What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-07 compared with 2023-05-04 · 58 added, 422 removed, 191 unchanged (72% of the section changed)

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Gaming peripherals, such as headsets, keyboards, mice, microphones, controllers, and simulation controls are estimated to be an $8.4 billion business globally with about 80% of that market in the Americas and Europe where the Company’s business is focused.

Competitive esports is a global phenomenon where professional gamers train and compete to win prize money, partner with major brands, and attract dedicated fans –

similar to traditional professional sports.

In 2022, there were over 530 million esports viewers, approximately 50% of whom considered themselves “esports enthusiasts,”

and that number is expected to increase to roughly 650 million viewers by 2025 according to an April 2022 report from Newzoo.

The console and PC gaming accessory markets are also driven by major game launches and long-running franchises that encourage players to continually buy equipment and accessories.

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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.

Competitive esports is a global phenomenon where professional gamers train and compete to win prize money, partner with major brands, and attract dedicated fans –

similar to traditional professional sports.

In 2022, there were over 530 million esports viewers, approximately 50% of whom considered themselves “esports enthusiasts,”

and that number is expected to increase to roughly 650 million viewers by 2025 according to an April 2022 report from Newzoo.

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.

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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.

We have experienced and may continue to experience increased freight costs and component availability challenges, which have begun to abate in 2023.

As a result, Turtle Beach continues to take proactive steps to limit the impact of these challenges and are working closely with our manufacturing and freight providers to reduce costs.

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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:

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;

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).

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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 months ended March 31, 2023 and March 31, 2022, are as follows:

Adjusted EBITDA (and a reconciliation to Net income (loss), the nearest GAAP financial measure) for the three and six months ended June 30, 2023 and June 30, 2022, are as follows:

Three Months Ended

Six Months Ended

(in thousands)

Interest expense

Interest expense (income)

Depreciation and amortization

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Income tax benefit

Restructuring expense

CEO transition related costs

Proxy contest and other

Adjusted EBITDA

Comparison of the Three Months Ended March 31, 2023 to the Three Months Ended March 31, 2022

Net loss for the three months ended March 31, 2023 was $(6.7) million with Adjusted EBITDA of $(2.3) million, compared to $(6.5) million with Adjusted EBITDA of $(5.7) million for the prior year, due to higher revenue driven by consumer demand, and operating expense management initiatives during the prior year.

Comparison of the Three Months Ended June 30, 2023 to the Three Months Ended June 30, 2022

Net loss for the three months ended June 30, 2023 was $(15.9) million with Adjusted EBITDA of $(5.6) million, compared to $(17.8) million with Adjusted EBITDA of $(12.1) million for the prior year, due to higher revenue and improved margins that were positively impacted by a less promotional environment, lower freight costs and lower recurring operating expenses.

Net loss for the six months ended June 30, 2023 was $(22.6) million with Adjusted EBITDA of $(7.9) million, compared to $(24.3) million with Adjusted EBITDA of $(17.8) million for the prior year, due to higher revenue driven by consumer demand, lower freight costs and lower recurring operating expenses.

Results of Operations

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Three Months Ended

Six Months Ended

(in thousands)

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Operating loss

Interest expense

Interest expense (income)

Other non-operating expense, net

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Three Months Ended

Six Months Ended

(in thousands)

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

Comparison of the Three Months Ended March 31, 2023 to the Three Months Ended March 31, 2022

Net revenue for the three months ended March 31, 2023 was $51.4 million, a $4.8 million increase from $46.7 million reflecting a stronger U.S.

Comparison of the Three Months Ended June 30, 2023 to the Three Months Ended June 30, 2022

Net revenue for the three months ended June 30, 2023 was $48.0 million, a $6.7 million increase from $41.3 million as consumer demand for our products increased and channel inventory levels stabilized led by console gaming headsets and flight simulation products.

For the three months ended June 30, 2023, gross margin increased to 24.7% from 19.1% in the comparable prior year period driven by lower freight costs including air freight, a less promotional environment and business mix.

Comparison of the Six Months Ended June 30, 2023 to the Six Months Ended June 30, 2022

Net revenue for the six months ended June 30, 2023 was $99.4 million, a $6.7 million increase from $88.0 million reflecting a stronger U.S.

console gaming headset market and increased consumer demand.

For the three months ended March 31, 2023, gross margin decreased to 27.5% from 30.1% in the comparable prior year period as a result of promotional spend above historic levels, partially offset by lower freight and logistics costs.

For the six months ended June 30, 2023, gross margin increased to 26.2% from 24.9% in the comparable prior year period as a result of lower freight and logistics costs, partially offset by higher promotional spend.

Operating Expenses

Three Months Ended

Six Months Ended

(in thousands)

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Selling and Marketing

Selling and marketing expenses for the three months ended March 31, 2023 totaled $9.5 million compared to $10.8 million for the three months ended March 31, 2022.

This decrease was primarily due to lower marketing initiatives to align with current consumer demand.

Selling and marketing expenses for the three and six months ended June 30, 2023 totaled $10.4 million and $19.9 million, respectively, compared to $11.6 million and $22.4 million for the three and six months ended June 30, 2022, respectively, due to more targeted marketing spend to drive sales growth.

Research and Development

Research and development costs for the three months ended March 31, 2023 were $4.1 million compared to $5.3 million for the three months ended March 31, 2022, due to expense management initiatives during the prior year to align headcount with new product and portfolio expansion strategies.

Research and development costs for the three and six months ended June 30, 2023 were $4.2 million and $8.3 million, respectively, compared to $5.1 million and $10.4 million for the three and six months ended June 30, 2022, respectively, due to expense management initiatives during the prior year to align headcount with new product and portfolio expansion strategies.

General and Administrative

General and administrative expenses for the three months ended March 31, 2023 totaled $7.0 million compared to $6.2 million for the three months ended March 31, 2022.

Excluding certain non-recurring proxy contest and other costs, expenses decreased $0.2 million primarily due to lower revenue-based employee expenses and certain corporate legal costs, partially offset by higher professional services costs.

Income tax benefit for the three months ended March 31, 2023 was ($0.1) million at an effective tax rate of 1.0% compared to income tax benefit for the three months ended March 31, 2022 of ($2.6) million at an effective tax rate of 29.0%.

The effective tax rate for the three months ended March 31, 2023 was primarily impacted by a true-up to foreign incomes tax payable, partially offset by the change in U.S.

General and administrative expenses for the three months ended June 30, 2023 totaled $13.1 million compared to $12.5 million for the three months ended June 30, 2022.

Excluding certain non-recurring executive compensation, proxy contest and shareholders' litigation costs, expenses decreased $1.3 million primarily due to lower non-cash stock-based compensation and employee expenses.

General and administrative expenses for the six months ended June 30, 2023 totaled $20.1 million compared to $18.8 million for the six months ended June 30, 2022.

Excluding certain non-recurring executive compensation, proxy contest and shareholders' litigation costs, expenses decreased $1.4 million primarily due lower non-cash stock-based compensation, employee expenses and certain corporate legal costs, partially offset by higher professional services costs.

Income tax benefit for the six months ended June 30, 2023 was ($0.1) million at an effective tax rate of 0.5% compared to income tax benefit for the six months ended June 30, 2022 of ($7.4) million at an effective tax rate of 23.3%.

The effective tax rate for the six months ended June 30, 2023 was primarily impacted by a true-up to foreign incomes tax payable, partially offset by the change in U.S.

valuation allowance, foreign taxes and interest on uncertain tax positions.

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The following table summarizes our sources and uses of cash:

Three Months Ended

Six Months Ended

(in thousands)

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Operating activities

Cash provided by operating activities for the three months ended March 31, 2023 was $29.0 million, an increase of $42.3 million as compared to cash used for operating activities of $13.3 million for the three months ended March 31, 2022.

The increase is primarily the result of market-driven inventory management activity and higher gross receipts.

Cash provided by operating activities for the six months ended June 30, 2023 was $24.2 million, an increase of $65.5 million as compared to cash used for operating activities of $41.2 million for the six months ended June 30, 2022.

The increase is primarily the result of market-driven inventory management activity, higher gross receipts and expense management initiatives during the prior year.

Investing activities

Cash used for investing activities was $0.9 million for the three months ended March 31, 2023, which was related to certain capital investments, compared to $0.6 million for the three months ended March 31, 2022.

Cash used for investing activities was $1.3 million for the six months ended June 30, 2023, which was related to certain capital investments, compared to $1.2 million for the six months ended June 30, 2022.

Financing activities

Net cash used for financing activities was ($19.0) million during the three months ended March 31, 2023 compared to net cash provided by financing activities of $0.4 million during the three months ended March 31, 2022.

Financing activities during the three months ended March 31, 2023 consisted primarily of $19.1 million revolving credit facility net repayments.

Net cash used for financing activities was ($18.7) million during the six months ended June 30, 2023 compared to net cash provided by financing activities of $16.2 million during the six months ended June 30, 2022.

Financing activities during the six months ended June 30, 2023 consisted primarily of $19.1 million revolving credit facility net repayments.

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.

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

In addition, the Company monitors the capital markets on an ongoing basis and may consider raising capital if favorable market conditions develop.

Foreign cash balances at March 31, 2023 and December 31, 2022 were $3.7 million and $6.5 million, respectively.

Foreign cash balances at June 30, 2023 and December 31, 2022 were $4.3 million and $6.5 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 0.375% to 0.50% and letter of credit fees and agent fees.

As of March 31, 2023, interest rates for outstanding borrowings were 10.50% for base rate loans and 6.50% for LIBOR rate loans, which reference interest rates were still in effect prior to the Libor Transition Amendments.

As of June 30, 2023, interest rates for outstanding borrowings were 10.75% for base rate loans and 6.50% for LIBOR rate loans, which reference interest rates were still in effect prior to the Libor Transition Amendments.

The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met or certain other events occur (as set forth in the Credit Facility).

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

As of March 31, 2023 and December 31, 2022, we did not have any derivative financial instruments.

As of June 30, 2023 and December 31, 2022, 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 March 31, 2023 and December 31, 2022, 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 June 30, 2023 and December 31, 2022, 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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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.

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

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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 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 not effective in regards to the internal controls over the tax provision as of March 31, 2023.

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 Principal Executive Officer (or PEO) and 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, 2023.

Changes in Internal Control over Financial Reporting

We identified a material weakness in internal control related to the proper design and implementation of certain controls over our income tax provision and management’s review of the income tax provision.

To address this material weakness, we have implemented certain remedial measures, as described in Item 9A of our 2022 Form 10-K.

Based on this evaluation, we consider the material weakness not to have been fully remediated as management has not yet been able to conclude, through testing, that the applicable controls have operated effectively.

Except as described above, 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.

In our annual report on Form 10-K for the year ended December 31, 2022, we identified a material weakness in internal control related to the proper design and implementation of certain controls over our income tax provision and management’s review of the income tax provision.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Corporation's annual or interim financial statements will not be prevented or detected on a timely basis.

Management implemented its plan to remediate the material weakness described above, which consisted of the following elements:

Management, with the assistance of a third party, performed an evaluation of the processes and procedures around the Company’s tax provision processes, internal control design gaps, and recommend process enhancements.

Implemented enhancements and process improvements, including the design and implementation of well defined controls and related control attributes regarding tax law changes, deferred taxes, uncertain tax positions and income tax disclosures.

Developed a detailed timeline of the tax provision calculation, to ensure that sufficient time is allocated to complete the process as designed.

As of June 30, 2023, management has determined that the material weakness identified has been remediated.

Other than the material weakness remediated above, 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.

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Item 1A - R isk 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.

The following discussion of risk factors contains forward-looking statements.

These risk factors may be important to understanding any statement in this Form 10-Q or elsewhere.

The following information should be read in conjunction with our financial statements and related notes in Part I, Item 1, “Financial Statements”

and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

of this Quarterly Report on Form 10-Q.

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.

Risks Related to Our Operations

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 increases in the costs of the goods and services we purchase as part of the manufacture and distribution of our products and in our operations generally.

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

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

As interest rates rise to address inflation, such increases have led to, and could lead to further increases in our borrowing costs over time.

Inflationary pressures can also have a negative impact on demand for the products we sell.

Reduced or delayed discretionary spending by consumers, specifically for consumer electronic goods, in response to inflationary pressures has and could continue to reduce demand for our products, resulting in reduced sales.

Our inability to adequately increase prices to offset increased costs associated with such inflationary pressures, or otherwise mitigate their impact, will increase our costs of doing business and could further reduce our margins and profitability.

In 2022, reduced margins and profitability stemming from inflationary pressures were considered triggering events and led to interim goodwill and long-lived asset quantitative impairment tests.

If such impacts are prolonged or substantial, they could necessitate similar impairment tests in the future or otherwise have a material negative effect on our results of operations.

Our brands face significant competition from other consumer electronics companies and this competition could have a material adverse effect on our financial condition and results of operations.

We compete with other producers of gaming accessories, including video game console manufacturers.

Our competitors may undertake more extensive marketing campaigns, adopt more aggressive pricing policies, or develop more commercially successful products for the PC and video game platforms than we do.

In addition, competitors with large product lines and popular products, in particular the video game console manufacturers, typically have greater leverage with retailers, distributors and other customers, who may be willing to promote products with less consumer appeal in return for access to those competitors’

more popular products.

In the event that a competitor reduces prices, we could be forced to respond by lowering our prices to remain competitive.

If we are forced to lower prices, we may be required to “price protect”

products that remain unsold in our customers’

inventories at the time of the price reduction.

Price protection results in our issuing a credit to our customers in the amount of the price reduction for each unsold unit in that customer’s inventory.

Our price protection policies, which are customary in the industry, can have a major impact on our profitability.

The manufacture, supply and shipment of our products are subject to supply chain and logistics risks that could adversely impact our financial results.

We face a number of risks related to supply chain management and logistics with respect to our products.

We experienced, and may in the future continue to experience, supply or labor shortages or other disruptions to our supply chain or logistics, which could result in shipping delays and increased costs, each of which could negatively impact our results, operations, product development, and sales.

The extent and duration of the impact of these challenges are subject to numerous factors, including the continuing impact of the COVID-19 pandemic, behavioral changes, wage and price costs, adoption of new or revised regulations, and broader macroeconomic conditions.

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

For example, the market shortage of semiconductors that persisted during 2020 and 2021 caused disruptions, from both a supply and pricing standpoint.

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

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

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

Accordingly, any future delays, disruptions, and supply and pricing risks, such as the ongoing supply chain challenges and disruptions that we expect to continue during 2023, could affect our ability to meet customer demand for our products, which could have an adverse effect on our business, results of operations and financial condition.

The manufacture, supply and shipment of our products are dependent upon a limited number of third parties, and our success is dependent upon the ability of these parties to manufacture, supply and ship sufficient quantities of our products to us in a timely fashion, as well as the continued viability and financial stability of these third parties.

In addition, many of our products use components with long order lead times and constrained supply.

Any disruption in supply of these components could materially impact the ability of our third-party manufacturing partners to produce our products.

We rely on third parties to manufacture and manage the logistics of transporting and distributing our products, which subjects us to a number of risks that have been exacerbated as a result of the ongoing supply chain issues that originated during the COVID-19 pandemic.

Our manufacturers’

and suppliers’

ability to supply products to us is also subject to a number of risks, including the unavailability of raw materials or components, their financial instability, the destruction of their facilities, work stoppages and any future public health crisis.

Any shortage of raw materials or components or an inability to control costs associated with manufacturing could increase our costs or impair our ability to ship orders in a timely and cost-efficient manner.

As a result, we could experience cancellations of orders, refusal to accept deliveries or a reduction in our prices and margins, any of which could harm our financial performance and results of operations.

We could be negatively affected if we are not able to engage third parties with the necessary capabilities or capacity on reasonable terms, or if those we engage with fail to meet their obligations (whether due to financial difficulties, manufacturing constraints, or other reasons).

Moreover, there can be no assurance that such manufacturers and suppliers will not refuse to supply us at prices we deem acceptable, independently market their own competing products in the future, or otherwise discontinue their relationships with us.

Our failure to maintain these existing manufacturing and supplier relationships, or to establish new relationships on similar terms in the future, could have a material adverse effect on our business, results of operations, financial condition and liquidity.

In particular, certain of our products have a number of components and subassemblies produced by outside suppliers.

In addition, for certain of these items, we qualify only a single source of supply with long lead times, which can magnify the risk of shortages or result in excess supply or decrease our ability to negotiate price with our suppliers.

Also, if we experience quality problems with suppliers, then our production schedules could be significantly delayed or costs significantly increased.

Each of these factors could have an adverse effect on our business, liquidity, results of operations and financial position.

In addition, the ongoing effectiveness of our supply chain is dependent on the timely performance of services by third parties shipping products and materials to and from our warehouse facilities and other locations.

If we encounter problems with these shipments, our ability to meet retailer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies could be materially adversely affected and we may be required to incur materially higher costs for shipping, including air freight.

We have experienced some of these problems in the past and we cannot assure you that we will not experience similar problems in the future.

The widespread outbreak of an illness, communicable disease, or any other public health crisis could adversely affect our business, results of operations, and financial condition.

We could be negatively impacted by the widespread outbreak of an illness, communicable disease, or any other public health crisis that results in economic or trade disruptions, including the disruption of global supply chains.

The COVID-19 pandemic negatively impacted the economy on a global, national, and local level, disrupted global supply chains, and created volatility and disruption of financial markets.

Responses from U.S.

and international governmental authorities and companies to reduce the spread of COVID-19 affected economic activity through various containment measures including, among others, restrictions on retail outlets, business closures, work stoppages, quarantine and work-from-home guidelines, limiting capacity at public spaces and events, vaccination requirements, or restrictions of global and regional travel.

Another outbreak of an illness, a communicable disease, or any other public health crisis, and any resulting impacts, such as an extended 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 of certain game titles to drive sales of our headset products.

The performance of our gaming accessories business is affected by the continued success of the PC gaming market and third-party gaming platforms, such as Microsoft’s Xbox consoles and Sony’s PlayStation consoles, as well as video games developed by such manufacturers and other third-party publishers.

Our business could suffer if any of these parties fail to continue to drive the success of these platforms, develop new or enhanced video game platforms, develop popular game and entertainment titles for current or future generation platforms or produce and timely release sufficient quantities of such consoles.

Further, if a platform is withdrawn from the market or fails to sell, we may be forced to liquidate inventories relating to that platform or accept returns resulting in significant losses.

The industries in which we operate are subject to competition in an environment of rapid technological change, and if we do not adapt to, and appropriately allocate our resources among, emerging technologies, our revenues could be negatively affected.

We must make substantial product development and other investments to align our product portfolio and development efforts in response to market changes in the gaming industry.

We must anticipate and adapt our products to emerging technologies in order to keep those products competitive.

When we choose to incorporate a new technology into our products or to develop a product for a new platform or operating system, we are often required to make a substantial investment prior to the introduction of the product.

If we invest in the development of a new technology or a product for a new platform that does not achieve significant commercial success, our revenues from those products likely will be lower than anticipated and may not cover our costs.

Further, our competitors may develop or adapt to an emerging technology more quickly or effectively than we do, creating products that are technologically superior to ours, more appealing to consumers, or both.

New and emerging technologies and alternate platforms for gaming, such as mobile devices and virtual reality devices, could make our products, generally designed for existing console and PC gaming platforms less attractive or, in time, obsolete, which could require us to transition our business model, such as by developing products for other gaming platforms.

There are numerous steps required to develop a product from conception to commercial introduction and to ensure timely shipment to retail customers, including designing, sourcing and testing the electronic components, receiving approval of hardware and other third-party licensors, factory availability and manufacturing and designing the graphics and packaging.

Any difficulties or delays in the product development process will likely result in delays in the contemplated product introduction schedule.

It is common in new product introductions or product updates to encounter technical and other difficulties affecting manufacturing efficiency and, at times, the ability to manufacture the product at all.

Although these difficulties can be corrected or improved over time with continued manufacturing experience and engineering efforts, if one or more aspects necessary for the introduction of products are not completed as scheduled, or if technical difficulties take longer than anticipated to overcome, the product introductions will be delayed, or in some cases may be terminated.

No assurances can be given that our products will be introduced in a timely fashion, and if new products are delayed, our sales and revenue growth may be limited or impaired.

A significant portion of our revenue is derived from a few large customers, and the loss of any such customer, or a significant reduction in purchases by such customer, could have a material adverse effect on our business, financial condition and results of operations.

During 2022, our three largest retail customers accounted for approximately 51% of our gross sales in the aggregate.

The loss of, or financial difficulties experienced by, any of these or any of our other significant customers, including as a result of the bankruptcy of a customer, could have a material adverse effect on our business, results of operations, financial condition and liquidity.

We do not have long-term agreements with these or other significant customers and our agreements with these customers do not require them to purchase any specific amount of products.

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

As a result, agreements with respect to pricing, returns, cooperative advertising or special promotions, among other things, are subject to periodic negotiation with each customer.

No assurance can be given that these or other customers will continue to do business with us or that they will maintain their historical levels of business.

In addition, the uncertainty of product orders can make it difficult to forecast our sales and allocate our resources in a manner consistent with actual sales, and our expense levels are based in part on our expectations of future sales.

If our expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls or ensure adequate product supply to meet customer demand.

In addition, financial difficulties experienced by a significant customer could increase our exposure to uncollectible receivables and the risk that losses from uncollected receivables exceed the reserves we have set aside in anticipation of this risk or limit our ability to continue to do business with such customers.

If our marketing efforts do not effectively raise the recognition and reputation of our brands, we may not be able to successfully implement our gaming accessory growth strategy.

We believe that our ability to extend the recognition and favorable perception of our Turtle Beach and ROCCAT brands is critical to implement our gaming accessory growth strategy, which includes maintaining our strong position in console gaming headsets and building our brand recognition and product appeal in PC gaming headsets, keyboards, and mice as well as in additional new categories over time.

These efforts cause us to incur significant costs in marketing;

however, these expenditures may not result in an increase in net sales that is sufficient to cover such costs.

If we fail to build and maintain our brands, or if we incur significant expenses in an unsuccessful attempt to build and maintain our brands, our business and ability to implement our growth strategy may be harmed.

Turtle Beach relies on its partnerships with influencers, athletes and esports teams to expand our market and promote our products, and our marketing and promotion partners may not perform to our expectations.

Relationships with new and established influencers, athletes and esports teams have been, and will continue to be, important to our success.

We rely on these partners to assist us in generating increased acceptance and use of our product offerings.

We have established a number of these relationships, and our growth depends in part on establishing new relationships and maintaining existing ones.

Certain partners may not view their relationships with us as significant to their own businesses, and they may reassess their commitment to us or decide to partner with our competitors in the future.

We cannot guarantee that any partner will perform their obligations as agreed or that we would be able to specifically enforce any agreement with them.

If any partner does not perform consistent with our agreements, we may be subject to negative or adverse publicity and other reputational risks, including the risk of unfavorable perception on social media or other platforms.

Additionally, our failure to maintain and expand these relationships may adversely impact our future revenue.

Our net sales and operating income fluctuate on a seasonal basis and decreases in sales or margins during peak seasons could have a disproportionate effect on our overall financial condition and results of operations.

Historically, a significant portion of our annual revenues have been generated during the holiday season of September to 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:

If our forecasts of demand for products are too high, we may accumulate excess inventories of products, which could lead to markdown allowances or write-offs affecting some or all of such excess inventories.

We may also have to adjust the prices of our existing products to reduce such excess inventories;

If demand for specific products increases beyond what we forecast, our suppliers and third-party manufacturers may not be able to increase production or obtain required components quickly enough to meet the demand.

Our failure to meet market demand may lead to missed opportunities to increase our base of gamers, damage our relationships with retailers or harm our business;

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:

higher product component costs and higher transportation and logistics costs driven by increasing rates of inflation globally;

changes in consumer discretionary spending and preferences driven by increasing rates of inflation;

trade restrictions, higher tariffs, currency fluctuations or the imposition of additional regulations relating to import or export of our products, especially in China, where many of our Turtle Beach products are manufactured, which could force us to seek alternate manufacturing sources or increase our costs;

difficulties obtaining domestic and foreign export, import and other governmental approvals, permits and licenses, and compliance with foreign laws, which could halt, interrupt or delay our operations if we cannot obtain such approvals, permits and licenses;

compliance with anti-corruption laws, including the U.S.

Foreign Corrupt Practices Act of 1977, the U.K.

Bribery Act 2010, the European Union Anti-Corruption Act and other similar laws, or non-compliance with such laws, which could subject us to trade sanctions administered by the Office of Foreign Assets Control, the U.S.

Department of Commerce and equivalent foreign entities;

difficulties encountered by our international distributors or us in staffing and managing foreign operations or international sales, including higher labor costs and tightening of the overall labor markets;

compliance by third-party suppliers, manufacturers and their subcontractors with our Manufacturer Code of Conduct and other applicable compliance policies;

transportation delays and difficulties of managing international distribution channels;

longer payment cycles for, and greater difficulty collecting, accounts receivable;

political and economic instability, including wars (such as the ongoing conflict in Ukraine), terrorism, political unrest, boycotts, curtailment of trade and other business restrictions, any of which could materially and adversely affect our net sales and results of operations;

public health issues (such as a pandemic);

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 utilize 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 internal controls, we may not be able to accurately report financial results or prevent fraud, which could have an adverse effect on our business and financial condition.

A material weakness is a deficiency or combination of deficiencies in our internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements would not be prevented or detected on a timely basis.

If we experience a material weakness or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations.

Any failure to maintain effective disclosure controls and internal control over financial reporting could have an adverse effect on our business, financial condition, and results of operations.

In connection with preparing the financial statements as of and for the year ended December 31, 2022, we identified a material weakness in our internal control related to the proper design and implementation of certain controls over our income tax provision and management’s review of the income tax provision.

The material weakness in internal controls over the tax provision did not result in any material misstatements in these financial statements or omissions in our previously reported financial statements.

Although we intend to take remedial actions in response to this control deficiency, there is no assurance that we will be able to prevent a material error or future control deficiencies (including material weaknesses) from occurring.

Our inability to assert that our internal control over financial reporting is effective could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline, and we may be subject to investigation, litigation, increases in insurance premiums or regulatory fines and sanctions.

Our business could be negatively affected as a result of actions of activist stockholders.

Immersion Corporation (Nasdaq:

IMMR, “Immersion”), through a subsidiary that owns approximately 8.4% of our outstanding common stock, has notified the Company of its intent to nominate three directors for election at the Company’s 2023 annual meeting of stockholders

(the “Notice”).

To avoid a costly and distracting proxy contest, the Company has engaged in good faith with Immersion numerous times but was unable to reach an amicable resolution that, in our view, would be aligned with the best interests of our stockholders.

Responding to Immersion’s proxy contest and any future campaigns by Immersion or other activist stockholders can be disruptive, costly and time-consuming, and can divert the attention of our Board, management and employees.

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.

In addition, in the event of shareholder activism, particularly with respect to matters which our Board, in exercising their fiduciary duties, disagree with or have determined not to pursue, our business could be adversely affected.

The Company could also face difficulty in attracting and retaining qualified directors to serve on our Board due to the perceived instability in the organization or lack of continuity if an activism campaign results in the appointment of an activist shareholder on the Board.

Activist campaigns such as the proxy contest launched by Immersion may also cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business, all of which could have a material adverse effect on the Company.

Moreover, if any of Immersion’s (or other activists’) nominees are elected with a specific agenda, it may adversely affect our ability to effectively and timely implement our long-term strategies, and this could in turn have an adverse effect on our business.

We have adopted a stockholder rights plan, which, together with provisions in our Articles of Incorporation and Nevada law, could discourage or prevent a potential takeover of our Company that might otherwise result in you receiving a premium over the market price for your common stock.

We adopted a stockholder rights plan pursuant to which we distributed one right for each outstanding share of common stock held by stockholders of record as of April 10, 2023.

Subject to certain exceptions, the rights generally would become exercisable upon any person or group acquiring beneficial ownership of twelve percent (12%) or more of the then-outstanding shares of our common stock without the approval of the Board of Directors.

Because the triggering of the rights may substantially dilute the stock ownership of a person or group attempting a take-over of us without the approval of our Board of Directors, even if such a change in control would result in our stockholders receiving a premium for their shares, the plan could make it more difficult for a third party to acquire us, or a significant percentage of our outstanding capital stock, without first negotiating with our Board of Directors.

Additionally, our Articles of Incorporation permit our Board of Directors to issue special shares from time to time, with such rights and preferences as they consider appropriate.

Our Board of Directors could authorize the issuance of special shares with terms and conditions and under circumstances that could have an effect of discouraging a takeover or other transaction.

As a Nevada corporation, we are also subject to certain provisions of the Nevada General Corporation Law that have anti-takeover effects and may inhibit a non-negotiated merger or other business combination.

These provisions are intended to encourage any person interested in acquiring us to negotiate with, and to obtain the approval of, our Board of Directors in connection with such a transaction.

However, certain of these provisions may discourage a future acquisition of the Company, including an acquisition in which the stockholders might otherwise receive a premium for their shares.

As a result, stockholders who might desire to participate in such a transaction may not have the opportunity to do so.

Risks Related to our Intellectual Property

Our competitive position will be adversely damaged if our products are found to infringe on the intellectual property rights of others.

Other companies and our competitors may currently own or obtain patents or other proprietary rights that might prevent, limit or interfere with our ability to make, use or sell our products.

Although we do not believe that our products infringe the proprietary rights of any third parties, we have received notices of alleged infringement in the past and there can be no assurance that infringement or other legal claims will not be asserted against us in the future or that we will not be found to infringe the intellectual property rights of others.

The electronics industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, resulting in significant and often protracted and expensive litigation.

In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results could be adversely affected.

Any litigation or claims, whether or not valid, could result in substantial costs and diversion of our resources.

An adverse result from intellectual property litigation could cause us to do one or more of the following:

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;

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.

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 these first parties enter into license agreements with companies other than us for their “closed systems”

or if we are unable to obtain sufficient quantities of these 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 the Credit Facility.

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, Bank of America may declare any outstanding borrowings under the Credit Facility immediately due and payable.

If we had outstanding borrowings under the Credit Facility, such an event would have an immediate and material adverse impact on our business, results of operations, and financial condition.

We could be required to obtain additional financing from other sources, and we cannot predict whether or on what terms, if any, additional financing might be available.

If we were required to seek additional financing and were unable to obtain it, we might need to change our business and capital expenditure plans, which may have a materially adverse effect on our business, financial condition and results of operations.

In addition, any debt under the Credit Facility could make it more difficult to obtain other debt financing in the future.

The Credit Facility contains certain financial covenants and other restrictions that limit our ability, among other things, to incur certain additional indebtedness;

pay dividends and repurchase stock;

make certain investments and other payments;

enter into certain mergers or consolidations;

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

engage in sale and leaseback transactions and transactions with affiliates;

and encumber and dispose of assets.

If we violate any of these covenants, we will likely be unable to borrow under the Credit Facility.

If a default occurs and is not timely cured or waived, Bank of America could seek remedies against us, including termination or suspension of obligations to make loans and issue letters of credit, and acceleration of amounts then outstanding under the applicable Credit Facility.

No assurance can be given that we will be able to maintain compliance with these covenants in the future.

The Credit Facility is asset based and can only be drawn down in an amount to which eligible collateral exists and can be negatively impacted by extended collection of accounts receivable, unexpectedly high product returns and slow-moving inventory, among other factors.

In addition, we have granted the lender a first-priority lien against substantially all of our assets, including trade accounts receivable and inventories.

Failure to comply with the operating restrictions or financial covenants could result in the lender terminating or suspending its obligation to make loans and issue letters of credit to us.

Additionally, a significant downturn in demand for our products or a reduction in gross margins could have a material impact on our result of operations, adversely affecting our ability to obtain financing.

General Risk Factors

The market price of our common stock may fluctuate significantly.

We cannot predict the prices at which our common stock may trade.

The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including but not limited to:

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 our engagement with, activist stockholders;

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;

general economic conditions and other external factors.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company.

These broad market fluctuations could adversely affect the trading price of our common stock.

These fluctuations may also cause short sellers to periodically enter the market on the belief that we may experience worse results in the future.

We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time.

We have adopted a shareholder rights plan, which, together with provisions in our articles of incorporation and Nevada law, could discourage or prevent a potential takeover of our Company that might otherwise result in you receiving a premium over the market price for your common stock.

We adopted a shareholder right plan pursuant to which we will distribute one right for each outstanding share of common stock held by stockholders of record as of April 10, 2023.

Because the rights may substantially dilute the stock ownership of a person or group attempting a take-over of us without the approval of our Board of Directors, even if such a change in control would result in our shareholders receiving a premium for their shares, the plan could make it more difficult for a third party to acquire us, or a significant percentage of our outstanding capital stock, without first negotiating with our Board of Directors.

Additionally, our articles of incorporation permit our Board of Directors to issue special shares from time to time, with such rights and preferences as they consider appropriate.

Our Board of Directors could authorize the issuance of special shares with terms and conditions and under circumstances that could have an effect of discouraging a takeover or other transaction.

These provisions are intended to encourage any person interested in acquiring us to negotiate with, and to obtain the approval of, our Board of Directors in connection with such a transaction.

However, certain of these provisions may discourage a future acquisition of the Company, including an acquisition in which the stockholders might otherwise receive a premium for their shares.

As a result, stockholders who might desire to participate in such a transaction may not have the opportunity to do so.

If we are unable to protect our information systems against service interruption, misappropriation of data, cyber-attacks or other 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, technical malfunctions, inadequate systems capacity, human error, power outages, computer viruses and security breaches.

Any disruptions affecting our information systems could have a material adverse impact on our business.

In addition, any failure to maintain adequate system security controls to protect our computer assets and sensitive data, including associate and client data, from unauthorized access, disclosure or use could damage our reputation with our associates and our clients, exposing us to financial liability, legal proceedings (such as class action lawsuits), and/or regulatory action.

While we have implemented measures to prevent security breaches and cyber incidents, our preventative measures and incident response efforts may not be entirely effective.

As a result, we may not be able to immediately detect any security breaches, which may increase the losses that we would suffer.

Further, remote working arrangements increase the risk of cybersecurity attacks and data breaches, particularly through phishing attempts, as our employees and third parties with whom we interact leverage our IT infrastructure in previously unanticipated ways.

Finally, our ability to continue to operate our business without significant interruption in the event of a disaster or other disruption depends, in part, on the ability of our information systems to operate in accordance with our disaster recovery and business continuity plans.

Our reliance on information systems and other technology also gives rise to cybersecurity risks, including security breach, espionage, system disruption, theft and inadvertent release of information.

The occurrence of any of these events could compromise our networks, and the information stored there could be accessed, publicly disclosed, lost or stolen.

Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt

operations, and damage our reputation, which could adversely affect our business.

In addition, as security threats continue to evolve, we may need to invest additional resources to protect the security of our systems.

We are subject to laws and regulations relating to data privacy, data protection, and other related matters, which are subject to change, and our failure to comply could negatively affect our business and reputation.

We are subject to a variety of laws and regulations with respect to data privacy, data protection and other related matters, including the California Consumer Privacy Act, as amended by the California Privacy Rights Act, and the European Union General Data Protection Regulation.

These laws and the regulations associated therewith have evolved significantly in recent years, and future laws and regulations in other jurisdictions in which our business operates may be enacted.

In addition, the application and interpretation of these laws and regulations are often unpredictable and uncertain.

Compliance with existing and emerging data privacy laws, regulations and industry standards could result in increased compliance costs and/or lead to changes in our business practices and policies, and any failure to abide by these laws, regulations and industry standards could adversely affect our reputation, lead to public enforcement actions or private litigation against us, require additional investment in resources or personnel, and reduce the availability of previously useful data, any of which could materially and adversely affect our business, operating results and financial condition

We have been party to stockholder litigation, and in the future could be party to additional stockholder litigation, which could harm our business, financial condition and operating results.

We have had, and may continue to have, actions brought against us by stockholders, including in connection with the Merger, as further described in Note 12.

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 companies like ours 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.

The translation risk is primarily concentrated in the exchange rate between the U.S.

dollar and the British Pound.

dollar fluctuates against other currencies in which we transact business, revenue and income could be impacted.

Any acquisitions we pursue could disrupt our business and harm our financial condition and results of operations.

As part of our business strategy, we review and intend to continue to review acquisition opportunities that we believe would be advantageous or complementary to the development of our business.

If we make any acquisitions, we could take any or all of the following actions, any one of which could adversely affect our business, financial condition, results of operations or share price:

use a significant portion of our available cash;

require a significant devotion of management’s time and resources in the pursuit or consummation of such acquisition;

incur debt, which may not be available to us on favorable terms and may adversely affect our liquidity;

issue equity or equity-based securities that would dilute existing stockholders’

ownership percentage;

assume contingent and other liabilities;

take charges in connection with such acquisitions.

Acquisitions also entail numerous other risks, including, without limitation:

difficulties in assimilating acquired operations, products, technologies and personnel;

unanticipated costs;

risks of entering markets in which we have limited or no prior experience;

regulatory approvals;

unanticipated costs or liabilities;

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

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

We may not be able to realize the anticipated synergies, innovation, operational efficiencies, and benefits of the acquisition or successfully integrate with our existing business the businesses, products, technologies or personnel that we acquire, and our failure to do so could harm our business and operating results.

Our products may be subject to warranty claims, product liability and product recalls.

We may be subject to product liability or warranty claims that could result in significant direct or indirect costs, or we could experience greater returns from retailers than expected, which could harm our net sales.

The occurrence of any quality problems due to defects in our products could make us liable for damages and warranty claims in excess of any existing reserves.

In addition to the risk of direct costs to correct any defects, warranty claims, product recalls or other problems, any negative publicity related to the perceived quality of our products could also affect our brand image, decrease retailer and distributor demand and our operating results and financial condition could be adversely affected.

Changes in production levels or processes could result in increased manufacturing errors, as well as higher component, manufacturing and shipping costs, all of which could reduce our profit margins, result in prices increases and harm our relationships with retailers and consumers.

We could incur unanticipated expenses in connection with warranty or product liability claims relating to a recall of one or more of our products, which could require significant expenditures to defend.

Additionally, we may be required to comply with governmental requirements to remedy the defect and/or notify consumers of the problem that could lead to unanticipated expense, and possible product liability litigation against a customer or us.

Changes in laws or regulations or the manner of their interpretation or enforcement could adversely impact our financial performance and restrict our ability to operate our business or execute our strategies.

We are subject to numerous domestic and foreign laws and regulations, including those related to customs, securities, consumer protection, data privacy, general employment and employee health and safety.

New laws or regulations, changes in existing laws or regulations or the manner of their interpretation or enforcement, may create uncertainty, increase our cost of doing business and restrict our ability to operate our business or execute our strategies.

This could include, among other things, compliance costs and enforcement under the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act related to disclosure and reporting requirements for companies that use “conflict”

minerals originating from the Democratic Republic of Congo or adjoining countries.

Additionally, the California Consumer Privacy Act and EU General Data Protection Regulation have significantly affected how we are able to market our products.

The SEC has also enacted or proposed significant changes to its regulations in recent years that impact our operations associated with being a public company.

We continually evaluate and monitor developments with respect to new and proposed laws, regulations, standards and rules and cannot predict or estimate the amount of the additional costs we may incur due to these laws, regulations, standards and rules or the timing of such costs.

Any such new or changed laws, regulations, standards and rules may be subject to varying interpretations and as a result, their application in practice may evolve over time as new guidance is provided by regulatory authorities and governing bodies.

This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

We are committed to maintaining high standards of corporate governance and public disclosure.

If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory authorities or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we may be harmed.

We are subject to various environmental laws and regulations that could impose substantial costs on us and may adversely affect our business, operating results and financial condition.

Our operations and some of our products are regulated under various federal, state, local and international environmental laws.

In addition, regulatory bodies in many of the jurisdictions in which we operate propose, enact and amend environmental laws and regulations on a regular basis.

If we were to violate or become liable under these environmental laws, we could be required to incur additional costs to comply with such regulations and may incur fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs.

Liability under environmental laws may be joint and several and without regard to comparative fault.

The ultimate costs under environmental laws and the timing of these costs are difficult to predict.

Although we cannot predict the ultimate impact of any new environmental laws and regulations, such laws may result in additional costs or decreased revenue, and could require that we redesign or change how we manufacture our products, any of which could have a material adverse effect on our business.

Additionally, to the extent that our competitors choose not to abide by these environmental laws and regulations, we may be at a cost disadvantage, thereby hindering our ability to effectively compete in the marketplace.

Our goals and disclosures related to environmental, social and governance (“ESG”) matters have and will likely continue to result in additional costs and risks to us, which may adversely affect our reputation, employee retention, and willingness of our customers and partners to do business with us.

Investor advocacy groups, institutional investors, investment funds, proxy advisory services, stockholders, and customers are increasingly focused on the ESG goals and practices of companies.

We are frequently asked by these groups to set ambitious ESG goals and provide new and more robust disclosure of ESG goals, progress toward ESG goals and other matters of interest to ESG stakeholders.

We have set ESG goals and are enhancing related disclosure of goals, progress, and other matters relating to ESG.

Our efforts to accomplish and accurately disclose ESG-related goals and objectives present numerous operational, reputational, financial, legal, and other risks, any of which could have a negative impact on our business, reputation, and stock price.

Our ability to set and achieve ESG goals and initiatives is subject to numerous risks including, among others:

(1) the availability and cost of limiting, eliminating or tracking our use of carbon-based energy sources and technologies, (2) evolving regulatory requirements affecting ESG standards or disclosures, including those related to greenhouse gas emissions tracking and disclosure, (3) our ability to partner with providers that can meet our sustainability, diversity, and other standards, (4) our ability to recruit, develop, and retain diverse talent, (5) the impact of our organic growth and acquisitions or dispositions of businesses or operations on our ESG goals, and (6) customers’

actual demand for ESG-oriented product offerings, which may be more expensive and less available than other options.

Standards for tracking and reporting on ESG matters are relatively new, have not been harmonized and continue to be promulgated and evolve.

Our selection of disclosure frameworks that seek to align with various reporting standards may change from time to time, including in response to new disclosure requirements, and may result in a lack of consistent or meaningful comparative data from period to period.

In addition, our processes and controls may not always comply with evolving standards for identifying, measuring and reporting ESG metrics, our interpretation of reporting standards may differ from those of others and such standards may change over time, any of which could result in significant revisions to our ESG goals or reported progress in achieving such goals.

If our ESG practices do not meet evolving investor or other stakeholder expectations and standards or regulatory requirements, then our reputation, our ability to attract or retain employees and our attractiveness as an investment, business partner or acquiror could be negatively impacted.

Similarly, our failure or perceived failure to pursue or fulfill our goals, targets and objectives or to satisfy various 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.

Information regarding risk factors appears in Part I, Item 1A.

Risk Factors of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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