What changed in this filing

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Item 1A. Risk Factors

2022-03-02 compared with 2021-03-04 · 69 added, 44 removed, 267 unchanged (30% of the section changed)

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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 novel coronavirus (“COVID-19”) pandemic and the measures being taken in response are uncertain and difficult to predict, but may include:

A decrease in the long-term demand and/or pricing for our products, and a global economic recession that could reduce demand and/or pricing for our products, resulting from actions taken by governments, businesses, and/or the general public in an effort to limit exposure to and spreading of such infectious diseases, such as travel restrictions, quarantines, and business shutdowns or slowdowns;

The effects of the public health crisis caused by the COVID-19 pandemic, and its variant strains, and the measures being taken in response are uncertain and difficult to predict, but may include:

A decrease in the demand and/or pricing for our products, and a global economic recession that could reduce demand and/or pricing for our products, resulting from actions taken by governments, businesses, and/or the general public in an effort to limit exposure to and spreading of such infectious diseases, such as travel restrictions, quarantines, and business shutdowns or slowdowns;

Disruptions to our supply chain in connection with the sourcing, manufacturing and transportation of finished goods and materials, in particular, the negative impact to lead-times and availability of semiconductor components which could lead to shortages preventing us from manufacturing products in the required quantities to support demand;

Disruptions in foot traffic to brick-and-mortar retail locations of our retailers resulting from stay-at-home orders and government restrictions on retailing operations could disrupt retail customer awareness and demand for our products;

Increased difficulty in new product development due to inability to collaborate on-site with manufacturing partners;

Disruptions in foot traffic to brick-and-mortar retail locations of our retailers resulting from the reinstatement of operational restrictions or temporary closures of retailing operations could disrupt retail customer awareness and demand for our products;

Negative impacts to our operations, including reductions in efficiency and productivity and increased costs resulting from efforts to mitigate the impact of COVID-19;

Deterioration of worldwide credit and financial markets that could limit our ability to obtain financing, result in losses due to failures of financial institutions and other parties, and cause a higher rate of losses on our accounts receivables due to defaults and bankruptcies;

Deterioration of the financial condition or liquidity, or interruptions to the operations, of our suppliers and customers, including retailers and distributors, could adversely affect the distribution, availability and sales of our products.

Additionally, as a result of stay-at-home orders and government restrictions on retailing operations due to COVID-19, retailers have experienced, and may continue to experience, liquidity constraints or other financial difficulties, 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.

Deterioration of the financial condition or liquidity, or interruptions to the operations, of our suppliers and customers, including retailers and distributions, could adversely affect the distribution, availability and sales of our products.

Additionally, as a result of operational and government restrictions on retailing operations due to COVID-19, retailers have experienced, and may continue to experience, liquidity constraints or other financial difficulties, 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.

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

The resumption of normal business operations after such interruptions may be delayed or constrained by lingering effects of COVID-19 on our employees, suppliers, manufactures, distributors, retailers, third-party service providers, and/or customers.

Additionally, we have seen an increase in demand for our products during the restriction periods and may see a decrease in demand for our products as restrictions imposed for the pandemic are lifted and social functions and activities start returning to pre-pandemic levels.

We have seen an increase in demand for our products during the COVID-19 pandemic and may see a decrease in demand for our products as restrictions imposed for the pandemic are lifted and social functions and activities start returning to pre-pandemic levels.

These effects, alone or taken together, could have a material adverse effect on our business, results of operations or financial condition.

An extended period of global supply chain and economic disruption resulting from the COVID-19 pandemic and the government measures adopted in response thereto could exacerbate the foregoing effects.

In addition, the potential impacts of COVID-19 also could affect many of our risk factors included in Item 1A of this Report.

In addition, the potential impacts of COVID-19 also could affect many of our risk factors included in Item 1A of this Annual Report.

However, as the COVID-19 situation is unprecedented and continuously evolving, the potential impacts to such risk factors remain uncertain.

The ongoing global economic recovery from the COVID-19 pandemic has caused significant challenges for global supply chains resulting in inflationary cost pressures and component shortages.

We have also experienced unique logistical challenges related to transportation delays.

As a result, we 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.

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

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.

Risks Related to Our Operations

We depend upon the success and availability of third-party gaming platforms and release of certain game titles to drive sales of our headset products.

The performance of our headset business is affected by the continued success of 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 videogame 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 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.

Recently, we have experienced, and may in the future 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, we experienced supply chain disruptions that resulted in significant cost increases.

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

Recent inflationary pressures have been exacerbated by the lower availability of, and increased prices for, freight and logistics, including air, sea, and ground freight.

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

While the Company has taken and continues to take measures to procure and maintain levels of inventory to prioritize product availability amidst global supply chain and logistical challenges, there can be no assurance that the Company 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.

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 3 rd party manufacturing partners to produce our products.

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 COVID-19 pandemic and the ongoing supply chain issues associated therewith.

Our manufacturers’ and suppliers’ ability to supply products to us is also subject to a number of risks, including the availability of raw materials or components, their financial instability, the destruction of their facilities, epidemics, or work stoppages.

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There may be significant and material disruptions to our supply chain and operations, and delays in the manufacture and shipment of our products, which may then have a material adverse effect on our business or 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.

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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 material additional costs for expedited shipping, including air freight.

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 material ly 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.

We depend upon the success and availability of third-party gaming platforms and release of certain game titles to drive sales of our headset products.

The performance of our headset business is affected by the continued success of 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.

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.

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 the 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 personal computer or video game platforms than we do.

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.

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

Also, any actions we undertake to increase prices in response to rising inflation or other considerations may reduce demand for our product and have a material adverse effect on our business or results of operations.

Conversely, any actions we undertake to increase prices in response to rising costs due to higher inflation levels or other considerations may reduce demand for our product if our competitors do not follow with similar pricing actions.

This may have a material adverse effect on our business or results of operations.

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.

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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.

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

We believe that our ability to extend the recognition and favorable perception of our Turtle Beach brand, and the recently acquired ROCCAT and NEAT 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.

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

We believe that our ability to extend the recognition and favorable perception of our Turtle Beach brand, and the ROCCAT and Neat Microphones 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 incur significant costs in marketing and these expenditures, however, may not result in a sufficient increase in net sales to cover such costs.

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.

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

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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 particular products, we could incur additional costs or experience manufacturing delays.

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.

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Our results of operations and financial condition may be adversely affected by global business, political, operational, financial, and economic conditions.

We face global business, political, operational, financial and economic risks inherent in international business, many of which are beyond our control, including:

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;

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;

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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;

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;

transportation delays and difficulties of managing international distribution channels;

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Downturns in the worldwide economy could adversely affect our business.

For example, the health crisis caused by COVID-19 has caused a downturn in the worldwide economy and resulted in adverse economic conditions across the world.

If these conditions continue, we could experience a reduction in demand for our products or a lengthening of consumer replacement schedules for our products.

We could experience a reduction in demand for our products or a lengthening of consumer replacement schedules for our products.

Reduced demand for these products could result in decreases in our average selling prices and product sales.

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The Sarbanes-Oxley Act of 2002 requires, among other things, that we evaluate our systems and processes and test our internal controls over financial reporting to allow management and our independent registered public accounting firm, as applicable, to report on the effectiveness of our internal control over financial reporting.

We have reported the remediation of a material weakness related to the review of material non-routine transactions or events disclosed in our 2018 Annual Report on Form 10-K.

In the future, if we are not able to remediate any identified material weakness or otherwise comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, investors could lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline and we could be subject to sanctions, investigations by the Nasdaq Stock Market, LLC, the SEC or other regulatory authorities, or shareholder litigation.

If we are not able to remediate any identified material weakness or otherwise comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, investors could lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline and we could be subject to sanctions, investigations by the Nasdaq Stock Market, LLC, the SEC or other regulatory authorities, or shareholder litigation.

In addition, failure to maintain effective internal controls could result in financial statements that do not accurately reflect our financial condition or results of operations.

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We may initiate claims or litigation against third parties in the future for infringement of our proprietary rights or to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors.

These claims could result in costly litigation and divert the efforts of our technical and management personnel.

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 .

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While Sony does not currently require a license for audio products to be compatible with PlayStation ® consoles, they could do so in the future.

Accordingly, Microsoft, Sony and other third-party gaming platform manufacturers may control 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.

We are party to ongoing stockholder litigation, and in the future could be party to additional stockholder litigation, any of which could harm our business, financial condition and operating results.

We have had, and may continue to have, actions brought against us by stockholders in connection with past transactions, changes in our stock price or other matters.

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.

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

We have had, and may continue to have, actions brought against us by stockholders in connection with the Merger, as further described in Item 3 – Legal Proceedings below, 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 .

For example, and as further described in Note 14, “Commitments and Contingencies,” we are involved in legal proceedings related to the merger of VTBH and Paris Acquisition Corp.

involving certain of our stockholders.

Risks Related to Liquidity

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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.

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 affect our ability to obtain financing.

General Risk Factors

Our business could 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.

Such inflationary pressures have been and could continue to be exacerbated by higher oil prices, geopolitical turmoil, and economic policy actions.

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 reduce our margins and profitability.

If such impacts are prolonged and substantial, they could have a material negative effect on our results of operations.

If we are unable to protect our information systems against service interruption, misappropriation of data or breaches of security, our operations could be disrupted, our reputation may be damaged, and we may be financially liable for damages.

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The United Kingdom’s exit of the European Union may negatively impact our operations.

The changes to the trading relationship between the United Kingdom (U.K.) and European Union resulting from the U.K’s exit from the European Union on January 31, 2020 (“Brexit”) will likely result in increased cost of goods imported into and exported from the U.K.

and may decrease the profitability of our U.K.

and other European operations.

Additional currency volatility could drive a weaker British pound, which increases the cost of goods imported into our U.K.

operations and may decrease the profitability of our U.K.

The changes to the trading relationship between the United Kingdom (UK) and European Union resulting from the UK’s exit from the European Union on January 31, 2020 (“Brexit”) have created uncertainty around possible increased cost of goods imported into and exported from the UK and may decrease the profitability of our UK and other European operations.

Additional currency volatility could drive a weaker British pound, which increases the cost of goods imported into our UK operations and may decrease the profitability of our UK operations.

A weaker British pound versus the Euro and U.S.

dollar also causes local currency results of our U.K.

operations to be translated into fewer U.S.

dollar also causes local currency results of our UK operations to be translated into fewer U.S.

dollars during a reporting period.

Agreements regarding tariff, trade, regulatory and other aspects of the U.K.’s future relationship with the European Union and its member status were reached on December 24, 2020.

parliament approved the agreements on December 30, 2020 and the European Parliament will approve the agreement in 2021.

As such, on January 1, 2021, provisional application of the agreement took effect and the new rules entered into force.

On December 24, 2020, the UK and the EU entered into a trade and cooperation agreement (the “Trade and Cooperation Agreement”), which was applied on a provisional basis from January 1, 2021, and entered into force on May 1, 2021.

The economic integration contemplated by the Trade and Cooperation Agreement does not reach the level that existed during the time the UK was a member state of the EU, and further, while the Trade and Cooperation Agreement sets out preferential arrangements in areas such as trade in goods and in services, digital trade and intellectual property, there is still uncertainty on the application and interpretation of many of its provisions.

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 market price of our common stock may fluctuate significantly.

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dollar and the British Pound.

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

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.

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use a significant portion of our available cash;

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

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;

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New laws or regulations, or changes in existing laws or regulations or the manner of their interpretation or enforcement, may create uncertainty for public companies, 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 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

This could include, among other things, compliance costs and enforcement under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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 or the timing of such costs.

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

What changed 10-K

Item 1A. Risk Factors