TURTLE BEACH CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes. This analysis summarizes the significant factors affecting our results of operations and the financial condition of our business in each of the fiscal years of 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®, ROCCAT® and
Neat Microphone® brands.

Turtle Beach is a global leader in feature-rich headset solutions for

use on multiple platforms, including video games and entertainment

consoles, handheld consoles, personal computers (“PCs”), tablets and mobiles

devices.

• ROCCAT is a brand of gaming headsets, keyboards, mice and other accessories

focused on the personal computer peripheral market.

• Neat Microphones is an innovative brand of USB and

        analog microphones


Business Trends

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 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 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 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.

Game simulation controllers and 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.

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Seasonality

Our gaming accessories business is seasonal with a significant portion of sales
and profits typically occurring around the holiday period. Historically, more
than 45% of revenues are generated during the period from September through
December as new products are introduced and consumers engage in holiday
shopping. 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

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 logistics 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

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 advance our best-selling gaming audio business with new headsets like the Recon 200 Gen 2, but we’ve also entered the $2.3 billion global microphone market with the acquisition of Neat Microphones, and we entered two major new categories: game 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.

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Key Performance Indicators and Non-GAAP Measures

Management routinely reviews key performance indicators including revenue,
operating income and margins, and earnings per share, among others. In addition,
we believe certain other measures provide useful information to management and
investors about us and our financial condition and results of operations for the
following reasons: (i) they are measures used by our Board of Directors and
management team to evaluate our operating performance; (ii) they are measures
used by our management team to make day-to-day operating decisions; (iii) the
adjustments made are often viewed as either non-recurring or not reflective of
ongoing financial performance and/or have no cash impact on operations; and (iv)
the metrics are used by securities analysts, investors and other interested
parties as a common operating performance measure to compare results across
companies in our industry by adjusting for potential differences caused by
variations in capital structures (affecting relative interest expense), and the
age and book value of facilities and equipment (affecting relative depreciation
and amortization expense). These metrics, however, are not measures of financial
performance under accounting principles generally accepted in the United States
of America ("GAAP") and given the limitations of these metrics as analytical
tools, should not be considered a substitute for gross profit, gross margins,
net income (loss) or other consolidated income statement data as determined in
accordance with GAAP. We consider the following non-GAAP measures, which may not
be comparable to similarly titled measures reported by other companies, to be
key performance indicators:

• Adjusted EBITDA is defined as net earnings (loss) before interest, taxes,

depreciation and amortization, stock-based compensation (non-cash) and

certain one-time special items that we believe are not representative

        of core operations.


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

Adjusted EBITDA

Adjusted EBITDA (and a reconciliation to net income, the nearest GAAP financial
measure) for the years ended December 31, 2021, 2020 and 2019 are as follows:

                                                               Year Ended
                                                              December 31,
                                                   2021           2020           2019
                                                             (in thousands)
Net income                                      $   17,721     $   38,746     $   17,944
Interest expense                                       383            467            929
Depreciation and amortization                        5,313          5,248          5,198
Stock-based compensation                             7,656          5,549          3,558
Income tax expense (benefit)                         2,428         13,711         (6,237 )
Unrealized loss (gain) on financial
instrument obligation                                    -              -         (1,601 )
Acquisition-related settlement                           -         (1,702 )            -
Change in fair value of contingent
consideration                                       (1,928 )       (1,121 )         (471 )
Business transaction expense                            78            550          3,516
Non-recurring business costs                         4,934              -              -
Adjusted EBITDA                                 $   36,585     $   61,448     $   22,836


Comparison of the year ended December 31, 2021 to the year ended December 31, 2020

Net income for the year ended December 31, 2021 was $17.7 million compared to a
net income of $38.7 million in the prior year for the years ended December 31,
2021 and 2020, respectively.

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 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, 2020 has been $38.7 million compared to a net income of $17.9 million the previous 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 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.

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Financial results

The following table sets forth the Company's statements of operations for the
periods presented:

                                                         Year Ended
                                                        December 31,
                                              2021          2020          2019
                                                       (in thousands)
Net revenue                                 $ 366,354     $ 360,093     $ 234,663
Cost of revenue                               237,971       226,305       155,950
Gross profit                                  128,383       133,788        78,713
Gross margin                                     35.0 %        37.2 %        33.5 %

Operating expenses                            107,952        84,621        68,286
Operating income                               20,431        49,167        10,427
Interest expense                                  383           467           929
Other non-operating expense (income), net        (101 )      (3,757 )      (2,209 )
Income before income tax                       20,149        52,457        11,707
Income tax expense (benefit)                    2,428        13,711        (6,237 )
Net income                                  $  17,721     $  38,746     $  17,944



Net Revenue and Gross Profit

The following table summarizes net revenue and gross profit for the periods
presented:

                               Year Ended
                              December 31,
                    2021          2020          2019
                             (in thousands)
Net Revenue       $ 366,354     $ 360,093     $ 234,660
Gross Profit      $ 128,383     $ 133,788     $  78,713
Gross Margin           35.0 %        37.2 %        33.5 %
Cash Margin (1)        35.6 %        38.1 %        34.4 %


(1) Excludes non-cash charges of $1.9 million for 2021, $3.3 million for 2020,

and $2.1 million for 2019.

Comparison of the year ended December 31, 2021 to the year ended December 31, 2020

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 sales decreased to 35.0% from 37.2% the previous year. The decrease is primarily attributable to higher transportation costs and more standardized 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.

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Operating Expenses

                                            Year Ended
                                           December 31,
                                  2021          2020         2019
                                          (in thousands)
Selling and marketing           $  58,883     $ 46,779     $ 38,634
Research and development           17,490       12,265        7,856

General and administrative expenses 31,501 25,027 18,280 Acquisition integration costs 78,550 3,516 Total operating expenses $107,952 $84,621 $68,286



Selling and Marketing

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 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 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.

Research and Development

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
increase $6.5 million for $31.5 million compared to $25.0 million for the year ended December 31, 2020. The year-over-year increase was primarily driven by higher professional fees and the inclusion of acquired headcount related to NEAT, 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 ($1.5 million), higher variable
compensation costs, increased professional and legal services, and certain legal
settlements.

Income Taxes

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.

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Other non-operating expenses (income)

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.

Cash and capital resources

Our primary sources of working capital are cash flow from operations and the availability of capital under our revolving credit facility, which has been infrequently used over the past year. We have funded transactions and acquisitions in recent periods with cash flow from operations and proceeds from debt and equity financings.

The following table summarizes our sources and uses of cash:

                                                               Year Ended
                                                              December 31,
                                                   2021           2020           2019
                                                             (in thousands)
Cash and cash equivalents at beginning of
period                                          $   46,681     $    8,249     $    7,078
Net cash provided by (used for) operating
activities                                            (327 )       51,049   

39,374

Net cash used for investing activities              (8,121 )       (5,663 )      (14,579 )
Net cash used for financing activities                 (56 )       (7,412 )      (24,180 )
Effect of foreign exchange on cash                    (457 )          458   

556

Cash and cash equivalents at the end of the period $37,720 $46,681

  $    8,249



Operating activities

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.

Investing activities

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.

Fundraising 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 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 millionoffset by $4.3 million from the sale of equity investments and proceeds from the exercise of stock options of $4.2 million.

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

Management’s assessment of liquidity

Management believes that our current cash and cash equivalents, the amounts
available under our revolving credit facility and cash flows derived from
operations will be sufficient to meet anticipated cash needs for working capital
and capital expenditures for at least the next 12 months. 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 currency cash balances at December 31, 2021 and December 31, 2020 were $10.2 million and $5.9 millionrespectively.

Issue of common shares in the market

On August 7, 2020, the Company entered into an ATM Equity Offering Sales
Agreement (the "Sales Agreement") with BofA Securities, Inc. (the "Sales
Agent"). Pursuant to the terms of the Sales Agreement, the Company may sell from
time to time through the Sales Agent shares of the Company's common stock, par
value $0.001 per share, having an aggregate offering price of up to $30 million.
The Company intends to use the net proceeds from the offering, after deducting
the Sales Agent's commissions and the Company's offering expenses, to support
its strategic growth plans, as well as for general corporate purposes.

There was no activity under the sales contract during the year ended December 31, 2021.

Revolving Credit Facility


On December 17, 2018, Turtle Beach and certain of its subsidiaries entered into
an amended and restated loan, guaranty, and security agreement ("Credit
Facility") with Bank of America, N.A. ("Bank of America"), as Agent, Sole Lead
Arranger and Sole Bookrunner, which replaced the then existing asset-based
revolving loan agreement. The Credit Facility, which expires on March 5, 2024,
provides for a line of credit of up to $80 million inclusive of a sub-facility
limit of $12 million for TB Europe, a wholly-owned subsidiary of Turtle Beach.
In addition, the Credit Facility provides for a $40 million accordion feature
and the ability to increase the borrowing base with a FILO Loan of up to $6.8
million.


On May 31, 2019, the Company amended the Credit Facility to provide for, amongst
other items, (i) the addition of TBC Holding Company LLC, a wholly-owned
subsidiary of VTB, as an obligor and (ii) the ability to make investments in TB
Germany GmbH, a wholly-owned subsidiary of TB Europe, of up to $4 million in
connection with the acquisition of ROCCAT and up to an additional $4 million
annually.


The maximum credit availability for loans and letters of credit under the Credit
Facility is governed by a borrowing base determined by the application of
specified percentages to certain eligible assets, primarily eligible trade
accounts receivable and inventories, and is subject to discretionary reserves
and revaluation adjustments. The Credit Facility may be used for working
capital, the issuance of bank guarantees, letters of credit and other corporate
purposes.

Amounts outstanding under the Credit Facility bear interest at a rate equal to
either a rate published by Bank of America or the LIBOR rate, plus in each case,
an applicable margin, which is between 0.50% to 1.25% for base rate loans, 1.25%
to 2.00% for U.S. LIBOR loans and U.K. loans and 2.00% and 2.75% for the FILO
Loan. In addition, Turtle Beach is required to pay a commitment fee on the
unused revolving loan commitment at a rate ranging from 0.25% to 0.50%, and
letter of credit fees and agent fees. As of December 31, 2021, interest rates
for outstanding borrowings were 3.75% for base rate loans and 3.00% for LIBOR
rate loans.

The Company is subject to financial covenant testing if certain availability
thresholds are not met or certain other events occur (as defined in the Credit
Facility). The Credit Facility requires the Company and its restricted
subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00
as of the last day of each fiscal quarter.

The Credit Facility also contains affirmative and negative covenants that,
subject to certain exceptions, limit our ability to take certain actions,
including our ability to incur debt, pay dividends and repurchase stock, make
certain investments and other payments, enter into certain mergers and
consolidations, engage in sale leaseback transactions and transactions with
affiliates and encumber and dispose of assets. Obligations under the Credit
Facility are secured by a security interest and lien upon substantially all of
the Company's assets.

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

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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 Company has been and will continue 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
                                                    Less Than                                           More Than
(in thousands)                         Total        One Year        1 - 3 Years       3 - 5 Years       Five Years
Contractual Obligations: (1) (3)
Operating lease obligations (2)       $  9,047     $     1,125     $       3,458     $       2,078            2,386
Total                                 $  9,047     $     1,125     $       3,458     $       2,078     $      2,386


(1) The contractual obligations exclude the tax debts of $3.4 million relative to

uncertain tax positions because we are unable to make a reasonably reliable valuation

estimate of the timing of settlement, if any, of such future payments.

(2) Operating leases represent payment obligations

non-cancellable leases for its facilities.

(3) Walk December 17, 2018the Company entered into an amended credit facility

which expires on March 5, 2024. Interest payments are not reflected in the

Credit facility because the amount that will be borrowed in future years is

uncertain.

Critical accounting estimates

Our discussion and analysis of our results of operations and capital resources
are based on our consolidated financial statements, which have been prepared in
conformity with GAAP. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses and the disclosure of
contingent assets and liabilities. Management bases its estimates, assumptions,
and judgments on historical experience and on various other factors that it
believes to be reasonable under the circumstances.

Different assumptions and judgments would change the estimates used in the preparation of the condensed consolidated financial statements, which, in turn, could change the results from those published. Management evaluates its estimates, assumptions and judgments on an ongoing basis.

Based on the foregoing, we have determined that our most critical accounting policies are those related to revenue recognition and sales return reserve, inventory valuation, asset impairment and income taxes.

Revenue recognition and sales return reserve

Net revenue consists primarily of revenue from the sale of gaming headsets and
accessories to wholesalers, retailers and to a lesser extent, on-line customers.
Our products function on a standalone basis (in connection with a readily
available gaming console, personal computer, or stereo) and are not sold with
additional services or rights to future goods or services. Revenue is recorded
for a contract through the following steps: (i) identifying the contract with
the customer; (ii) identifying the performance obligations in the contract;
(iii) determining the transaction price; (iv) allocating the transaction price
to the performance obligations; and (v) recognizing revenue when or as each
performance obligation is satisfied.

Each contract at inception is evaluated to determine whether the contract should
be accounted for as having one or more performance obligations. Revenue is
recognized when obligations under the terms of a contract with our customer are
satisfied; generally this occurs at a point in time when the risk and title to
the product transfers to the customer. Our standard terms of delivery are
included in our contracts of sale, order confirmation documents, and invoices.
The Company excludes sales taxes collected from customers from "Net Revenue" in
its Consolidated Statements of Operations.

Certain customers may receive cash-based incentives (including cash discounts,
quantity rebates, and price concessions), which are accounted for as variable
consideration. Provisions for sales returns are recognized in the period the
sale is recorded based upon our prior experience and current trends. These
revenue reductions are established by the Company based upon management's best
estimates at the time of sale following the historical trend, adjusted to
reflect known changes in the factors that impact such reserves and allowances,
and the terms of agreements with customers. We do not expect to have significant
changes in our estimates for variable considerations.

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Inventory valuation

Inventories are valued at the lower of weighted average cost or market, at the
individual item level. Market is determined based on the estimated net
realizable value, which is generally the selling price. Inventory levels are
monitored to identify slow-moving items and markdowns are used to increase sales
of such products. Physical inventory counts are performed annually in January
and estimates are made for any shortage between the date of the physical
inventory count and the balance sheet date.

Asset impairment

Historically, we have had significant long-lived tangible and intangible assets,
including goodwill with indefinite lives, which are susceptible to valuation
adjustments as a result of changes in various factors or conditions. We assess
the potential impairment of intangible and fixed assets whenever events or
changes in circumstances indicate that full recoverability of net asset balances
through future cash flows is in question. Goodwill and indefinite-lived
intangible assets are assessed at least annually, but also whenever events or
changes in circumstances indicate the carrying values may not be recoverable.
Factors we consider important, which could trigger an impairment of such assets
include significant underperformance relative to historical or projected future
operating results; significant changes in the manner of use of the acquired
assets or the strategy for our overall business; significant negative industry
or economic trends; significant decline in our stock price for a sustained
period; and a decline in our market capitalization below net book value.

Management estimates future pre-tax cash flows based on historical experience,
knowledge, and market data. Estimates of future cash flows require that we make
assumptions and apply judgment, including forecasting future sales and expenses
and estimating useful lives of the assets. These estimates can be affected by
factors such as future product development and economic conditions that can be
difficult to predict, as well as other factors such as those outlined in "Risk
Factors." If the expected future cash flows related to the long-lived assets are
less than the assets' carrying value, an impairment loss would be recognized for
the difference between estimated fair value and carrying value.

There are inherent assumptions and estimates used in developing future cash
flows requiring management judgment including projecting revenues, interest
rates and the cost of capital.  Many of the factors used in assessing fair value
are outside our control and it is reasonably likely that assumptions and
estimates will change in future periods.  These changes can result in future
impairments.

Income Taxes

We account for income taxes using the asset and liability method. Under the
asset and liability method, deferred tax assets and liabilities are recognized
based on the differences between the financial statement carrying value of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates and laws expected to
be in effect when the differences are expected to reverse. The effect of a
change in tax rates on deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date. Inherent in the
measurement of these deferred balances are certain judgments and interpretations
of existing tax law and other published guidance as applied to our operations.
Our effective tax rate considers our judgment of expected tax liabilities in the
various jurisdictions within which we are subject to tax.

In determining the need for a valuation allowance on deferred tax assets, management must make assumptions and exercise judgment, including forecasting future earnings, taxable income and the composition of earnings in the jurisdictions in which we operate.

The tax effects of uncertain tax positions taken or expected to be taken in
income tax returns are recognized only if they are "more likely-than-not" to be
sustained on examination by the taxing authorities based on the technical merits
as of the reporting date. The tax benefits recognized in the financial
statements from such positions are measured based on the largest benefit that
has a greater than fifty percent likelihood of being realized upon ultimate
settlement. We recognize estimated accrued interest and penalties related to
uncertain tax positions in income tax expense.

There have been no material changes to the critical accounting policies and
estimates. See Note 1, "Summary of Significant Accounting Policy," in the notes
to the consolidated financial statements for a complete discussion of recent
accounting pronouncements. We are currently evaluating the impact of certain
recently issued guidance on our financial condition and results of operations in
future periods.


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