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Item 7. Management’s Discussion and Analysis

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This discussion summarizes the significant factors affecting our results of operations and the financial condition of our business during each of the fiscal years in the three-year period ended December 31, 2021.

Turtle Beach Corporation (herein referred to as the “Company,” “we,” “us,” or “our”), headquartered in White Plains, New York, and incorporated in the state of Nevada in 2010, is a premier audio technology company with expertise and experience in developing, commercializing and marketing innovative products across a range of large addressable markets under the Turtle Beach® and ROCCAT® brands.

Turtle Beach Corporation (herein referred to as the “Company,” “we,” “us,” or “our”), headquartered in White Plains, New York, and incorporated in the state of Nevada in 2010, is a premier audio technology company with expertise and experience in developing, commercializing, and marketing innovative products across a range of large addressable markets under the Turtle Beach®, ROCCAT® and Neat Microphone® brands.

Turtle Beach is a worldwide leader of feature-rich headset solutions for use across multiple platforms, including video game and entertainment consoles, handheld consoles, personal computers (“PC”), tablets and mobile devices.

ROCCAT is a gaming headsets, keyboards, mice and other accessories brand focused in the personal computer peripherals market.

ROCCAT is a gaming headsets, keyboards, mice, and other accessories brand focused on the personal computer peripherals market.

Neat Microphones is an innovative brand of high-quality digital USB and analog microphones

Business Trends

Gaming Headset Market

Based on sales tracking data from The NPD Group, Inc.

(“NPD Group”), the console gaming headset market in our largest market, the United States, increased by 41.3% in 2020.

This was the result of unprecedented growth in the console gaming headset market during the pandemic when new gamers entered the market, lapsed gamers started playing again, existing gamers played more, and non-gamers bought headsets for remote learning.

The Company’s market share in the United States was over 45% in 2020.

Traditionally, the gaming market has grown as new gamers enter and some existing gamers upgraded headsets.

Console Headset Market

The global market for console headsets in 2021 was approximately $1.7 billion in which we are the market leader.

This market experienced unprecedented growth in 2020 driven by the initial COVID-19 stay-at-home orders when new gamers entered the market, lapsed gamers started playing again, existing gamers played more, and non-gamers bought headsets for remote learning.

In 2021, this market experienced a decline due to weaker retail traffic, a slower holiday season from disappointing triple A video game releases and console supply constraints.

Traditionally, the gaming market has grown as new gamers enter and existing gamers upgrade headsets.

However, the emergence of battle royale games that are highly social, collaborative, and competitive, contributed to a higher growth in the video game industry and a higher proportion of gamers using headsets.

And given that the vast majority of the gaming headset market is driven by replacement and upgrading, this large influx of new gaming headset users could drive an increase in demand for gaming headsets in future years.

Additionally, with the COVID-19 pandemic and consumers following stay-at-home guidance, gaming headsets have seen increase driven by an overall increase in gaming, and by work-from-home, school/learn-from-home, and because chatting with friends during online play has become a main form of daily interactivity and communication for many.

And given that most of the gaming headset market is driven by replacement and upgrading, this large influx of new gaming headset users is expected to drive an increase in demand for gaming headsets in future years.

Additionally, with the ongoing COVID-19 pandemic, use of gaming headsets has seen increased demand driven by an overall increase in gaming, and by work-from-home, school/learn-from-home, and because chatting with friends during online play continues to be an important form of daily interactivity and communication for many, progressed by pandemic-related containment measures.

PC Accessories Market

The market for PC gaming headsets, mice, and keyboards is estimated to have grown in 2021 to $3.8 billion.

PC gaming in the U.S.

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

While most games are available on multiple platforms, gaming on PC offers advantages including improved graphics, the increased speed and precision of mouse/keyboard controls, and more.

Gaming mice and keyboards are engineered to provide gamers with higher-end performance and a superior gaming experience through benefits including faster response times, improved materials and build quality, programmable buttons and keys, software suites to customize and control devices and settings, and more.

Audio Accessories Market

On January 12, 2021, we announced the acquisition of Neat Microphones (“Neat”) that creates, manufactures and sells high-quality digital USB and analog microphones.

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

While most games are available on multiple platforms, gaming on PC offers advantages that include improved graphics, increased speed and precision of mouse/keyboard controls, and the ability for customization.

Gaming mice and keyboards are engineered to provide gamers with high-end performance and a superior gaming experience through benefits including faster response times, improved materials and build quality, programmable buttons and keys, and software suites to customize and control devices and settings.

Microphone Market

In 2021, the Company completed the acquisition of Neat, a brand that creates, manufactures, and sells high-quality digital USB and analog microphones.

Neat‘s accomplished leadership team includes the former founders of Blue Microphones, inventors of the first high-performance USB microphone, and pioneers behind other award-winning microphones that have revolutionized how professionals and consumers capture their voice, music and more.

The acquisition enables our entry into the $2.3 billion global microphone market, which is experiencing rapid growth in the digital/USB accessories segment where Neat’s product innovation is focused.

The acquisition enabled our entry into the $2.3 billion global microphone market, which is experiencing rapid growth in the digital/USB accessories segment where Neat’s product innovation is focused.

Controllers and Gaming Simulation Markets

During 2021, the Company expanded into the gaming simulation and gaming controller markets with the launch of the VelocityOne Flight™ simulation control system and the Xbox Recon Controller, respectively.

These markets will increase our total addressable market by $1 billion, with third-party game controllers at roughly $600 million and PC/console flight simulation hardware at roughly $400 million in global market.

Our gaming accessories business is seasonal with a significant portion of sales and profits typically occurring around the holiday period.

Historically, more than 45% of revenues are generated during the period from September through December as new products are introduced and consumers engage in holiday shopping.

In connection with the seasonality of the business, historically the Company’s borrowings on the revolving credit facility increased as a result of the holiday inventory build leading up to year-end and declined on gross receipts during the first quarter of the following year.

In 2020, as a result of the unprecedented revenue, the Company ended the year with no outstanding borrowings under its revolving credit facility.

However, in the past few years, normal seasonal patterns have been significantly changed due to pandemic-driven shifts in consumer demand.

In connection with the seasonality of the business, historically the Company’s borrowings on the revolving credit facility increase as a result of the holiday inventory build leading up to year-end and decline on gross receipts during the first quarter of the following year.

In 2021, the Company ended the year with no outstanding borrowings under its revolving credit facility as cash flows from operations were sufficient to fund the Company’s working capital needs.

COVID-19 Outlook

The effects of the global pandemic and the measures being taken in response are uncertain and difficult to predict.

As a result of government mandated stay-at-home orders, the Company’s 2020 revenues have exceeded historical levels as the overall gaming and headset markets have experienced an unprecedented surge in demand.

However, the risk of a global economic recession may adversely impact the long-term demand and/or pricing for our products, constrain retail sales of our products, constrain supply of our products, or delay the supply of the next generation Xbox and PlayStation ® consoles.

During 2020, as the pandemic resulted in stay-at-home guidance, the gaming accessory market experienced a significant surge in demand as existing gamers began gaming more and new gamers entered the market.

In addition, the increase in working from home and learning from home created additional demand for accessories, particularly gaming headsets which work well for video and audio calls.

As a result, the Company’s 2020 revenues exceeded historical levels as the overall gaming and headset markets experienced an unprecedented surge in demand.

Through 2021 and going forward, the effects of the global pandemic and the measures being taken in response are uncertain and difficult to predict.

While there were likely certain one-time purchases caused by the stay-at-home orders, we believe millions of new gamers have joined the market which created an ongoing, larger installed base of players in 2021.

Supply Chain and Logistic Outlook

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

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

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

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

Results of Operations

Management Overview

During 2020, driven by stay-at-home orders, demand surged for everything related to gaming, and supporting the remote “work-from-home” environment, including hardware, software and accessories for both consoles and PC;

and Turtle Beach capitalized on this demand and outpaced the market based on the strength of our products and brand as well as our supply and retail execution.

In 2020, overall console headset sales increased by $235M over 2019 for North America, of which Turtle Beach revenue increased by $127M, an increase of 52% vs.

42% for the market.

Further, our investments to drive growth resulted in the Elo series PC gaming headsets, the first products that blend ROCCAT’s award-winning design and innovation with Turtle Beach’s gaming audio expertise and exclusive audio technologies.

As a result, combined with the newly released Vulcan Keyboards and Burst Pro Mouse, revenue related to our ROCCAT products more than doubled in 2020.

For 2020, our reported net income was $38.7 million, or diluted net income per share of $2.37, with cash from operating activities of $51 million reflective of higher gross receipts, which was partially offset by certain costs to align inventory levels with elevated consumer demand.

Forward looking, we continue to be very excited about the recent launches for PlayStation®5 and Microsoft's new Xbox platform consoles, and to step up our investments to capitalize on new opportunities and, with the integration of the ROCCAT acquisition, the recent Neat acquisition, the excellent team we have here, and our strong continued execution, we will continue to take actions to enable and drive further expansion and growth.

This year, ROCCAT introduced its groundbreaking optical switch technology that registers key strokes and mouse clicks that are significantly more responsive than standard switches and, in 2021, ROCCAT will continue filling out its entire lineup with additional keyboard, mouse and headset offerings targeting various price points and performance minded gamers.

Whereas, the acquisition of Neat Microphones, whose leadership team includes the former founders of Blue Microphones, inventors of the first high-performance USB microphone, further expands Turtle Beach’s portfolio with a variety of advanced microphone products slated to launch throughout 2021 to meet the growing demand for high-quality, affordable microphones.

Finally, we believe the strong underlying consumer demand continues to be driven by greater overall engagement of existing gamers as well as new and lapsed gamers joining the market as new gaming headset users.

In addition, non-gamers continue to buy headsets for at-home work, school and socializing.

In 2021, our reported net income was $17.7 million, or diluted net income per share of $0.97.

We grew from our record year in 2020 due to growth in non-console products including PC accessories, controllers, and flight simulation.

The non-console products represented approximately 20% of total revenues in 2021.

The console market declined year over year due to semiconductor constraints and weaker game performance.

Our console business was negatively impacted by semiconductor constraints with our wireless products.

In spite of this Turtle Beach console market share continues to be higher than the next three competitors.

Not only are we continuing to move our best-selling gaming audio business forward with new headsets like the Recon 200 Gen 2, we also entered into the $2.3 billion global microphone market with the acquisition of Neat Microphones, and we have entered two large new categories:

gaming controllers with the Xbox Recon Controller, and flight simulation hardware with the VelocityOne Flight™ simulation control system.

Looking forward, we have expanded our gaming accessory offerings, operating in seven gaming market categories with addressable markets of over $8.5 billion.

As a result, we exceeded 20% of our revenues in categories outside the console gaming headset category, in which we have been a leader for over ten years, and we believe we are on-target to achieve the Company’s goal of $100 million non-console headset revenues in 2022.

Key Performance Indicators and Non-GAAP Measures

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Business transaction expense

Non-recurring business costs

Adjusted EBITDA

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For the year ended December 31, 2021, Adjusted EBITDA was $36.6 million compared to $61.4 million, for the year ended December 31, 2020.

Net income and Adjusted EBITDA increased primarily due to higher revenue and favorable business mix as the Company capitalized on the surging stay-at-home driven gaming consumer demand and outpaced the market based on brand strength and product availability.

Net income and Adjusted EBITDA decreased reflecting higher freight and supply chain costs, annualized run-rate increases in operating expenses due to larger size of the business, and growth investments.

Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019

Net income for the year ended December 31, 2019 was $17.9 million compared to a net income of $39.2 million in the prior year, inclusive of a $1.6 million unrealized financial instrument obligation gain and a $5.3 million unrealized financial instrument obligation loss, for the years ended December 31, 2019 and 2018, respectively.

Net income for the year ended December 31, 2020 was $38.7 million compared to a net income of $17.9 million in the prior year, respectively.

For the year ended December 31, 2020, Adjusted EBITDA was $61.4 million compared to $22.8 million, for the year ended December 31, 2019.

Net income and Adjusted EBITDA decreased primarily due to a decline in the gaming accessory market from the battle royale driven record levels in the prior year and, certain initial investments in the recently acquired ROCCAT branded products.

Financial Results

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Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020

Net revenues for year ended December 31, 2020 was $360.1 million, a $125.4 million, or 53.5%, increase from $234.7 million in 2019.

This is due to a surge in gaming activity, including an influx of new gamers, returning gamers, and non-gaming headset use, ignited by state and local stay-at-home orders in place for a significant part of 2020 along with strong execution to rapidly increase supply to meet the increase in demand.

Net revenue for year ended December 31, 2021 was $366.3 million, a $6.3 million, or 1.7%, increase from $360.1 million in 2020 driven by PC accessories growth and the entry into gaming controllers and flight simulation hardware, which offset the weaker console headset demand mostly due to weaker retail traffic, a slower holiday season from disappointing triple A video game releases and console supply constraints.

For the year ended December 31, 2021, gross profit as a percentage of net revenue decreased to 35.0% from 37.2% in the prior year.

The decrease was primarily due to higher freight costs and more normalized holiday promotional activity.

Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019

Net revenue for year ended December 31, 2020 increased $125.4 million, or 53.5% from 2019.

This was due to a surge in gaming activity, including an influx of new gamers, returning gamers, and non-gaming headset use, ignited by state and local stay-at-home orders in place for a significant part of 2020 along with strong execution to rapidly increase supply to meet the increase in demand.

For the year ended December 31, 2020, gross profit as a percentage of net revenue increased to 37.2% from 33.5% in the prior year.

Margins were positively impacted by lower promotional activity, favorable business mix, and volume-driven fixed costs leverage, partially offset by certain air freight to enable retail supply and higher tariff costs.

Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018

Net revenues for year ended December 31, 2019 decreased $52.7 million, or 18.3%, as a result of the decrease in demand from the prior period when battle royale driven consumer demand reached record levels.

While the overall gaming accessory market declined across all channels, the Company held 43.4% of the North American console market revenue share on the strong performance of the Stealth 600 Series, which continued to be the top selling console model, and the recently released Recon 70 Series.

For the year ended December 31, 2019, gross profit as a percentage of net revenue decreased to 33.5% from 37.9% in the prior year.

Margins were impacted by a more normal level of promotions, product mix, increased refurbishment and warehouse costs, and a decline in volume-based fixed cost leveraging.

Operating Expenses

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Selling and marketing expense for the year ended December 31, 2021 totaled $58.9 million, or 16.1% as a percentage of net revenues, compared to $46.8 million, or 13.0% as a percentage of net revenues, for the prior year.

This increase was primarily due to the inclusion of acquired ROCCAT-related headcount, volume-based direct sales related fees and commissions, and increased digital media spend to build ROCCAT brand awareness, partially offset by decreases in marketing event spend, retail marketing initiatives and advertising display depreciation.

This increase was primarily due to marketing initiatives to support product portfolio expansion, expansion of geographies, and entry into new product categories.

Selling and marketing expense for the year ended December 31, 2020 totaled $46.8 million, or 13.0% as a percentage of net revenues, compared to $38.6 million, or 16.5% as a percentage of net revenues, for the year ended December 31, 2019.

This increase was primarily due to incremental costs associated with ROCCAT related headcount and expenses and certain digital and sponsorship initiatives, partially offset by decreases in revenue-based commissions and advertising display depreciation.

Research and Development

For the year ended December 31, 2020, we invested $12.3 million in research and development, an increase from prior years attributable to the expansion of PC accessories development capability and, the Stealth 600 and Stealth 700 Gen 2 wireless gaming headsets for the recently-launched Xbox and PlayStation®5 platforms, investments to increase the company’s software capabilities, and investments to begin work on several new product categories launching in 2021.

For the years ended December 31, 2019 and 2018, we expended $7.9 million and $5.6 million, respectively, reflective of new product initiatives, patent related costs and ROCCAT headcount expenses for 2019, and new headset portfolio expansion to launch the Atlas line of PC gaming headsets for 2018.

For the year ended December 31, 2021, we invested $17.5 million in research and development, an increase from prior years attributable to additional resources and infrastructure to support product expansion including new category introductions:

the VelocityOne Flight™ simulation control system, the Xbox Recon Controller and Neat microphones.

For the years ended December 31, 2020 and 2019, we expended $12.3 million and $7.9 million, respectively.

For the year 2020, this increase was attributable to the expansion of PC accessories development capability and, the Stealth 600 and Stealth 700 Gen 2 wireless gaming headsets for Xbox and PlayStation®5 platforms, investments to increase the company’s software capabilities, and investments to begin work on several new product categories that launched in 2021.

For the year 2019, expenses were reflective of new product initiatives, patent related costs and ROCCAT headcount expenses.

General and Administrative

General and administrative expenses for the year ended December 31, 2021 increased $6.5 million to $31.5 million compared to $25.0 million for the year ended December 31, 2020.

The year-over-year increase was primarily due to the inclusion of acquired ROCCAT-related expenses ($1.5 million), higher variable compensation costs, increased professional and legal services, and certain legal settlements.

The year-over-year increase was primarily due to increased professional fees and the inclusion of acquired NEAT-related headcount, partially offset by lower variable compensation costs.

General and administrative expenses for the year ended December 31, 2020 increased $6.7 million to $25.0 million compared to $18.3 million for the year ended December 31, 2019.

The year-over-year increase was primarily due to the inclusion of acquired ROCCAT-related expenses ($1.9 million) and higher non-cash stock expense, partially offset by lower variable compensation costs.

Interest Expense

Interest expense decreased $0.5 million for the year ended December 31, 2020 compared to the prior year due to reduced revolver usage during the record revenue year, increasing cash-on-hand balances.

Interest expense decreased $4.4 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 due to the full repayment of the subordinated notes and term loans, and the exchange of the Series B redeemable preferred stock, both of which occurred in 2018.

Income tax expense for the year ended December 31, 2021 was $2.4 million at an effective tax rate of 12.1% compared to income tax expense of $13.7 million for the year ended December 31, 2020 at an effective tax rate of 26.1%.

The effective tax rate was primarily impacted by tax benefits attributable to stock option exercises and restricted stock vestings, Research and Development (“R&D”) credits and the reduced tax rate on our Foreign Derived Intangible Income (“FDII”).

These tax benefits were partially offset by the impact of disallowed compensation and state income tax expense.

During 2021, we substantially completed a federal R&D study for the 2018-2020 tax years, recognizing tax benefits of $0.5 million net of reserves.

An estimate of $0.2 million R&D credits, net of reserves, was included for 2021.

In addition, we completed an analysis of our foreign sales and recognized a tax benefit of $1.0 million on our FDII.

Income tax expense for the year ended December 31, 2020 was $13.7 million at an effective tax rate of 26.1% compared to income tax benefit of $6.2 million for the year ended December 31, 2019 at an effective tax rate of (53.3%).

The effective tax rate was primarily impacted by permanent items including state taxes, executive compensation, and reserves for uncertain tax positions.

Income tax benefit for the year ended December 31, 2019 was $6.2 million at an effective tax rate of (53.3%) compared to income tax expense of $ 1.7 million for the year ended December 31, 2018 at an effective tax rate of 4.2 %.

The effective tax rate was primarily impacted by a change in the valuation allowance for deferred tax assets of $10.1 million, which included a $7.4 million benefit related to the release of the valuation allowance in certain jurisdictions.

Other Non-Operating Expense (Income)

Other non-operating income totaled $3.8 million for the year ended December 31, 2020, including a $1.7 million acquisition-related settlement gain and $1.2 million fair value of contingent consideration reversal, compared to other non-operating income of $2.2 million for the year ended December 31, 2019, which included a $1.6 million unrealized gain related to the change in value of a financial instrument obligation.

Other non-operating expense totaled $7.8 million for the year ended December 31, 2018, which included a $5.3 million loss from the change in fair value of a financial instrument, $1.6 million loss on extinguishment related to the prepayment of our Term Loan and Subordinated Notes and the negative exchange impact of the stronger U.S.

dollar on our foreign operations.

Other non-operating income totaled $0.1 million for the year ended December 31, 2021, including a $1.9 million fair value of contingent consideration reversal, compared to other non-operating income of $3.8 million for the year ended December 31, 2020, which included a $1.7 million acquisition-related settlement gain and $1.2 million fair value of contingent consideration reversal.

Other non-operating income totaled $3.8 million for the year ended December 31, 2020, including a $1.7 million acquisition-related settlement gain and $1.2 million fair value of contingent consideration reversal, compared to other non-operating income of $2.2 million for the year ended December 31, 2019, which included $1.6 million unrealized gain related to the change in fair value of a financial instrument obligation.

Liquidity and Capital Resources

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Cash and cash equivalents at beginning of period

Net cash provided by operating activities

Net cash provided by (used for) operating activities

Net cash used for investing activities

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Operating activities

Cash provided by operating activities for the year ended December 31, 2020 was $51.1 million, an increase of $11.7 million as compared to $39.4 million for the year ended December 31, 2019.

Cash used for operating activities for the year ended December 31, 2021 was $0.3 million, a decrease of $51.4 million as compared to cash provided by operating activities totaling $51.0 million for the year ended December 31, 2020.

The decrease is primarily the result of lower operating results increased inventory levels in response to supply chain and logistic headwinds.

Cash provided by operating activities for the year ended December 31, 2020 was $51.0 million, an increase of $11.7 million as compared to cash provided by operating activities of $39.4 million for the year ended December 31, 2019.

This is primarily the result of higher gross receipts, partially offset by increased product purchases, and related air freight costs, to align inventory levels with elevated consumer demand.

Cash provided by operating activities for the year ended December 31, 2019 was $39.4 million, a decrease of $2.9 million as compared to cash used in operating activities of $42.2 million for the year ended December 31, 2018.

This is primarily the result of lower gross receipts, incremental ROCCAT costs, increased sales and marketing-related expenditures, partially offset by a reduction in inventory purchases.

Investing activities

Cash used for investing activities was $5.7 million of capital expenditures primarily related to in-store advertising displays, new product manufacturing tooling and internal system upgrades during the year ended December 31, 2020 compared to $14.6 million in 2019, which included $12.7 million related to the ROCCAT acquisition and $1.9 million of capital expenditures.

Cash used for investing activities was $14.6 million during the year ended December 31, 2019 compared to $5.1 million in 2018, as a result of the $12.7 million related to the ROCCAT acquisition and $1.9 million of capital expenditures, compared to $5.1 million of capital expenditures in the prior year.

Cash used for investing activities was $8.1 million of capital expenditures related to in-store advertising displays and new product manufacturing tooling, as well as $2.5 million related to the Neat Microphones acquisition, during the year ended December 31, 2021 compared to $5.7 million in 2020 of capital expenditures primarily related to in-store advertising displays, new product manufacturing tooling and internal system upgrades.

Cash used for investing activities was $5.7 million during the year ended December 31, 2020 compared to $14.6 million in 2019.

2020 expenditures consisted mainly of in-store advertising displays, new product manufacturing tooling and internal system upgrades, while 2019 expenditures included $12.7 million related to the ROCCAT acquisition and $1.9 million of capital expenditures.

Financing activities

Net cash used for financing activities was $0.1 million during the year ended December 31, 2021 compared to net cash used for financing activities of $7.4 million and net cash used for financing activities of $24.2 million during the years ended December 31, 2020 and 2019, respectively.

Financing activities during the year included net repayments on our revolving credit facility of $15.7 million, offset by $4.3 million received from the sale of equity securities and proceeds from exercise of stock options of $4.2 million.

Financing activities during the year ended December 31, 2021 included stock option exercise proceeds of $5.3 million and repurchases of common stock of $4.9 million.

Financing activities in 2020 included net repayments on our revolving credit facility of $15.7 million, offset by $4.3 million received from the sale of equity securities and proceeds from exercise of stock options of $4.2 million.

Financing activities in 2019 included net repayments on our revolving credit facility of $21.7 million and $2.5 million of common stock repurchases.

Financing activities in 2018 included the repayment of certain subordinated notes of $23.9 million, net term loan repayments of $11.7 million, the exchange of the Series B redeemable preferred stock of $1.4 million and net repayments on our revolving credit facilities of $1.1 million, partially offset by proceeds from exercise of stock options and warrants of $4.2 million.

Management assessment of liquidity

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

Foreign cash balances at December 31, 2020 and December 31, 2019 were both $5.9 million.

Foreign cash balances at December 31, 2021 and December 31, 2020 were $10.2 million and $5.9 million, respectively.

At-the-Market Common Stock Issuance

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

During 2020, the Company sold a total of 237,813 shares of its common stock under the Sales Agreement in the open market at an average gross selling price of $18.39 per share for net proceeds of $4.4 million.

There was no activity under the Sales Agreement during the year ended December 31, 2021.

Revolving Credit Facility

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As of December 31, 2021, the Company was in compliance with all the financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $64.6 million.

In 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates .

LIBOR’s administrator ceased publishing one-week and two-month U.S.

Dollar LIBOR immediately after the LIBOR publication on December 31, 2021, and is scheduled to cease publication of the remaining U.S.

Dollar LIBOR tenors immediately after the publication on June 30, 2023.

The Compan y has been and will continu e to monitor LIBOR-related market, regulatory and accounting developments.

Pursuant to the credit agreement, the Companies may borrow at interest rates determined with reference to a rate published by Bank of America or the LIBOR rate, plus in each case, an applicable margin .

Contractual Obligations

Our principal commitments primarily consist of obligations for minimum payment commitments to lessors for office space and the revolving credit facility.

As of December 31, 2021, the future non-cancelable minimum payments under these commitments were as follows:

Payments Due by Period

(in thousands)

Contractual Obligations:

Operating lease obligations (2)

Contractual obligations exclude tax liabilities of $3.4 million related to uncertain tax positions because we are unable to make a reasonably reliable estimate of the timing of settlement, if any, of these future payments.

Operating lease agreements represent obligations to make payments under non-cancelable lease agreements for its facilities.

On December 17, 2018, the Company entered into an amended Credit Facility that expires on March 5, 2024.

Interest payments are not reflected under the Credit Facility because the amount that will be borrowed in future years is uncertain.

Critical Accounting Estimates

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We are currently evaluating the impact of certain recently issued guidance on our financial condition and results of operations in future periods.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements are transactions, agreements, or other contractual arrangements with an unconsolidated entity for which we have an obligation to the entity that is not recorded in the consolidated financial statements.

As of December 31, 2020, there are no significant off-balance sheet arrangements.

Contractual Obligations

Our principal commitments primarily consist of obligations for minimum payment commitments to lessors for office space and the revolving credit facility.

As of December 31, 2020, the future non-cancelable minimum payments under these commitments were as follows:

Payments Due by Period

(in thousands)

Contractual Obligations:

Operating lease obligations (2)

Contractual obligations exclude tax liabilities of $2.4 million related to uncertain tax positions because we are unable to make a reasonably reliable estimate of the timing of settlement, if any, of these future payments.

Operating lease agreements represent obligations to make payments under non-cancelable lease agreements for its facilities.

On December 17, 2018, the Company entered into an amended Credit Facility that expires on March 5, 2024.

However, due to certain terms of the facility, the indebtedness is required to be classified as a current liability.

Interest payments are not reflected under the Credit Facility because the amount that will be borrowed in future years is uncertain.

- Qualitative and Quantitative Disclosures about Market Risk

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Inflation Risk

The Company is exposed to market risk due to the possibility of inflation, such as increases in the cost of its products.

Although the Company does not believe that inflation has had a material impact on its financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on the Company’s ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenue if the selling prices of products do not increase with these increased costs.

The Company is exposed to market risk due to inflationary pressures, including higher labor-related costs and increases in the costs of the goods and services we purchase as part of the manufacture and distribution of our products, increased costs from supply chain and logistic headwinds and in our operations generally.

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

A high rate of inflation in the future may have an adverse effect on the Company’s ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenue if the selling prices of products do not increase with these increased costs.

- Financial Statemen ts and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (BDO USA, LLP New York, New York, PCAOB # 243 )

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 2020 and 2019

Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Balance Sheets as of December 2021 and 2020

Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 2, 2022, expressed an unqualified opinion thereon.

Change in Accounting Principle Related to Leases

As discussed in Note 14 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019, due to the adoption of Accounting Standards Codification Topic 842, Leases.

Basis for Opinion

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Turtle Beach Corporation

Consolidated Statements of Operations

Year ended December 31,

(in thousands, except per-share data)

Cost of revenue

Operating expenses:

Selling and marketing

Research and development

General and administrative

Total operating expenses

Operating income

Interest expense

Other non-operating expense (income), net

Income before income tax

Income tax expense (benefit)

Net income per share:

Weighted average number of shares:

See accompanying Notes to the Consolidated Financial Statements

Turtle Beach Corporation

Consolidated Statements of Comprehensive Income (Loss)

Year ended December 31,

(in thousands)

Other comprehensive income (loss):

Foreign currency translation adjustment

Other comprehensive income (loss)

Comprehensive income (loss)

See accompanying Notes to the Consolidated Financial Statements

Turtle Beach Corporation

Consolidated Balance Sheets

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Total Current Liabilities

Deferred income taxes

Income tax payable

Other liabilities

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Turtle Beach Corporation

Consolidated Statements of Operations

Year ended December 31,

(in thousands, except per-share data)

Cost of revenue

Operating expenses:

Selling and marketing

Research and development

General and administrative

Total operating expenses

Operating income

Interest expense

Other non-operating expense (income), net

Income before income tax

Income tax expense (benefit)

Net income per share

Weighted average number of shares:

See accompanying Notes to the Consolidated Financial Statements

Turtle Beach Corporation

Consolidated Statements of Comprehensive Income (Loss)

Year ended December 31,

(in thousands)

Other comprehensive income (loss):

Foreign currency translation adjustment

Other comprehensive income (loss)

Comprehensive income (loss)

See accompanying Notes to the Consolidated Financial Statements

Turtle Beach Corporation

Consolidated Statements of Cash Flows

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CASH FLOWS FROM OPERATING ACTIVITIES

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

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Stock-based compensation

Accrued interest on Series B redeemable preferred stock

Paid-in-kind interest

Deferred income taxes

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Decrease in fair value of contingent consideration

Loss on debt extinguishment

Changes in operating assets and liabilities, net of acquisitions:

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Other liabilities

Net cash provided by operating activities

Net cash provided by (used for) operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

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Repayment of revolving credit facilities

Proceeds of term loan

Proceeds from sale of equity securities

Repayment of term loan

Repayment of subordinated notes - related party

Settlement of Series B redeemable preferred stock

Proceeds from exercise of stock options and warrants

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Repurchase of common stock to satisfy employee tax withholding obligations

Debt financing costs

Cash portion of loss on debt extinguishment

Net cash used for financing activities

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Reclassification of financial instrument obligation

Exchange of Series B redeemable preferred stock

See accompanying Notes to the Consolidated Financial Statements

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Balance at December 31, 2018

Cumulative effect of the adoption of ASC 606

Other comprehensive loss

Issuance of common stock in exchange for Series B redeemable preferred stock, net of issuance costs

Other comprehensive income, net of tax

Reclassification of financial instrument obligation

Issuance of restricted stock

Repurchase of common stock and retirement of related treasury shares

Common stock buyback

Issuance of common stock upon exercise of warrants

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Other comprehensive income, net of tax

Reclassification of financial instrument obligation

Issuance of restricted stock

Repurchase of common stock and retirement of related treasury shares

Common stock buyback

Issuance of common stock upon exercise of warrants

Proceeds of sales of equity securities

Stock options exercised

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Balance at December 31, 2020

Other comprehensive income, net of tax

Other comprehensive loss, net of tax

Issuance of restricted stock

Settlement of deferred Stock

Repurchase of common stock and retirement of related treasury shares

Proceeds of sales of equity securities

Common stock buyback

Stock options exercised

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Summary of Significant Accounting Policies

Turtle Beach Corporation (“Turtle Beach” or the “Company”), headquartered in White Plains, New York and incorporated in the state of Nevada in 2010, is a premier audio and gaming technology company with expertise and experience in developing, commercializing and marketing innovative products across a range of large addressable markets under the Turtle Beach® and ROCCAT® brands.

Turtle Beach Corporation (“Turtle Beach” or the “Company”), headquartered in White Plains, New York and incorporated in the state of Nevada in 2010, is a premier audio and gaming technology company with expertise and experience in developing, commercializing, and marketing innovative products across a range of large addressable markets under the Turtle Beach®, ROCCAT® and Neat Microphone® brands.

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All intercompany accounts and transactions have been eliminated in consolidation.

Reverse Split

On April 6, 2018, the Company effected a one-for- four reverse stock split of its common stock pursuant to which every four shares of common stock outstanding immediately prior to the reverse split were combined into one share of common stock.

As a result of the reverse split, all outstanding share amounts and computations using such amounts in the Company’s financial statements and notes thereto have been retroactively adjusted to reflect the reverse stock split.

Uses of Estimates

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As future events and their effects cannot be determined with precision, actual results could differ from these estimates, and those differences could be material to the consolidated financial statements.

The novel coronavirus (“COVID-19”) pandemic has disrupted worldwide economic markets and the extent to which COVID-19 continues to affect the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict.

The novel coronavirus (“COVID-19”) pandemic, and its variant strains, has disrupted worldwide economic markets and the extent to which COVID-19 continues to affect the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict.

During 2020, the Company experienced a significant increase in demand for its products due to the COVID-19-related stay-at-home orders, which resulted in increased revenue.

Going forward, the effects of the global pandemic and the measures being taken in response are uncertain and difficult to predict.

Nonetheless, the Company continues to actively monitor and assess the impact of the pandemic on its business, operations, and financial condition.

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Each contract at inception is evaluated to determine whether the contract should be accounted for as having one or more performance obligations.

The Company's business activities were determined to be a single performance obligation with revenue recognized when

obligations under the terms of a contract with its customer are satisfied;

The Company's business activities were determined to be a single performance obligation with revenue recognized when obligations under the terms of a contract with its customer are satisfied;

generally, this occurs at a point in time when the risk and title to the product transfers to the customer.

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Deferred Financing Costs

Deferred financing costs represent costs incurred in conjunction with our debt financing activities and are capitalized and amortized over the life of the related financing arrangements.

Deferred financing costs represent costs incurred in conjunction with the Company’s debt financing activities and are capitalized and amortized over the life of the related financing arrangements.

If the debt is retired early, the related unamortized deferred financing costs are written off in the period the debt is retired as part of the net carrying value of the debt, and any gains or losses are recorded in the statement of operations under the caption “Other non-operating expense (income), net.”

Stock-Based Compensation

Compensation costs related to stock options and restricted stock grants are calculated based on the fair value of the stock-based awards on the date of grant, net of estimated forfeitures.

Compensation costs related to stock options, restricted stock grants and performance-based restricted share units are calculated based on the fair value of the stock-based awards on the date of grant, net of estimated forfeitures.

The grant date fair value of awards is determined using the Black-Scholes option-pricing model and the related stock-based compensation is recognized on a straight-line basis over the period in which an employee is required to provide service in exchange for the award, which is generally four years .

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Demonstration units and convention booths

Demonstration headsets

Valuation of Long-Lived and Intangible Assets and Goodwill

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Accounts receivable are unsecured and represent amounts due based on contractual obligations of customers.

The Company’s three largest individual customers accounted for approximately 47 % of its gross sales in the aggregate for the year ended December 31, 2020, or individually 11 %, 23 % and 13 %, compared to 11 %, 20 % and 9 % in 2019 and 9 %, 19 % and 11 % in 2018.

In addition, these three customers accounted for 1 %, 34 % and 10 % of accounts receivable as of December 31, 2020 and 33 %, 29 % and 9 % as of December 31, 2019.

Our five largest individual customers accounted for approximately 66 % of our gross sales in 2021, 67 % of our gross sales in 2020, and 66 % of our gross sales in 2019.

During 2021, our three largest customers - Walmart, Target, and Amazon - each accounted for between 10 % to 23 % of our consolidated net sales.

Additionally, as of December 31, 2021, the Company had four customers with open receivables greater than 10% of the total receivable balance.

Concentrations of credit risk with respect to accounts receivable are mitigated by performing ongoing credit evaluations of customers to assess the probability of collection based on a number of factors, including past transaction experience with the customer, evaluation of their credit history, limiting the credit extended, and review of the invoicing terms of the contract.

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Upon adoption of the new standard as it relates to the Company's accounting for real estate operating leases, assets and liabilities increased by approximately $ 3.3 million.

In June 2016, the Financial Accounting Standards Board issued ASU No.

In June 2016, the FASB issued ASU No.

2016-13, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," amending the accounting for the impairment of financial instruments, including trade receivables.

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The adoption of this guidance did not have a material impact on our financial condition and results of operations.

In January 2017, the FASB issued ASU No.

2017-04 , Intangibles-Goodwill and Other:

Simplifying the Test for Goodwill Impairment , which simplifies how an entity is required to test goodwill for impairment.

A goodwill impairment will be measured by the amount by which a

reporting unit’s carrying value exceeds its fair value, with the amount of impairment not to exceed the carrying amount of goodwill.

ASU 2017-04 is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, and must be adopted on a prospective basis.

The Company adopted ASU No.

2017-04 prospectively on January 1, 2020 , which did no t have a material impact on the consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Improvements to Non-employee Share-Based Payment Accounting , that expands the scope of Topic 718, Compensation—Stock Compensation , to include share-based payments issued to non-employees for goods or services and substantially aligned the accounting for share-based payments to non-employees and employees.

The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

The adoption of ASU No.

2018-07 did not have a material impact on the financial statements.

In December 2019, the FASB issued ASU No.

2019-12, Simplifying the Accounting for Income Taxes, which amends ASC Topic 740 by removing certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

It also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

The pronouncement is effective for fiscal years beginning after December 15, 2020, or for any interim periods within those fiscal years, with early adoption permitted.

The Company adopted ASU 2019-12 on January 1, 2020, which did not have a material impact on the consolidated financial statements.

In March 2020, the FASB issued ASU No.

2020-04, “Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04).” In 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop

persuading or compelling banks to submit the London Interbank Offered Rate ( “ LIBOR ” ), a benchmark interest rate referenced in a variety of agreements, after 2021.

In March 2021, the United Kingdom's Financial Conduct Authority confirmed that U.S.

Dollar LIBOR will no longer be published after December 31, 2021, for one-week and two-month U.S.

Dollar LIBOR tenors, and after June 30, 2023, for all other U.S.

Dollar LIBOR tenors.

ASU 2020-04 provides entities with optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

In January 2021, the FASB issued amendments to the guidance through ASU 2021-01 to include all contract modifications and hedging relationships affected by reference rate reform, including those that do not directly reference LIBOR, or another reference rate expected to be discontinued, and clarify which optional expedients may be applied to them.

The guidance can be applied prospectively.

The optional relief is temporary and generally cannot be applied to contract modifications and hedging relationships entered into or evaluated after December 31, 2022.

The Compan y does not expect the new guidance to have a material impact on their financial position, results of operations or liquidity.

Neat Microphones

On January 12, 2021, the Company acquired certain assets related to the Neat Microphones business of Stray Electrons LLC, a California limited liability company.

On January 12, 2021, the Company acquired certain assets related to the Neat Microphones business (“Neat Microphones”) of Stray Electrons LLC, a California limited liability company for a purchase price of $ 2.5 million and up to $ 2.3 million in potential earn-outs based on revenues and earnings targets for the year ended December 31, 2021, as provided in the asset purchase agreement.

The closing payment was funded from cash on the Company’s balance sheet.

Neat creates, manufactures, and sells high-quality digital USB and analog microphones that embrace cutting-edge technology and design.

In addition, business transaction costs incurred in connection with the acquisition of $ 0.3 million for the year ended December 31, 2021, were recorded as a component of “General and administrative” expenses in the Company’s Condensed Consolidated Statements of Operations.

Neat Microphones creates, manufactures, and sells high-quality digital USB and analog microphones that embrace cutting-edge technology and design.

The goodwill from the acquisition of Neat Microphones, which is fully deductible for tax purposes, consists largely of synergies and economies of scale expected from adding the operations of Neat Microphones’ and the Company’s existing business and supply channels.

The fair value of Neat Microphone’s identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method.

Some of the more significant assumptions inherent in the development of intangible asset values include:

the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, the assessment of the intangible asset’s life cycle, as well as other factors.

The following table summarizes key information underlying intangible assets related to the Neat Microphones acquisition:

(In thousands)

Customer relationships

Developed technology

No payment will be made under the contingent earn-out provisions of the asset purchase agreement as certain revenue targets were not achieved, and as such, th e $ 1.9 million fair value of contingent consideration recorded related to the potential $ 2.3 million in earn-outs has been fully released as of December 31, 2021.

On May 31, 2019, the Company completed its acquisition of the business and assets of ROCCAT, a provider of gaming keyboards, mice and other accessories for a purchase price of approximately $ 12.7 million and up to $ 3.4 million in potential earn-outs based on revenues for the years ended December 31, 2019 and 2020, as provided in the asset purchase agreement.

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Total consideration

The fair values of ROCCAT’s assets and liabilities was determined based on estimates and assumptions that management believes are

The fair values of ROCCAT’s assets and liabilities were determined based on estimates and assumptions that management believes are

These adjustments primarily relate to certain short-term assets, intangible assets, and certain liabilities including contingent

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The Company has not presented combined pro forma financial information of the Company and the pre-acquisition ROCCAT business because the results of operations of the acquired business are considered immaterial.

No payment will be made under the contingent earn-out provisions of the acquisition agreement as certain revenue targets were not achieved, and as such, th e $ 1.1 million fair value recorded related to the potential $ 3.4 million earn-outs has been fully released.

No payment will be made under the contingent earn-out provisions of the asset purchase agreement as certain revenue targets were not achieved, and as such, th e $ 1.1 million fair value recorded related to the potential $ 3.4 million earn-outs has been fully released as of December 31, 2020.

Fair Value Measurement

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Cash and cash equivalents

Revolving credit facility

Contingent consideration liabilities

Cash equivalents are stated at amortized cost, which approximates fair value as of the consolidated balance sheet dates, due to the short period of time to maturity;

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The carrying value of the Credit Facility equals fair value as the stated interest rate approximates market rates currently available to the Company, which is considered a Level 2 input.

The Company values contingent consideration related to business combinations using a weighted probability calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows.

Allowance for Sales Returns

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(in thousands)

Accrued tax-related payables

Accrued employee expenses

Accrued royalty

Accrued marketing

Accrued freight

Accrued employee expenses

Accrued marketing

Accrued tax-related payables

Accrued expenses

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Unrealized loss (gain) on financial instrument obligation

Loss on debt extinguishment

Other non-operating expense (income)

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The acquired intangible assets relating to developed technology, customer relationships, and trade name are subject to amortization.

Refer to Note 2, “Acquisitions” for additional information related to ROCCAT’s identifiable intangible assets.

In January 2021, the Company completed its acquisition of the business and assets relating to the Neat Microphones business.

The acquired intangible assets relating to developed technology, customer relationships, and trade name are subject to amortization.

Refer to Note 2, “Acquisitions” for additional information related to ROCCAT’s and Neat Microphone’s identifiable intangible assets.

Amortization expense related to definite lived intangible assets was $ 1.3 million, $ 0.9 million and $ 0.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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(in thousands)

All goodwill is attributable to the gaming accessories reporting unit.

Changes in the carrying values of goodwill for twelve months ended December 31, 2021 are as follows:

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Balance as of January 1, 2021

ROCCAT acquisition opening balance adjustment

NEAT Microphones acquisition

Balance as of December 31, 2021

Credit Facilities and Long-Term Debt

(in thousands)

Revolving credit facility, maturing March 2024

The Company had no outstanding balance related to its revolving credit facility as of December 31, 2021 and December 31, 2020.

Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was $ 0.4 million, $ 0.5 million and $ 0.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Amortization of deferred financing costs was $ 0.2 million, $ 0.2 million and $ 1.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Amortization of deferred financing costs was $ 0.2 million for each of the years ended December 31, 2021, 2020 and 2019, respectively.

In connection with the Company’s amendment and restatement of its Credit Facility (as noted below), the Company incurred $ 0.6 million of financing costs that have been deferred, added to the then remaining unamortized financing costs and will be recognized over the term of the respective agreement.

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Foreign Operations

Income (loss) before income taxes

Income before income taxes

Federal statutory rate

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Change in valuation allowance

Interest on Series B redeemable preferred stock

Unrealized loss (gain) on financial instrument obligation

Excess tax benefit recognized

Foreign Derived Intangible Income (a)

Foreign tax credit

R&D Credit (b)

Global intangible low taxed income

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Change in unrecognized tax benefits

Nondeductible compensation

Section 162(m)

Provision (benefit) for income taxes

The Company completed an analysis of its export sales during 2021.

The FDII benefit is for the 2020 and 2021 tax years.

The Company completed a Research and Development credit study during 2021.

The R&D credit benefit is for the 2018 through 2021 tax years.

The tax effects of significant items comprising the Company’s deferred tax assets (liabilities) are as follows:

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Unrecognized tax benefits

Right of Use Liability

Right of Use Asset

Depreciation and amortization

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Based on the Section 382 limitation, the Company was not able to utilize its net operating losses to fully offset its taxable income in 2018.

Based on the Section 382 limitation, the pre-ownership change net operating losses are fully utilized through 2020 due to sufficient taxable income in 2019 and 2020.

The Company believes, based on the estimated Section 382 limitation and the net operating loss carryforward period, that the pre ownership change net operating losses can be fully utilized in future years if there is sufficient taxable income in such carryforward period.

The realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible.

During 2015, as a result of cumulative losses in recent years primarily due to incremental costs associated with the console transition, acquisition costs and initial investments in the HyperSound business, the Company concluded that a full valuation allowance was required on its net domestic deferred tax assets.

During the fourth quarter of 2019, the Company concluded that it was more likely than not that the deferred tax assets would be realized.

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The Company recognizes only those tax positions that meet the more-likely-than-not recognition threshold, and establishes tax reserves for uncertain tax positions that do not meet this threshold.

The Company has settled uncertain tax positions in certain jurisdictions, which resulted in a decrease in amounts based on tax positions in prior periods of approximately $ 36 thousand and $ 0.7 million for the years ended December 31, 2020 and 2019, respectively.

The Company settled uncertain tax positions in certain jurisdictions, of approximately $ 36 thousand for year ended December 31, 2020;

no ne were settled for the year ended December 31, 2021.

To the extent these unrecognized tax benefits are ultimately recognized, approximately $ 3.4 million will impact the Company’s effective tax rate in future periods.

The Company is currently in discussions with certain additional jurisdictions regarding uncertain tax positions and based on those discussions estimates that the amounts based on tax positions in prior periods will potentially decrease by $ 0.6 million within the next twelve months.

The Company is considering filing for relief provisions in certain jurisdictions and based on such anticipated filings, it is reasonably possible that amounts of unrecognized tax benefits could decrease by $ 2.3 million within the next twelve months.

Interest and penalties associated with income tax matters are included in the provision for income taxes.

As of December 31, 2021, the Company had uncertain tax positions of $ 3.8 million, inclusive of $ 1.1 million of interest and penalties.

We are currently under examination by certain state and local taxing jurisdictions.

The Company is not currently under examination by certain state and local taxing jurisdictions.

Further, at any given time, multiple tax years may be subject to examination by various taxing authorities.

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State and Local

Preferred Stock

Series B Redeemable Preferred Stock

In September 2010, VTBH issued 1,000,000 shares of non-voting Series B Redeemable Preferred Stock (“Series B Preferred Stock”) with a fair value of $ 12.4 million.

The Series B Preferred Stock was required to be redeemed on the earlier of September 28, 2030, or the occurrence of a liquidation event at its original issue price of $ 12.425371 per share plus any accrued but unpaid dividends.

Dividends were cumulative and accrued at a rate of 8.0 % per annum, compounded quarterly, and payable as and when declared by the Board of Directors.

The Series B Preferred Stock did not contain any conversion rights.

On February 18, 2015, Dr.

John Bonanno (“Dr.

Bonanno”), the original holder of the Series B Preferred Stock, filed a complaint in Delaware Chancery Court alleging breach of contract.

According to the complaint, the merger between VTBH and Turtle Beach purportedly triggered a contractual obligation for VTBH to redeem Dr.

Bonanno’s stock.

Bonanno requested a declaratory judgment stating that he was entitled to damages, including a redemption of his stock valued at $ 15.1 million (equal to the original issue price of his stock plus accrued dividends) as well as other costs and expenses.

On April 23, 2018, the Company facilitated and entered into a series of transactions pursuant to which the Series B Preferred Stock was acquired from Dr.

Bonanno by non-affiliate investors and subsequently retired.

As part of the transactions, the Company entered into (i) an Exchange Agreement (the “Exchange Agreement”) with such non-affiliate investors pursuant to which the Company agreed to exchange the Series B Preferred Stock for an aggregate of 1,307,143 newly issued shares of the Company’s common stock and wholly-funded warrants exercisable for an aggregate of 550,000 shares of the Company’s common stock and (ii) a Settlement Agreement (the “Settlement Agreement”) with Dr.

Pursuant to the Settlement Agreement, Dr.

Bonanno agreed to discontinue certain previously disclosed claims and actions against the Company related to the Series B Preferred Stock, as well as to provide a release of the Company with respect to all such claims and any other claims related to Dr.

Bonanno’s ownership or disposition of the Series B Preferred Stock.

In connection with and as consideration thereof, the Company agreed to pay Dr.

Bonanno a cash sum of $ 1.0 million to settle nonredemption claims in connection with the matter, and to pay an additional $ 1.25 million if a change of control transaction meeting certain specified requirements is consummated within three years of the date of the Settlement Agreement.

Accordingly, on April 26, 2018, all exchanged shares of Series B Preferred Stock were retired, and no shares of Series B Preferred Stock remain outstanding.

The redemption value of the Series B Preferred Stock was $ 19.4 million as of the transaction date, and $ 18.9 million as of December 31, 2017.

The Company assessed the relative fair values of the Series B Preferred Stock retired pursuant to the Exchange Agreement and Settlement Agreement to determine the amount of the total transaction consideration transferred that was allocable to each component.

The Company determined the fair value of the Series B Preferred Stock to be greater than the total consideration transferred.

In addition, the Company was not able to reliably estimate the fair value of the litigation settlement.

Based on these fair value assessments, the Company utilized the residual approach and first allocated proceeds to the Series B Preferred Stock, which resulted in no amount of the consideration being allocated to the litigation settlement.

Accordingly, the entire transaction was accounted for as an equity transaction with the difference between the carrying value of the Series B Preferred Stock and the fair value of the consideration transferred included in stockholders’ equity.

Under the initial terms of the warrants, the holders had the right to receive, at their option, a cash payment for the remaining unexercised portion of the warrants upon the Company consummating a Fundamental Transaction (as defined in the warrant agreement, and including any merger, consolidation, sale or other reorganization event in which its common stock is converted into or exchanged for securities, cash or other property).

If so elected by the warrant holders, the cash payment would have been based on a Black-Scholes pricing model and would have been made upon the consummation of a Fundamental Transaction or during the ensuing 30-day period thereafter.

As a result of these terms regarding the possible future cash payment, the Company accounted for the warrants issued in connection with the retirement of the Series B Preferred Stock as a financial instrument obligation that is marked to market each period, with subsequent changes in fair value reported in earnings.

The fair value of the warrants upon issuance and at December 31, 2018, was $ 2.6 million and $ 7.8 million, respectively.

On March 20, 2019, the Company amended the terms of the warrant agreement so that the value of the warrant no longer have to be adjusted to fair value.

Stock-Based Compensation for further discussion.

For the year ended December 31, 2020, the company recognized no gain or loss related to warrants.

For the years ended December 31, 2019 and December 31, 2018, respectively, the company recognized an unrealized gain of $ 1.6 million and unrealized loss of $ 5.3 million on the warrants that is included in “Other non-operating expense (income), net” in the Consolidated Statement of Operations.

For the years ended December 31, 2020 and 2019, the Company recognized no interest expense on the Series B Preferred Stock.

For the year ended December 31, 2018, the Company recognized $ 0.5 million.

There were no dividends declared during the years ended December 31, 2020, 2019 and 2018.

Registration Rights Agreement

In connection with the Exchange Agreement, the Company entered into an agreement (the “Registration Rights Agreement”) with certain non-affiliate investors pursuant to which, among other things, the Company agreed to file a registration statement to register for resale the shares of common stock (i) issued and outstanding as a result of the consummation of the transactions contemplated by the Exchange Agreement and (ii) issuable upon the exercise of the wholly-funded warrants.

The Company is required to cause the registration statement to be declared effective as soon as practicable, but in no event later than 90 days after the closing of the transactions contemplated by the Exchange Agreement, which occurred on April 26, 2018.

The Company also agreed, among other things, to indemnify the investors under the registration statement from certain liabilities and to pay all fees and expenses incident to the Company’s performance of or compliance with the Registration Rights Agreement.

Net Income (Loss) Per Share

Net Income Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share of common stock attributable to common stockholders:

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Any repurchases under the program will be made from time to time on the open market at prevailing market prices.

On April 1, 2021, the Company’s Board of Directors approved an extension and expansion of this repurchase program to acquire up to $ 25 million of its common shares, expiring April 9, 2023 .

As of December 31, 2021 , the Company has repurchased 0.5 million shares of its common stock for a total cost of $ 7.4 million .

Stock-Based Compensation

On October 30, 2013, the Board of Directors adopted, and on December 27, 2013, the stockholders approved, the 2013 Stock-Based Incentive Compensation Plan (the “2013 Plan”), that became effective upon consummation of the Merger on January 15, 2014 and was subsequently amended at our 2019 Annual Meeting.

Our stock-based compensation program is a broad-based program designed to attract and retain employees while also aligning employees’ interests with the interests of our shareholders.

In addition, members of our Board of Directors participate in our stock-based compensation program in connection with their service on our board.

The Compa n y’s stock-based compensation program is a broad-based program designed to attract and retain employees while also aligning employees’ interests with the interests of our shareholders.

In addition, members of the Board of Directors participate in the stock-based compensation program in connection with their service on the board.

Stock option awards outstanding under the 2013 Plan are time-based and granted at exercise prices which are equal to the market value of the Company’s common stock on the grant date and expire no later than ten years from the date of grant, but only to the extent they have vested.

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Balance at December 31, 2020

Plan Amendment

Options granted

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Restricted stock granted

Restricted forfeited

Forfeited/ Expired restricted stock added back

Performance-Based restricted stock granted

Balance at December 31, 2021

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As of December 31, 2021 total unrecognized compensation cost related to the nonvested restricted stock awards granted was $ 10.4 million, which is expected to be recognized over a remaining weighted average vesting period of 2.4 years.

Stock Warrants

In connection with certain subordinated notes, the Company issued warrants to purchase an aggregate 0.4 million shares and 0.3 million shares of the Company’s common stock at an exercise price of $ 10.16 and $ 8.00 per share, respectively, to SG VTB Holdings, LLC, all of which were settled through cashless exercises during the year ended December 31, 2019.

In connection with the retirement of the Series B Preferred Stock in April 2018, the Company issued wholly-funded warrants exercisable for an aggregate of 0.5 million shares of its common stock.

Under the terms of the warrants, the holders had the right to receive, at their option, a cash payment for the remaining unexercised portion of the warrants upon the Company consummating a Fundamental Transaction (as defined in the warrant agreement, and including any merger, consolidation, sale or other reorganization event in which its common stock is converted into or exchanged for securities, cash or other property).

If so elected by the warrant holders, the cash payment will be based on a Black-Scholes pricing model and will be made upon the consummation of a Fundamental Transaction or during the ensuing 30-day period thereafter.

On March 30, 2019, the Company and the warrant holders entered into an amendment to the warrant agreement that revises the terms under which warrant holders may exercise their rights under a Fundamental Transaction.

As a result of this amendment, the warrants are no longer accounted for as a financial instrument obligation and reported as a liability that is marked to market each period with changes in fair value reported in earnings.

The warrants were marked to market through March 30, 2019, the execution date of the amendment, at which time the warrants are accounted for as an equity instrument.

The fair value on that date of $ 6.2 million was reclassified to additional paid-in-capital.

For the years ended December 31, 2020 and 2019, the Company recognized no gain or loss and an unrealized gain of $ 1.6 million , respectively, on the warrants that is included in “Other non-operating expense (income), net” in the Condensed Consolidated Statement of Operations.

Performance-Based Restricted Share Units

As of December 31, 2021, the Company had 134,000 performance-based restricted share units outstanding.

The vesting of performance-based restricted share units is determined over a three-year period based on (i) the amount by which revenue growth exceeds a defined baseline market growth each year and (ii) the achievement of specified tiers of adjusted EBITDA as a percentage of net revenue each year, with the ability to earn and vest into such units ranging from 0 % to 200 %.

Included in our share-based compensation was expense recognized for our performance-based restricted share unit awards of $ 1.0 million in 2021.

Phantom Equity Activity

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During the year ended December 31, 2020, the Company sold a total of 237,813 shares of its common stock under the Sales Agreement in the open market at an average gross selling price of $ 18.39 per share for net proceeds of $ 4.4 million.

During the year ended December 31, 2021, the Company had no sales of its common stock under the Sales Agreement.

Segment Information

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Shareholders Class Action :

On August 5, 2013, VTBH and the Company (f/k/a Parametric Sound Corporation) announced that they had entered into the Merger Agreement pursuant to which VTBH would acquire approximately 80 % ownership interest and existing shareholders would maintain approximately 20 % ownership interest in the combined company.

On August 5, 2013, VTBH and the Company (f/k/a Parametric Sound Corporation) announced that they had entered into the Merger Agreement pursuant to which VTBH would acquire an approximately 80 % ownership interest and existing shareholders would maintain an approximately 20 % ownership interest in the combined company (the “Merger”).

Following the announcement, several shareholders filed class action lawsuits in California and Nevada seeking to enjoin the Merger.

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On January 18, 2019, the district court certified a class of shareholders of the Company as of January 15, 2014.

On October 11, 2019, the parties notified the district court that they had reached a settlement that would resolve the pending action if ultimately approved

by the Court.

On October 11, 2019, the parties notified the district court that they had reached a settlement that would resolve the pending action if ultimately approved by the Court.

On January 13, 2020, the district court preliminarily approved the settlement between the plaintiffs and all defendants.

A final approval hearing was held on May 18, 2020, wherein the Court approved the settlement and entered final judgment.

On May 22, 2020, PAMTP LLC, which purports to hold the claims of eight shareholders who opted out of the class settlement described above, brought suit against the Company, the Company’s CEO, Juergen Stark, Stripes Group, LLC, SG VTB Holdings, LLC, Kenneth Fox, and members of the Company’s Board of Directors prior to the merger in Nevada state court.

A final hearing was held on May 18, 2020, wherein the Court approved the settlement and entered final judgment.

On May 22, 2020, PAMTP LLC, which purports to hold the claims of eight shareholders who opted out of the class settlement described above, brought suit against the Company, the Company’s CEO, Juergen Stark, Stripes Group, LLC, SG VTB Holdings, LLC, Kenneth Fox, and former members of the Company’s Board of Directors in Nevada state court.

This opt-out action asserts the same direct claims that were asserted by the class of shareholders described above.

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The Court denied those motions by order of August 20, 2020.

Discovery is ongoing and the case is scheduled for trial in August 2021.

The case was tried in August 2021 and all defendants, including the Company, prevailed on all counts with final judgment entered in their favor on September 3, 2021.

Plaintiff has filed a notice of their intent to appeal the judgment.

Defendants have pending motions to obtain their costs and fees in successfully defending against the claims, which were heard in December 2021.

Commercial Dispute :

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The Company filed a cross-complaint against the former employee on May 25, 2017 for certain activities related to his employment with the Company.

Discovery is closed and the case was set for trial on April 6, 2020 in San Diego County Superior Court.

Due to the continued closure of the Court, the April 6, 2020 trial date was vacated and the current trial date is July 9, 2021.

The matter was tried between September 24 and October 7, 2021.

On October 8, 2021, a jury rendered a unanimous verdict in favor of the Company on the employment claims.

The Court granted a directed verdict to the Company on its Cross Complaint against the former employee.

Judgment was entered in favor of the Company on October 27, 2021.

On December 20, 2021, the former employee filed a notice of appeal of the judgment.

Settlement of Disputes :

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Intellectual Property dispute:

On November 24, 2020, ABP Technology Limited (ABP) issued a claim for trade mark infringement in the High Court of England and Wales against Voyetra Turtle Beach, Inc.

On November 24, 2020, ABP Technology Limited (ABP) issued a claim for trademark infringement in the High Court of England and Wales against Voyetra Turtle Beach, Inc.

(“VTB”) and Turtle Beach Europe Limited (“TBEU”) relating to the use by VTB and TBEU of the sign STEALTH on and in relation to gaming headsets in the UK.

VTB and TBEU filed and served a Defence to the claim on February 2, 2021.

The next stage in the proceedings will be a Case Management Conference (date to be set) at which the Court will give directions for each stage to trial.

The trial is expected to be set for mid-2022.

VTB and TBEU filed and served a Defense to the claim on February 2, 2021.

On March 31, 2021, ABP filed an application for summary judgement.

The summary judgment application was heard by the Court in November 2021 and was dismissed.

VTB and TBEU were granted permission by the Court to amend their Defense to include a counterclaim against ABP for trademark infringement.

In January 2022, ABP was granted leave to appeal to the Court of Appeal in respect of the decision to allow VTB and TBEU to amend their Defense.

The appeal is due to be heard before April 13, 2022.

The next stage in the main proceedings will be a Case Management Conference (date to be set) at which the Court will give directions for each stage to trial.

The trial is expected to be set for late 2022/early 2023.

The Company will continue to vigorously defend itself in the foregoing matters.

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The Company determines whether an arrangement is a lease at inception.

The Company leases office spaces that provide for future minimum rental lease payments under non-cancelable operating leases that have remaining lease terms of one year to nine year s, and do not contain any material residual value guarantees or material restrictive covenants.

The Company leases office spaces that provide for future minimum rental lease payments under non-cancelable operating leases that have remaining lease terms of one year to nine years , and do not contain any material residual value guarantees or material restrictive covenants.

The components of the right-of-use assets and lease liabilities were as follows:

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Lease liability obligations, current

Other current liabilities

Lease liability obligations, noncurrent

Other liabilities

Total lease liability obligations

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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 7. Management’s Discussion and Analysis