What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-08 · 92 added, 98 removed, 536 unchanged (26% of the section changed)

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The Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the federal securities laws.

In addition, forward-looking statements are subject to certain risks and uncertainties, including those described elsewhere in this Quarterly Report on Form 10-Q (including the effects related to the coronavirus ( “

COVID-19 ”

) pandemic) that could cause actual results to differ materially from the Company's historical experience and its present expectations or projections.

In addition, forward-looking statements are subject to certain risks and uncertainties, including those described elsewhere in this Quarterly Report on Form 10-Q that could cause actual results to differ materially from the Company's historical experience and its present expectations or projections.

Business Overview

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Business Trends

We participate in the global software and accessories gaming market, which had an estimated size of $200 billion in 2021, per updated data published by Newzoo in April 2022.

We participate in the global software and accessories gaming market, which is estimated to be approximately $200 billion, per updated data published by Newzoo in October 2022.

The global gaming audience exceeds global cinema and music markets with over 3 billion active gamers worldwide.

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similar to traditional professional sports.

There were approximately 490 million esports viewers in 2021, and that is expected to increase to roughly 641 million viewers by 2025, according to a report from Newzoo.

There were over 490 million viewers in 2021, and that is expected to increase to roughly 685 million viewers by 2025, according to a report from Newzoo.

Of those 685 million projected viewers, approximately 341 million are considered “esports enthusiasts.”

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In 2022, we have experienced a higher rate of inflation than in recent years resulting in higher cost of goods, selling expenses, and general and administrative expenses.

Such increases have had and may continue to have a negative impact on the Company’s profit margins if selling prices of products do not increase with the increased costs.

Such increases have had and may continue to have a negative impact on the Company’s revenue and profit margins if the current decline in consumer demand for gaming accessories is not temporary and/or selling prices of products do not increase with the increased costs.

The COVID-19 pandemic has disrupted worldwide economic markets and the extent to which the pandemic and measures adopted in response thereto continue to affect the Company's business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict.

While there were likely certain one-time purchases of our products caused by stay-at-home guidance and remote working and learning, we believe millions of new gamers have joined the market which created an ongoing, larger installed base of players.

At the beginning of the pandemic, we saw an increase in demand for our products due to increased gaming and stay at home orders;

however, such increased demand for our products has subsided as restrictions imposed have been lifted and social functions and activities continue to return to pre-pandemic levels.

Recent results have been impacted by the difficult macroeconomic conditions, which have slowed discretionary spending across gaming and many other categories;

but in the long term, the growth prospects in the video game industry remain as strong as they have ever been.

In fact, according to Newzoo, the number of new gamers added globally from 2019 to 202 totals nearly 400 million.

Console Headset Market

The global market for console headsets in 2021 was approximately $1.7 billion.

The global market for console headsets is estimated to be approximately $1.7 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 released their latest next generation consoles, Xbox® Series and PlayStation®5 platforms just ahead of the 2020 holiday season.

Demand for the new consoles has continued to be very strong and exceeded supply which is a good indicator

of the enthusiasm for the latest consoles.

Demand for these consoles has continued to be very strong and exceeded supply which is a good indicator of the enthusiasm for the latest consoles.

The demand for gaming consoles is forecasted to continue to be strong in 2022 with the additional supply of PlayStation®5 and Xbox ® Series platforms expected to help the overall console market reach single digit percentage growth in 2022.

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PC Accessories Market

The market for PC gaming headsets, mice, and keyboards is estimated to have grown slightly in 2021 to $3.6 billion.

The market for PC gaming headsets, mice, and keyboards is estimated to be approximately $3.6 billion.

The same gaming, work-from-home, and school-learn-from-home factors associated with the COVID-19 pandemic that benefitted the accessories market also resulted in increased consumer demand for headsets, keyboards, mice, and other accessories developed for PC gaming in recent years.

PC gaming in the U.S.

has seen a resurgence in popularity the past few years and continues to be a main gaming platform internationally, driven by big AAA game launches, PC-specific esports leagues, popular teams and players, content creators and influencers and cross-platform play.

has seen a resurgence in popularity during the past few years and continues to be a main gaming platform 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.

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Microphone Market

As of 2021, the microphone market is estimated to be $2.1 billion in size of which roughly an estimated $630 million is for digital USB microphones.

The microphone market is estimated to be $2.1 billion in size of which roughly an estimated $700 million is for digital/USB microphones.

The market for high-quality microphones, specifically digital microphones, has experienced significant growth as content creators on YouTube, Twitch and other popular platforms are gravitating toward using high-quality professional equipment for their workstations.

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Supply Chain and Logistic Outlook

The ongoing global economic recovery, subsequent to the COVID-19 pandemic, as well as a surge in imports and high demand for electronics, has created significant challenges for global supply chains resulting in inflationary cost pressures and component shortages.

The ongoing global economic recovery, as well as a surge in imports and high demand for electronics, has created significant challenges for global supply chains resulting in inflationary cost pressures and component shortages.

We have also experienced logistical challenges related to transportation delays and have incurred incremental costs for commodities and components used in our products as well as component shortages that have negatively impacted our sales and results of operations.

These factors resulted in the demand for such goods to exceed supply chain capacity, which drove costs and lead times higher.

We expect that these challenges will continue

to have an impact on our businesses for the foreseeable future.

We expect that these challenges will continue to have an impact on our businesses for the foreseeable future.

As a result, we continue to take proactive steps to continue to limit the impact of these challenges and are working closely with our suppliers to manage availability of products and implement other cost savings initiatives.

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Adjusted EBITDA is a non-GAAP measure that we believe is useful to investors to measure the operational strength and performance of our business.

Adjusted EBITDA is defined as net income (loss) before interest, taxes, depreciation and amortization, stock-based compensation (non-cash) and certain special items that we believe are not representative of core operations.

Adjusted EBITDA is defined as net income (loss) before interest, taxes, depreciation and amortization, stock-based compensation and certain special items that we believe are not representative of core operations.

Cash Margin is defined as gross margin excluding depreciation and amortization, and stock-based compensation.

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However, Adjusted EBITDA is not a measure 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.

Adjusted EBITDA (and a reconciliation to Net income (loss), the nearest GAAP financial measure) for the three and six months ended June 30, 2022 and June 30, 2021, are as follows:

Adjusted EBITDA (and a reconciliation to Net income (loss), the nearest GAAP financial measure) for the three and nine months ended September 30, 2022 and September 30, 2021, are as follows:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Income tax expense (benefit)

Inventory and component related reserves

Restructuring expense

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Adjusted EBITDA

Comparison of the Three Months Ended June 30, 2022 to the Three Months Ended June 30, 2021

Net loss for the three months ended June 30, 2022 was $17.8 million with Adjusted EBITDA of ($12.1) million, compared to net income of $1.7 million with Adjusted EBITDA of $5.0 million for the prior year, due to consumer spending caution across all major markets, reduced channel inventory levels at retailers, increased freight costs, business mix, and volume-driven fixed cost deleveraging.

Comparison of the Six Months Ended June 30, 2022 to the Six Months Ended June 30, 2021

Net loss for the six months ended June 30, 2022 was $24.3 million with Adjusted EBITDA of ($17.8) million compared to net income of $10.6 million with Adjusted EBITDA of $20.3 million for the prior period due to lower revenue as compared to prior year's incremental stimulus check driven spending as well as increased freight costs.

Comparison of the Three Months Ended September 30, 2022 to the Three Months Ended September 30, 2021

Net loss for the three months ended September 30, 2022 was $12.0 million with Adjusted EBITDA of ($6.9) million, compared to net income of $2.6 million with Adjusted EBITDA of $6.7 million for the prior year, due to lower revenue as a result of macroeconomic conditions, as well as increased freight costs and volume-driven fixed cost deleveraging, partially offset by lower operating expenses.

Comparison of the Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021

Net loss for the nine months ended September 30, 2022 was $36.3 million with Adjusted EBITDA of ($24.8) million compared to net income of $13.2 million with Adjusted EBITDA of $27.0 million for the prior period due to lower revenue as a result of macroeconomic conditions, reduced channel inventory levels at retailers, increased freight costs, business mix, and volume-driven fixed cost deleveraging, partially offset by lower selling and marketing spend.

Results of Operations

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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(1) Excludes depreciation and amortization, and stock-based compensation

Comparison of the Three Months Ended June 30, 2022 to the Three Months Ended June 30, 2021

Net revenue for the three months ended June 30, 2022 was $41.3 million, a $37.3 million decrease from $78.6 million reflecting lower customer demand as a result of a challenging macroeconomic environment, lower channel inventory levels at retailers and global supply chain issues.

The comparable prior year period revenues were at elevated levels resulting from stay-at-home orders and government stimulus payments.

For the three months ended June 30, 2022, gross margin decreased to 19.1% from 36.5% in the comparable prior year period.

The decrease was primarily due to higher promotional credits driven by more aggressive competitive pricing actions to reduce channel inventory levels, business mix, higher freight costs, volume-driven fixed cost deleveraging and higher warehouse costs to ensure product supply.

Comparison of the Six Months Ended June 30, 2022 to the Six Months Ended June 30, 2021

Net revenue for the six months ended June 30, 2022 was $88.0 million, a $83.7 million decrease from $171.6 million in the elevated comparable prior year period brought on by stay-at-home orders and government stimulus payments.

For the six months ended June 30, 2022, gross margin decreased to 24.9% from 37.0% in the comparable prior year period.

The decrease was primarily due to higher freight costs, a more normalized level of promotional credits and volume-driven fixed cost deleveraging.

Comparison of the Three Months Ended September 30, 2022 to the Three Months Ended September 30, 2021

Net revenue for the three months ended September 30, 2022 was $51.3 million, a $34.0 million decrease from $85.3 million reflecting lower demand due to macroeconomic conditions and retailers adjusting inventory levels coming out of the higher pandemic driven 2021.

For the three months ended September 30, 2022, gross margin decreased to 14.1% from 34.3% in the comparable prior year period.

The three months ended September 30, 2022 included a $5.3 million charge for potential excess components and product inventory relating to pandemic driven supply chain and logistic impacts.

Additionally, promotional spend was above historic levels to reduce retailer inventories and address competitive pricing, freight costs continued above prior year levels and lower revenue has reduced fixed cost leverage.

Comparison of the Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021

Net revenue for the nine months ended September 30, 2022 was $139.3 million, a $117.7 million decrease from $256.9 million in the elevated comparable prior year period reflecting lower customer demand as a result of a challenging macroeconomic environment, channel inventory destocking at retailers and global supply chain issues.

For the nine months ended September 30, 2022, gross margin decreased to 20.9% from 36.1% in the comparable prior year period.

The decrease was primarily due to $5.3 million charge for potential excess components and product inventory relating to pandemic driven supply

chain and logistic impacts, higher freight and warehouse costs, higher promotional credits driven by more aggressive competitive pricing actions to reduce channel inventory levels, volume-driven fixed cost deleveraging and higher warehouse costs to ensure product supply.

Operating Expenses

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Selling and Marketing

Selling and marketing expenses for the three and six months ended June 30, 2022 totaled $11.6 million and $22.4 million, respectively, compared to $15.7 million and $27.2 million, respectively, for the three and six months ended June 30, 2021.

This decrease was primarily due to lower revenue-based expenses and scaling of marketing initiatives to the consumer environment.

Selling and marketing expenses for the three and nine months ended September 30, 2022 totaled $10.6 million and $33.0 million, respectively, compared to $14.3 million and $41.5 million, respectively, for the three and nine months ended September 30, 2021.

This decrease was primarily due to lower revenue-based expenses and reduction of marketing initiatives to align with current consumer demand.

Research and Development

Research and development costs for the three and six months ended June 30, 2022 were $5.1 million and $10.4 million, respectively, compared to $4.4 million and $8.4 million, respectively, for the three and six months ended June 30, 2021.

The year-over-year increases were primarily due to the addition of resources and infrastructure to support new product development and further global expansion.

Research and development costs for the three and nine months ended September 30, 2022 were $4.4 million and $14.8 million, respectively, compared to $4.5 million and $12.9 million, respectively, for the three and nine months ended September 30, 2021, as we continue to invest in new product categories and portfolio expansion to position the Company for growth.

General and Administrative

General and administrative expenses for the three months ended June 30, 2022 totaled $12.5 million compared to $8.2 million for the three months ended June 30, 2021.

Excluding certain non-recurring fees related to the proxy contest with respect to the 2022 annual meeting of stockholders and shareholder litigation costs, expenses decreased $0.8 million primarily due to lower professional fees.

General and administrative expenses for the six months ended June 30, 2022 totaled $18.8 million compared to $15.2 million for the six months ended June 30, 2021.

Excluding certain non-recurring fees related to the proxy contest with respect to the 2022 annual meeting of stockholders and shareholder litigation costs, expenses decreased $1.1 million primarily due to lower professional fees and employee costs.

Income tax benefit for the three months ended June 30, 2022 was $4.7 million at an effective tax rate of 21.0% and income tax benefit for the six months ended June 30, 2022 was $7.4 million at an effective tax rate of 23.3%.

Income tax benefit for the three months ended June 30, 2021 was $1.3 million at an effective tax rate of (295.6%) and income tax expense for the six months ended June 30, 2021 was $1.5 million at an effective tax rate of 12.3%.

The effective tax rate for the six months ended June 30, 2022 was primarily impacted by the deduction for stock option exercises, offset by certain non-deductible costs and state income tax expense.

General and administrative expenses for the three months ended September 30, 2022 totaled $6.0 million compared to $9.0 million for the three months ended September 30, 2021.

Excluding certain non-recurring fees related to the proxy contest with respect to the 2022 annual meeting of stockholders and shareholder litigation costs, expenses decreased $0.2 million primarily due to lower revenue-based employee expenses.

General and administrative expenses for the nine months ended September 30, 2022 totaled $24.8 million compared to $24.2 million for the nine months ended September 30, 2021.

Excluding certain non-recurring fees related to the proxy contest with respect to the 2022 annual meeting of stockholders ($6.7 million) and other litigation cost, expenses decreased $1.2 million primarily due to lower employee costs and professional fees.

Income tax benefit for the three months ended September 30, 2022 was $4.4 million at an effective tax rate of 26.8% and income tax benefit for the nine months ended September 30, 2022 was $11.8 million at an effective tax rate of 24.5%.

Income tax benefit for the three months ended September 30, 2021 was $1.8 million at an effective tax rate of (226.2%) and income tax benefit for the nine months ended September 30, 2021 was $0.3 million at an effective tax rate of (2.6%).

The effective tax rate for the three and nine months ended September 30, 2022 was primarily impacted by state taxes, certain credits and discrete deductions for employee stock option exercise, offset by nondeductible officer compensation and global intangible low taxed income.

Liquidity and Capital Resources

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The following table summarizes our sources and uses of cash:

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Net cash used for investing activities

Net cash provided by financing activities

Net cash provided by (used for) financing activities

Effect of foreign exchange on cash

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Operating activities

Cash used for operating activities for the six months ended June 30, 2022 was $41.2 million, a decrease of $53.7 million as compared to cash provided by operating activities of $12.4 million for the six months ended June 30, 2021.

Cash used for operating activities for the nine months ended September 30, 2022 was $69.5 million, a decrease of $59.2 million as compared to cash used for operating activities of $10.3 million for the nine months ended September 30, 2021.

The decrease is primarily the result of lower gross receipts as well as higher inventory levels due to retailers compressing channel inventory and accelerated procurements to ensure product supply.

Investing activities

Cash used for investing activities was $1.2 million for the six months ended June 30, 2022, which was related to certain capital investments, compared to $5.8 million for the six months ended June 30, 2021, which included $2.5 million related to the Neat Microphones acquisition.

Cash used for investing activities was $1.9 million for the nine months ended September 30, 2022, which was related to certain capital investments, compared to $7.0 million for the nine months ended September 30, 2021, which included $2.5 million related to the Neat Microphones acquisition.

Financing activities

Net cash provided by financing activities was $16.2 million during the six months ended June 30, 2022 compared to $2.8 million during the six months ended June 30, 2021.

Financing activities during the six months ended June 30, 2022 and June 30, 2021 consisted primarily of $15.7 million revolving credit facility borrowings and $2.8 million share-based activity, respectively.

Net cash provided by financing activities was $45.2 million during the nine months ended September 30, 2022 compared to net cash used for financing activities of $0.9 million during the nine months ended September 30, 2021.

Financing activities during the nine months ended September 30, 2022 consisted primarily of $44.6 million revolving credit facility borrowings.

Management assessment of liquidity

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Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements.

Foreign cash balances at June 30, 2022 and December 31, 2021 were $3.4 million and $10.2 million, respectively.

At-the-Market Equity Offering Sales Agreement

On August 7, 2020, the Company entered into an ATM Equity Offering Sales Agreement (the “Sales Agreement”) with BofA Securities, Inc.

(the “Sales Agent”).

Pursuant to the terms of the Sales Agreement, the Company may sell from time to time through the Sales Agent shares of the Company’s common stock, par value $0.001 per share, having an aggregate offering price of up to $30 million.

The Company intends to use the net proceeds from the offering, after deducting the Sales Agent’s commissions and the Company’s offering expenses, to support its strategic growth plans, as well as for general corporate purposes.

There was no activity under this agreement during the six months ended June 30, 2022.

Foreign cash balances at September 30, 2022 and December 31, 2021 were $2.8 million and $10.2 million, respectively.

Revolving Credit Facility

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In addition, Turtle Beach is required to pay a commitment fee on the unused revolving loan commitment at a rate ranging from 0.25% to 0.50% and letter of credit fees and agent fees.

As of June 30, 2022, interest rates for outstanding borrowings were 5.25% for base rate loans and 3.00% for LIBOR rate loans.

As of June 30, 2022, there was $15.7 million in outstanding borrowings under the Credit Facility.

The Company and the administrative agent entered into an amendment to the Credit Agreement (the "LIBOR Transition Amendment") to replace the LIBOR rate as a reference rate available for use in the computation of interest under the Credit Agreement in favor of (i) the Applicable Rate (as defined in the Credit Agreement) plus Sterling Overnight Index Average (“SONIA”) or the Euro Interbank Offered Rate (“EURIBOR”).

As of September 30, 2022, interest rates for outstanding borrowings were 7.50% for base rate loans and 5.13% for LIBOR rate loans.

As of September 30, 2022, there was $44.6 million in outstanding borrowings under the Credit Facility.

The Company and the administrative agent entered into an amendment to the Credit Agreement (the “LIBOR Transition Amendment”) to replace the LIBOR rate as a reference rate available for use in the computation of interest under the Credit Agreement in favor of (i) the Applicable Rate (as defined in the Credit Agreement) plus Sterling Overnight Index Average (“SONIA”) or the Euro Interbank Offered Rate (“EURIBOR”).

The Company expects to enter into an additional agreement to finalize the transition of the U.S.

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Obligations under the Credit Facility are secured by a security interest and lien upon substantially all of the Company’s assets.

As of June 30, 2022, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $22.0 million.

As of September 30, 2022, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $25.3 million.

Critical Accounting Estimates

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The Company does not use derivative financial instruments for speculative or trading purposes.

As of June 30, 2022 and December 31, 2021, we did not have any derivative financial instruments.

As of September 30, 2022 and December 31, 2021, we did 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 June 30, 2022 and December 31, 2021, our monetary assets and liabilities that 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.

As of September 30, 2022 and December 31, 2021, our monetary assets and liabilities that 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.

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Reduced or delayed discretionary spending by consumers in response to inflationary pressures has reduced consumer demand for our products, resulting in reduced sales.

In 2022, we have experienced a higher rate of inflation than in recent years resulting in higher cost of

goods, selling expenses, and general and administrative expenses.

In 2022, we have experienced a higher rate of inflation than in recent years resulting in higher cost of goods, selling expenses, and general and administrative expenses.

Such increases have had and may continue to have a negative impact on the Company’s profit margins if selling prices of products do not increase with the increased costs.

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At the conclusion of the period covered by this Quarterly Report on Form 10-Q, 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 June 30, 2022.

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 September 30, 2022.

Changes in Internal Control over Financial Reporting

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Risks Related to Our Operations

The strategic alternatives review process could disrupt our business, affect our financial condition and results of operations and lead to increased volatility in the market price of our common stock.

In connection with the settlement of our engagement with The Donerail Group LP and certain of its affiliates (“Donerail”), we announced a process to review strategic alternatives.

We have incurred and may continue to incur substantial expenses associated with that process.

That process may be time-consuming and disruptive to our business by diverting the attention of our management, Board of Directors and employees.

In addition, we may be subject to costly and time-consuming litigation related to that process.

Further, that process may result in the loss of potential business opportunities and have a negative effect on the market price and volatility of our common stock, as well as our ability to recruit and retain qualified personnel.

Our business has been and could continue to be adversely affected by inflationary pressures.

We are exposed to inflationary pressures including higher labor-related costs and potential increases in the costs of the goods and services we purchase as part of the manufacture and distribution of our products and in our operations generally.

In 2021 and the first half of 2022, global supply chain constraints and the continuing effects of the COVID-19 pandemic (including government measures adopted in response thereto) have resulted in heightened inflationary cost pressures.

Since 2021, global supply chain constraints and the continuing effects of the COVID-19 pandemic (including government measures adopted in response thereto) have resulted in heightened inflationary cost pressures.

Such inflationary pressures have also been and could continue to be exacerbated by higher oil prices, geopolitical turmoil (including the ongoing conflict in Ukraine), increased logistics costs and economic policy actions.

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Recently, we have 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, and broader macroeconomic conditions.

In 2021 and in the first half of 2022, we 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.

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, and broader macroeconomic conditions.

We have experienced supply chain disruptions that resulted in significant cost increases for commodities and components used in our products, as well as component shortages that have negatively affected our sales and results of operations.

For example, the recent market shortage of semiconductors has caused disruptions, from both a supply and pricing standpoint.

As discussed above, recent inflationary pressures have also been exacerbated by the lower availability of, and increased prices for, freight and logistics, including air, sea, and ground freight.

We may not be able to pass along these price increases to its customers.

We may not be able to pass along these price increases to our customers.

While we have taken and continue to take measures implement cost saving initiatives and procure and maintain levels of inventory to prioritize product availability amidst global supply chain and logistical challenges, including by working closely with our suppliers, there can be no assurance that we will be able to continue to do so.

Accordingly, any future delays, disruptions, and supply and pricing risks, such as the ongoing supply chain challenges and disruptions that we expect to continue during 2022, 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.

Accordingly, any future delays, disruptions, and supply and pricing risks, such as the ongoing supply chain challenges and disruptions that we

expect to continue during 2022, 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.

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The effects of the COVID-19 pandemic could adversely affect our business, results of operations, and financial condition.

The effects of the public health crisis caused by the COVID-19 pandemic, its variant strains, and the measures taken in response are uncertain and difficult to predict, but may include a decrease in the demand and/or pricing for our products, disruptions to our supply chain, and a general deterioration of the global economy, among others.

Additionally, retailers have experienced, and may continue to experience, liquidity constraints or other financial difficulties due to COVID-19, which could lead to a reduction in the amount of merchandise purchased from us, an increase in order cancellations or the need to

extend payment terms.

The effects of the public health crisis caused by the COVID-19 pandemic, its variant strains, and the measures taken in response thereto are uncertain and difficult to predict, but may include a decrease in the demand and/or pricing for our products, disruptions to our supply chain, and a general deterioration of the global economy, among others.

Any or all of these measures could substantially reduce revenue or have a material adverse effect on our results of operations.

At the beginning of the COVID-19 pandemic, we saw an increase in demand for our products due to increased gaming, work-from-home, and school-learn-from-home, however, such increased demand for our products has subsided as restrictions imposed for the pandemic are lifted and social functions and activities continue to return to pre-pandemic levels.

At the beginning of the COVID-19 pandemic, we saw an increase in demand for our products due to increased gaming, work-from-home, and school-learn-from-home, however, such increased demand for our products has subsided as restrictions imposed for the pandemic have been lifted and social functions and activities continue to return to pre-pandemic levels.

This decrease in demand may continue as further pandemic restrictions are lifted and social functions not involving the use of our products continue to return.

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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.

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.

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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.

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.

All of our customers generally purchase from us on a purchase order basis.

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Further, we have incurred and may incur in the future additional expenses by retaining the services of various professionals to advise us in engagement with activist shareholders.

If a future proxy contest or a related settlement results in additional changes in the composition of our Board of Directors, it may adversely affect our ability to continue to effectively implement our business strategy and could, in certain circumstances, give third parties certain rights under our existing contractual obligations, which could adversely affect our business.

If a future proxy contest or a related

settlement results in additional changes in the composition of our Board of Directors, it may adversely affect our ability to continue to effectively implement our business strategy and could, in certain circumstances, give third parties certain rights under our existing contractual obligations, which could adversely affect our business.

Risks Related to our Intellectual Property

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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.

of our products are sold internationally, we are also dependent on the laws of many countries to protect and enforce our intellectual property rights.

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.

37 unchanged sentences

make certain investments and other payments;

enter into certain mergers

or consolidations;

enter into certain mergers or consolidations;

undergo certain changes of control of our company or board of directors;

35 unchanged sentences

Negotiations between the UK and the EU are expected to continue in relation to the relationship between the UK and the EU in certain other areas which are not covered by the Trade and Cooperation Agreement.

The long-term effects of Brexit will depend on the effects

of the implementation and application of the Trade and Cooperation Agreement and any other relevant agreements between the UK and the EU.

The long-term effects of Brexit will depend on the effects of the implementation and application of the Trade and Cooperation Agreement and any other relevant agreements between the UK and the EU.

The market price of our common stock may fluctuate significantly.

50 unchanged sentences

and potential loss of key employees from either our existing business or the acquired organization.

Acquisitions may result in accounting charges for restructuring and other expenses, amortization of purchased technology and intangible assets and stock-based compensation expense, any of which could materially and adversely affect our operating results.

adversely affect our operating results.

We may not be able to realize the anticipated synergies, innovation, operational efficiencies, benefits of 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.

12 unchanged sentences

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.

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 or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we may be harmed.

19 unchanged sentences

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.

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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis