V
OFFICERS
Directors shall determine. The Board of Directors may from time to time, by resolution, elect or appoint such other officers and agents as it
may deem advisable and shall have such powers and duties and be paid such compensation as may be directed by the Board of Directors.
Any individual may hold two or more offices. The election or appointment of an officer shall not of itself create contract rights.
Section 27. Tenure and Duties of Officers.
(a) General. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly
elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the
Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors.
(b) Duties of Chairman of the Board of Directors. The Chairman of the Board of Directors, when present, shall preside at all
meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly
incident to their office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from
time to time. If there is no Chief Executive Officer, then the Chairman of the Board of Directors shall also serve as the Chief Executive
Officer of the Corporation and shall have the powers and duties prescribed in paragraph (c) of this Section 27.
(c) Duties of Chief Executive Officer. The Chief Executive Officer shall preside at all meetings of the stockholders and at all
meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. The Chief Executive
Officer shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of
the Corporation. The Chief Executive Officer shall perform other duties commonly incident to their office and shall also perform such other
duties and have such other powers as the Board of Directors shall designate from time to time.
(d) Duties of President. The President, subject to the supervision and control of the Board of Directors, any duly authorized
committee thereof, and the Chief Executive Officer, shall in general actively supervise and control the business and affairs of the Corporation
and, in the Chief Executive Officer’s absence, at the request of the Board of Directors, the President shall perform all of the duties of the
Chief Executive Officer and, in so performing, shall have all the powers of, and be subject to all restrictions upon, the Chief Executive
Officer. The President shall perform such other duties and have such other powers which are delegated and assigned to him or her by the
Board of Directors, the Chief Executive Officer, these Bylaws or as may be provided by law.
(e) Duties of Senor Vice Presidents. The Senior Vice Presidents shall act under the direction of the President and in the absence or
disability of the President shall perform the duties and exercise the powers of the President. They shall perform such other duties and have
such other powers as the President or the Board of Directors may from time to time prescribe. The Board of Directors may designate one or
more Senior Vice Presidents or may otherwise specify the order of seniority of the Senior Vice Presidents. Unless otherwise specified, Senior
Vice Presidents are senior to Vice Presidents. The duties and powers of the President shall descend to the Senior Vice Presidents in such
specified order of seniority. A Senior Vice President may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts
and other instruments, except in cases in which the signing and execution thereof shall be expressly delegated by resolution of the Board of
Directors or by these bylaws to some other officer or agent of the Corporation or shall be required by applicable law otherwise to be signed
or executed.
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(f) Duties of Secretary. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record
all acts and proceedings thereof in the minute book of the Corporation. The Secretary shall give notice in conformity with these Bylaws of all
meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall
perform all other duties given him in these Bylaws and other duties commonly incident to their office and shall also perform such other
duties and have such other powers as the Board of Directors shall designate from time to time. The Chief Executive Officer or the President
may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each
Assistant Secretary shall perform other duties commonly incident to their office and shall also perform such other duties and have such other
powers as the Board of Directors, the Chief Executive Officer or the President shall designate from time to time.
(g) Duties of Treasurer. The Treasurer shall keep or cause to be kept the books of account of the Corporation in a thorough and
proper manner and shall render statements of the financial affairs of the Corporation in such form and as often as required by the Board of
Directors, the Chief Executive Officer or the President. The Treasurer, subject to the order of the Board of Directors, shall have the custody
of all funds and securities of the Corporation. The Treasurer shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer or the President shall designate
from time to time.
Section 28. Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to
any other officer or agent, notwithstanding any provision hereof.
Section 29. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors or to the Chief
Executive Officer or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is
given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise
specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without
prejudice to the rights, if any, of the Corporation under any contract with the resigning officer.
Section 30. Removal. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of
a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee
or superior officers upon whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION
Section 31. Execution of Corporate Instrument. The Board of Directors may, in its discretion, determine the method and
designate the signatory officer or officers, or other person or persons, to execute on behalf of the Corporation any corporate instrument or
document, or to sign on behalf of the Corporation the corporate name without limitation, or to enter into contracts on behalf of the
Corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the
Corporation.
Unless otherwise specifically determined by the Board of Directors or otherwise required by law, promissory notes, deeds
of trust, mortgages and other evidences of indebtedness of the Corporation, and other corporate instruments or documents requiring the
corporate seal, and certificates
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of shares of stock owned by the Corporation, shall be executed, signed or endorsed by the Chairman of the Board of Directors, the Chief
Executive Officer, the President or any Vice President, and by the Secretary or the Treasurer. All other instruments and documents requiring
the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the
Board of Directors.
of the Corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do.
All checks and drafts drawn on banks or other depositaries on funds to the credit of the Corporation or in special accounts
Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or
employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable
for any purpose or for any amount.
Section 32. Voting of Securities Owned by the Corporation. All stock and other securities of other corporations owned or held by
the Corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the
person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of
Directors, the Chief Executive Officer, the President, or any Vice President.
Section 33. Form and Execution of Certificates.
ARTICLE VII
SHARES OF STOCK
(a) Every holder of stock in the Corporation shall be entitled to have a certificate signed by or in the name of the Corporation by
officers or agents designated by the Board of Directors for the purpose, certifying the number of shares of stock owned by him, her or it in
the Corporation; provided, however, that the Board of Directors may authorize the issuance of uncertificated shares of some or all of any or
all classes or series of the Corporation’s stock. Any such issuance of uncertificated shares shall have no effect on existing certificates for
shares until such certificates are surrendered to the Corporation, or on the respective rights and obligations of the stockholders. Whenever
such certificate is countersigned or otherwise authenticated by a transfer agent or a transfer clerk and by a registrar (other than the
Corporation), then a facsimile of the signatures of any corporate officers or agents, the transfer agent, transfer clerk or the registrar of the
Corporation may be printed or lithographed upon the certificate in lieu of the actual signatures. In the event that any officer or officers who
have signed, or whose facsimile signatures have been used on any certificate or certificates for stock cease to be an officer or officers because
of death, resignation or other reason, before the certificate or certificates for stock have been delivered by the Corporation, the certificate or
certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed the
certificate or certificates, or whose facsimile signature or signatures have been used thereon, had not ceased to be an officer or officers of the
Corporation. The Board of Directors may designate the Corporation’s transfer agent as an agent of the Corporation with authority to sign the
certificate in the name of the Corporation certifying the number of shares of stock owned by a holder of the Corporation’s stock.
(b) Within a reasonable time after the issuance or transfer of uncertificated shares, the Corporation shall send to the registered
owner thereof a written statement certifying the number of shares owned by him, her or it in the Corporation and, to the extent required by
law, at least annually thereafter, the Corporation shall provide to such stockholders of record holding uncertificated shares, a written
statement confirming the information contained in such written statement previously sent. Except as
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otherwise expressly provided by law, the rights and obligations of the stockholders shall be identical whether or not their shares of stock are
represented by certificates.
(c) Each certificate representing shares shall state the following upon the face thereof: the name of the state of the Corporation’s
organization; the name of the person to whom issued; the number and class of shares and the designation of the series, if any, which such
certificate represents; the par value of each share, if any, represented by such certificate or a statement that the shares are without par value.
Certificates of stock shall be in such form consistent with law as shall be prescribed by the Board of Directors. No certificate shall be issued
until the shares represented thereby are fully paid. In addition to the above, all certificates evidencing shares of the Corporation’s stock or
other securities issued by the Corporation shall contain such legend or legends as may from time to time be required by the Nevada Revised
Statutes and/or such other federal, state or local laws or regulations then in effect.
Section 34. Lost Certificates. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore
issued by the Corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. The Corporation may require, as a condition precedent to the issuance of a new
certificate or certificates, the owner of such lost, stolen or destroyed certificate or certificates, or their legal representative, to advertise the
same in such manner as it shall require or to give the Corporation a surety bond in such form and amount as it may direct as indemnity
against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 35. Transfers.
(a) Transfers of record of shares of stock of the Corporation shall be made only upon its books by the holders thereof, in person or
by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares.
(b) The Corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more
classes of stock of the Corporation to restrict the transfer of shares of stock of the Corporation of any one or more classes owned by such
stockholders in any manner not prohibited by the Nevada Revised Statutes.
Section 36. Fixing Record Dates.
(a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less
than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on
which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or
allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful
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action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is filed,
the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
(c) Notwithstanding anything in this Section 36 to the contrary, a record date for determining stockholders entitled to take action by
written consent shall be fixed in accordance with Section 13 of these Bylaws.
Section 37. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on
its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except
as otherwise provided by the laws of Nevada.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
Section 38. Execution of Other Securities. All bonds, debentures and other corporate securities of the Corporation, other than
stock certificates (covered in Section 33), may be signed by the Chairman of the Board of Directors, the Chief Executive Officer or any Vice
President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of
such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Treasurer; provided, however, that
where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile
signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of
the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the
signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee
as aforesaid, shall be signed by the Treasurer of the Corporation or such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other
corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer
before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate
security nevertheless may be adopted by the Corporation and issued and delivered as though the person who signed the same or whose
facsimile signature shall have been used thereon had not ceased to be such officer of the Corporation.
ARTICLE IX
DIVIDENDS
Section 39. Declaration of Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Articles
of Incorporation, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid
in cash, in property or in shares of the capital stock, subject to the provisions of the Articles of Incorporation.
Section 40. Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or
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for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board of Directors
shall think conducive to the interests of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in
which it was created.
ARTICLE X
FISCAL YEAR
Section 41. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board Directors.
ARTICLE XI
INDEMNIFICATION
Section 42. Indemnification of Directors, Executive Officers, Other Officers, Employees and Other Agents.
(a) Directors Officers. The Corporation shall indemnify its directors and officers to the fullest extent not prohibited by the Nevada
Revised Statutes provided that the Corporation shall not be required to indemnify any director or officer in connection with any proceeding
(or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board of Directors of the Corporation, (iii) such indemnification is provided by the Corporation, in its sole discretion,
pursuant to the powers vested in the Corporation under the Nevada Revised Statutes or (iv) such indemnification is required to be made under
subsection (d).
(b) Employees and Other Agents. The Corporation shall have power to indemnify its employees and other agents as set forth in
the Nevada Revised Statutes.
(c) Expense. The Corporation shall advance to any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that
he is or was a director or officer, of the Corporation, or is or was serving at the request of the Corporation as a director or executive officer of
another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following
request therefor, all expenses incurred by any director or officer in connection with such proceeding upon receipt of an undertaking by or on
behalf of such person to repay said mounts if it should be determined ultimately that such person is not entitled to be indemnified under this
Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Bylaw, no advance shall be
made by the Corporation to an officer of the Corporation (except by reason of the fact that such officer is or was a director of the Corporation
in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a
determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were
not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made
demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not
opposed to the best interests of the Corporation.
(d) Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors
and officers under this Bylaw shall be deemed to be contractual
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rights and be effective to the same extent and as if provided for in a contract between the Corporation and the director or officer. Any right to
indemnification or advances granted by this Bylaw to a director or officer shall be enforceable by or on behalf of the person holding such
right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition
of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part,
shall be entitled to be paid also the expense of prosecuting their claim. In connection with any claim for indemnification, the Corporation
shall be entitled to raise as a defense to any such action that the claimant has not met the standard of conduct that make it permissible under
the Nevada Revised Statutes for the Corporation to indemnify the claimant for the amount claimed. In connection with any claim by an
officer of the Corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the
fact that such officer is or was a director of the Corporation) for advances, the Corporation shall be entitled to raise a defense as to any such
action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not
opposed in the best interests of the Corporation, or with respect to any criminal action or proceeding that such person acted without
reasonable cause to believe that their conduct was lawful. Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification
of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Nevada Revised Statutes,
nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met
the applicable standard of conduct. In any suit brought by a director or officer to enforce a right to indemnification or to an advancement of
expenses hereunder, the burden of proving that the director or officer is not entitled to be indemnified, or to such advancement of expenses,
under this Article XI or otherwise shall be on the Corporation.
(e) Non-Exclusivity of Rights. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which
such person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, Bylaws, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in their official capacity and as to action in another capacity while
holding office. The Corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees
or agents respecting indemnification and advances, to the fullest extent not prohibited by the Nevada Revised Statutes.
(f) Survival of Rights. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a
director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
(g) Insurance. To the fullest extent permitted by the Nevada Revised Statutes, the Corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Bylaw.
(h) Amendments. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this
Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of
the Corporation.
(i) Saving Clause. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction,
then the Corporation shall nevertheless indemnify each director and officer to the full extent not prohibited by any applicable portion of this
Bylaw that shall not have been invalidated, or by any other applicable law.
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(j) Certain Definitions. For the purposes of this Bylaw, the following definitions shall apply:
preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or investigative.
(i) The term “proceeding” shall be broadly construed and shall include, without limitation, the investigation,
fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in
connection with any proceeding.
(ii) The term “expenses” shall be broadly construed and shall include, without limitation, court costs, attorneys’
(iii) The term the “Corporation” shall include, in addition to the resulting Corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director,
officer, employee or agent or another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
(iv) References to a “director,” “executive officer,” “officer,” “employee” or “agent” of the Corporation shall
include, without limitation, situations where such person is serving at the request of the Corporation as, respectively, a director, executive
officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise.
(v) References to “other enterprises” shall include employee benefit plans; references to “fines” shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the Corporation” shall
include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in
good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall
be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this Bylaw.
Section 43. Notices.
ARTICLE XII
NOTICES
(a) Notice to Stockholders. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it
shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to their last known post office
address as shown by the stock record of the Corporation or its transfer agent.
(b) Notice to Directors. Any notice required to be given to any director may be given by any method stated in Section 20(e). Notice
sent through registered or certified mail, return receipt requested, shall be sent to such address as the director shall have filed in writing with
the Secretary, or, in the absence of such filing, to the last known post office address of such director. Notice may be delivered by
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electronic transmission if: (i) consented to by the recipient, and (ii) the electronic transmission contains or is accompanied by information
from which the recipient can determine the date of the transmission (such as, for example, electronic mail or facsimile). Any consent to
receive notice by electronic transmission may be revoked by the person who consented by written or electronic notice to the person to whom
the consent was delivered. Any such consent is deemed revoked if: (i) the person is unable to receive two consecutive electronic
transmissions given by the Corporation in accordance with such consent; and (ii) such inability becomes known to the Secretary of the
Corporation or other person responsible for the giving of notice. The inadvertent failure to treat any such inability as a revocation does not
invalidate any meeting or other action.
(c) Affidavit of Mailing. An affidavit of mailing, executed by a duly authorized and competent employee of the Corporation or an
agent of the Corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the
names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained.
(d) Time Notices Deemed Given. Notice shall be deemed effective: (i) if personally delivered, when given directly to the recipient
or when left at the residence or usual place of business of the recipient; (ii) if sent by registered or certified mail, return receipt requested, the
date shown on the return receipt signed by or on behalf of the addressee; (iii) if given by electronic transmission, when (A) it enters an
information processing system that the recipient has designated or uses for the purpose of receiving electronic transmissions of the type sent,
and (B) it is in a form ordinarily capable of being processed by that system. Consistent with the foregoing and by way of example, notice by
electronic transmission shall be deemed effective: (i) if given by facsimile, when directed to a number at which the recipient has consented to
receive notice; and (ii) if given by electronic mail, when directed to an electronic mail address at which the recipient has consented to receive
notice. An electronic transmission shall be deemed received under this Section 43(d) even if no natural person is aware of its receipt. In the
absence of fraud, an affidavit of the Secretary of the Corporation that the notice has been given by a form of electronic transmission is prima
facie evidence of the facts stated in the affidavit.
(e) Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but
one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in
respect of any other or others.
(f) Failure to Receive Notice. The period or limitation of time within which any stockholder may exercise any option or right, or
enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege,
pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such
stockholder or such director to receive such notice.
(g) Notice to Person with Whom Communication Is Unlawful. Whenever notice is required to be given, under any provision of
law or of the Articles of Incorporation or Bylaws of the Corporation, to any person with whom communication is unlawful, the giving of
such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or
permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by
the Corporation is such as to require the filing of a certificate under any provision of the Nevada Revised Statutes, the certificate shall
29
state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom
communication is unlawful.
(h) Notice to Person with Undeliverable Address. Whenever notice is required to be given, under any provision of law or the
Articles of Incorporation or Bylaws of the Corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all
notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two
consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a
twelve-month period, have been mailed addressed to such person at their address as shown on the records of the Corporation and have been
returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held
without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to
the Corporation a written notice setting forth their then current address, the requirement that notice be given to such person shall be
reinstated. In the event that the action taken by the Corporation is such as to require the filing of a certificate under any provision of the
Nevada Revised Statutes, the certificate need not state that notice was not given to persons to whom notice was not required to be given
pursuant to this paragraph.
(i) Electronic Transmission. For purposes of these Bylaws, ‘electronic transmission’ means any form or process of communication
not directly involving the physical transfer of paper or another tangible medium which: (i) is suitable for the retention, retrieval and
reproduction of information by the recipient; and (ii) is retrievable and reproducible in paper form by the recipient through an automated
process used in conventional commercial practice. The term ‘electronic transmission’ shall include, without limitation, facsimile and
electronic mail.
ARTICLE XIII
AMENDMENTS
Section 44. Amendments. The Board of Directors shall have the power to adopt, amend or repeal the Bylaws.
ARTICLE XIV
INAPPLICABILITY OF NEVADA REVISED STATUTES SECTIONS 78.378 TO 78.3793, INCLUSIVE
Section 45. Inapplicability of Nevada Revised Statutes Sections 78.378 to 78.3793, Inclusive. The provisions of Nevada Revised
Statutes Sections 78.378 to 78.3793, inclusive, shall not apply to the Corporation or to the acquisition of a controlling interest by existing or
future stockholders.
30
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
We consent to the incorporation by reference in the following Registration Statements of Turtle Beach Corporation:
Consent of Independent Registered Public Accounting Firm
1. Registration Statement Number 333-225106 on Form S-3
2. Registration Statement Number 333-193982 on Form S-8
3. Registration Statement Number 333-230691 on Form S-8
4. Registration Statement Number 333-233179 on Form S-8
5. Registration Statement Number 333-277870 on Form S-8
of our reports dated March 13, 2024, with respect to the consolidated financial statements and schedule of Turtle Beach Corporation and the effectiveness
of internal control over financial reporting of Turtle Beach Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 2023.
Exhibit 23.1
/s/ ERNST & YOUNG LLP
New York, New York
March 13, 2024
Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
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, No. 333-233179 and No. 333-277870) of Turtle Beach Corporation of our report dated March 29, 2023, relating to the consolidated financial
statements and schedule, which appear in this Annual Report on Form 10-K.
/s/ BDO USA, P.C.
New York, New York
March 13, 2024
Exhibit 31.1
I, Cris Keirn, 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 13, 2024
By:
/s/ CRIS KEIRN
Cris Keirn
Interim CEO & SVP Global Sales
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 13, 2024
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, 2023 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), we, Cris Keirn, 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 13, 2024
Date: March 13, 2024
By:
By:
/s/ CRIS KEIRN
Cris Keirn
Interim CEO & SVP Global Sales
(Principal Executive Officer)
/s/ JOHN T. HANSON
John T. Hanson
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer)
COMPENSATION RECOUPMENT POLICY OF
Turtle Beach Corporation
Adopted to go into effect on December 1, 2023, with
retroactive effectiveness to the Effective Date
Exhibit 97.1
Section A-1. Purpose.
Article A
Purpose and General Terms
Turtle Beach Corporation (the “Company”) has adopted this Compensation Recoupment Policy (this “Policy”) to implement a
mandatory clawback policy in the event of a Restatement in compliance with the Applicable Rules, which is set forth in Article B
of this Policy.
Any capitalized terms used, but not immediately defined, in this Policy have the meanings set forth in Section A-2 or Section B-
1.
Section A-2. Defined Terms.
The following capitalized terms used in this Policy have the following meanings:
(a)
(b)
(c)
(d)
(e)
“Applicable Rules” means Section 10D of the Exchange Act and Rule 10D-1 promulgated thereunder and Listing
Rule 5608 of the Listing Rules of The Nasdaq Stock Market.
“Board” means the Board of Directors of the Company.
“Committee” means the Compensation Committee of the Board, or, in the absence of such committee, a majority of
independent directors serving on the Board.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Regulators” means, as applicable, the Securities and Exchange Commission and the Nasdaq Stock Market
(“Nasdaq”).
Section A-3. Administration.
This Policy shall be administered in the sole discretion of the Committee. The Committee shall have the discretion to interpret
the Policy and make all determinations with respect to this Policy, consistent with applicable law and this Policy. Without
limiting the foregoing, Article B of this Policy shall be interpreted in a manner that is consistent with the requirements of the
Applicable Rules, and compliance with this Policy shall not be waived by the Committee, the Board or the Company in any
respect.
Any interpretations and determinations made by the Committee shall be final and binding on all affected individuals.
Section A-4. Effective Date; Term.
This Policy is effective as of October 2, 2023 (the “Effective Date”). Article B of this Policy applies to Incentive-Based
Compensation that is Received by any Executive Officer on or after the Effective Date as described in Section B-3 below.
Section A-5. Amendment.
The Board may amend this Policy from time to time in its discretion, subject to any limitations under applicable law or listing
standards, including, the Applicable Rules. Without limiting the forgoing, the Board may amend this Policy as it deems
necessary to reflect any amendment of the Applicable Rules or regulations or guidance issued under the Applicable Rules.
Section A-6. No Substitution of Rights; Non-Exhaustive Rights.
Any right of recoupment under this Policy is in addition to, and not in lieu of, any other remedies or rights that may be available
to the Company pursuant to (a) the Turtle Beach Corporation 2023 Stock-Based Incentive Compensation Plan (as amended) or
any other incentive or retention plan of the Company or any of its subsidiaries (or any successor plan to any of the foregoing), (b)
the terms of any recoupment policy or provision in any employment agreement, compensation agreement or arrangement, or
other agreement, or (c) any other legal remedies available to the Company under applicable law.
In addition to recovery of compensation as provided for in this Policy, the Company may take any and all other actions as it
deems necessary, appropriate and in the Company’s best interest in connection with the Committee determining that this Policy
should apply, including termination of the employment of, or initiating legal action against, an Executive Officer, and nothing in
this Policy limits the Company’s rights to take any such appropriate actions.
Section A-7. Governing Law.
This Policy and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by mandatory
provisions of the Applicable Rules, shall be governed by and construed in accordance with the laws of the State of Nevada
without regard to choice of law principles. If any provision of this Policy shall be held illegal or invalid for any reason, such
illegality or invalidity shall not affect the remaining parts of this Policy, but this Policy shall be construed and enforced as if the
illegal or invalid provision had never been included in this Policy.
Article B
DODD-FRANK RECOUPMENT POLICY FOR
EXECUTIVE OFFICERS
Section B-1. Specific Defined Terms. For the purposes of this Article B, the following terms have the following meanings,
which will be interpreted to comply with the Applicable Rules:
(a)
(b)
(c)
(d)
“Executive Officer” means each officer of the Company who is identified as an executive officer for the purposes of
17 CFR § 229.401(b), which is defined as the Company’s president, principal financial officer, principal accounting
officer (or if there is no such accounting officer, the controller), any vice president of the Company in charge of a
principal business unit, division or function (such as sales, administration, or finance), any other officer who performs
a policy-making function, or any other person who performs similar significant policy-making functions for the
Company, as determined under 17 CFR §229.401(b).
“Financial Reporting Measures” means (i) measures that are determined and presented in accordance with the
accounting principles used in preparing the Company’s financial statements, and any measures that are derived
wholly or in part from such measures[1], (ii) the Company’s stock price, and (iii) total shareholder return in respect of
the Company. A “Financial Reporting Measure” need not be presented within the financial statements or included in
a filing with the SEC.
“Incentive-Based Compensation” means any compensation that is granted, earned, or vested, based wholly or in part
upon the attainment of a Financial Reporting Measure.[2]Incentive-Based Compensation does not include, among
other forms of compensation, equity awards that vest exclusively upon completion of a specified employment period,
without any performance condition, and bonus awards that are discretionary or based on subjective goals or goals
unrelated to Financial Reporting Measures.
“Received” – Incentive-Based Compensation is deemed “Received” for the purposes of this Policy in the Company’s
fiscal period during which the Financial Reporting Measure applicable to the Incentive-Based Compensation award is
attained, even if the payment or grant of the Incentive-Based Compensation occurs after the end of that period.
(e)
(f)
“Recovery Period” means the three completed fiscal years immediately preceding the date on which the Company is
required to prepare a Restatement, which date is the earlier of (i) the date the Board, a committee of the Board, or the
officer or officers of the Company authorized to take such action if Board action is not required, concludes, or
reasonably should have concluded, that the Company is required to prepare a Restatement or (ii) a date that a court,
regulator or other legally authorized body directs the Company to prepare a Restatement.
“Restatement” means that the Company is required to prepare an accounting restatement due to a material
noncompliance of the Company with any financial reporting requirement under the securities laws, including any
required accounting restatement to correct an error in previously issued financial statements (i) that is material to the
previously issued financial statements, or (ii) that would result in a material misstatement if the error were corrected
in the current period or left uncorrected in the current period.
Section B-2. Recovery on a Restatement.
In the event that the Company is required to prepare a Restatement, the Company shall reasonably promptly recover from an
Executive Officer the amount of any erroneously awarded Incentive-Based Compensation that is Received by such Executive
Officer during the Recovery Period. The amount of erroneously Received Incentive-Based Compensation will be the excess of
the Incentive-Based Compensation Received by the Executive Officer (whether in cash or shares) based on the erroneous data in
the original financial statements over the Incentive-Based Compensation (whether in cash or in shares) that would have been
Received by the Executive Officer had such Incentive-Based Compensation been based on the restated results, without respect to
any tax liabilities incurred or paid by the Executive Officer.
Recovery of any erroneously awarded compensation under this Article B is not dependent on fraud or misconduct by any
Executive Officer in connection with a Restatement.
Without limiting the foregoing, for Incentive-Based Compensation based on the Company’s stock price or total shareholder
return, where the amount of erroneously awarded compensation is not subject to mathematical recalculation directly from the
information in the Restatement, (a) the amount shall be based on the Company’s reasonable estimate of the effect of the
Restatement on the stock price or total shareholder return upon which the Incentive-Based Compensation was Received and (b)
the Company shall maintain documentation of the determination of that reasonable estimate and provide such estimate to Nasdaq.
Section B-3. Covered Executive Officers and Covered Incentive-Based Compensation.
This Article B covers all persons who are Executive Officers at any time during the Recovery Period for which Incentive-Based
Compensation is Received or during the performance period applicable to such Incentive-Based Compensation. Incentive-Based
Compensation shall not be recovered under this Article B to the extent Received by any person before the date the person served
as an Executive Officer. Subsequent changes in an Executive Officer’s employment status, including retirement or termination of
employment, do not affect the Company’s right to recover Incentive-Based Compensation pursuant to this Article B.
Article B of this Policy shall apply to Incentive-Based Compensation that is Received by any Executive Officer on or after the
Effective Date and that results from attainment of a Financial Reporting Measure based on or derived from financial information
for any fiscal period ending on or after the Effective Date. For the avoidance of doubt, this will include Incentive-Based
Compensation that may have been approved, awarded, or granted to an Executive Officer on or before the Effective Date if such
Incentive-Based Compensation is Received after the Effective Date.
Section B-4. Methods of Recovery; Limited Exceptions.
The Committee shall determine, in its sole discretion, the method of recovering any Incentive-Based Compensation Received
pursuant to this Article B, consistent with applicable law, which may include, without limitation, the methods of recovery
described in Article C.
No recovery shall be required if any of the following conditions are met and the Committee determines that, on such basis,
recovery would be impracticable:
(a)
(b)
(c)
the direct expense paid to a third party to assist in enforcing this Article B would exceed the amount to be recovered;
providedthat prior to making a determination that it would be impracticable to recover any Incentive-Based
Compensation based on the expense of enforcement, the Company shall (i) have made a reasonable attempt to
recover the Incentive-Based Compensation, (ii) have documented such reasonable attempts to recover, and (iii)
provide the documentation to Nasdaq;
recovery would violate home country law where that law was adopted prior to November 28, 2022; provided that,
prior to making a determination that it would be impracticable to recover any Incentive-Based Compensation based
on a violation of home country law, the Company shall (i) have obtained an opinion of home country counsel,
acceptable to Nasdaq, that recovery would result in such violation, and (ii) provide a copy of such opinion to Nasdaq;
or
recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to
employees, to fail to meet the requirements of Section 401(a)(13) or Section 411(a) of the Internal Revenue Code of
1986, as amended (the “Code”), and U.S. Treasury regulations promulgated thereunder.
Section B-5.
Reporting; Disclosure; Monitoring.
The Company shall make all required disclosures and filings with the Regulators with respect to this Policy in accordance with
the requirements of the Applicable Rules, and any other requirements applicable to the Company, including the disclosures
required in connection with SEC filings.
Section C-1. Recovery.
Article C
METHODS OF RECOVERY
Subject to Section B-4, in the event that the Committee determines that this Policy should apply, to the extent permitted by
applicable law, the Company shall, as determined by the Committee in its sole discretion, take any such actions as it deems
necessary or appropriate to recover Incentive-Based Compensation. The actions may include, without limitation (and as
applicable):
(a)
(b)
(c)
(d)
forfeit, reduce or cancel any Incentive-Based Compensation (whether vested or unvested) that has not been
distributed or otherwise settled;
seek recovery of any Incentive-Based Compensation that was previously paid to the Executive Officer;
seek recovery of any amounts realized on the vesting, exercise, settlement, sale, transfer, or other disposition of any
equity-based Incentive-Based Compensation;
recoup any amount in respect of Incentive-Based Compensation that was contributed or deferred to a plan that takes
into account Incentive-Based Compensation (excluding certain tax-qualified plans, but including deferred
compensation plans, and supplemental executive retirement plans, and insurance plans to the extent otherwise
permitted by applicable law, including Section 409A of the Code) and any earnings accrued on such Incentive-Based
Compensation;
(e)
(f)
except as otherwise required by Article B, determine whether Incentive-Based Compensation should be recouped on
a pre-tax or after-tax basis;
offset, withhold, eliminate or cause to be forfeited any amount that could be paid or awarded to the Executive Officer
after the date of determination; and
(g)
take any other remedial and recovery action permitted by law, as determined by the Committee.
In addition, (A) the Committee may authorize legal action for breach of fiduciary duty or other violation of law and take such
other actions to enforce the obligations of the Executive Officer to the Company as the Committee deems appropriate and (B) in
the event that an Executive Officer fails to repay or reimburse erroneously awarded compensation that is subject to recovery, the
Committee may require such individual to reimburse the Company for any and all expenses reasonably incurred (including legal
fees) by the Company in recovering erroneously awarded compensation under this Policy.
Section C-2. Notice.
Before the Company takes action to seek recovery of compensation pursuant to this Policy against an Executive Officer, the
Company shall take commercially reasonable steps to provide such individual with advance written notice of such clawback;
provided that this notice requirement shall not in any way delay the reasonably prompt recovery of any erroneously awarded
Incentive-Based Compensation pursuant to Article B.
Section C-3. No Indemnification.
The Company shall not indemnify any current or former Executive Officer against the loss of erroneously awarded
compensation, and shall not pay or reimburse any such person for premiums incurred or paid for any insurance policy to fund
such person’s potential recovery obligations.
[1]“Financial Reporting Measures” include, but are not limited to, the following examples of accounting-based measures and measures derived from: (i)
revenues; (ii) net income; (iii) operating income; (iv) profitability of one or more reportable segments; (v) financial ratios (e.g., accounts receivable
turnover and inventory turnover rates); (vi) net assets or net asset value per share (e.g., for registered investment companies and business development
companies that are subject to the rule); (vii) earnings before interest, taxes, depreciation and amortization; (viii) funds from operations and adjusted funds
from operations; (ix) liquidity measures (e.g., working capital, operating cash flow); (x) return measures (e.g., return on invested capital, return on assets);
(xi) earnings measures (e.g., earnings per share); (xii) sales per square foot or same store sales, where sales is subject to an accounting restatement; (xiii)
revenue per user, or average revenue per user, where revenue is subject to an accounting restatement; (xiv) cost per employee, where cost is subject to an
accounting restatement; (xv) any of such financial reporting measures relative to a peer group, where the Company’s financial reporting measure is subject
to an accounting restatement; and (xvi) tax basis income.
[2]“Incentive-Based Compensation”, includes, but is not limited to, (i) non-equity incentive plan awards that are earned based wholly or in part on satisfying
a Financial Reporting Measure performance goal; (ii) bonuses paid from a “bonus pool,” the size of which is determined based wholly or in part on
satisfying a Financial Reporting Measure performance goal; (iii) other cash awards based on satisfaction of a Financial Reporting Measure performance
goal; (iv) restricted stock, restricted stock units, performance share units, stock options, and stock appreciation rights that are granted or become vested
wholly or in part on satisfying a Financial Reporting Measure performance goal; and (v) proceeds received upon the sale of shares acquired through an
incentive plan that were granted or vested based wholly or in part on satisfying a Financial Reporting Measure performance goal.