UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 2017
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35465
TURTLE BEACH CORPORATION
(Exact name of registrant as specified in its charter)
Nevada | 27-2767540 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification |
44 South Broadway, 4th Floor White Plains, New York | 10601 |
(Address of principal executive offices) | (Zip Code) |
(888) 496-8001
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbols | Name of each exchange on which registered |
Common Stock, par value $0.001 | HEAR | The Nasdaq Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to SEctionSection 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The number of shares of the registrant'sregistrant’s Common Stock, par value $0.001 per share, outstanding on OctoberJuly 31, 20172022 was 49,386,006.
INDEX
Page | |||
2 | |||
Item 1. | 2 | ||
2 | |||
3 | |||
4 | |||
Item 2. | 17 | ||
Item 3. | 23 | ||
Item 4. | 24 | ||
PART II. OTHER INFORMATION | 25 | ||
Item 1. | 25 | ||
Item 1A. | 25 | ||
Item | 36 | ||
Item 5. | 36 | ||
Item 6. | 37 | ||
38 |
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Turtle Beach Corporation
Condensed Consolidated Balance Sheets
September 30, 2017 | December 31, 2016 | ||||||
ASSETS | (in thousands, except par value and share amounts) | ||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 473 | $ | 6,183 | |||
Accounts receivable, net | 24,588 | 54,633 | |||||
Inventories | 45,869 | 21,698 | |||||
Prepaid expenses and other current assets | 4,956 | 4,121 | |||||
Total Current Assets | 75,886 | 86,635 | |||||
Property and equipment, net | 4,427 | 4,311 | |||||
Intangible assets, net | 1,484 | 1,618 | |||||
Deferred income taxes | 126 | 543 | |||||
Other assets | 1,146 | 1,693 | |||||
Total Assets | $ | 83,069 | $ | 94,800 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |||||||
Current Liabilities: | |||||||
Revolving credit facilities | $ | 24,793 | $ | 35,905 | |||
Term loan | 4,814 | 2,647 | |||||
Accounts payable | 29,996 | 11,927 | |||||
Other current liabilities | 12,110 | 16,414 | |||||
Total Current Liabilities | 71,713 | 66,893 | |||||
Term loan, long-term portion | 7,238 | 10,442 | |||||
Series B redeemable preferred stock | 18,547 | 17,480 | |||||
Subordinated notes - related party | 20,051 | 17,881 | |||||
Other liabilities | 2,239 | 2,800 | |||||
Total Liabilities | 119,788 | 115,496 | |||||
Commitments and Contingencies | |||||||
Stockholders' Equity (Deficit) | |||||||
Common stock, $0.001 par value - 100,000,000 shares authorized; 49,386,006 and 49,251,336 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 49 | 49 | |||||
Additional paid-in capital | 147,802 | 146,615 | |||||
Accumulated deficit | (184,279 | ) | (166,800 | ) | |||
Accumulated other comprehensive loss | (291 | ) | (560 | ) | |||
Total Stockholders' Equity (Deficit) | (36,719 | ) | (20,696 | ) | |||
Total Liabilities and Stockholders' Equity (Deficit) | $ | 83,069 | $ | 94,800 |
(unaudited)
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
|
| June 30, |
|
| June 30, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands, except per-share data) |
| |||||||||||||
Net revenue |
| $ | 41,300 |
|
| $ | 78,564 |
|
| $ | 87,962 |
|
| $ | 171,617 |
|
Cost of revenue |
|
| 33,418 |
|
|
| 49,854 |
|
|
| 66,051 |
|
|
| 108,052 |
|
Gross profit |
|
| 7,882 |
|
|
| 28,710 |
|
|
| 21,911 |
|
|
| 63,565 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Selling and marketing |
|
| 11,587 |
|
|
| 15,678 |
|
|
| 22,416 |
|
|
| 27,223 |
|
Research and development |
|
| 5,136 |
|
|
| 4,416 |
|
|
| 10,388 |
|
|
| 8,409 |
|
General and administrative |
|
| 12,532 |
|
|
| 8,173 |
|
|
| 18,767 |
|
|
| 15,210 |
|
Total operating expenses |
|
| 29,255 |
|
|
| 28,267 |
|
|
| 51,571 |
|
|
| 50,842 |
|
Operating income (loss) |
|
| (21,373 | ) |
|
| 443 |
|
|
| (29,660 | ) |
|
| 12,723 |
|
Interest expense |
|
| 84 |
|
|
| 73 |
|
|
| 193 |
|
|
| 170 |
|
Other non-operating expense, net |
|
| 1,109 |
|
|
| (65 | ) |
|
| 1,828 |
|
|
| 514 |
|
Income (loss) before income tax |
|
| (22,566 | ) |
|
| 435 |
|
|
| (31,681 | ) |
|
| 12,039 |
|
Income tax expense (benefit) |
|
| (4,740 | ) |
|
| (1,286 | ) |
|
| (7,379 | ) |
|
| 1,480 |
|
Net income (loss) |
| $ | (17,826 | ) |
| $ | 1,721 |
|
| $ | (24,302 | ) |
| $ | 10,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | (1.08 | ) |
| $ | 0.11 |
|
| $ | (1.49 | ) |
| $ | 0.67 |
|
Diluted |
| $ | (1.08 | ) |
| $ | 0.09 |
|
| $ | (1.49 | ) |
| $ | 0.58 |
|
Weighted average number of shares: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 16,500 |
|
|
| 15,920 |
|
|
| 16,348 |
|
|
| 15,737 |
|
Diluted |
|
| 16,500 |
|
|
| 18,329 |
|
|
| 16,348 |
|
|
| 18,204 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)
2
Turtle Beach Corporation
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | ||||||||||||
(in thousands, except per-share data) | |||||||||||||||
Net Revenue | $ | 35,975 | $ | 38,384 | $ | 69,439 | $ | 91,774 | |||||||
Cost of Revenue | 23,437 | 34,457 | 48,384 | 79,372 | |||||||||||
Gross Profit | 12,538 | 3,927 | 21,055 | 12,402 | |||||||||||
Operating expenses: | |||||||||||||||
Selling and marketing | 5,586 | 7,016 | 15,564 | 19,737 | |||||||||||
Research and development | 1,336 | 2,637 | 4,423 | 6,701 | |||||||||||
General and administrative | 3,499 | 4,591 | 11,740 | 15,161 | |||||||||||
Goodwill and intangible asset impairment | — | 32,084 | — | 63,236 | |||||||||||
Restructuring charges | 241 | 339 | 509 | 564 | |||||||||||
Total operating expenses | 10,662 | 46,667 | 32,236 | 105,399 | |||||||||||
Operating income (loss) | 1,876 | (42,740 | ) | (11,181 | ) | (92,997 | ) | ||||||||
Interest expense | 2,042 | 1,866 | 5,717 | 5,331 | |||||||||||
Other non-operating expense (income), net | (252 | ) | 326 | (517 | ) | 1,395 | |||||||||
Earnings (loss) before income tax | 86 | (44,932 | ) | (16,381 | ) | (99,723 | ) | ||||||||
Income tax expense (benefit) | 578 | (133 | ) | 1,098 | (340 | ) | |||||||||
Net loss | $ | (492 | ) | $ | (44,799 | ) | $ | (17,479 | ) | $ | (99,383 | ) | |||
Net loss per share: | |||||||||||||||
Basic | $ | (0.01 | ) | $ | (0.91 | ) | $ | (0.35 | ) | $ | (2.05 | ) | |||
Diluted | $ | (0.01 | ) | $ | (0.91 | ) | $ | (0.35 | ) | $ | (2.05 | ) | |||
Weighted average number of shares: | |||||||||||||||
Basic | 49,386 | 49,230 | 49,328 | 48,371 | |||||||||||
Diluted | 49,386 | 49,230 | 49,328 | 48,371 |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
|
| June 30, |
|
| June 30, |
| ||||
|
| (in thousands) |
| |||||||||||||
Net income (loss) |
| $ | (17,826 | ) |
| $ | 1,721 |
|
| $ | (24,302 | ) |
| $ | 10,559 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustment |
|
| (1,090 | ) |
|
| 805 |
|
|
| (1,519 | ) |
|
| 94 |
|
Other comprehensive income (loss) |
|
| (1,090 | ) |
|
| 805 |
|
|
| (1,519 | ) |
|
| 94 |
|
Comprehensive income (loss) |
| $ | (18,916 | ) |
| $ | 2,526 |
|
| $ | (25,821 | ) |
| $ | 10,653 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)
3
Turtle Beach Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | ||||||||||||
(in thousands) | |||||||||||||||
Net loss | $ | (492 | ) | $ | (44,799 | ) | $ | (17,479 | ) | $ | (99,383 | ) | |||
Other comprehensive income (loss): | |||||||||||||||
Foreign currency translation adjustment | 111 | 1 | 269 | (69 | ) | ||||||||||
Other comprehensive income (loss) | 111 | 1 | 269 | (69 | ) | ||||||||||
Comprehensive loss | $ | (381 | ) | $ | (44,798 | ) | $ | (17,210 | ) | $ | (99,452 | ) |
|
|
|
|
|
|
| ||
|
| June 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
| (unaudited) |
|
|
|
| ||
ASSETS |
| (in thousands, except par value and share amounts) |
| |||||
Current Assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 10,877 |
|
| $ | 37,720 |
|
Accounts receivable, net |
|
| 8,551 |
|
|
| 35,953 |
|
Inventories |
|
| 120,694 |
|
|
| 101,933 |
|
Prepaid expenses and other current assets |
|
| 13,606 |
|
|
| 17,506 |
|
Total Current Assets |
|
| 153,728 |
|
|
| 193,112 |
|
Property and equipment, net |
|
| 6,144 |
|
|
| 6,955 |
|
Deferred income taxes |
|
| 13,009 |
|
|
| 5,899 |
|
Goodwill |
|
| 10,686 |
|
|
| 10,686 |
|
Intangible assets, net |
|
| 5,126 |
|
|
| 5,788 |
|
Other assets |
|
| 8,261 |
|
|
| 8,065 |
|
Total Assets |
| $ | 196,954 |
|
| $ | 230,505 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
| ||
Current Liabilities: |
|
|
|
|
|
| ||
Revolving credit facility |
| $ | 15,707 |
|
| $ | — |
|
Accounts payable |
|
| 31,030 |
|
|
| 40,475 |
|
Other current liabilities |
|
| 19,456 |
|
|
| 37,693 |
|
Total Current Liabilities |
|
| 66,193 |
|
|
| 78,168 |
|
Income tax payable |
|
| 3,774 |
|
|
| 3,774 |
|
Other liabilities |
|
| 7,334 |
|
|
| 7,194 |
|
Total Liabilities |
|
| 77,301 |
|
|
| 89,136 |
|
Commitments and Contingencies |
|
|
|
|
|
| ||
Stockholders’ Equity |
|
|
|
|
|
| ||
Common stock, $0.001 par value - 25,000,000 shares authorized; 16,526,393 and 16,168,147 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively |
|
| 17 |
|
|
| 16 |
|
Additional paid-in capital |
|
| 202,382 |
|
|
| 198,278 |
|
Accumulated deficit |
|
| (81,354 | ) |
|
| (57,052 | ) |
Accumulated other comprehensive income (loss) |
|
| (1,392 | ) |
|
| 127 |
|
Total Stockholders’ Equity |
|
| 119,653 |
|
|
| 141,369 |
|
Total Liabilities and Stockholders’ Equity |
| $ | 196,954 |
|
| $ | 230,505 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)
4
Turtle Beach Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended | |||||||
September 30, 2017 | September 30, 2016 | ||||||
(in thousands) | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net loss | $ | (17,479 | ) | $ | (99,383 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||
Depreciation and amortization | 3,000 | 4,185 | |||||
Amortization of intangible assets | 259 | 4,028 | |||||
Amortization of debt financing costs | 1,181 | 957 | |||||
Stock-based compensation | 1,187 | 3,222 | |||||
Accrued interest on Series B redeemable preferred stock | 1,067 | 989 | |||||
Paid in kind interest | 1,844 | 1,585 | |||||
Deferred income taxes | 417 | (485 | ) | ||||
Reversal of sales returns reserve | (2,209 | ) | (4,931 | ) | |||
Provision for doubtful accounts | 49 | 105 | |||||
Provision for obsolete inventory | 1,914 | 9,628 | |||||
Loss on impairment of assets | — | 63,236 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | 32,205 | 33,564 | |||||
Inventories | (26,085 | ) | (28,975 | ) | |||
Accounts payable | 17,537 | 20,796 | |||||
Prepaid expenses and other assets | (733 | ) | (1,465 | ) | |||
Income taxes payable | 669 | 81 | |||||
Other liabilities | (5,532 | ) | (4,020 | ) | |||
Net cash provided by operating activities | 9,291 | 3,117 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchase of property and equipment | (2,584 | ) | (2,260 | ) | |||
Net cash used for investing activities | (2,584 | ) | (2,260 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Borrowings on revolving credit facilities | 98,165 | 131,810 | |||||
Repayment of revolving credit facilities | (109,277 | ) | (137,964 | ) | |||
Repayment of capital leases | (4 | ) | (31 | ) | |||
Repayment of term loan | (1,443 | ) | (3,610 | ) | |||
Proceeds from sale of common stock, net of issuance costs | — | 5,968 | |||||
Debt financing costs | — | (805 | ) | ||||
Net cash used for financing activities | (12,559 | ) | (4,632 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | 142 | (62 | ) | ||||
Net decrease in cash and cash equivalents | (5,710 | ) | (3,837 | ) | |||
Cash and cash equivalents - beginning of period | 6,183 | 7,114 | |||||
Cash and cash equivalents - end of period | $ | 473 | $ | 3,277 | |||
SUPPLEMENTAL DISCLOSURE OF INFORMATION | |||||||
Cash paid for interest | $ | 1,364 | $ | 1,474 | |||
Cash paid for income taxes | $ | — | $ | — |
|
| Six Months Ended |
| |||||
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||
|
| (in thousands) |
| |||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
| ||
Net income (loss) |
| $ | (24,302 | ) |
| $ | 10,559 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 2,458 |
|
|
| 1,847 |
|
Amortization of intangible assets |
|
| 623 |
|
|
| 625 |
|
Amortization of debt financing costs |
|
| 94 |
|
|
| 95 |
|
Stock-based compensation |
|
| 3,567 |
|
|
| 3,727 |
|
Deferred income taxes |
|
| (7,110 | ) |
|
| (101 | ) |
Change in sales returns reserve |
|
| (4,992 | ) |
|
| (4,186 | ) |
Provision for obsolete inventory |
|
| (1,289 | ) |
|
| 783 |
|
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
| ||
Accounts receivable |
|
| 32,152 |
|
|
| 20,028 |
|
Inventories |
|
| (21,288 | ) |
|
| (11,413 | ) |
Accounts payable |
|
| (9,914 | ) |
|
| 4,580 |
|
Prepaid expenses and other assets |
|
| 1,055 |
|
|
| (11,299 | ) |
Income taxes payable |
|
| 1,550 |
|
|
| (6,850 | ) |
Other liabilities |
|
| (13,851 | ) |
|
| 4,053 |
|
Net cash provided by (used for) operating activities |
|
| (41,247 | ) |
|
| 12,448 |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
| ||
Purchases of property and equipment |
|
| (1,207 | ) |
|
| (3,316 | ) |
Acquisition of a business, net of cash acquired |
|
| — |
|
|
| (2,500 | ) |
Net cash used for investing activities |
|
| (1,207 | ) |
|
| (5,816 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
| ||
Borrowings on revolving credit facilities |
|
| 36,209 |
|
|
| 120,858 |
|
Repayment of revolving credit facilities |
|
| (20,502 | ) |
|
| (120,858 | ) |
Proceeds from exercise of stock options and warrants |
|
| 538 |
|
|
| 3,262 |
|
Repurchase of common stock to satisfy employee tax withholding obligations |
|
| — |
|
|
| (463 | ) |
Net cash provided by financing activities |
|
| 16,245 |
|
|
| 2,799 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| (634 | ) |
|
| 85 |
|
Net increase (decrease) in cash and cash equivalents |
|
| (26,843 | ) |
|
| 9,516 |
|
Cash and cash equivalents - beginning of period |
|
| 37,720 |
|
|
| 46,681 |
|
Cash and cash equivalents - end of period |
| $ | 10,877 |
|
| $ | 56,197 |
|
|
|
|
|
|
|
| ||
SUPPLEMENTAL DISCLOSURE OF INFORMATION |
|
|
|
|
|
| ||
Cash paid for interest |
| $ | 108 |
|
| $ | 88 |
|
Cash paid (received) for income taxes |
| $ | (2,539 | ) |
| $ | 8,041 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)
5
Turtle Beach Corporation
Condensed Consolidated Statement of Stockholders' Stockholders’ Equity (Deficit)
(unaudited)
Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||
Shares | Amount | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||
Balance at December 31, 2016 | 49,251 | $ | 49 | $ | 146,615 | $ | (166,800 | ) | $ | (560 | ) | $ | (20,696 | ) | |||||||
Net loss | — | — | — | (17,479 | ) | — | (17,479 | ) | |||||||||||||
Other comprehensive loss | — | — | — | — | 269 | 269 | |||||||||||||||
Stock-based compensation | 135 | — | 1,187 | — | — | 1,187 | |||||||||||||||
Balance at September 30, 2017 | 49,386 | $ | 49 | $ | 147,802 | $ | (184,279 | ) | $ | (291 | ) | $ | (36,719 | ) |
|
| Common Stock |
|
| Additional |
|
| Accumulated |
|
| Accumulated |
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Income (Loss) |
|
| Total |
| ||||||
|
| (in thousands) |
| |||||||||||||||||||||
Balance at December 31, 2021 |
|
| 16,168 |
|
| $ | 16 |
|
| $ | 198,278 |
|
| $ | (57,052 | ) |
| $ | 127 |
|
| $ | 141,369 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,476 | ) |
|
| — |
|
|
| (6,476 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (429 | ) |
|
| (429 | ) |
Issuance of restricted stock |
|
| 30 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock options exercised |
|
| 47 |
|
|
| — |
|
|
| 361 |
|
|
| — |
|
|
| — |
|
|
| 361 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 1,537 |
|
|
| — |
|
|
| — |
|
|
| 1,537 |
|
Balance at March 31, 2022 |
|
| 16,245 |
|
| $ | 16 |
|
| $ | 200,176 |
|
| $ | (63,528 | ) |
| $ | (302 | ) |
| $ | 136,362 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (17,826 | ) |
|
| — |
|
|
| (17,826 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,090 | ) |
|
| (1,090 | ) |
Issuance of restricted stock |
|
| 257 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock options exercised |
|
| 24 |
|
|
| 1 |
|
|
| 176 |
|
|
| — |
|
|
| — |
|
|
| 177 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 2,030 |
|
|
| — |
|
|
| — |
|
|
| 2,030 |
|
Balance at June 30, 2022 |
|
| 16,526 |
|
| $ | 17 |
|
| $ | 202,382 |
|
| $ | (81,354 | ) |
| $ | (1,392 | ) |
| $ | 119,653 |
|
|
| Common Stock |
|
| Additional |
|
| Accumulated |
|
| Accumulated |
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Income (Loss) |
|
| Total |
| ||||||
|
| (in thousands) |
| |||||||||||||||||||||
Balance at December 31, 2020 |
|
| 15,476 |
|
|
| 15 |
|
|
| 190,568 |
|
|
| (74,773 | ) |
|
| 589 |
|
| $ | 116,399 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,838 |
|
|
| — |
|
|
| 8,838 |
|
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (711 | ) |
|
| (711 | ) |
Issuance of restricted stock |
|
| 26 |
|
|
| — |
|
|
| 113 |
|
|
| — |
|
|
| — |
|
|
| 113 |
|
Repurchase of common stock and retirement of related treasury shares |
|
| (6 | ) |
|
| — |
|
|
| (215 | ) |
|
| — |
|
|
| — |
|
|
| (215 | ) |
Stock options exercised |
|
| 159 |
|
|
| 1 |
|
|
| 911 |
|
|
| — |
|
|
| — |
|
|
| 912 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 1,786 |
|
|
| — |
|
|
| — |
|
|
| 1,786 |
|
Balance at March 31, 2021 |
|
| 15,655 |
|
| $ | 16 |
|
| $ | 193,163 |
|
| $ | (65,935 | ) |
| $ | (122 | ) |
| $ | 127,122 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,721 |
|
|
| — |
|
|
| 1,721 |
|
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 805 |
|
|
| 805 |
|
Issuance of restricted stock |
|
| 202 |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
Repurchase of common stock and retirement of related treasury shares |
|
| (9 | ) |
|
| — |
|
|
| (248 | ) |
|
| — |
|
|
| — |
|
|
| (248 | ) |
Stock options exercised |
|
| 217 |
|
|
| — |
|
|
| 2,350 |
|
|
| — |
|
|
| — |
|
|
| 2,350 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 1,941 |
|
|
| — |
|
|
| — |
|
|
| 1,941 |
|
Balance at June 30, 2021 |
|
| 16,065 |
|
| $ | 16 |
|
| $ | 197,207 |
|
| $ | (64,214 | ) |
| $ | 683 |
|
| $ | 133,692 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)
6
Turtle Beach Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note1. Background and Basis of Presentation
Organization
Turtle Beach Corporation (“Turtle Beach” or the “Company”), headquartered in San Diego, CaliforniaWhite 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 HyperSound®Neat Microphones® brands. Turtle Beach is a worldwide leading providerleader 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. HyperSoundROCCAT is a gaming keyboards, mice and other accessories brand focused on the PC peripherals market. Neat Microphones is a microphones brand focused on using cutting edge technology is an innovative patent-protected sound technology that delivers immersive, directional audio offering unique potential benefits in a variety of commercial settings and consumer devices.
VTB Holdings, Inc. (“VTBH”), a wholly-owned subsidiary of Turtle Beach Corporation and the parent holding companyowner of the headset business,Voyetra Turtle Beach, Inc. (“VTB”), was incorporated in the state of Delaware in 2010 with operations principally located in Valhalla, New York. Voyetra2010. VTB, the owner of Turtle Beach Inc.Europe Limited (“VTB”TB Europe”), was incorporated in the state of Delaware in 1975.
Basis of Presentation
The accompanying interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. All intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire fiscal year.
The December 31, 20162021 Condensed Consolidated Balance Sheet has been derived from the Company's most recentCompany’s audited financial statements included in its Annual Report on Form 10-K.
These financial statements should be read in conjunction with the annual financial statements and the notes thereto included in ourthe Annual Report on Form 10-K filed with the SEC on March 8, 2017 (“Annual Report”) that contains information useful to understanding the Company'sCompany’s businesses and financial statement presentations.
Use of estimates: The preparation of accompanying unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These estimates may change, as new events occur and additional information is obtained, and will be recognized in the consolidated financial statements in the period in which such changes occur. Future actual results could differ materially from these estimates.
Note2. Summary of Significant Accounting Policies
The preparation of consolidated annual and quarterly financial statements in conformity with generally accepted accounting principlesGAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of ourthe Company’s consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. The Company can give no assurance that actual results will not differ from those estimates.
There have been no material changes to the criticalsignificant accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report.
7
Note 3. Fair Value Measurement
The Company follows a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt instruments and debt instruments.certain warrants. As of SeptemberJune 30, 20172022 and December 31, 2016, there were no outstanding financial assets and liabilities recorded at fair value on a recurring basis and2021, the Company had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted.
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||||||||||
|
| Reported |
|
| Fair Value |
|
| Reported |
|
| Fair Value |
| ||||
|
| (in thousands) |
| |||||||||||||
Financial Assets and Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 10,877 |
|
| $ | 10,877 |
|
| $ | 37,720 |
|
| $ | 37,720 |
|
Revolving credit facility |
| $ | 15,707 |
|
| $ | 15,707 |
|
| $ | — |
|
| $ | — |
|
September 30, 2017 | December 31, 2016 | ||||||||||||||
Reported | Fair Value | Reported | Fair Value | ||||||||||||
(in thousands) | |||||||||||||||
Financial Assets and Liabilities: | |||||||||||||||
Cash and cash equivalents | $ | 473 | $ | 473 | $ | 6,183 | $ | 6,183 | |||||||
Credit Facility | 24,793 | 24,793 | 35,905 | 35,905 | |||||||||||
Term Loans | 12,924 | 12,575 | 14,367 | 14,281 | |||||||||||
Subordinated Debt | 21,247 | 21,403 | 19,403 | 18,569 |
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; and accounts receivable and accounts payable are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment. The carrying value of the Credit Facility and Term Loan Due 2018 equals fair value as the stated interest rate approximates market rates currently available to the Company, which are considered Level 2 inputs. The fair values of our Term Loan Due 2019 and Subordinated Debt are based upon an estimated market value calculation that factors principal, time to maturity, interest rate and current cost of debt, which is considered a Level 32 input.
Note4. Allowance for Sales Returns
The following table provides the changes in our sales return reserve, which is classified as a reduction of accounts receivable:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
| |||||||||||||
Balance, beginning of period |
| $ | 5,713 |
|
| $ | 11,910 |
|
| $ | 8,998 |
|
| $ | 11,233 |
|
Reserve accrual |
|
| 2,792 |
|
|
| 4,212 |
|
|
| 5,475 |
|
|
| 9,977 |
|
Recoveries and deductions, net |
|
| (4,499 | ) |
|
| (9,075 | ) |
|
| (10,467 | ) |
|
| (14,163 | ) |
Balance, end of period |
| $ | 4,006 |
|
| $ | 7,047 |
|
| $ | 4,006 |
|
| $ | 7,047 |
|
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(in thousands) | |||||||||||||||
Balance, beginning of period | $ | 2,153 | $ | 579 | $ | 4,591 | $ | 6,268 | |||||||
Reserve accrual | 2,146 | 2,807 | 4,228 | 7,341 | |||||||||||
Recoveries and deductions, net | (1,917 | ) | (2,049 | ) | (6,437 | ) | (12,272 | ) | |||||||
Balance, end of period | $ | 2,382 | $ | 1,337 | $ | 2,382 | $ | 1,337 |
Note5. Composition of Certain Financial Statement Items
Inventories
Inventories consist of the following:
|
| June 30, |
|
| December 31, |
| ||
|
| (in thousands) |
| |||||
Finished goods |
| $ | 119,612 |
|
| $ | 101,446 |
|
Raw materials |
|
| 1,082 |
|
|
| 487 |
|
Total inventories |
| $ | 120,694 |
|
| $ | 101,933 |
|
8
September 30, 2017 | December 31, 2016 | ||||||
(in thousands) | |||||||
Raw materials | $ | 1,842 | $ | 1,680 | |||
Finished goods | 44,027 | 20,018 | |||||
Total inventories | $ | 45,869 | $ | 21,698 |
Property and Equipment, net
Property and equipment, net, consists of the following:
|
| June 30, |
|
| December 31, |
| ||
|
| (in thousands) |
| |||||
Machinery and equipment |
| $ | 2,383 |
|
| $ | 2,255 |
|
Software and software development |
|
| 2,400 |
|
|
| 2,404 |
|
Furniture and fixtures |
|
| 1,440 |
|
|
| 1,257 |
|
Tooling |
|
| 8,494 |
|
|
| 7,855 |
|
Leasehold improvements |
|
| 1,708 |
|
|
| 1,794 |
|
Demonstration units and convention booths |
|
| 15,199 |
|
|
| 14,493 |
|
Total property and equipment, gross |
|
| 31,624 |
|
|
| 30,058 |
|
Less: accumulated depreciation and amortization |
|
| (25,480 | ) |
|
| (23,103 | ) |
Total property and equipment, net |
| $ | 6,144 |
|
| $ | 6,955 |
|
September 30, 2017 | December 31, 2016 | ||||||
(in thousands) | |||||||
Machinery and equipment | $ | 1,359 | $ | 1,321 | |||
Software and software development | 383 | 383 | |||||
Furniture and fixtures | 400 | 288 | |||||
Tooling | 2,043 | 1,581 | |||||
Leasehold improvements | 1,271 | 1,247 | |||||
Demonstration units and convention booths | 10,652 | 8,172 | |||||
Total property and equipment, gross | 16,108 | 12,992 | |||||
Less: accumulated depreciation and amortization | (11,681 | ) | (8,681 | ) | |||
Total property and equipment, net | $ | 4,427 | $ | 4,311 |
Other Current Liabilities
Other current liabilities consist of the following:
|
| June 30, |
|
| December 31, |
| ||
|
| (in thousands) |
| |||||
Accrued legal |
|
| 3,846 |
|
|
| 1,126 |
|
Accrued marketing |
|
| 2,792 |
|
|
| 3,723 |
|
Accrued employee expenses |
|
| 2,650 |
|
|
| 4,114 |
|
Accrued royalty |
|
| 1,651 |
|
|
| 11,582 |
|
Accrued freight |
|
| 1,819 |
|
|
| 6,251 |
|
Accrued expenses |
|
| 6,698 |
|
|
| 10,897 |
|
Total other current liabilities |
| $ | 19,456 |
|
| $ | 37,693 |
|
September 30, 2017 | December 31, 2016 | ||||||
(in thousands) | |||||||
Accrued vendor expenses | $ | 1,839 | $ | 4,735 | |||
Accrued royalty | 2,485 | 3,370 | |||||
Accrued employee expenses | 1,580 | 2,791 | |||||
Accrued expenses | 6,206 | 5,518 | |||||
Total other current liabilities | $ | 12,110 | $ | 16,414 |
Note6. Goodwill and Other Intangible Assets
Acquired Intangible Assets
Acquired identifiable intangible assets, and related accumulated amortization, as of SeptemberJune 30, 20172022 and December 31, 20162021 consist of:
|
| June 30, 2022 |
| |||||||||
|
| Gross |
|
| Accumulated |
|
| Net Book |
| |||
|
| (in thousands) |
| |||||||||
Customer relationships |
| $ | 8,355 |
|
| $ | 6,667 |
|
| $ | 1,688 |
|
Tradenames |
|
| 3,066 |
|
|
| 884 |
|
|
| 2,182 |
|
Developed technology |
|
| 1,884 |
|
|
| 574 |
|
|
| 1,310 |
|
Foreign currency |
|
| (1,363 | ) |
|
| (1,309 | ) |
|
| (54 | ) |
Total Intangible Assets |
| $ | 11,942 |
|
| $ | 6,816 |
|
| $ | 5,126 |
|
|
| December 31, 2021 |
| |||||||||
|
| Gross |
|
| Accumulated |
|
| Net Book |
| |||
|
| (in thousands) |
| |||||||||
Customer relationships |
| $ | 8,355 |
|
| $ | 6,315 |
|
| $ | 2,040 |
|
Tradenames |
|
| 3,066 |
|
|
| 730 |
|
|
| 2,336 |
|
Developed technology |
|
| 1,884 |
|
|
| 440 |
|
|
| 1,444 |
|
Foreign currency |
|
| (896 | ) |
|
| (865 | ) |
|
| (32 | ) |
Total Intangible Assets |
| $ | 12,409 |
|
| $ | 6,620 |
|
| $ | 5,788 |
|
9
September 30, 2017 | |||||||||||||||
Gross Carrying Value | Accumulated Amortization | Asset Impairment | Net Book Value | ||||||||||||
(in thousands) | |||||||||||||||
Customer relationships | $ | 5,796 | $ | 4,064 | $ | — | $ | 1,732 | |||||||
Foreign Currency | (933 | ) | (685 | ) | — | (248 | ) | ||||||||
Total Intangible Assets | $ | 4,863 | $ | 3,379 | $ | — | $ | 1,484 | |||||||
December 31, 2016 | |||||||||||||||
Gross Carrying Value | Accumulated Amortization | Asset Impairment | Net Book Value | ||||||||||||
(in thousands) | |||||||||||||||
Customer relationships | $ | 5,796 | $ | 3,737 | $ | — | $ | 2,059 | |||||||
Non-compete agreements | 177 | 177 | — | — | |||||||||||
In-process Research and Development | 27,100 | 4,074 | 23,026 | — | |||||||||||
Developed technology | 8,880 | 802 | 8,078 | — | |||||||||||
Trade names | 170 | 92 | 78 | — | |||||||||||
Patent and trademarks | 967 | 65 | 902 | — | |||||||||||
Foreign Currency | (1,294 | ) | (853 | ) | — | (441 | ) | ||||||||
Total Intangible Assets | $ | 41,796 | $ | 8,094 | $ | 32,084 | $ | 1,618 |
In connection with the October 2012 VTB acquired Lygo, subsequently renamedacquisition of TB Europe, Ltd. Thethe acquired intangible assetassets related to customer relationships is being amortized over an estimated useful life of thirteen years with the amortization being included within sales and marketing expense.
In May 2019, the Company completed its acquisition of the business and assets of the ROCCAT business, and in January 2014,2021, the merger between VTBHCompany completed its acquisition of the business and Turtle Beach (f/k/a Parametric Sound Corporation) was completed.assets of the Neat Microphones business. The respective acquired intangible assets relating to developed technology, customer relationships and trade name werenames are subject to amortization over their respective useful lives. In September 2016, we recorded an impairment charge related to the total remaining acquired intangible assets value.
Amortization expense related to definite lived intangible assets of $0.1$0.3 million and $0.3$0.6 million was recognized for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, and $1.4$0.3 million and $4.0$0.6 million was recognized for the three and ninesix months ended SeptemberJune 30, 2016,2021, respectively.
As of SeptemberJune 30, 2017,2022, estimated annual amortization expense related to definite lived intangible assets in future periods is as follows:
|
| (in thousands) |
| |
2022 |
| $ | 638 |
|
2023 |
|
| 1,041 |
|
2024 |
|
| 1,008 |
|
2025 |
|
| 889 |
|
2026 |
|
| 637 |
|
Thereafter |
|
| 967 |
|
Total |
| $ | 5,180 |
|
There were 0 changes in the carrying values of goodwill for the three months ended June 30, 2022 from the balance as of December 31, 2021.
(in thousands) | |||
2017 | $ | 109 | |
2018 | 366 | ||
2019 | 307 | ||
2020 | 258 | ||
2021 | 217 | ||
Thereafter | 475 | ||
Total | $ | 1,732 |
Note7. Revolving Credit FacilitiesFacility and Long-Term Debt
|
| June 30, |
|
| December 31, |
| ||
|
| (in thousands) |
| |||||
Revolving credit facility, maturing March 2024 |
| $ | 15,707 |
|
| $ | - |
|
September 30, 2017 | December 31, 2016 | ||||||
(in thousands) | |||||||
Revolving credit facility, maturing March 2019 | $ | 24,793 | $ | 35,905 | |||
Term Loan Due 2018 | 2,564 | 3,632 | |||||
Term Loan Due 2019 | 10,360 | 10,735 | |||||
Less unamortized deferred financing fees | 872 | 1,278 | |||||
Total Term Loans | 12,052 | 13,089 | |||||
Subordinated notes - related party | 21,247 | 19,403 | |||||
Less unamortized debt discount | 1,196 | 1,522 | |||||
Total Subordinated notes | 20,051 | 17,881 | |||||
Total outstanding debt | 56,896 | 66,875 | |||||
Less: current portion of revolving line of credit | (24,793 | ) | (35,905 | ) | |||
Less: current portion of term loans | (4,814 | ) | (2,647 | ) | |||
Total noncurrent portion of long-term debt | $ | 27,289 | $ | 28,323 |
Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was $1.5$0.1 million and $4.2 million, respectively, for the three and nine months ended September 30, 2017 and, $1.3 million and $3.9 million, respectively, for the three and nine months ended September 30, 2016. This includes related party interest of $0.6 million and $1.8$0.2 million for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, and $0.5$0.1 million and $1.6$0.2 million for the three and ninesix months ended SeptemberJune 30, 2016, respectively, in connection with the subordinated notes.
Amortization of deferred financing costs was $0.4 million$47 thousand and $1.2 million or$94 thousand for the three and ninesix months ended SeptemberJune 30, 2017, respectively, $0.3 million2022 and$47 thousand and $1.0 million$95 thousand for the
Revolving Credit Facility
On March 31, 2014,December 17, 2018, Turtle Beach and certain of its subsidiaries entered into a new asset-based revolving creditan amended and restated loan, guaranty and security agreement (“Credit Facility”)
On May 31, 2019, the Company amended the Credit Facility to provide for, amongst other items, (i) the addition of creditTBC Holding Company LLC, a wholly-owned subsidiary of VTB, as an obligor and other corporate purposes.
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.10
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 betweenThe Company and the administrative agent entered into an amendment to the Credit Facility (the "LIBOR Transition Amendment") to replace the LIBOR rate as a reference rate available for use in the computation of interest under the Credit Agreement in favor of (i) the Applicable Rate (as defined in the Credit Facility) plus Sterling Overnight Index Average (“SONIA”) or the Euro Interbank Offered Rate (“EURIBOR”). The Company expects to enter into an additional agreement to finalize the transition of the U.S. LIBOR rate prior its expiration on June 30, 2023.
The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met meaning thator certain other events occur (as set forth in the Company does not have receivables and inventory which are eligible to borrow on underCredit Facility). At such times, the Credit Facility in excess of amounts borrowed, the Credit Facility requi
The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions, including ourthe Company’s 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'sCompany’s assets.
As of SeptemberJune 30, 2017,2022, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $12.5 million, net of the outstanding Term Loan Due 2018 (as defined below) that is considered to be an additional outstanding amount under the Credit Facility.$22.0 million.
Note was issued with an interest rate of (i) 10% per annum for the first year and (ii) 20% per annum for all periods thereafter, with interest accruing and being added to the principal amount of the note quarterly.
In order to determine the quarterly provision for income taxes, we usethe Company uses an estimated annual effective tax rate, (“ETR”), which is based on expected annual income and statutory tax rates in the various jurisdictions. However, to the extent that application of the estimated annual effective tax rate is not representative of the quarterly portion of actual tax expense expected to be recorded for the year, we determine the quarterlyCompany determines the provision for income taxes based on actual year-to-date income (loss). Certain significant or unusual items are separately recognized as discrete items in the quarterperiod during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
The following table presents ourthe Company’s income tax expense (benefit) and effective income tax rate:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
| |||||||||||||
Income tax expense (benefit) |
| $ | (4,740 | ) |
| $ | (1,286 | ) |
| $ | (7,379 | ) |
| $ | 1,480 |
|
Effective income tax rate |
|
| 21.0 | % |
|
| (295.6 | %) |
|
| 23.3 | % |
|
| 12.3 | % |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(in thousands) | |||||||||||||||
Income tax expense (benefit) | $ | 578 | $ | (133 | ) | $ | 1,098 | $ | (340 | ) | |||||
Effective income tax rate | 672.1 | % | 0.3 | % | (6.7 | )% | 0.3 | % |
Income tax expensebenefit for the three and nine months ended SeptemberJune 30, 20172022 was $0.6$4.7 million at an effective tax rate of 672.1%21.0% and $1.1income tax benefit for the six months ended June 30, 2022 was $7.4 million at an effective tax rate of (6.7)23.3%, respectively.. Income tax benefit for the three and nine months ended SeptemberJune 30, 20162021 was $(0.1)$1.3 million at an effective tax rate of 0.3%(295.6%) and $(0.3)income tax expense for the six months ended June 30, 2021 was $1.5 million at an effective tax rate of 0.3%, respectively.
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. Interest and penalties associated with income tax matters are included in the provision for income taxes in the condensed consolidated statementstatements of operations. As of SeptemberJune 30, 2017,2022, the Company had uncertain tax positions of $2.2$3.8 million, inclusive of $0.7$1.1 million of interest and penalties.
The Company has determined that a valuation allowance is not needed against the deferred tax asset as of June 30, 2022, with the exception of net operating losses for certain separate state filings. This analysis is performed on a quarterly basis and includes an evaluation of all positive and negative evidence to determine whether it is more-likely-than-not that the deferred tax assets will be realizable. This is based on generating earnings and taxable income in recent years, no tax attributes on hand that are at risk of expiring in the near future nor is there any history of expiring attributes, the cyclical nature of our business, and projections of future taxable income. In the event that actual results differ from these estimates, the Company may need to modify the level of valuation allowance which could materially impact our business, financial condition and results of operations.
11
The Company is subject to income taxes domestically and in various foreign jurisdictions. The Company files U.S., state and foreign income tax returns in jurisdictions with various statutes of limitations. The federal tax years open under the statute of limitations are 20132018 through 2015,2020, and the state tax years open under the statute of limitations are 20122017 through 2015. The Company was notified by the IRS of an examination covering our fiscal year end 2015 federal income tax return, which is currently in the discovery phase.2020.
Note9. Stock-Based Compensation
Total estimated stock-based compensation expense for employees and non-employees, related to all of the Company'sCompany’s stock-based awards, was comprised as follows:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
| |||||||||||||
Cost of revenue |
| $ | 96 |
|
| $ | 90 |
|
| $ | 122 |
|
| $ | 487 |
|
Selling and marketing |
|
| 539 |
|
|
| 446 |
|
|
| 937 |
|
|
| 777 |
|
Research and development |
|
| 390 |
|
|
| 348 |
|
|
| 673 |
|
|
| 597 |
|
General and administrative |
|
| 1,005 |
|
|
| 1,057 |
|
|
| 1,835 |
|
|
| 1,866 |
|
Total stock-based compensation |
| $ | 2,030 |
|
| $ | 1,941 |
|
| $ | 3,567 |
|
| $ | 3,727 |
|
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(in thousands) | |||||||||||||||
Cost of revenue | $ | 20 | $ | 152 | $ | (66 | ) | $ | 398 | ||||||
Selling and marketing | 18 | 40 | 74 | 50 | |||||||||||
Research and development | 68 | 138 | 188 | 424 | |||||||||||
General and administrative | 264 | 687 | 991 | 2,350 | |||||||||||
Total stock-based compensation | $ | 370 | $ | 1,017 | $ | 1,187 | $ | 3,222 |
The following table presents the stock activity and the total number of shares available for grant as of SeptemberJune 30, 2017:
(in thousands) | ||||
Balance at December 31, | 998 | |||
Options | 31 | |||
Restricted Stock | (484 | ) | ||
Restricted Stock Forfeited | 28 | |||
Performance Shares Unearned | 7 | |||
Performance Shares Granted | (167 | ) | ||
Balance at | 413 |
Stock Option Activity
|
| Options Outstanding |
| |||||||||||||
|
| Number of |
|
| Weighted- |
|
| Weighted- |
|
| Aggregate |
| ||||
|
|
|
|
|
|
|
| (in years) |
|
|
|
| ||||
Outstanding at December 31, 2021 |
|
| 1,739,240 |
|
| $ | 7.72 |
|
|
| 7.02 |
|
| $ | 25,542,823 |
|
Options Granted |
|
| - |
|
|
| - |
|
|
|
|
|
|
| ||
Options Exercised |
|
| (71,379 | ) |
|
| 7.54 |
|
|
|
|
|
|
| ||
Options Forfeited |
|
| (31,181 | ) |
|
| 10.28 |
|
|
|
|
|
|
| ||
Outstanding at June 30, 2022 |
|
| 1,636,680 |
|
| $ | 7.68 |
|
|
| 6.45 |
|
| $ | 8,417,740 |
|
Vested and expected to vest at June 30, 2022 |
|
| 1,621,925 |
|
| $ | 7.74 |
|
|
| 6.44 |
|
| $ | 8,350,391 |
|
Exercisable at June 30, 2022 |
|
| 1,143,564 |
|
| $ | 7.28 |
|
|
| 5.98 |
|
| $ | 6,537,350 |
|
Options Outstanding | |||||||||
Number of Shares Underlying Outstanding Options | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||
(In years) | |||||||||
Outstanding at December 31, 2016 | 6,381,447 | 1.90 | 7.37 | 20,033 | |||||
Granted | 704,865 | 0.93 | |||||||
Exercised | — | — | |||||||
Forfeited | (1,053,683 | ) | 2.22 | ||||||
Outstanding at September 30, 2017 | 6,032,629 | 1.73 | 6.75 | 2,543 | |||||
Vested and expected to vest at September 30, 2017 | 6,022,628 | 1.74 | 6.75 | 2,543 | |||||
Exercisable at September 30, 2017 | 3,886,414 | 1.76 | 6.68 | 2,100 |
Stock options are time-based and the majority are exercisable within
10 years of the date of grant, but only to the extent they have vested. The options generally vest as specified in the option agreements subject to acceleration in certain circumstances. In the event participants in the12
Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. There were no option exercises duringThe aggregate intrinsic value of options exercised was $0.8 million for the ninesix months ended SeptemberJune 30, 2017.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted as of the grant date. The following are assumptions for the nine months ended September 30, 2017.
Restricted Stock Activity
|
| Shares |
|
| Weighted |
| ||
Nonvested restricted stock at December 31, 2021 |
|
| 788,454 |
|
| $ | 16.81 |
|
Granted |
|
| 483,533 |
|
|
| 21.20 |
|
Vested |
|
| (258,399 | ) |
|
| 16.31 |
|
Shares forfeited |
|
| (27,854 | ) |
|
| 16.58 |
|
Nonvested restricted stock at June 30, 2022 |
|
| 985,734 |
|
| $ | 19.10 |
|
Shares | Weighted Average Grant Date Fair Value Per Share | ||||
Nonvested restricted stock at December 31, 2016 | 135,705 | 1.84 | |||
Granted | 166,665 | 0.90 | |||
Vested | (91,002 | ) | 2.06 | ||
Forfeited | (43,903 | ) | 1.16 | ||
Nonvested restricted stock at September 30, 2017 | 167,465 | 0.96 |
As of SeptemberJune 30, 2017,2022, total unrecognized compensation costcosts related to the nonvested restricted stock awards granted towas $17.6 million, which will be recognized over a remaining weighted average vesting period of 0.5 years was minimal.
Performance-Based Restricted Share Units
As of June 30, 2022, the Company had 256,342 performance-based restricted share units outstanding, including 167,000issued to SG VTBin 2022. 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 a trust affiliated with Ronald Doornink warrants to purchase 1.7 million shares(ii) the achievement of the Company’s common stock at an exercise pricespecified tiers of $2.54 per share. The warrants are exercisable for a period of five years beginning on the date of issuance, July 22, 2015. The exercise price and the number of shares of Common Stock purchasable are subject to adjustment and do not carry any voting rights or other rightsadjusted EBITDA as a stockholderpercentage of the Company prior to exercise. The shares issuable upon exercise are also subject to the “demand” and “piggyback” registration rights set forth in the in the Company’s Stockholder Agreement, dated August 5, 2013, as amended July 10, 2014.
Note10. Net LossIncome (Loss) Per Share
The following table sets forth the computation of basic and diluted net lossincome (loss) per share of common stock attributable to common stockholders:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands, except per-share data) |
| |||||||||||||
Net income (loss) |
| $ | (17,826 | ) |
| $ | 1,721 |
|
| $ | (24,302 | ) |
| $ | 10,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares outstanding — Basic |
|
| 16,500 |
|
|
| 15,920 |
|
|
| 16,348 |
|
|
| 15,737 |
|
Plus incremental shares from assumed conversions: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Dilutive effect of restricted stock |
|
| — |
|
|
| 421 |
|
|
| — |
|
|
| 469 |
|
Dilutive effect of stock options |
|
| — |
|
|
| 1,438 |
|
|
| — |
|
|
| 1,448 |
|
Dilutive effect of warrants |
|
| — |
|
|
| 550 |
|
|
| — |
|
|
| 550 |
|
Weighted average common shares outstanding — Diluted |
|
| 16,500 |
|
|
| 18,329 |
|
|
| 16,348 |
|
|
| 18,204 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | (1.08 | ) |
| $ | 0.11 |
|
| $ | (1.49 | ) |
| $ | 0.67 |
|
Diluted |
| $ | (1.08 | ) |
| $ | 0.09 |
|
| $ | (1.49 | ) |
| $ | 0.58 |
|
13
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(in thousands, except per-share data) | |||||||||||||||
Net Loss | $ | (492 | ) | $ | (44,799 | ) | $ | (17,479 | ) | $ | (99,383 | ) | |||
Weighted average common shares outstanding — Basic | 49,386 | 49,230 | 49,328 | 48,371 | |||||||||||
Plus incremental shares from assumed conversions: | |||||||||||||||
Dilutive effect of stock options | — | — | — | — | |||||||||||
Weighted average common shares outstanding — Diluted | 49,386 | 49,230 | 49,328 | 48,371 | |||||||||||
Net loss per share: | |||||||||||||||
Basic | $ | (0.01 | ) | $ | (0.91 | ) | $ | (0.35 | ) | $ | (2.05 | ) | |||
Diluted | $ | (0.01 | ) | $ | (0.91 | ) | $ | (0.35 | ) | $ | (2.05 | ) |
Incremental shares from stock options and restricted stock awards are computed byusing the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards and the estimated tax benefit of the assumed exercises.
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
| |||||||||||||
Stock options |
|
| 1,655 |
|
|
| 77 |
|
|
| 1,672 |
|
|
| 769 |
|
Unvested restricted stock awards |
|
| 963 |
|
|
| 8 |
|
|
| 915 |
|
|
| 283 |
|
Warrants |
|
| 550 |
|
|
| — |
|
|
| 550 |
|
|
| — |
|
Total |
|
| 3,168 |
|
|
| 85 |
|
|
| 3,137 |
|
|
| 1,052 |
|
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||
(in thousands) | |||||||||||
Stock options | 6,133 | 6,758 | 6,287 | 6,321 | |||||||
Warrants | 3,059 | 3,068 | 3,061 | 3,072 | |||||||
Unvested restricted stock awards | 167 | 136 | 137 | 115 | |||||||
Total | 9,359 | 9,962 | 9,485 | 9,508 |
Note11. Segment and Geographic Information
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net Revenues | (in thousands) | ||||||||||||||
Headset | $ | 35,947 | $ | 38,283 | $ | 69,291 | $ | 91,172 | |||||||
HyperSound | 28 | 101 | 148 | 602 | |||||||||||
Total | $ | 35,975 | $ | 38,384 | $ | 69,439 | $ | 91,774 | |||||||
Operating Income (Loss) | |||||||||||||||
Headset | $ | 1,819 | $ | 1,710 | $ | (9,779 | ) | $ | (7,971 | ) | |||||
HyperSound | 57 | (44,450 | ) | (1,402 | ) | (85,026 | ) | ||||||||
Total | $ | 1,876 | $ | (42,740 | ) | $ | (11,181 | ) | $ | (92,997 | ) | ||||
Interest Expense | $ | 2,042 | $ | 1,866 | $ | 5,717 | $ | 5,331 | |||||||
Other non-operating expense (income), net | $ | (252 | ) | $ | 326 | (517 | ) | 1,395 | |||||||
Earnings (loss) before income tax | $ | 86 | $ | (44,932 | ) | $ | (16,381 | ) | $ | (99,723 | ) |
September 30, 2017 | December 31, 2016 | ||||||
Total Assets | (in thousands) | ||||||
Headset | $ | 83,029 | $ | 94,081 | |||
HyperSound (1) | 27,918 | 31,233 | |||||
Eliminations | (27,878 | ) | (30,514 | ) | |||
Total | $ | 83,069 | $ | 94,800 |
The following table represents total net revenues based on where customers are physically located:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
| |||||||||||||
North America |
| $ | 27,384 |
|
| $ | 50,645 |
|
| $ | 58,752 |
|
| $ | 114,780 |
|
Europe and Middle East |
|
| 9,179 |
|
|
| 19,075 |
|
|
| 21,301 |
|
|
| 45,418 |
|
Asia Pacific |
|
| 4,737 |
|
|
| 8,844 |
|
|
| 7,909 |
|
|
| 11,419 |
|
Total net revenues |
| $ | 41,300 |
|
| $ | 78,564 |
|
| $ | 87,962 |
|
| $ | 171,617 |
|
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(in thousands) | |||||||||||||||
North America | $ | 23,320 | $ | 28,063 | $ | 47,371 | $ | 69,679 | |||||||
United Kingdom | 5,204 | 3,142 | 9,182 | 9,073 | |||||||||||
Europe | 5,947 | 5,477 | 9,884 | 9,326 | |||||||||||
International | 1,504 | 1,702 | 3,002 | 3,696 | |||||||||||
Total net revenues | $ | 35,975 | $ | 38,384 | $ | 69,439 | $ | 91,774 |
Note12. Commitments and Contingencies
Litigation
The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the amount of any liability that could arise with respect to these actions cannot be determined with certainty, in the Company’s opinion, any such liability will not have a material adverse effect on its consolidated financial position, consolidated results of operations or liquidity.
Shareholders Class Action:
14
On May 22, 2020, PAMTP LLC, which purports to hold the claims of 8 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. The defendants filed 2 motions to dismiss this complaint, which were heard on August 10, 2020. The Court denied those motions by order of August 20, 2020. The case was tried in Delaware ChanceryAugust 2021 and all defendants, including the Company, prevailed on all counts with final judgment entered in their favor on September 3, 2021.
Employment Litigation: On April 20, 2017, a former employee filed an action in the Superior Court alleging breach of contract against VTBH. According to the complaint, the Merger purportedly triggered a contractual obligation for VTBH to redeem Dr. Bonanno's stock. Dr. Bonanno requests a declaratory judgment stating that he is entitled to damages including a redemption of his stock for the redemption valueCounty of $15.1 million (equal toSan Diego, State of California. The complaint alleges claims including wrongful termination, retaliation and various other provisions of the original issue price of his stock plus accrued dividends)California Labor Code. The complaint seeks unspecified economic and non-economic losses, as well as other costsallegedly unpaid wages, unreimbursed business expenses statutory penalties, interest, punitive damages and expenses.attorneys’ fees. The Company filed a cross-complaint against the former employee on May 25, 2017 for certain activities related to his employment with the Company. The matter was tried between September 24 and October 7, 2021. On FebruaryOctober 8, 2016,2021 a jury rendered a unanimous verdict in favor of the Delaware ChanceryCompany on the employment claims. The Court granted VTBH's motiona directed verdict to dismiss for improper venue, and Dr. Bonnano's complaintthe Company on its Cross- Complaint against the former employee. Judgment was dismissed without prejudice. In January of 2017, Dr. Bonanno filed a complaintentered in New York state court alleging breach of contract against VTBH and seeking a declaratory judgment that he is entitled to damages and specific performance, including redemption of his stock. The Company answered the complaint on March 7, 2017. At the orderfavor of the Court,Company on October 27, 2021. On December 20, 2021, the parties filed cross-motions for summary judgment on March 31, 2017, on the sole question of whether the Merger was a defined event in the
Intellectual Property Dispute: 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 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 its entirety.November 2021 and was dismissed. The plaintiff’s abilitynext stage in the main proceedings will be a Case Management Conference on November 4, 2022 at which the Court will give directions for each stage to recover any damagestrial. The trial is subjectexpected to certain limitations, including, but not limited to, legally available funds. VTBH maintains that the Merger did not trigger any obligation to redeem Mr. Bonanno's preferred stock.
Consumer Class Action: On July 20, 2016, Bigben Interactive S.A. (“BigBen”)June 13, 2022, an individual filed a statement of claim before the Regional Court of Berlin, Germanyclass action lawsuit against VTB which statementin the United States District Court for the Central District of claim was formally serviced upon VTB on June 28, 2017.California. The statement of claimcomplaint alleges that VTB’s termination of a distribution agreementVTB violated the Telephone Consumer Protection Act, 47 U.S.C. § 227(b), by and between BigBen and VTB breached the terms thereof and was invalid, and that BigBen is entitled to damages amounting to damages amounting to €5.0 million plus accrued interests thereon plus certain additional damages as a result of such invalid termination. VTB filed its statement of defense with the court on September 21, 2017. VTB maintains that its termination of the agreement was valid and that BigBen’s claims against it are without merit. VTB's statement of defense was submittedsending marketing-related text messages to the plaintiff and other members of the public who have registered their telephone numbers on the national Do-Not-Call Registry. The plaintiff seeks to represent a class of all persons in the United States whose telephone numbers were present on the national Do-Not-Call Registry and received text messages from VTB within the last four years. The complaint seeks statutory damages and an order enjoining VTB from sending further text messages to telephone numbers listed on the national Do-Not-Call Registry. VTB believes that the plaintiff consented to receive marketing-related text messages from VTB and maintains that it does not contact members of the public without their consent. VTB has filed an initial response to the complaint. The court has granted the option to submitnot yet set a further written statement in reply to the statement of defense.
The Company will continue to vigorously defend itself in the foregoing unresolved matters. However, litigation and investigations are inherently uncertain. Accordingly, the Company cannot predict the outcome of these matters. The Company has not recorded any accrual at SeptemberJune 30, 20172022 for contingent losses associated with these matters based on its belief that losses, while possible, are not probable. Further, any possible range of loss cannot be reasonably estimated at this time. The unfavorable resolution of these matters could have a material adverse effect on the Company’s business, results of operations, financial condition, or cash flows. The Company is engaged in other legal actions, not described above, arising in the ordinary course of its business and, while there can be no assurance, believes that the ultimate outcome of these other legal actions will not have a material adverse effect on its business, results of operations, financial condition, or cash flows.
Warranties
The Company warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product. Warranties are generally fulfilled by replacing defective products with new products. The following table provides the changes in our product warranties,warranty reserve, which are included in accrued liabilities:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
| |||||||||||||
Warranty, beginning of period |
| $ | 789 |
|
| $ | 1,118 |
|
| $ | 856 |
|
| $ | 1,039 |
|
Warranty costs accrued |
|
| 72 |
|
|
| 119 |
|
|
| 193 |
|
|
| 453 |
|
Settlements of warranty claims |
|
| (143 | ) |
|
| (215 | ) |
|
| (331 | ) |
|
| (470 | ) |
Warranty, end of period |
| $ | 718 |
|
| $ | 1,022 |
|
| $ | 718 |
|
| $ | 1,022 |
|
Operating Leases - Right of Use Assets
The Company adopted ASU 2016-02, Leases, on January 1, 2019. 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 years, and do not contain any material residual value guarantees or material restrictive covenants.
15
The components of the right-of-use assets and lease liabilities were as follows:
|
| Balance Sheet Classification |
| June 30, 2022 |
| |
|
|
|
| (in thousands) |
| |
Right-of-use assets |
| Other assets |
| $ | 7,619 |
|
|
|
|
|
|
| |
Lease liability obligations, current |
| Other current liabilities |
| $ | 1,069 |
|
Lease liability obligations, noncurrent |
| Other liabilities |
|
| 7,134 |
|
Total lease liability obligations |
|
|
| $ | 8,203 |
|
Weighted-average remaining lease term (in years) |
|
|
|
| 5.4 |
|
Weighted-average discount rate |
|
|
|
| 5.25 | % |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(in thousands) | |||||||||||||||
Warranty, beginning of period | $ | 529 | $ | 717 | $ | 639 | $ | 580 | |||||||
Warranty costs accrued | 59 | 195 | 173 | 672 | |||||||||||
Settlements of warranty claims | (109 | ) | (162 | ) | (333 | ) | (502 | ) | |||||||
Warranty, end of period | $ | 479 | $ | 750 | $ | 479 | $ | 750 |
During the six months ended June 30, 2022, the Company received a limited numberrecognized approximately $0.7 million of reportslease costs in operating expenses and approximately $0.5 million of operating cash flows from consumers and retailers that certain EAR FORCE
Approximate future minimum lease payments for the Company’s investigation. An outside laboratory engaged byright of use assets over the Company identified the substanceremaining lease periods as mold. In cooperation with the U.S. Consumer Product Safety Commission (“CPSC”), the Company is voluntarily recalling certain units of the headsets. As of SeptemberJune 30, 2017 and the date of this report, the Company has not received notice of any law suits against the Company in connection with the recall and is working with the contract manufacturer to collect reimbursement for certain related costs.
|
| (in thousands) |
| |
2022 |
| $ | 660 |
|
2023 |
|
| 1,285 |
|
2024 |
|
| 1,306 |
|
2025 |
|
| 1,293 |
|
2026 |
|
| 1,200 |
|
Thereafter |
|
| 3,674 |
|
Total minimum payments |
|
| 9,418 |
|
Less: Imputed interest |
|
| (1,215 | ) |
Total |
| $ | 8,203 |
|
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our operations should be read together with our unaudited condensed consolidated financial statements and the related notes included in Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 8, 20172, 2022 (the "Annual Report.")
This Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this Report are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects,” “strategies” and similar expressions.expressions or negatives thereof. Caution should be taken not to place undue reliance on any such forward-looking statements because they involve risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements. Forward-looking statements are based on the beliefs, as well as assumptions made by, and information currently available to, the Company's management and are made only as of the date hereof. The Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.otherwise, except as required by the federal securities laws. In addition, forward-looking statements are subject to certain risks and uncertainties, including those described elsewhere in this Quarterly Report on Form 10-Q (including the effects related to the coronavirus (“COVID-19”) pandemic) that could cause actual results to differ materially from the Company's historical experience and its present expectations or projections.
Business Overview
Turtle Beach Corporation (herein referred to as(“Turtle Beach” or the “Company,” “we,” “us,” or “our”“Company”), headquartered in San Diego, CaliforniaWhite 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 operating under two reportable segments,the Turtle Beach® (“Headset“), ROCCAT® and HyperSound®.
Business Trends
We participate in the global software and accessories gaming accessories market, which includes headsetshad an estimated size of $200 billion in 2021, per updated data published by Newzoo in April 2022. The global gaming audience exceeds global cinema and othermusic markets with over 3 billion active gamers worldwide. Gaming peripherals, such as gamepads, specialtyheadsets, keyboards, mice, microphones, controllers, adapters, batteries, memory and interactivesimulation are estimated to be an over $8.5 billion business globally with over 80% of that market in the Americas and Europe where the Company’s business is focused.
Competitive esports is a global phenomenon where professional gamers train and compete to win prize money, partner with major brands, and attract dedicated fans – similar to traditional professional sports. There were approximately 490 million esports viewers in 2021, and that is expected to increase to roughly 641 million viewers by 2025, according to a report from Newzoo. Of those 641 million projected viewers, approximately 318 million are considered “esports enthusiasts.”
Many gamers play online, where a gaming toysheadset (which typically includes a microphone allowing players to communicate in real-time) provides a more immersive experience and a competitive advantage in the industry’s most popular games and franchises.
The Company’s results are heavily dependentaffected by numerous macroeconomic factors including inflation, consumer spending confidence and global supply chains. In 2022, we have experienced a higher rate of inflation than in recent years resulting in higher cost of goods, selling expenses, and general and administrative expenses. Such increases have had and may continue to have a negative impact on the Company’s profit margins if selling prices of products do not increase with the increased costs.
The COVID-19 pandemic has disrupted worldwide economic markets and the extent to which the pandemic and measures adopted in response thereto continue to affect the Company's business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict. While there were likely certain one-time purchases of our products caused by stay-at-home guidance and remote working and learning, we believe millions of new gamers have joined the market which created an ongoing, larger installed base of players.
Console Headset Market
The global video game industry. In 2013, themarket for console headsets in 2021 was approximately $1.7 billion. PlayStation® and Xbox® consoles continue to be dominant gaming industry experiencedplatforms in North America and Europe for games that drive headset usage. Consistent with a cyclical event ashistorical pattern of major new console launches every 7-8 years, Microsoft and Sony each announced newreleased their latest next generation consoles, forXbox® Series and PlayStation®5 platforms just ahead of the first time in eight years, and the consumer response to the Xbox One and PlayStation®4 (the “new generation” or “new-gen” consoles) has been overwhelmingly positive, creating a new installed base of gamers and a market2020 holiday season. Demand for new-gen headsets.
17
of the enthusiasm for the latest consoles. The demand for gaming consoles is forecasted to continue to be strong in 2022 with the additional supply of PlayStation®5 and Xbox® Series platforms expected to be nearly as disruptive as this past change as the new generation of platform uses fairly standard audio connectivity, which we believe is unlikely to change
Nintendo has sold over 100 million units of the Nintendo Switch™ since its release in early 2017. Nintendo continues adding and expanding their library of games with an increased number of multiplayer chat-enabled games. Nintendo also sells the Nintendo Switch™ Lite, a follow-on product that offers gamers the hand-held only version of their popular gaming console.
While gaming on mobile/tablet devices represents about 51% of the global gaming market uncharacteristically slowedand headsets can be used for mobile gaming, console and PC gaming are by-far the largest drivers of gaming headset use.
PC Accessories Market
The market for PC gaming headsets, mice, and keyboards is estimated to have grown slightly in 2021 to $3.6 billion. The same gaming, work-from-home, and school-learn-from-home factors associated with the COVID-19 pandemic that benefitted the accessories market also resulted in increased consumer demand for headsets, keyboards, mice, and other accessories developed for PC gaming in recent years.
PC gaming in the 2016 holiday season, leadingU.S. has seen a resurgence in popularity the past few years and continues to higher-than-normal channel inventory entering 2017, as consumer deferred purchases aheadbe a main gaming platform internationally, driven by big AAA game launches, PC-specific esports leagues, popular teams and players, content creators and influencers and cross-platform play. While most games are available on multiple platforms, gaming on PC offers advantages including improved graphics, increased speed and precision of mid-cycle console refreshesmouse/keyboard controls, and the ability for deeper customization. Gaming mice and keyboards are engineered to provide gamers with high-end performance and a limited line upsuperior gaming experience through features such as faster response times, improved materials and build quality, programmable buttons and keys, and software suites to customize and control devices and settings.
PC gaming mice come in a variety of multi-player games. By mid-year channel inventory normalized, however, retailer business model initiativesdifferent ergonomic shapes and sizes, are available in both wired and wireless models, offer options for different sensors (optical and laser) and responsiveness, and often feature integrated RGB lighting and software to reduce channels inventory levels have shiftedunify with the anticipated timinglighting on other devices for a visually consistent PC gaming appearance. Similarly, PC gaming keyboards often deliver a competitive advantage by offering options for mechanical and optical key switches that feel and sound different and offer customizable lighting.
PC and console gaming markets are also driven by major game launches and franchises that encourage players to buy equipment and accessories. On Xbox®, PlayStation®, and PC flagship games like Call of revenue. We believeDuty®, Destiny, Star Wars: Battlefront, Battlefield, Grand Theft Auto, and battle royale games like Fortnite, Call of Duty Warzone, Apex Legends, and PlayerUnknown’s Battlegrounds, are examples of major franchises that prominently feature online multiplayer modes that encourage communication and tend to drive increased gaming headset demand. Many of these actionsestablished franchises launch new titles annually leading into the holidays and as a result can cause an additional boost to the normally strong holiday sales for gaming accessories.
Microphone Market
As of 2021, the microphone market is estimated to be $2.1 billion in size of which roughly an estimated $630 million is for digital USB microphones. The market for high-quality microphones, specifically digital microphones, has experienced significant growth as content creators on YouTube, Twitch and other popular platforms are notgravitating toward using high-quality professional equipment for their workstations. Additionally, with the trend to remote work, the need for a well-performing desktop microphone has become an indicationimportant tool for working and learning from home, as well as staying connected with family and friends. Turtle Beach’s acquisition of an overall industry decline, but will requireNeat Microphones in 2021 expanded the Company’s reach into the global microphone market, including, in particular, the market for digital/USB microphones that are often used by gamers, streamers, and influencers with other PC accessories.
Other Gaming Accessories Market
During 2021, the Company successfully 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 increased 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.
Supply Chain and Logistic Outlook
The ongoing global economic recovery, subsequent to maintain higher inventory levelsthe 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 meet customer demands with shorter lead times.
18
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 revenues, while continuingour suppliers to pursue certain licensing opportunities for this technology. In October, the Company agreed to its initial license deal within the commercial audio fieldmanage availability of use.
Key Performance Indicators and Non-GAAP Measures
In evaluating our results, management routinely reviews key performance indicators, includingwhich include non-GAAP measures as well as the operating metrics of 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) it is one of thethey are measures used by our boardBoard of directorsDirectors and management team to evaluate our operating performance; (ii) it is one of thethey 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 or have no cash impact on operations; and (iv) it isthey 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 backing outadjusting 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). TheseWe consider the following metrics, however,which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:
We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about our operating profitability adjusted for certain non-cash items, non-routine items that we do not expect to continue at the same level in the future, as well as other items that are not core to our operations. Further, we believe Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against that of other peer companies using similar measures. However, Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America (“GAAP”) and, given the limitations of these metrics as analytical tools, should not be considered a substitute for gross profit, gross margins, net income (loss) or other consolidated income statement data as determined in accordance with GAAP. We consider the following non-GAAP measure, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:
Adjusted EBITDA (and a reconciliation to Net loss,income (loss), the nearest GAAP financial measure) for the three and ninesix months ended SeptemberJune 30, 20172022 and 2016June 30, 2021, are as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(in thousands) | |||||||||||||||
Net loss | $ | (492 | ) | $ | (44,799 | ) | $ | (17,479 | ) | $ | (99,383 | ) | |||
Interest expense | 2,042 | 1,866 | 5,717 | 5,331 | |||||||||||
Depreciation and amortization | 876 | 3,047 | 3,259 | 8,213 | |||||||||||
Stock-based compensation | 370 | 1,017 | 1,187 | 3,222 | |||||||||||
Income tax expense (benefit) | 578 | (133 | ) | 1,098 | (340 | ) | |||||||||
Restructuring charges | 241 | 339 | 509 | 564 | |||||||||||
Business model transition charge | (312 | ) | 7,079 | 41 | 7,079 | ||||||||||
Impairment charges | — | 32,084 | — | 63,236 | |||||||||||
Adjusted EBITDA | $ | 3,303 | $ | 500 | $ | (5,668 | ) | $ | (12,078 | ) |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
| |||||||||||||
Net income (loss) |
| $ | (17,826 | ) |
| $ | 1,721 |
|
| $ | (24,302 | ) |
| $ | 10,559 |
|
Interest expense |
|
| 84 |
|
|
| 73 |
|
| $ | 193 |
|
|
| 170 |
|
Depreciation and amortization |
|
| 1,577 |
|
|
| 1,430 |
|
| $ | 3,081 |
|
|
| 2,472 |
|
Stock-based compensation |
|
| 2,030 |
|
|
| 1,941 |
|
| $ | 3,567 |
|
|
| 3,727 |
|
Income tax expense (benefit) |
|
| (4,740 | ) |
|
| (1,286 | ) |
| $ | (7,379 | ) |
|
| 1,480 |
|
Restructuring Expense |
|
| 527 |
|
|
| — |
|
| $ | 527 |
|
|
| — |
|
Business transaction expense |
|
| — |
|
|
| 88 |
|
|
| — |
|
|
| 250 |
|
Non-recurring business costs |
|
| 6,267 |
|
|
| 987 |
|
| $ | 6,499 |
|
|
| 1,626 |
|
Adjusted EBITDA |
| $ | (12,081 | ) |
| $ | 4,954 |
|
| $ | (17,814 | ) |
| $ | 20,284 |
|
Comparison of the Three Months Ended SeptemberJune 30, 20172022 to the Three Months Ended SeptemberJune 30, 2016
Net loss for the three months ended SeptemberJune 30, 20172022 was $0.5$17.8 million with Adjusted EBITDA of ($12.1) million, compared to a net lossincome of $44.8$1.7 million inwith Adjusted EBITDA of $5.0 million for the prior year, period, including $0.5 million and $0.3 million of net loss attributable to the Headset segment, respectively.
Comparison of the NineSix Months Ended SeptemberJune 30, 20172022 to the NineSix Months Ended SeptemberJune 30, 2016
Net loss for the ninesix months ended SeptemberJune 30, 20172022 was $17.5$24.3 million with Adjusted EBITDA of ($17.8) million compared to a net lossincome of $99.4$10.6 million inwith Adjusted EBITDA of $20.3 million for the prior year period including $16.1 million and $14.4 million of net loss attributabledue to the Headset segment, respectively.
19
Results of Operations
The following table sets forth the Company’s statementstatements of operations for the periods presented:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(in thousands) | |||||||||||||||
Net Revenue | $ | 35,975 | $ | 38,384 | $ | 69,439 | $ | 91,774 | |||||||
Cost of Revenue | 23,437 | 34,457 | 48,384 | 79,372 | |||||||||||
Gross Profit | 12,538 | 3,927 | 21,055 | 12,402 | |||||||||||
Operating expenses | 10,662 | 46,667 | 32,236 | 105,399 | |||||||||||
Operating loss | 1,876 | (42,740 | ) | (11,181 | ) | (92,997 | ) | ||||||||
Interest expense | 2,042 | 1,866 | 5,717 | 5,331 | |||||||||||
Other non-operating expense (income), net | (252 | ) | 326 | (517 | ) | 1,395 | |||||||||
Earnings (loss) before income tax | 86 | (44,932 | ) | (16,381 | ) | (99,723 | ) | ||||||||
Income tax expense (benefit) | 578 | (133 | ) | 1,098 | (340 | ) | |||||||||
Net loss | $ | (492 | ) | $ | (44,799 | ) | $ | (17,479 | ) | $ | (99,383 | ) |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
| |||||||||||||
Net revenue |
| $ | 41,300 |
|
| $ | 78,564 |
|
| $ | 87,962 |
|
| $ | 171,617 |
|
Cost of revenue |
|
| 33,418 |
|
|
| 49,854 |
|
|
| 66,051 |
|
|
| 108,052 |
|
Gross profit |
|
| 7,882 |
|
|
| 28,710 |
|
|
| 21,911 |
|
|
| 63,565 |
|
Operating expenses |
|
| 29,255 |
|
|
| 28,267 |
|
|
| 51,571 |
|
|
| 50,842 |
|
Operating income (loss) |
|
| (21,373 | ) |
|
| 443 |
|
|
| (29,660 | ) |
|
| 12,723 |
|
Interest expense |
|
| 84 |
|
|
| 73 |
|
|
| 193 |
|
|
| 170 |
|
Other non-operating expense, net |
|
| 1,109 |
|
|
| (65 | ) |
|
| 1,828 |
|
|
| 514 |
|
Income (loss) before income tax |
|
| (22,566 | ) |
|
| 435 |
|
|
| (31,681 | ) |
|
| 12,039 |
|
Income tax expense (benefit) |
|
| (4,740 | ) |
|
| (1,286 | ) |
|
| (7,379 | ) |
|
| 1,480 |
|
Net income (loss) |
| $ | (17,826 | ) |
| $ | 1,721 |
|
| $ | (24,302 | ) |
| $ | 10,559 |
|
Net Revenue and Gross Profit
The following table summarizes net revenue and gross profit for the periods presented:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
| |||||||||||||
Net Revenue |
| $ | 41,300 |
|
| $ | 78,564 |
|
| $ | 87,962 |
|
| $ | 171,617 |
|
Gross Profit |
| $ | 7,882 |
|
| $ | 28,710 |
|
| $ | 21,911 |
|
| $ | 63,565 |
|
Gross Margin |
|
| 19.1 | % |
|
| 36.5 | % |
|
| 24.9 | % |
|
| 37.0 | % |
Cash Margin (1) |
|
| 20.8 | % |
|
| 37.2 | % |
|
| 26.4 | % |
|
| 37.7 | % |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(in thousands) | |||||||||||||||
Net Revenue | $ | 35,947 | $ | 38,283 | $ | 69,291 | $ | 91,172 | |||||||
Gross Profit | 12,328 | 12,766 | 21,465 | 24,643 | |||||||||||
Gross Margin | 34.3 | % | 33.3 | % | 31.0 | % | 27.0 | % | |||||||
Cash Margin (1) | 34.8 | % | 34.0 | % | 31.6 | % | 27.9 | % |
Comparison of the Three Months Ended SeptemberJune 30, 20172022 to the Three Months Ended SeptemberJune 30, 2016
Net revenuesrevenue for the three months ended SeptemberJune 30, 2017 were $35.92022 was $41.3 million, a $2.3$37.3 million decrease from $78.6 million reflecting lower customer demand as compared to three months ended September 30, 2016. The slight decrease, due to a holiday order timing shift from certain North American retailers that pushed revenue to October, reflects recent industry data that we believe indicates a start of the gaming console headset market recovery aheadresult of a solid lineup of expected new game launcheschallenging macroeconomic environment, lower channel inventory levels at retailers and the holiday season that will include the release of the Xbox One X console. Additionally, our international business increased 22.6% driven by market share growth in the United Kingdomglobal supply chain issues. The comparable prior year period revenues were at elevated levels resulting from stay-at-home orders and Europe.
For the three months ended SeptemberJune 30, 2017,2022, gross profit as a percentage of net revenue increasedmargin decreased to 34.3%19.1% from 33.3%36.5% in the comparable prior year. Headset margins were positively impacted by product cost savingsyear period. The decrease was primarily due to higher promotional credits driven by our supply chain and logistics teams and productmore aggressive competitive pricing actions to reduce channel inventory levels, business mix, partially offset by the loss ofhigher freight costs, volume-driven fixed cost leverage.
Comparison of the NineSix Months Ended SeptemberJune 30, 20172022 to the NineSix Months Ended SeptemberJune 30, 2016
Net revenuesrevenue for the ninesix months ended SeptemberJune 30, 2017 decreased $21.92022 was $88.0 million, or 24.0%, as compared to ninea $83.7 million decrease from $171.6 million in the elevated comparable prior year period brought on by stay-at-home orders and government stimulus payments.
For the six months ended SeptemberJune 30, 2016,2022, gross margin decreased to 24.9% from 37.0% in the comparable prior year period. The decrease was primarily due to the negative impacthigher freight costs, a more normalized level of 2016 holiday channel overhang, a result of lower industry-wide demand as limited sales of marquee games disrupted holiday purchasing behavior,promotional credits and retailer business model initiatives to reduce on-hand inventory levels.
20
Operating Expenses
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(in thousands) | |||||||||||||||
Selling and marketing | $ | 5,586 | $ | 7,016 | $ | 15,564 | $ | 19,737 | |||||||
Research and development | 1,336 | 2,637 | 4,423 | 6,701 | |||||||||||
General and administrative | 3,499 | 4,591 | 11,740 | 15,161 | |||||||||||
Asset impairment | — | 32,084 | — | 63,236 | |||||||||||
Restructuring charges | 241 | 339 | 509 | 564 | |||||||||||
Total operating expenses | $ | 10,662 | $ | 46,667 | $ | 32,236 | $ | 105,399 | |||||||
By Segment: | |||||||||||||||
Headset | $ | 10,509 | $ | 11,056 | $ | 31,244 | $ | 32,613 | |||||||
HyperSound | $ | 153 | $ | 35,611 | $ | 992 | $ | 72,786 |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
| |||||||||||||
Selling and marketing |
| $ | 11,587 |
|
| $ | 15,678 |
|
| $ | 22,416 |
|
| $ | 27,223 |
|
Research and development |
|
| 5,136 |
|
|
| 4,416 |
|
|
| 10,388 |
|
|
| 8,409 |
|
General and administrative |
|
| 12,532 |
|
|
| 8,173 |
|
|
| 18,767 |
|
|
| 15,210 |
|
Total operating expenses |
| $ | 29,255 |
|
| $ | 28,267 |
|
| $ | 51,571 |
|
| $ | 50,842 |
|
Selling and Marketing
Selling and marketing expenses for the three and six months ended SeptemberJune 30, 20172022 totaled $5.6$11.6 million or 15.5% as a percentage of net revenues,and $22.4 million, respectively, compared to $7.0$15.7 million or 18.3% as a percentage of net revenues, for the three months ended September 30, 2016. The decrease was attributable to the reduction of HyperSound business related sales force and marketing campaigns and, certain promotional activity that has been deferred to align with upcoming game releases.
Research and Development
Research and development costs for the three and six months ended June 30, 2022 were $5.1 million and $10.4 million, respectively, compared to $4.4 million and $8.4 million, respectively, for the three and six months ended June 30, 2021. The year-over-year increases were primarily due to the addition of resources and infrastructure to support new product development and further global expansion.
General and Administrative
General and administrative expenses for the three months ended SeptemberJune 30, 20172022 totaled $3.5$12.5 million or 9.7% as a percentage of net revenues, compared to $4.6$8.2 million or 12.0% as a percentage of net revenues, for the three months ended SeptemberJune 30, 2016. The decrease was2021. Excluding certain non-recurring fees related to the proxy contest with respect to the 2022 annual meeting of stockholders and shareholder litigation costs, expenses decreased $0.8 million primarily due to lower non-cash charges, legal and professional service fees and headcount reductions.
General and administrative expenses for the ninesix months ended SeptemberJune 30, 20172022 totaled $11.7$18.8 million or 16.9% as a percentage of net revenues, compared to $15.2 million or 16.5% as a percentage of net revenues, for the ninesix months ended SeptemberJune 30, 2016. The decrease was2021. Excluding certain non-recurring fees related to the proxy contest with respect to the 2022 annual meeting of stockholders and shareholder litigation costs, expenses decreased $1.1 million primarily due to lower non-cash chargesprofessional fees and employee expenses.
Income Taxes
Income tax benefit for the three and nine months ended SeptemberJune 30, 2017 and September 30, 2016 related to our continued efforts to improve our operating efficiency in our Headset business, such as closing excess facilities and reducing redundancies, and reducing HyperSound business operating expenses.
Liquidity and Capital Resources
Our primary sources of working capital are cash flowflows from operations and availability of capital under our revolving credit facility. We have funded operations and acquisitions in recent periods with operating cash flows and proceeds from debt and equity financings.
The following table summarizes our sources and uses of cash:
Nine Months Ended | |||||||
September 30, | |||||||
2017 | 2016 | ||||||
(in thousands) | |||||||
Cash and cash equivalents at beginning of period | $ | 6,183 | $ | 7,114 | |||
Net cash provided by operating activities | 9,291 | 3,117 | |||||
Net cash used for investing activities | (2,584 | ) | (2,260 | ) | |||
Net cash used for financing activities | (12,559 | ) | (4,632 | ) | |||
Effect of foreign exchange on cash | 142 | (62 | ) | ||||
Cash and cash equivalents at end of period | $ | 473 | $ | 3,277 |
|
| Six Months Ended |
| |||||
|
| June 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
Cash and cash equivalents at beginning of period |
| $ | 37,720 |
|
| $ | 46,681 |
|
Net cash provided by (used for) operating activities |
|
| (41,247 | ) |
|
| 12,448 |
|
Net cash used for investing activities |
|
| (1,207 | ) |
|
| (5,816 | ) |
Net cash provided by financing activities |
|
| 16,245 |
|
|
| 2,799 |
|
Effect of foreign exchange on cash |
|
| (634 | ) |
|
| 85 |
|
Cash and cash equivalents at end of period |
| $ | 10,877 |
|
| $ | 56,197 |
|
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Operating activities
Cash used for operating activities for the six months ended June 30, 2022 was $41.2 million, a decrease of $53.7 million as compared to cash provided by operating activities for the nine months ended September 30, 2017 was $9.3 million, an increase of $6.2 million as compared to $3.1$12.4 million for the ninesix months ended SeptemberJune 30, 2016.2021. The increasedecrease is primarily the result of lower HyperSound business net cash burn and certain initiatives to better align cash expenditures with the seasonality of the gaming market, partially offset by lower gross receipts as well as higher inventory levels due to reduced sales volumes.
Investing activities
Cash used for investing activities was $2.6$1.2 million for the six months ended June 30, 2022, which was related to certain capital investments, compared to $5.8 million for the six months ended June 30, 2021, which included $2.5 million related to the Neat Microphones acquisition.
Financing activities
Net cash provided by financing activities was $16.2 million during the
Management assessment of liquidity
Management believes that our current cash and cash equivalents, the amounts available under our revolving credit facility and cash flows derived from operations will be sufficient to meet anticipated cash needsshort-term and long-term funding for working capital and capital expenditures for at leastincluding amounts to develop new products, fund future stock repurchases and to pursue strategic opportunities.
In addition, the next 12 months.Company monitors the capital markets on an ongoing basis and may consider raising capital if favorable market conditions develop. 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 SeptemberJune 30, 20172022 and December 31, 20162021 were $0.1$3.4 million and $0.2$10.2 million, respectively.
At-the-Market Equity Offering Sales Agreement
On August 7, 2020, the Company entered into an ATM Equity Offering Sales Agreement (the “Sales Agreement”) with BofA Securities, Inc. (the “Sales Agent”). Pursuant to the terms of the Sales Agreement, the Company may sell from time to time through the Sales Agent shares of the Company’s common stock, par value $0.001 per share, having an aggregate offering price of up to $30 million. The Company intends to use the net proceeds from the offering, after deducting the Sales Agent’s commissions and the Company’s offering expenses, to support its strategic growth plans, as well as for general corporate purposes.
There was no activity under this agreement during the six months ended June 30, 2022.
Revolving Credit Facility
On March 31, 2014,December 17, 2018, Turtle Beach and certain of its subsidiaries entered into a new asset-based revolving creditan amended and restated loan, guaranty and security agreement (“Credit Facility”)
On May 31, 2019, the Company amended the Credit Facility to provide for, amongst other items, (i) the addition of creditTBC Holding Company LLC, a wholly-owned subsidiary of VTB, as an obligor and other corporate purposes.
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.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 between22
The Company and the administrative agent entered into an amendment to the Credit Agreement (the "LIBOR Transition Amendment") to replace the LIBOR rate as a reference rate available for use in the computation of interest under the Credit Agreement in favor of (i) the Applicable Rate (as defined in the Credit Agreement) plus Sterling Overnight Index Average (“SONIA”) or the Euro Interbank Offered Rate (“EURIBOR”). The Company expects to enter into an additional agreement to finalize the transition of the U.S. LIBOR rate prior its expiration on June 30, 2023.
The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met meaning thator certain other events occur (as defined in the Company does not have receivables and inventory which are eligible to borrow on underCredit Facility). At such times, the Credit Facility in excess of amounts borrowed, the Credit Facility requi
The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions, including ourthe Company’s 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'sCompany’s assets.
As of SeptemberJune 30, 2017,2022, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $12.5 million, net of the outstanding Term Loan Due 2018 (as defined below) that is considered to be an additional outstanding amount under the Credit Facility.
Critical Accounting Estimates
Our discussion and analysis of our results of operations and capital resources are based on our condensed consolidated financial statements, which have been prepared in conformity with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
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 reported. Management evaluates its estimates, assumptions and judgments on an ongoing basis.
See Note 2, “Summary of Significant Accounting Policies,” into the Notes to theunaudited condensed consolidated financial statements contained herein 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.
Item 3 - Qualitative and Quantitative Disclosures aboutAbout Market Risk
Market risk represents the risk of loss that may impact a company'sour financial position due to adverse changes in financial market prices and rates. The Company'sCompany’s market risk exposure is primarily a result of fluctuations in interest rates, and foreign currency exchange rates and inflation.
The Company has used derivative financial instruments, specifically foreign currency forward and option contracts, to manage exposure to foreign currency risks, by hedging a portion of its forecasted expenses denominated in British Pounds expected to occur within a year. The effect of exchange rate changes on foreign currency forward and option contracts is expected to offset the effect of exchange rate changes on the underlying hedged item. The Company does not use derivative financial instruments for speculative or trading purposes. As of
Foreign Currency Exchange Risk
The Company has exchange rate exposure primarily with respect to the British Pound and Euro. As of
Inflation Risk
The Company is exposed to market risk due to the possibility of inflation, such asinflationary pressures, including higher labor-related costs, increases in the costcosts of its products. Although the Company does not believe that inflation has hadgoods and services we purchase as part of the manufacture and distribution of our products, increased costs from supply chain and logistic headwinds and increased costs 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. Inflationary pressures can also have a materialnegative impact on its financial positiondemand for the products we sell. Reduced or results of operationsdelayed discretionary spending by consumers in response to date,inflationary pressures has reduced consumer demand for our products, resulting in reduced sales. In 2022, we have experienced a highhigher rate of inflation than in the futurerecent years resulting in higher cost of
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goods, selling expenses, and general and administrative expenses. Such increases have had and may continue to have an adverse effecta negative impact on the Company’s ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenueprofit margins if the selling prices of products do not increase with thesethe increased costs.
Item 4 - Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are designed to ensure that (1) information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (2) that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures.
At the conclusion of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision of our Chief Executive Officer (our principal executive officer, or PEO) and our Chief Financial Officer (our principal financial officer, or PFO), of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our PEO and PFO concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, were effective as of SeptemberJune 30, 2017.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the period covered that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
Please refer to Note 12, - “Commitments and Contingencies” in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated into this item by reference.
Item 1A - Risk Factors
Set forth below is a summary of certain material risks related to an investment in our securities, which should be considered carefully in evaluating such an investment. Our business, financial condition, operating results and cash flows can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, results of operations, cash flows and common stock price. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations.
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to
Because of the following factors, as well as other factors affecting the Company’s financial condition and operating
Risks Related to Liquidity
The strategic alternatives review process could disrupt our business, affect our financial condition and results of operations and lead to increased volatility in the market price of our common stock.
In connection with the settlement of our engagement with The Donerail Group LP and certain of its affiliates (“Donerail”), we announced a process to review strategic alternatives. We depend uponhave incurred and may continue to incur substantial expenses associated with that process. That process may be time-consuming and disruptive to our business by diverting the attention of our management, Board of Directors and employees. In addition, we may be subject to costly and time-consuming litigation related to that process. Further, that process may result in the loss of potential business opportunities and have a negative effect on the market price and volatility of our common stock, as well as our ability to recruit and retain qualified personnel.
Our business has been and could continue to be adversely affected by inflationary pressures.
We are exposed to inflationary pressures including higher labor-related costs and potential increases in the costs of the goods and services we purchase as part of the manufacture and distribution of our products and in our operations generally. In 2021 and the first half of 2022, global supply chain constraints and the continuing effects of the COVID-19 pandemic (including government measures adopted in response thereto) have resulted in heightened inflationary cost pressures. Such inflationary pressures have also been and could continue to be exacerbated by higher oil prices, geopolitical turmoil (including the ongoing conflict in Ukraine), increased logistics costs and economic policy actions. As interest rates rise to address inflation, such increases could lead to an increase in borrowing costs over time.
Inflationary pressures can also have a negative impact on demand for the products we sell. Reduced or delayed discretionary spending by consumers, specifically for consumer electronic goods, in response to inflationary pressures has and could continue to reduce demand for our products, resulting in reduced sales. Our inability to adequately increase prices to offset increased costs associated with such inflationary pressures, or otherwise mitigate their impact, will increase our costs of doing business and reduce our margins and profitability. If such impacts are prolonged or substantial, they could have a material negative effect on our results of operations.
The manufacture, supply and shipment of our products are subject to supply chain and logistics risks that could adversely impact our financial results.
We face a number of risks related to supply chain management and logistics with respect to our products. Recently, we have experienced, and may in the future continue to experience, supply or labor shortages or other disruptions to our supply chain or logistics, which could result in shipping delays and increased costs, each of which could negatively impact our results, operations, product development, and sales. The extent and duration of the impact of these challenges are subject to numerous factors, including the continuing impact of the
25
COVID-19 pandemic, behavioral changes, wage and price costs, adoption of new or revised regulations, and broader macroeconomic conditions.
In 2021 and in the first half of 2022, we experienced supply chain disruptions that resulted in significant cost increases for commodities and components used in our products, as well as component shortages that have negatively affected our sales and results of operations. For example, the recent market shortage of semiconductors has caused disruptions, from both a supply and pricing standpoint. As discussed above, recent inflationary pressures have also been exacerbated by the lower availability of, capital under our revolving credit facility and term loan to finance our operations. Any additional financing that we may needincreased prices for, freight and logistics, including air, sea, and ground freight. We may not be available on favorable terms or at all.
The manufacture, supply and shipment of our products are dependent upon a limited number of third parties, and our success is dependent upon the ability of these parties to manufacture, supply and ship sufficient quantities of our products to us in a timely fashion, as well as the continued viability and financial stability of these third parties. In addition, many of our products use components with long order lead times and constrained supply. Any disruption in supply of these components could materially impact the ability of our third-party manufacturing partners to produce our products.
We would be requiredrely on third parties to obtain additional financing frommanufacture and manage the logistics of transporting and distributing our products, which subjects us to a number of risks that have been exacerbated as a result of the COVID-19 pandemic and the ongoing supply chain issues associated therewith. Our manufacturers’ and suppliers’ ability to supply products to us is also subject to a number of risks, including the availability of raw materials or components, their financial instability, the destruction of their facilities, epidemics or work stoppages. Any shortage of raw materials or components or an inability to control costs associated with manufacturing could increase our costs or impair our ability to ship orders in a timely and cost-efficient manner. As a result, we could experience cancellations of orders, refusal to accept deliveries or a reduction in our prices and margins, any of which could harm our financial performance and results of operations.
The continuation of stay-at-home orders and other sources,COVID-19 pandemic related restrictions internationally has led to factory closures, interruptions in supply chains, increased regulation and we cannot predict whether or on what terms, if any, additional financing might be available. If we are required to seek additional financing and are unable to obtain it, we may have to change our business and capital expenditure plans,workforce shortages, each of which may continue in the future. These issues and others may make it difficult for our suppliers and manufacturers to source raw materials or components, manufacture finished goods and export our products. There may be significant and material disruptions to our supply chain and operations, and delays in the manufacture and shipment of our products, which may then have a materiallymaterial adverse effect on our business or results of operations.
We could be negatively affected if we are not able to engage third parties with the necessary capabilities or capacity on reasonable terms, or if those we engage with fail to meet their obligations (whether due to financial difficulties, manufacturing constraints, or other reasons). Moreover, there can be no assurance that such manufacturers and suppliers will not refuse to supply us at prices we deem acceptable, independently market their own competing products in the future, or otherwise discontinue their relationships with us. Our failure to maintain these existing manufacturing and supplier relationships, or to establish new relationships on similar terms in the future, could have a material adverse effect on our business, results of operations, financial condition and liquidity.
In particular, certain of our products have a number of components and subassemblies produced by outside suppliers. In addition, for certain of these items, we qualify only a single source of supply with long lead times, which can magnify the risk of shortages or result in excess supply and also decreases our ability to negotiate price with our suppliers. Also, if we experience quality problems with suppliers, then our production schedules could be significantly delayed or costs significantly increased, which could have an adverse effect on our business, liquidity, results of operations. operation and financial position.
In addition, the debt underongoing effectiveness of our supply chain is dependent on the Loan Documents could make it more difficulttimely performance of services by third parties shipping products and materials to obtain other debt financing in the future, which could put us at a competitive disadvantage to competitors with less debt.
The Credit Facility is asset based and can only be drawn down in an amount to which eligible collateral exists and can be negatively impacted by extended collection of accounts receivable, unexpectedly high product returns and slow moving inventory, among other factors. Aseffects of the date of this report, we were in compliance with our covenants under the Loan Documents.
The effects of the public health crisis caused by the COVID-19 pandemic, its variant strains, and the measures taken in response are uncertain and difficult to predict, but may include a decrease in the demand and/or pricing for our products, disruptions to our supply chain, and a general deterioration of the global economy, among others.
Additionally, retailers have experienced, and may continue to experience, liquidity constraints or other stakeholdersfinancial difficulties due to COVID-19, which could lead to a reduction in the amount of merchandise purchased from us, an increase in order cancellations or the need to
26
extend payment terms. Any or all of these measures could substantially reduce revenue or have doubts regardinga material adverse effect on our abilityresults of operations.
At the beginning of the COVID-19 pandemic, we saw an increase in demand for our products due to increased gaming, work-from-home, and school-learn-from-home, however, such increased demand for our products has subsided as restrictions imposed for the pandemic are lifted and social functions and activities continue to return to pre-pandemic levels. This decrease in demand may continue as a going concern, thisfurther pandemic restrictions are lifted and social functions not involving the use of our products continue to return.
These effects, alone or taken together, could result in further loss of confidence, which, in turn, could materially adversely affect our ability to
We depend upon the success and availability of third-party gaming platforms and softwarerelease of certain game titles to drive sales of our headset products.
The performance of our headset business is affected by the continued success of third-party gaming platforms, such as Microsoft'sMicrosoft’s Xbox® consoles and Sony'sSony’s PlayStation® consoles, as well as video games developed by such manufacturers and other third-party publishers. Our business could suffer if any of these parties fail to continue to drive the success of these platforms, develop new or enhanced videogamevideo game platforms, develop popular game and entertainment titles for current or future generation platforms or produce and timely release sufficient quantities of such consoles. For example, DFC Intelligence forecasts' estimates of future cumulative new generation console has declined since the debut of the new-gen consoles in 2013, which, if such estimates are accurate, may negatively impact our future headset sales or otherwise negatively impact our business. Further, if a platform is withdrawn from the market or fails to sell, we may be forced to liquidate inventories relating to that platform or accept returns resulting in significant losses.
Our Xbox One headsets are dependent on this license. Microsoft has the right to terminate the Xbox One Agreement under certain circumstances set forth in the agreement. Should the Xbox One Agreement be terminated, our headset offerings may be limited, thereby significantly reducing our revenues.
We compete with other producers of personal computers and video game console headsets,gaming accessories, including the video game console manufacturers. Our competitors may spend more money and time on developing and testing products, undertake more extensive marketing campaigns, adopt more aggressive pricing policies, pay higher fees to licensors for motion picture, television, sports, music and character properties, or develop more commercially successful products for the personal computer orPC and video game platforms than we do. In addition, competitors with large product lines and popular products, in particular the video game console manufacturers, typically have greater leverage with retailers, distributors and other customers, who may be willing to promote products with less consumer appeal in return for access to those competitors’ more popular products.
In the event that a competitor reduces prices, we could be forced to respond by lowering our prices to remain competitive. If we are forced to lower prices, we may be required to “price protect” products that remain unsold in our customers’ inventories at the time of the price reduction. Price protection results in our issuing a credit to our customers in the amount of the price reduction for each unsold unit in that customer’s inventory. Our price protection policies, which are customary in the industry, can have a major impact on our salesprofitability. Also, any actions we undertake to increase prices in response to rising inflation or other considerations may reduce demand for our product and profitability.
Conversely, any actions we undertake to become incompatible with that hardware manufacturer’s console, there could be unanticipated delaysincrease prices in the release ofresponse to rising costs due to higher inflation levels or other considerations may reduce demand for our products as well as increases to projected development, manufacturing, marketing or distribution costs, any of which could harmif our competitors do not follow with similar pricing actions. This may have a material adverse effect on our business and financial results.
The industries in which we operate are subject to competition in an environment of rapid technological change, and if we do not adapt to, and appropriately allocate our resources among, emerging technologies, our revenues could be negatively affected.
We must make substantial product development and other investments to align our product portfolio and development efforts in response to market changes in the gaming industry. We must anticipate and adapt our products to emerging technologies in order to keep those products competitive. When we choose to incorporate a new technology into our products or to develop a product for a new platform or operating system, we are often required to make a substantial investment prior to the introduction of the product. If we invest in the development of a new technology or for a new platform that does not achieve significant commercial success, our revenues from those products likely will be lower than anticipated and may not cover our costs.
New and resources to shift product development resources to that technology or platform and it may be more difficult to compete against existing products incorporating that technology or for that platform. Any failure to successfully adapt to, and appropriately allocate resources among, emerging technologies and alternate platforms for gaming, such as mobile devices and virtual reality devices, could harmmake the consoles for which our competitive position, reduce our share and significantly increase theheadsets are designed less attractive or, in time, it takesobsolete, which could require us to bring populartransition our business model such as develop products to market.
There are numerous steps required to develop a product from conception to commercial introduction and to ensure timely shipment to retail customers, including designing, sourcing and testing the electronic components,
receiving approval of hardware and other third-party licensors, factory availability and manufacturing and designing the graphics and packaging. Any difficulties or delays in the product development process will likely result in delays in the contemplated product introduction schedule. It is common in new product introductions27
or product updates to encounter technical and other difficulties affecting manufacturing efficiency and, at times, the ability to manufacture the product at all. Although these difficulties can be corrected or improved over time with continued manufacturing experience and engineering efforts, if one or more aspects necessary for the introduction of products are not completed as scheduled, or if technical difficulties take longer than anticipated to overcome, the product introductions will be delayed, or in some cases may be terminated. No assurances can be given that our products will be introduced in a timely fashion, and if new products are delayed, our sales and revenue growth may be limited or impaired.
A significant portion of our revenue is derived from a few large customers, and the loss of any such customer, or a significant reduction in purchases by such customer, could have a material adverse effect on our business, financial condition and results of operations.
During 2016,2021, our three largest individual customers accounted for approximately 49%41% of our gross sales in the aggregate. The loss of, or financial difficulties experienced by, any of these or any of our other significant customers, including as a result of the bankruptcy of a customer, could have a material adverse effect on our business, results of operations, financial condition and liquidity. We do not have long-term agreements with these or other significant customers and our agreements with these customers do not require them to purchase any specific amount of products. All of our customers generally purchase from us on a purchase order basis. As a result, agreements with respect to pricing, returns, cooperative advertising or special promotions, among other things, are subject to periodic negotiation with each customer. No assurance can be given that these or other customers will continue to do business with us or that they will maintain their historical levels of business. In addition, the uncertainty of product orders can make it difficult to forecast our sales and allocate our resources in a manner consistent with actual sales, and our expense levels are based in part on our expectations of future sales. If our expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls. In addition, financial difficulties experienced by a significant customer could increase our exposure to uncollectible receivables and the risk that losses from uncollected receivables exceed the reserves we have set aside in anticipation of this risk.
Turtle Beach relies on its partnerships with influencers, athletes and shipmentesports teams to expand our market and promote our products, which may not perform to our expectations.
We believe that our ability to extend the recognition and favorable perception of our products are dependent upon a limited number of third parties,Turtle Beach brand, and the ROCCAT and Neat Microphones brands, is critical to implement our success is dependent upon the ability of these parties to manufacture, supplygaming accessory growth strategy, which includes maintaining our strong position in console gaming headsets and ship sufficient quantities of theirbuilding our brand recognition and product components to usappeal in a timely fashion,PC gaming headsets, keyboards, and mice as well as in additional new categories over time. These efforts incur significant costs in marketing and these expenditures, however, may not result in a sufficient increase in net sales to cover such costs.
If our marketing efforts do not effectively raise the continued viabilityrecognition and financial stabilityreputation of our brands, we may not be able to successfully implement our gaming accessory growth strategy.
Relationships with new and established influencers, athletes and esports teams have been, and will continue to be, important to our future success. We rely on these partners to assist us in generating increased acceptance and use of our product offerings. We have established a number of these third-parties.
Our net sales and operating income fluctuate on a seasonal basis and decreases in sales or margins during peak seasons could have a disproportionate effect on our overall financial condition and results of operations.
Historically, a majoritysignificant portion of our annual revenues have been generated during the holiday season of September to December. If we do not accurately forecast demand for particular products, we could incur additional costs or experience manufacturing
Demand for our products depends on many factors such as consumer preferences and the introduction or adoption of game platforms and related content and can be difficult to forecast. If we misjudge the demand for our products, we could face the following problems in our operations, each of which could harm our operating results:
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Our results of operations and financial condition may be adversely affected by global business, political, operational, financial and economic conditions.
We face business, political, operational, financial and economic risks inherent in international business, many of which are beyond our control, including:
Any of these factors could reduce our net sales, decrease our gross margins, increase our expenses or reduce our profitability. Should we establish our own operations in international territories where we currently utilize a distributor, we will become subject to greater risks associated with operating outside of the United States.
The electronics industry in general has historically been characterized by a high degree of volatility and is subject to substantial and unpredictable variations resulting from changing business cycles. Our operating results will be subject to fluctuations based on general economic conditions, and in particular conditions that impact discretionary consumer spending. The audio products sector ofDownturns in the electronics industry has and may continue toworldwide economy could adversely affect our business. We could experience a slowdownreduction in sales, which adversely impactsdemand for our products or a lengthening of consumer replacement schedules for our products. Reduced demand for these products could result in decreases in our average selling prices and product sales. A deterioration of current conditions in worldwide credit markets could limit our ability to generate revenues and impacts the results of our future operations.obtain financing. A lack of available credit in financial markets may adversely affect the ability of our commercial customers to finance purchases and operations and could result in an absence of orders or spending for our products as well as create supplier disruptions. We are unable to predict the likely duration and severity of any adverse economic conditions and disruptions in financial markets and the effects they will have on our business and its financial condition.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report financial results or prevent fraud, which could have an adverse effect on our business and financial condition.
Effective internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud. Any
inability to provide reliable financial reports or prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires, among other things, that we perform systemevaluate our systems and process evaluationprocesses and testing oftest our internal controlcontrols over financial reporting to allow management and our independent registered public accounting firm, as applicable, to report on the effectiveness of our internal control over financial reporting. If we are not able to remediate any identified material weakness or otherwise comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, investors could lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline and we could be subject to sanctions, investigations by NASDAQ,the Nasdaq Stock Market, LLC, the SEC or other regulatory authorities, or shareholder litigation.
In addition, failure to maintain effective internal controls could result in financial statements that do not accurately reflect our financial condition or results of operations. There can be no assurance that we will be able to maintain a system of internal controls that fully complies with the requirements of the Sarbanes-Oxley Act of 2002 or that our management and independent registered public accounting firm will continue to conclude that our internal controls are effective.
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Our business could be negatively affected as a result of any future proxy contest or the supervisionactions of activist shareholders.
Although our engagement with certain entities affiliated with The Donerail Group LP (“Donerail”) was settled as a result of our Chief Executive Officer (our principal executive officer,entry into a cooperation agreement, future proxy contests or PEO)related activist activities could adversely affect our business for a number of reasons, including the fact that responding to proxy contests and our Chief Financial Officer (our principal financial officer, or PFO), ofother actions by activist shareholders can be disruptive, costly and time-consuming; can divert the effectiveness of the design and operationattention of our disclosure controlsmanagement, Board of Directors and procedures. Based uponemployees; and can create perceived uncertainties as to our future direction and governance that evaluation,may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel, business partners, customers and other stakeholders important to our PEOsuccess. Any future proxy contest or activist activities could also cause our stock price to experience periods of volatility. Further, we have incurred and PFO concluded that our disclosure controls and procedures, as definedmay incur in Rule 13a-15(e)the future additional expenses by retaining the services of the Exchange Act, were effective as of September 30, 2017. However, because of the inherent limitations of internal control over financial reporting, including the possibility of collusionvarious professionals to advise us in engagement with activist shareholders. If a future proxy contest or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because ofrelated settlement results in additional changes in conditions, or that the degreecomposition of compliance with the policies or proceduresour Board of Directors, it may deteriorate.
Risks Related to our Intellectual Property and other Legal and Regulatory Matters
Our competitive position will be seriouslyadversely damaged if our products are found to infringe on the intellectual property rights of others.
Other companies and our competitors may currently own or obtain patents or other proprietary rights that might prevent, limit or interfere with our ability to make, use or sell our products. Although we do not believe that our products infringe the proprietary rights of any third parties, we have received notices of alleged infringement in the past and there can be no assurance that infringement or other legal claims will not be asserted against us in the future or that we will not be found to infringe the intellectual property rights of others. The electronics industry is characterized by vigorous protection and pursuit of intellectual property rights orand positions, resulting in significant and often protracted and expensive litigation. In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results could be adversely affected. Any litigation or claims, whether or not valid, could result in substantial costs or aand diversion of our resources. An adverse result from intellectual property litigation could forcecause us to do one or more of the following:
If we are forced to take any of the foregoing actions, we could face substantial costs and shipment delays and our business could be seriously harmed. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may be inadequate to insure us for all liability that may be imposed.
In addition, it is possible that our customers or end users may seek indemnity from us in the event that our products are found or alleged to infringe the intellectual property rights of others. Any such claim for indemnity could result in substantial expensescosts to us that could harmadversely impact our operating results.
If we are unable to obtain and maintain intellectual property rights and/or enforce those rights against third parties who are violating those rights, our business could suffer.
We rely on various intellectual property rights, including patents, trademarks, trade secrets and trade dress to protect our Turtle Beach brand name, reputation, product appearance, and technology and our proprietary rights in our HyperSound technology. Although we have entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with selected parties with whom we conduct business to limit access to and disclosure of our proprietary information, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent misappropriation of that intellectual property or deter independent third-party development of similar technologies. Monitoring the unauthorized use of proprietary technology and trademarks is costly, and any dispute or other litigation, regardless of outcome, may be costly and time consuming and may divert the attention of management and key personnel from our business operations. The steps taken by us may not prevent unauthorized use of proprietary technology or trademarks. Many features of our products are not protected by patents; and as a consequence, we may not have the legal right to prevent others from reverse engineering or otherwise copying and using these features in competitive products. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could adversely affect our financial results.
We are susceptible to counterfeiting of our products, which may harm our reputation for producing high-quality products and force us to incur expenses in enforcing our intellectual property rights. Such claims and lawsuits can be expensive to resolve, require substantial management time and resources, and may not provide a satisfactory or timely result, any of which may harm our results of operations. As some
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of our products are sold internationally, we are also dependent on the laws of a range ofmany countries to protect and enforce our intellectual property rights. These laws may not protect intellectual property rights to the same extent or in the same manner as the laws of the United States.
Further, we are party to licenses that grant us rights to intellectual property, including trademarks, which are necessary or useful to our Turtle Beach business. One or more of our licensors may allege that we have breached our license agreement with them, and seek to terminate our license. If successful, this could result in our loss of the right to use the licensed intellectual property, which could adversely affect our ability to commercialize our technologies or products, as well as harm our competitive business position and our business prospects.
Our success also depends in part on our ability to obtain and enforce intellectual property protection of our technology, particularly our patents. There is no guarantee any patent will issuebe granted on any patent application that we have filed or may file. Claims allowed from existing or pending patents may not be of sufficient scope or strength to protect the economic value of our technologies. Further, any patent that we may obtain will expire at some point, and it is possible that it may be challenged, invalidated or
We may initiate claims or litigation against third parties in the future for infringement of our proprietary rights or to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors. These claims could result in costly litigation and divert the efforts of our technical and management personnel. As a result, our operating results could sufferbe adversely affected and our financial condition could be harmed.
We are dependent upon third-party intellectual property to manufacture some of our products.
The performance of certain technology used in new generation consoles, such as integrated voice and chat audio from the Xbox One, is®
platforms are improved by a licensed component to ensure compatibility with our products.
While we currently believe that we have the necessary licenses, or can obtain the necessary licenses, in order to produce compatible products, there is no guarantee that our licenses will be renewed or granted in the first instance.instance in the future. Moreover, if these first parties enter into license agreements with companies other than us for their “closed systems” or if we are unable to obtain sufficient quantities of these headset adapters or chips, we would be placed at a competitive disadvantage.
In order for certain of our headsets to connect to the Xbox® platforms’ advanced features and controls, a proprietary computer chip or wireless module is required. As a result, with respect to our products designed for the Xbox® platforms, we are currently reliant on Microsoft or their designated supplier to provide us with sufficient quantities of such chips and/or modules. If we are unable to obtain sufficient quantities of these chips and/or modules, sales of such Xbox® platform headsets and consequently our revenues would be adversely affected.
We are licensed and approved by Microsoft to develop and sell Xbox® platform compatible audio products pursuant to a license agreement under which we have the right to manufacture (including through third-party manufacturers), market and sell audio products for the Xbox® platform video game console. Our HyperSound technology is subjectcurrent Xbox® platform headsets are dependent on this license, and headsets for future Xbox® consoles may also be dependent on this license. Microsoft has the right to government regulation,terminate that license under certain circumstances set forth in the agreement. Should that license be terminated, our headset offerings may be limited, which could leadsignificantly reduce our revenues. While Sony does not currently require a license for audio products to be compatible with PlayStation® consoles, they could do so in the future.
While the Company believes it currently has the necessary licenses, or can obtain the necessary licenses to produce compatible products, Microsoft, Sony and other third-party gaming platform manufacturers may control or limit our ability to manufacture headsets compatible with their platforms, and could cause unanticipated expenses and/delays in the release of our products as well as increases to projected development, manufacturing, licensing, marketing or enforcement action against us.
Risks Related to Liquidity
We depend upon the Radiation Control for Health and Safety Actavailability of 1968, and the associated regulations promulgated by the Food and Drug Administration (“FDA”), HyperSound products are regulated as electrical emitters of ultrasonic vibrations. Under the terms of such regulations, in August 2012 we provided, and in January 2016 further supplemented, an abbreviated reportcapital under our revolving credit facility to the FDA describing the HyperSound commercial product. In September 2015 we provided an initial product report describing the HyperSound Clear® 500P product. The FDA may respond to these reports and request changes or safeguards tofinance our HyperSound products, but it has not done so to date. We also are required to notify the FDA in writing should a product be found to have a defect relating to safety of use due to the emission of electronic product radiation. We do not believe our technology poses any human health risks. However, it is possibleoperations. Any additional financing that we may need may not be available on favorable terms, or oneat all.
In addition to cash flow generated from operations, we have financed our operations with the Credit Facility. If we are unable to comply with the financial and other covenants contained in the Credit Facility and are unable to obtain a waiver under the Credit Facility, Bank of America may declare any outstanding borrowings under the Credit Facility immediately due and payable. If we had outstanding borrowings under the Credit Facility, as we currently do, such an event would have an immediate and material adverse impact on our customers,business, results of operations, and financial condition. We could be required to modifyobtain additional financing from other sources, and we cannot predict whether or on what terms, if any, additional financing might be available. If we were required to seek additional financing and were unable to obtain it, we might need to change our business and capital expenditure plans, which may have a materially adverse effect on our business, financial condition and results of operations. In addition, any debt under the technology, Credit Facility could make it more difficult to obtain other debt financing in the future. The Credit Facility contains certain financial covenants and other restrictions that limit our ability, among other things, to incur certain additional indebtedness; pay dividends and repurchase stock; make certain investments and other payments; enter into certain mergers
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or consolidations; undergo certain changes of control of our company or board of directors; engage in sale and leaseback transactions and transactions with affiliates; and encumber and dispose of assets.
If we violate any of these covenants, we will likely be unable to borrow under the Credit Facility. If a default occurs and is not timely cured or waived, Bank of America could seek remedies against us, including termination or suspension of obligations to make loans and issue letters of credit, and acceleration of amounts then outstanding under the applicable Credit Facility. No assurance can be given that we will be able to maintain compliance with these covenants in the future. The Credit Facility is asset based and can only be drawn down in an amount to which eligible collateral exists and can be negatively impacted by extended collection of accounts receivable, unexpectedly high product incorporatingreturns and slow-moving inventory, among other factors. In addition, we have granted the technology,lender a first-priority lien against substantially all of our assets, including trade accounts receivable and inventories. Failure to comply with requirements thatthe operating restrictions or financial covenants could result in the lender terminating or suspending its obligation to make loans and issue letters of credit to us.
Additionally, a significant downturn in demand for our products or a reduction in gross margins could have a material impact on our result of operations, adversely affecting our ability to obtain financing.
General Risk Factors
If we are unable to protect our information systems against service interruption, misappropriation of data or breaches of security, our operations could be disrupted, our reputation may be imposeddamaged, and we may be financially liable for damages.
We rely heavily on information systems to manage our operations, including a full range of retail, financial, sourcing and merchandising systems. We regularly make investments to upgrade, enhance or replace these systems, as well as leverage new technologies to support our growth strategies. In addition, we have implemented enterprise-wide initiatives that are intended to standardize business processes and optimize performance. Further, while many of our employees and certain suppliers with whom we do business operate in a remote working environment during the COVID-19 pandemic, the risk of cybersecurity attacks and data breaches, particularly through phishing attempts, may be increased as we and third-parties with whom we interact leverage our IT infrastructure in previously unanticipated ways during the ongoing COVID-19 pandemic. Any delays or difficulties in transitioning to new systems or integrating them with current systems or the failure to implement our initiatives in an orderly and timely fashion could result in additional investment of time and resources, which could impair our ability to improve existing operations and support future growth, and ultimately have a material adverse effect on our business.
The reliability and capacity of our information systems are critical. Despite preventative efforts, our systems are vulnerable to damage or interruption from, among other things, natural disasters, technical malfunctions, inadequate systems capacity, human error, power outages, computer viruses and security breaches. Any disruptions affecting our information systems could have a material adverse impact on our business. In addition, any failure to maintain adequate system security controls to protect our computer assets and sensitive data, including associate and client data, from unauthorized access, disclosure or use could damage our reputation with our associates and our clients, exposing us to financial liability, legal proceedings (such as class action lawsuits), and/or regulatory action. While we have implemented measures to prevent security breaches and cyber incidents, our preventative measures and incident response efforts may not be entirely effective. As a result, we may not be able to immediately detect any security breaches, which may increase the losses that we would suffer. Finally, our ability to continue to operate our business without significant interruption in the event of a disaster or other disruption depends, in part, on the ability of our information systems to operate in accordance with our disaster recovery and business continuity plans.
Our reliance on information systems and other technology also gives rise to cybersecurity risks, including security breach, espionage, system disruption, theft and inadvertent release of information. The occurrence of any of these events could compromise our networks, and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations, and damage our reputation, which could adversely affect our business. In addition, as security threats continue to evolve, we may need to invest additional resources to protect the security of our systems.
The United Kingdom’s exit of the European Union may negatively impact our operations.
The changes to the trading relationship between the United Kingdom (UK) and European Union resulting from the UK’s exit from the European Union on January 31, 2020 (“Brexit”) have created uncertainty around possible increased cost of goods imported into and exported from the UK and may decrease the profitability of our UK and other European operations. Additional currency volatility could drive a weaker British pound, which increases the cost of goods imported into our UK operations and may decrease the profitability of our UK operations. A weaker British pound versus the Euro and U.S. dollar also causes local currency results of our UK operations to be translated into fewer U.S. dollars during a reporting period. On December 24, 2020, the UK and the EU entered into a trade and cooperation agreement (the “Trade and Cooperation Agreement”), which was applied on a provisional basis from January 1, 2021, and entered into force on May 1, 2021. The economic integration contemplated by the FDA. Our HyperSound product advertisingTrade and Cooperation Agreement does not reach the level that existed during the time the UK was a member state of the EU, and further, while the Trade and Cooperation Agreement sets out preferential arrangements in areas such as trade in goods and in services, digital trade and intellectual property, there is regulatedstill uncertainty on the application and interpretation of many of its provisions. Negotiations between the UK and the EU are expected to continue in relation to the relationship between the UK and the EU in certain other areas which are not covered by the Federal Trade Commission (the “FTC”), which requires all advertising be truthful, not deceptive or unfair, and evidence based.
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of the implementation and application of the Trade and Cooperation Agreement and any other relevant agreements between the UK and the HyperSound Tinnitus Module are regulatedEU.
The market price of our common stock may fluctuate significantly.
We cannot predict the prices at which our common stock may trade. The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including but not limited to:
Stock markets in general have experienced volatility that has often been unrelated to the Federal Food, Drug, and Cosmetic Act, or FDCA, and implementing regulations. HyperSound Clear 500P received 510(k) clearance permitting over -operating performance of a particular company. These broad market fluctuations could adversely affect the - counter (“OTC”) commercial distribution for use as a group auditory trainer or group hearing aid andtrading price of our common stock. These fluctuations may also cause short sellers to periodically enter the HyperSound Tinnitus Module feature received 510(k) clearance for prescription usemarket on the belief that we may experience worse results in the temporary relieffuture. We cannot predict the actions of tinnitus symptoms. Inmarket participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time.
We have been party to stockholder litigation, and in the future could be party to additional stockholder litigation, which could harm our business, financial condition and operating results.
We have had, and may continue to have, actions brought against us by stockholders, including in connection with the recent restructuringMerger, as further described in Note 12. Commitments and Contingencies, based on past transactions, changes in our stock price or other matters. Any such claims, whether or not resolved in our favor, could divert our management and other resources from the operation of our business and otherwise result in unexpected and substantial expenses that would adversely and materially impact our business, financial condition and operating results.
Loss of our key management and other personnel could impact our business.
Our future success depends largely upon the HyperSound business, we terminated salescontinued service of HyperSound Clear 500P productsour executive officers and in March 2017 we deactivatedother key management and technical personnel and on our FDA listing of these devices. We also did not renew our 2017 European Union certifications for HyperSound Clear 500P devices. Any future sales of regulated products would require new registrations and certifications.
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Our business could be subjectadversely affected by significant movements in foreign currency exchange rates.
Our business could be adversely affected by significant movements in foreign currency exchange rates. We are exposed to FDA’s requirements for marketed medical devicesfluctuations in foreign currency transaction exchange rates, particularly with respect to those HyperSound Clear 500P products that have already been sold, such as the Quality System Regulation, or QSR (which imposes procedural, documentationEuro and record keeping requirements regardingBritish Pound. Any significant change in the manufacturevalue of medical devices);currencies of the Medical Device Reporting regulation (which requires that manufacturers reportcountries in which we do business relative to the FDA if their devicevalue of the U.S. dollar could affect our ability to sell products competitively and control our cost structure. Additionally, we are subject to foreign exchange translation risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. The translation risk is primarily concentrated in the exchange rate between the U.S. dollar and the British Pound. As the U.S. dollar fluctuates against other currencies in which we transact business, revenue and income could be impacted.
Any acquisitions we pursue could disrupt our business and harm our financial condition and results of operations.
As part of our business strategy, we review and intend to continue to review acquisition opportunities that we believe would be advantageous or complementary to the development of our business. If we make any acquisitions, we could take any or all of the following actions, any one of which could adversely affect our business, financial condition, results of operations or share price:
Acquisitions also entail numerous other risks, including, without limitation: difficulties in assimilating acquired operations, products, technologies and personnel; unanticipated costs; diversion of management’s attention from existing operations; risks of entering markets in which we have limited or contributeno prior experience; regulatory approvals; unanticipated costs or liabilities; and potential loss of key employees from either our existing business or the acquired organization. Acquisitions may result in accounting charges for restructuring and other expenses, amortization of purchased technology and intangible assets and stock-based compensation expense, any of which could materially and adversely affect our operating results. We may not be able to a deathrealize the anticipated synergies, innovation, operational efficiencies, benefits of or serious injury if it weresuccessfully integrate with our existing business the businesses, products, technologies or personnel that we acquire, and our failure to recur);do so could harm our business and the Reports of Corrections and Removals regulation (which requires manufacturers to report recalls and field actions to the FDA if initiated to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may pose a risk to health). FDA enforces these requirements by inspection and market surveillance. If the FDA finds a violation, it can institute a wide range of enforcement actions, ranging from a public warning letter to more severe sanctions such as fines, penalties,
Our products may be subject to warranty claims, product liability and product recalls.
We may be subject to product liability or warranty claims that could result in significant direct or indirect costs, or we could experience greater returns from retailers than expected, which could harm our net sales. The occurrence of any quality problems due to defects in our products could make us liable for damages and warranty claims in excess of any existing reserves. In addition to the risk of direct costs to correct any defects, warranty claims, product recalls or other problems, any negative publicity related to the perceived quality of our products could also affect our brand image, decrease retailer and distributor demand and our operating results and financial condition could be adversely affected.
We could incur unanticipated expenses in connection with warranty or product liability claims relating to a recall of one or more of our products, which could require significant expenditures to defend. Additionally, we may be required to comply with governmental requirements to remedy the defect and/or notify consumers of the problem that could lead to unanticipated expense, and possible product liability litigation against a customer or us. As of December 31, 2016 and the date of this report, the Company has not received notice of any lawsuits against the Company in connection with any recall actions.
Changes in laws or regulations or the manner of their interpretation or enforcement could adversely impact our financial performance and restrict our ability to operate our business or execute our strategies.
New laws or regulations, or changes in existing laws or regulations or the manner of their interpretation or enforcement, may create uncertainty for public companies, increase our cost of doing business and restrict our ability to operate our business or execute our strategies. This could include, among other things, compliance costs and enforcement under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). For example, under Section 1502 of the Dodd-Frank Act, the SEC has adopted additional disclosure requirements related to the source of certain “conflict minerals” for issuers for which such “conflict minerals” are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that issuer. The metals covered by the rules include tin, tantalum, tungsten and gold. Our suppliers may use some or all of these materials in their production processes. The rules require us to conduct a reasonable country of origin inquiry to determine if we know or have reason to believe any of the minerals used in the production process may have originated from the Democratic Republic of the Congo or an adjoining country. If we are not able to determine the minerals did not originate from a covered country or conclude that there is no reason to believe that the minerals used in the production process may have originated in a covered country, we would be required to perform supply chain due diligence on members of our supply chain. Global supply chains can have multiple layers, thus the costs of complying with these new requirements could be substantial. These new requirements may also reduce the number of suppliers who provide conflict free metals, and may affect our ability to obtain products in sufficient quantities or at competitive prices. Compliance costs such as these could have a material adverse effect on our results of operations.
We continually evaluate and monitor developments with respect to new and proposed laws, regulations, standards and rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. Any such new or changed laws, regulations, standards and rules may be subject to varying interpretations and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate
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governance and public disclosure. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we may be harmed.
We are subject to various environmental laws and regulations that could impose substantial costs on us and may adversely affect our business, operating results and financial condition.
Our operations and some of our products are regulated under various federal, state, local and international environmental laws. In addition, regulatory bodies in many of the jurisdictions in which we operate propose, enact and amend environmental laws and regulations on a regular basis. The environmental laws and regulations applying to our business include those governing the discharge of pollutants into the air and water, the management, disposal and labeling of, and exposure to, hazardous substances and wastes and the cleanup of contaminated sites. If we were to violate or become liable under these
Our goals and disclosures related to environmental, social and governance (“ESG”) matters have and will likely continue to result in additional costs and risks to us, which may adversely affect our reputation, employee retention, and willingness of our customers and partners to do business with us.
Investor advocacy groups, institutional investors, investment funds, proxy advisory services, stockholders, and customers are increasingly focused on the ESG goals and practices of companies. We are frequently asked by investors and other stakeholders to set ambitious ESG goals and provide new and more robust disclosure of ESG goals, progress toward ESG goals and other matters of interest to ESG stakeholders. We are moving towards setting ESG goals and enhancing related disclosure of goals, progress, and other matters relating to ESG. Our efforts to accomplish and accurately disclose ESG-related goals and objectives present numerous operational, reputational, financial, legal, and other risks, any of which could have a negative impact on our business, reputation, and stock price.
Our ability to set and achieve ESG goals and initiatives, is subject to numerous risks, including, among others: (1) the availability and cost of limiting or eliminating our use of carbon-based energy sources and technologies, (2) evolving regulatory requirements affecting ESG standards or disclosures, (3) our ability to partner with providers that can meet our sustainability, diversity, and other standards, (4) our ability to recruit, develop, and retain diverse talent, (5) the impact of our organic growth and acquisitions or dispositions of businesses or operations on our ESG goals, and (6) customers’ actual demand for ESG-oriented product offerings, which may be more expensive and less available than other options.
The standards for tracking and reporting on ESG matters are relatively new, have not been harmonized and continue to evolve. Our selection of disclosure frameworks that seek to align with various reporting standards may change from time to time and may result in a lack of consistent or meaningful comparative data from period to period. In addition, our processes and controls may not always comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislationevolving standards for identifying, measuring and reporting ESG metrics, our interpretation of reporting standards may differ from those of others and such standards may change over time, any of which could result in fines, criminal penaltiessignificant revisions to our ESG goals or reported progress in achieving such goals.
If our ESG practices do not meet evolving investor or other stakeholder expectations and standards or regulatory requirements, then our reputation, our ability to attract or retain employees and our attractiveness as an adverse effectinvestment, business partner or acquiror could be negatively impacted. Similarly, our failure or perceived failure to pursue or fulfill our goals, targets and objectives or to satisfy various
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reporting standards within the timelines we announce, or at all, could also have similar negative impacts and expose us to government enforcement actions and private litigation.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
On April 9, 2019, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $15.0 million of its common stock. Any repurchases under the program will be made from time to time on our business.
Issuer Purchases of Equity Securities | ||||||||||||||||
Total | Average | Total Number | Approximate | |||||||||||||
Period | ||||||||||||||||
April 1-30, 2022 | — | $ | — | — | — | |||||||||||
May 1-31, 2022 | — | $ | — | — | — | |||||||||||
June 1-30, 2022 | 17,594,289 | |||||||||||||||
Total | — | $ | — | — |
For the bid pricesecond quarter of the Company’s2022, we did not repurchase any shares of common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days. Nasdaq’s written notice has no effect on the listing or trading of the Company’s common stock at this time.
Item 5 - Other Information
None.
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Item 6. Exhibits
3.1 | |||
3.2 | |||
10.1 | |||
10.2†** | |||
31.1 ** | |||
** | |||
** | |||
Extensible Business Reporting Language (XBRL) Exhibits | |||
101.INS | Inline XBRL Instance Document | ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | ||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | ||
** Filed herewith.
†Includes a management contract or any compensatory plan, contract or arrangement
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TURTLE BEACH CORPORATION | ||||
Date: | August 8, 2022 | By: | / | |
John T. Hanson Chief Financial Officer, Treasurer and Secretary | ||||
(Principal Financial and Accounting Officer) |
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