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 |
Preferred Stock Purchase Rights | N/A | 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, 20172023 was 49,386,006.
INDEX
Page | |||
2 | |||
Item 1. | 2 | ||
2 | |||
3 | |||
4 | |||
Item 2. | 18 | ||
Item 3. | 24 | ||
Item 4. | 25 | ||
PART II. OTHER INFORMATION | 26 | ||
Item 1. | 26 | ||
Item 1A. | 26 | ||
Item | 26 | ||
Item 5. | 26 | ||
Item 6. | 27 | ||
29 |
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, |
| ||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (in thousands, except per-share data) |
| |||||||||||||
Net revenue |
| $ | 47,982 |
|
| $ | 41,300 |
|
| $ | 99,426 |
|
| $ | 87,962 |
|
Cost of revenue |
|
| 36,110 |
|
|
| 33,418 |
|
|
| 73,415 |
|
|
| 66,051 |
|
Gross profit |
|
| 11,872 |
|
|
| 7,882 |
|
|
| 26,011 |
|
|
| 21,911 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Selling and marketing |
|
| 10,351 |
|
|
| 11,587 |
|
|
| 19,874 |
|
|
| 22,416 |
|
Research and development |
|
| 4,189 |
|
|
| 5,136 |
|
|
| 8,290 |
|
|
| 10,388 |
|
General and administrative |
|
| 13,125 |
|
|
| 12,532 |
|
|
| 20,132 |
|
|
| 18,767 |
|
Total operating expenses |
|
| 27,665 |
|
|
| 29,255 |
|
|
| 48,296 |
|
|
| 51,571 |
|
Operating loss |
|
| (15,793 | ) |
|
| (21,373 | ) |
|
| (22,285 | ) |
|
| (29,660 | ) |
Interest expense (income) |
|
| (17 | ) |
|
| 84 |
|
|
| 146 |
|
|
| 193 |
|
Other non-operating expense, net |
|
| 198 |
|
|
| 1,109 |
|
|
| 318 |
|
|
| 1,828 |
|
Loss before income tax |
|
| (15,974 | ) |
|
| (22,566 | ) |
|
| (22,749 | ) |
|
| (31,681 | ) |
Income tax benefit |
|
| (54 | ) |
|
| (4,740 | ) |
|
| (124 | ) |
|
| (7,379 | ) |
Net loss |
| $ | (15,920 | ) |
| $ | (17,826 | ) |
| $ | (22,625 | ) |
| $ | (24,302 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss per share |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | (0.93 | ) |
| $ | (1.08 | ) |
| $ | (1.34 | ) |
| $ | (1.49 | ) |
Diluted |
| $ | (0.93 | ) |
| $ | (1.08 | ) |
| $ | (1.34 | ) |
| $ | (1.49 | ) |
Weighted average number of shares: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 17,156 |
|
|
| 16,500 |
|
|
| 16,869 |
|
|
| 16,348 |
|
Diluted |
|
| 17,156 |
|
|
| 16,500 |
|
|
| 16,869 |
|
|
| 16,348 |
|
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 loss |
| $ | (15,920 | ) |
| $ | (17,826 | ) |
| $ | (22,625 | ) |
| $ | (24,302 | ) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustment |
|
| (35 | ) |
|
| (1,090 | ) |
|
| 410 |
|
|
| (1,519 | ) |
Other comprehensive income (loss) |
|
| (35 | ) |
|
| (1,090 | ) |
|
| 410 |
|
|
| (1,519 | ) |
Comprehensive loss |
| $ | (15,955 | ) |
| $ | (18,916 | ) |
| $ | (22,215 | ) |
| $ | (25,821 | ) |
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, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (unaudited) |
|
|
|
| ||
ASSETS |
| (in thousands, except par value and share amounts) |
| |||||
Current Assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 15,787 |
|
| $ | 11,396 |
|
Accounts receivable, net |
|
| 20,254 |
|
|
| 43,336 |
|
Inventories |
|
| 67,831 |
|
|
| 71,252 |
|
Prepaid expenses and other current assets |
|
| 8,927 |
|
|
| 9,196 |
|
Total Current Assets |
|
| 112,799 |
|
|
| 135,180 |
|
Property and equipment, net |
|
| 5,691 |
|
|
| 6,362 |
|
Goodwill |
|
| 10,686 |
|
|
| 10,686 |
|
Intangible assets, net |
|
| 2,238 |
|
|
| 2,612 |
|
Other assets |
|
| 8,124 |
|
|
| 8,547 |
|
Total Assets |
| $ | 139,538 |
|
| $ | 163,387 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
| ||
Current Liabilities: |
|
|
|
|
|
| ||
Revolving credit facility |
| $ | — |
|
| $ | 19,053 |
|
Accounts payable |
|
| 34,036 |
|
|
| 19,846 |
|
Other current liabilities |
|
| 21,808 |
|
|
| 25,433 |
|
Total Current Liabilities |
|
| 55,844 |
|
|
| 64,332 |
|
Income tax payable |
|
| 2,196 |
|
|
| 2,076 |
|
Other liabilities |
|
| 7,443 |
|
|
| 8,038 |
|
Total Liabilities |
|
| 65,483 |
|
|
| 74,446 |
|
Commitments and Contingencies |
|
|
|
|
|
| ||
Stockholders’ Equity |
|
|
|
|
|
| ||
Common stock, $0.001 par value - 25,000,000 shares authorized; 17,309,270 and 16,569,173 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively |
|
| 17 |
|
|
| 17 |
|
Additional paid-in capital |
|
| 214,245 |
|
|
| 206,916 |
|
Accumulated deficit |
|
| (139,223 | ) |
|
| (116,598 | ) |
Accumulated other comprehensive income (loss) |
|
| (984 | ) |
|
| (1,394 | ) |
Total Stockholders’ Equity |
|
| 74,055 |
|
|
| 88,941 |
|
Total Liabilities and Stockholders’ Equity |
| $ | 139,538 |
|
| $ | 163,387 |
|
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, 2023 |
|
| June 30, 2022 |
| ||
|
| (in thousands) |
| |||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
| ||
Net loss |
| $ | (22,625 | ) |
| $ | (24,302 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 1,948 |
|
|
| 2,458 |
|
Amortization of intangible assets |
|
| 513 |
|
|
| 623 |
|
Amortization of debt financing costs |
|
| 75 |
|
|
| 94 |
|
Stock-based compensation |
|
| 6,929 |
|
|
| 3,567 |
|
Deferred income taxes |
|
| (209 | ) |
|
| (7,110 | ) |
Change in sales returns reserve |
|
| (2,419 | ) |
|
| (4,992 | ) |
Provision for obsolete inventory |
|
| (1,098 | ) |
|
| (1,289 | ) |
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
| ||
Accounts receivable |
|
| 32,685 |
|
|
| 32,152 |
|
Inventories |
|
| 5,457 |
|
|
| (21,288 | ) |
Accounts payable |
|
| 7,452 |
|
|
| (9,914 | ) |
Prepaid expenses and other assets |
|
| 691 |
|
|
| 1,055 |
|
Income taxes payable |
|
| (261 | ) |
|
| 1,550 |
|
Other liabilities |
|
| (4,928 | ) |
|
| (13,851 | ) |
Net cash provided by (used for) operating activities |
|
| 24,210 |
|
|
| (41,247 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
| ||
Purchases of property and equipment |
|
| (1,252 | ) |
|
| (1,207 | ) |
Net cash used for investing activities |
|
| (1,252 | ) |
|
| (1,207 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
| ||
Borrowings on revolving credit facilities |
|
| 99,785 |
|
|
| 36,209 |
|
Repayment of revolving credit facilities |
|
| (118,838 | ) |
|
| (20,502 | ) |
Proceeds from exercise of stock options and warrants |
|
| 1,358 |
|
|
| 538 |
|
Repurchase of common stock |
|
| (974 | ) |
|
| — |
|
Debt issuance costs |
|
| (80 | ) |
|
| — |
|
Net cash provided by (used for) financing activities |
|
| (18,749 | ) |
|
| 16,245 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| 182 |
|
|
| (634 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| 4,391 |
|
|
| (26,843 | ) |
Cash and cash equivalents - beginning of period |
|
| 11,396 |
|
|
| 37,720 |
|
Cash and cash equivalents - end of period |
| $ | 15,787 |
|
| $ | 10,877 |
|
|
|
|
|
|
|
| ||
SUPPLEMENTAL DISCLOSURE OF INFORMATION |
|
|
|
|
|
| ||
Cash paid for interest |
| $ | 226 |
|
| $ | 108 |
|
Cash paid (received) for income taxes |
| $ | (137 | ) |
| $ | (2,539 | ) |
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, 2022 |
|
| 16,569 |
|
|
| 17 |
|
|
| 206,916 |
|
|
| (116,598 | ) |
|
| (1,394 | ) |
| $ | 88,941 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,705 | ) |
|
| — |
|
| $ | (6,705 | ) |
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 445 |
|
| $ | 445 |
|
Issuance of restricted stock |
|
| 14 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| $ | - |
|
Stock options exercised |
|
| 21 |
|
|
| — |
|
|
| 124 |
|
|
| — |
|
|
| — |
|
| $ | 124 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 1,959 |
|
|
| — |
|
|
| — |
|
| $ | 1,959 |
|
Balance at March 31, 2023 |
|
| 16,604 |
|
| $ | 17 |
|
| $ | 208,999 |
|
| $ | (123,303 | ) |
| $ | (949 | ) |
| $ | 84,764 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (15,920 | ) |
|
| — |
|
| $ | (15,920 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (35 | ) |
| $ | (35 | ) |
Issuance of restricted stock |
|
| 469 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| $ | - |
|
Stock options exercised |
|
| 322 |
|
|
| — |
|
|
| 1,234 |
|
|
| — |
|
|
| — |
|
| $ | 1,234 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 4,986 |
|
|
| — |
|
|
| — |
|
| $ | 4,986 |
|
Repurchase of common stock |
|
| (86 | ) |
|
| — |
|
|
| (974 | ) |
|
| — |
|
|
| — |
|
| $ | (974 | ) |
Balance at June 30, 2023 |
|
| 17,309 |
|
| $ | 17 |
|
| $ | 214,245 |
|
| $ | (139,223 | ) |
| $ | (984 | ) |
| $ | 74,055 |
|
|
| 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 income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (17,826 | ) |
|
| — |
|
|
| (17,826 | ) |
Other comprehensive income, 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 |
|
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® and HyperSound®ROCCAT® 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. HyperSound technologyROCCAT is an innovative patent-protected sound technology that delivers immersive, directional audio offering unique potential benefits in a variety of commercial settingsgaming keyboards, mice 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, 20162022 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, 20172023 and December 31, 2016, there were no outstanding financial assets and liabilities recorded at fair value on a recurring basis and2022, 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, 2023 |
|
| December 31, 2022 |
| ||||||||||
|
| Reported |
|
| Fair Value |
|
| Reported |
|
| Fair Value |
| ||||
|
| (in thousands) |
| |||||||||||||
Financial Assets and Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 15,787 |
|
| $ | 15,787 |
|
| $ | 11,396 |
|
| $ | 11,396 |
|
Revolving credit facility |
| $ | — |
|
| $ | — |
|
| $ | 19,053 |
|
| $ | 19,053 |
|
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 equalsapproximates fair value, as the stated interest rate approximates market rates currently availabledue to the Company, which are considered Level 2 inputs. The fair valuesvariable rate nature of our Term Loan Due 2019the debt, as of June 30, 2023 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 3 input.December 31, 2022.
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, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (in thousands) |
| |||||||||||||
Balance, beginning of period |
| $ | 6,639 |
|
| $ | 5,713 |
|
| $ | 7,817 |
|
| $ | 8,998 |
|
Reserve accrual |
|
| 2,556 |
|
|
| 2,792 |
|
|
| 6,150 |
|
|
| 5,475 |
|
Recoveries and deductions, net |
|
| (3,797 | ) |
|
| (4,499 | ) |
|
| (8,569 | ) |
|
| (10,467 | ) |
Balance, end of period |
| $ | 5,398 |
|
| $ | 4,006 |
|
| $ | 5,398 |
|
| $ | 4,006 |
|
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 |
| $ | 67,071 |
|
| $ | 70,407 |
|
Raw materials |
|
| 760 |
|
|
| 845 |
|
Total inventories |
| $ | 67,831 |
|
| $ | 71,252 |
|
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 |
| $ | 2,622 |
|
| $ | 2,373 |
|
Software and software development |
|
| 2,395 |
|
|
| 2,396 |
|
Furniture and fixtures |
|
| 1,732 |
|
|
| 1,713 |
|
Tooling |
|
| 10,488 |
|
|
| 9,901 |
|
Leasehold improvements |
|
| 2,030 |
|
|
| 2,050 |
|
Demonstration units and convention booths |
|
| 15,755 |
|
|
| 15,379 |
|
Total property and equipment, gross |
|
| 35,022 |
|
|
| 33,812 |
|
Less: accumulated depreciation and amortization |
|
| (29,331 | ) |
|
| (27,450 | ) |
Total property and equipment, net |
| $ | 5,691 |
|
| $ | 6,362 |
|
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 employee expenses |
| $ | 2,508 |
|
| $ | 4,171 |
|
Accrued tax-related payables |
|
| 2,889 |
|
|
| 4,159 |
|
Accrued marketing |
|
| 2,609 |
|
|
| 4,147 |
|
Accrued royalty |
|
| 1,596 |
|
|
| 2,527 |
|
Accrued freight |
|
| 2,027 |
|
|
| 1,746 |
|
Accrued expenses |
|
| 10,179 |
|
|
| 8,683 |
|
Total other current liabilities |
| $ | 21,808 |
|
| $ | 25,433 |
|
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, 20172023 and December 31, 2016 consist2022 consisted of:
|
| June 30, 2023 |
| |||||||||
|
| Gross |
|
| Accumulated |
|
| Net Book |
| |||
|
| (in thousands) |
| |||||||||
Customer relationships |
| $ | 8,085 |
|
| $ | 6,986 |
|
| $ | 1,099 |
|
Tradenames |
|
| 3,066 |
|
|
| 2,378 |
|
|
| 688 |
|
Developed technology |
|
| 1,884 |
|
|
| 1,557 |
|
|
| 327 |
|
Foreign currency |
|
| (1,225 | ) |
|
| (1,349 | ) |
|
| 124 |
|
Total Intangible Assets |
| $ | 11,810 |
|
| $ | 9,572 |
|
| $ | 2,238 |
|
9
|
| December 31, 2022 |
| |||||||||
|
| Gross |
|
| Accumulated |
|
| Net Book |
| |||
|
| (in thousands) |
| |||||||||
Customer relationships |
| $ | 8,085 |
|
| $ | 6,750 |
|
| $ | 1,335 |
|
Tradenames |
|
| 3,066 |
|
|
| 2,147 |
|
|
| 919 |
|
Developed technology |
|
| 1,884 |
|
|
| 1,495 |
|
|
| 389 |
|
Foreign currency |
|
| (1,375 | ) |
|
| (1,344 | ) |
|
| (31 | ) |
Total Intangible Assets |
| $ | 11,660 |
|
| $ | 9,048 |
|
| $ | 2,612 |
|
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 January 2014,May 2019, the merger between VTBHCompany completed its acquisition of the business and Turtle Beach (f/k/a Parametric Sound Corporation) was completed.assets of ROCCAT. The acquired intangible assets relating to developed technology, customer relationships, and trade name wereare subject to amortizationamortization. During the fourth quarter of 2022, the Company made the decision to increasingly leverage the Turtle Beach brand across our product portfolio including PC products over their respective useful lives. In September 2016, wetime. Due to this decision, the Company prepared an impairment calculation to determine the present value of the ROCCAT tradename asset using the relief from royalty method. As a result of the present value calculation, in the fourth quarter 2022, the Company recorded an impairment charge of $0.8 million for the ROCCAT tradename intangible asset.
In January 2021, the Company completed its acquisition of the business and assets relating to the Neat Microphones business. During the fourth quarter of 2022, as part of the 2023 annual operating and strategic plan process, the Company made the decision to transition microphone products to the Turtle Beach brand. As a result of this decision, there was no longer a basis for carrying the remaining net intangible assets related to the totalNeat brand. In the fourth quarter 2022, the Company recorded an impairment charge of $1.1 million related to the remaining acquiredNeat net intangible assets value.
Amortization expense related to definite lived intangible assets of $0.1$0.0 million and $0.3$0.5 million was recognized for the three and ninesix months ended SeptemberJune 30, 2017,2023, 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, respectively.
As of SeptemberJune 30, 2017,2023, estimated annual amortization expense related to definite lived intangible assets in future periods iswas as follows:
|
| (in thousands) |
| |
2023 |
| $ | 516 |
|
2024 |
|
| 1,003 |
|
2025 |
|
| 425 |
|
2026 |
|
| 170 |
|
Thereafter |
|
| - |
|
Total |
| $ | 2,114 |
|
There were no changes in the carrying values of goodwill for the six months ended June 30, 2023 from the balance as of December 31, 2022.
(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 April 2025 |
| $ | - |
|
| $ | 19,053 |
|
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, 2017,2023, 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$33 thousand and $1.2 million or$75 thousand for the three and ninesix months ended SeptemberJune 30, 2017,2023, respectively, $0.3 million and $1.0 million$47 thousand and $94 thousand for the
10
Revolving Credit Facility
On March 31, 2014,5, 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(the “Credit Facility”)
On March 10, 2023, the issuanceCompany entered into a Third Amendment to Amended and Restated Loan, Guaranty and Security Agreement (the “Third Amendment”), by and among the Company, VTB, TBC Holding Company LLC, TB Europe, VTBH, the financial institutions party thereto from time to time and Bank of bank guarantees,
The Third Amendment provides for, among other things: (i) extending the maturity date of creditthe Credit Facility from March 5, 2024 to April 1, 2025; (ii) updating the interest rate 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
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, 2017,2023, 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.$38.5 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, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (in thousands) |
| |||||||||||||
Income tax benefit |
| $ | (54 | ) |
| $ | (4,740 | ) |
| $ | (124 | ) |
| $ | (7,379 | ) |
Effective income tax rate |
|
| 0.3 | % |
|
| 21.0 | % |
|
| 0.5 | % |
|
| 23.3 | % |
11
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 | % |
The effective tax expenserate for the three and ninesix months ended SeptemberJune 30, 2017 was $0.6 million at an effective tax rate of 672.1% and $1.1 million at an effective tax rate of (6.7)%, respectively. Income tax benefit for the three and nine months ended September 30, 2016 was $(0.1) million at an effective tax rate of 0.3% and $(0.3) 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, 2017,2023, the Company had uncertain tax positions of $2.2$2.9 million, inclusive of $0.7$0.8 million of interest and penalties.
As required by the authoritative guidance on accounting for income taxes the Company evaluates the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred taxes will not be realized. The Company considers all positive and negative evidence in determining if, based on the weight of such evidence, a valuation allowance is required. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, the Company establishes a valuation allowance. Due to the significant 2022 pre-tax loss, coupled with cumulative book losses projected in early future years, the Company recorded a valuation allowance on its net U.S. deferred tax assets as of December 31, 2022. The Company’s continues to maintain this valuation allowance for the three months ended June 30, 2023.
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 20132019 through 2015,2021, and the state tax years open under the statute of limitations are 20122018 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.2021.
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, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (in thousands) |
| |||||||||||||
Cost of revenue |
| $ | 162 |
|
| $ | 96 |
|
| $ | 337 |
|
| $ | 122 |
|
Selling and marketing |
|
| 410 |
|
|
| 539 |
|
|
| 900 |
|
|
| 937 |
|
Research and development |
|
| 324 |
|
|
| 390 |
|
|
| 680 |
|
|
| 673 |
|
General and administrative |
|
| 4,074 |
|
|
| 1,005 |
|
|
| 5,012 |
|
|
| 1,835 |
|
Total stock-based compensation |
| $ | 4,970 |
|
| $ | 2,030 |
|
| $ | 6,929 |
|
| $ | 3,567 |
|
On May 1, 2023, the Company announced that the Company and Juergen Stark, Chairman, Chief Executive Officer and President of the Company, have agreed that Mr. Stark would not continue as Chief Executive Officer and President of the Company, with his employment to terminate effective as of the close of business on June 30, 2023. On May 2, 2023, the Company entered into a separation agreement with Mr. Stark, resulting in an acceleration of the total stock-based compensation associated with equity awards granted to him. During the six months ended June 30, 2023, the Company recorded a total of $4.0 million in stock-based compensation expenses and related payroll that would not have been recognized if Mr. Stark had not announced his retirement.
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, | 550 | |||
Options | 11 | |||
Restricted Stock | (504 | ) | ||
Restricted Stock Forfeited | 13 | |||
Performance Shares Unearned | 94 | |||
Performance Shares Granted | (163 | ) | ||
Balance at | 1 |
12
On July 6, 2023, the Company’s stockholders approved an amendment to the plan to, among other things, (i) change the name to Turtle Beach Corporation 2023 Stock-Based Incentive Compensation Plan, and (ii) increase the number of shares of the Company’s common stock, par value $0.001 per share, authorized for issuance by 1,049,000.
Stock Option Activity
|
| Options Outstanding |
| |||||||||||||
|
| Number of |
|
| Weighted- |
|
| Weighted- |
|
| Aggregate |
| ||||
|
|
|
|
|
|
|
| (in years) |
|
|
|
| ||||
Outstanding at December 31, 2022 |
|
| 1,577,545 |
|
| $ | 7.66 |
|
|
| 5.81 |
|
| $ | 2,465,015 |
|
Options Granted |
|
| - |
|
|
| - |
|
|
|
|
|
|
| ||
Options Exercised |
|
| (343,007 | ) |
|
| 3.96 |
|
|
|
|
|
|
| ||
Options Forfeited |
|
| (11,485 | ) |
|
| 14.48 |
|
|
|
|
|
|
| ||
Outstanding at June 30, 2023 |
|
| 1,223,053 |
|
| $ | 8.63 |
|
|
| 4.44 |
|
| $ | 4,707,610 |
|
Vested and expected to vest at June 30, 2023 |
|
| 1,222,015 |
|
| $ | 8.73 |
|
|
| 4.44 |
|
| $ | 4,699,256 |
|
Exercisable at June 30, 2023 |
|
| 1,087,615 |
|
| $ | 8.76 |
|
|
| 4.14 |
|
| $ | 4,211,217 |
|
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 theAggregate 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 $2.4 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, 2022 |
|
| 865,446 |
|
| $ | 18.75 |
|
Granted |
|
| 504,092 |
|
|
| 9.97 |
|
Vested |
|
| (546,939 | ) |
|
| 16.53 |
|
Shares forfeited |
|
| (13,028 | ) |
|
| 17.78 |
|
Nonvested restricted stock at June 30, 2023 |
|
| 809,571 |
|
| $ | 14.80 |
|
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, 2017,2023, total unrecognized compensation costcosts related to the nonvested restricted stock awards granted towas $11.1 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, 2023, the Company issuedhad 256,342 performance-based restricted share units outstanding. The vesting of performance-based restricted share units is determined over a three-year period based on (i) the amount by which revenue growth exceeds a defined baseline market growth each year and (ii) the achievement of specified tiers of adjusted EBITDA as a percentage of net revenue each year, with the
13
ability to SG VTBearn and a trust affiliated with Ronald Doornink warrantsvest into such units ranging from 0% to purchase 1.7 million shares200%. As of June 30, 2023, achievement of the Company’s common stock at an exercise price 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 rights as a stockholder 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.
Note 12, “Commitments and Contingencies” for further information.
The following table sets forth the computation of basic and diluted net loss per share of common stock attributable to common stockholders:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (in thousands, except per-share data) |
| |||||||||||||
Net loss |
| $ | (15,920 | ) |
| $ | (17,826 | ) |
| $ | (22,625 | ) |
| $ | (24,302 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares outstanding — Basic |
|
| 17,156 |
|
|
| 16,500 |
|
|
| 16,869 |
|
|
| 16,348 |
|
Plus incremental shares from assumed conversions: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Dilutive effect of restricted stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Dilutive effect of stock options |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Dilutive effect of warrants |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Weighted average common shares outstanding — Diluted |
|
| 17,156 |
|
|
| 16,500 |
|
|
| 16,869 |
|
|
| 16,348 |
|
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | (0.93 | ) |
| $ | (1.08 | ) |
| $ | (1.34 | ) |
| $ | (1.49 | ) |
Diluted |
| $ | (0.93 | ) |
| $ | (1.08 | ) |
| $ | (1.34 | ) |
| $ | (1.49 | ) |
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, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (in thousands) |
| |||||||||||||
Stock options |
|
| 1,363 |
|
|
| 1,655 |
|
|
| 1,384 |
|
|
| 1,672 |
|
Unvested restricted stock awards |
|
| 908 |
|
|
| 963 |
|
|
| 860 |
|
|
| 915 |
|
Warrants |
|
| 550 |
|
|
| 550 |
|
|
| 550 |
|
|
| 550 |
|
Total |
|
| 2,821 |
|
|
| 3,168 |
|
|
| 2,794 |
|
|
| 3,137 |
|
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, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (in thousands) |
| |||||||||||||
North America |
| $ | 32,356 |
|
| $ | 27,384 |
|
| $ | 73,068 |
|
| $ | 58,752 |
|
Europe and Middle East |
|
| 11,861 |
|
|
| 9,179 |
|
|
| 21,587 |
|
|
| 21,301 |
|
Asia Pacific |
|
| 3,765 |
|
|
| 4,737 |
|
|
| 4,771 |
|
|
| 7,909 |
|
Total net revenues |
| $ | 47,982 |
|
| $ | 41,300 |
|
| $ | 99,426 |
|
| $ | 87,962 |
|
14
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:
On May 22, 2020, PAMTP LLC, which purports to hold the claims of eight shareholders who opted out of the class settlement described above, brought suit against the Company, the Company’s CEO, Juergen Stark, Stripes Group, LLC, SG VTB Holdings, LLC, Kenneth Fox, and former members of the Company’s Board of Directors in Nevada state court. This opt-out action asserts the same direct claims that were asserted by the class of shareholders described above. The defendants filed two 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 August 2021 and all remaining defendants, including the Company, prevailed on all counts with final judgment entered in their favor on September 3, 2021. Plaintiff is appealing that judgment.
Employment Litigation: On April 20, 2017, a minority shareholder of VTBH,former employee filed a complaintan action in Delaware Chancerythe 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 its entirety. The plaintiff’s ability to recover any damages is subject 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.
15
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, 20172023 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, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (in thousands) |
| |||||||||||||
Warranty, beginning of period |
| $ | 616 |
|
| $ | 789 |
|
| $ | 618 |
|
| $ | 856 |
|
Warranty costs accrued |
|
| 190 |
|
|
| 72 |
|
|
| 375 |
|
|
| 193 |
|
Settlements of warranty claims |
|
| (166 | ) |
|
| (143 | ) |
|
| (353 | ) |
|
| (331 | ) |
Warranty, end of period |
| $ | 640 |
|
| $ | 718 |
|
| $ | 640 |
|
| $ | 718 |
|
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.
The components of the right-of-use assets and lease liabilities were as follows:
|
| Balance Sheet Classification |
| June 30, 2023 |
| |
|
|
|
| (in thousands) |
| |
Right-of-use assets |
| Other assets |
| $ | 7,514 |
|
|
|
|
|
|
| |
Lease liability obligations, current |
| Other current liabilities |
| $ | 1,092 |
|
Lease liability obligations, noncurrent |
| Other liabilities |
|
| 7,091 |
|
Total lease liability obligations |
|
|
| $ | 8,183 |
|
Weighted-average remaining lease term (in years) |
|
|
|
| 6.3 |
|
Weighted-average discount rate |
|
|
|
| 4.3 | % |
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, 2023, the Company received a limited numberrecognized approximately $0.8 million of reportslease costs in operating expenses and approximately $0.6 million of operating cash flows from consumers and retailers that certain EAR FORCE
16
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) |
| |
2023 |
| $ | 647 |
|
2024 |
|
| 1,437 |
|
2025 |
|
| 1,451 |
|
2026 |
|
| 1,361 |
|
2027 |
|
| 1,383 |
|
Thereafter |
|
| 3,182 |
|
Total minimum payments |
|
| 9,461 |
|
Less: Imputed interest |
|
| (1,278 | ) |
Total |
| $ | 8,183 |
|
17
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, 201729, 2023 (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 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“) and HyperSound®.
Business Trends
Turtle Beach participates in the global software and accessories gaming accessories market, which includes headsetsis estimated to be approximately $193 billion. The global gaming audience now exceeds global cinema and othermusic markets with over three billion active gamers worldwide. Gaming peripherals, such as gamepads, specialtyheadsets, keyboards, mice, microphones, controllers, adapters, batteries, memory and interactivesimulation controls are estimated to be an $8.4 billion business globally with about 80% of that market in the Americas and Europe where the Company’s business is focused.
The console and PC gaming toysaccessory markets are heavily dependent onalso driven by major game launches and long-running franchises that encourage players to continually buy equipment and accessories. On Xbox, PlayStation, Nintendo Switch and PC, flagship games like Call of Duty, 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 drive increased demand for gaming headsets. Many of these established franchises launch new titles annually, leading into the holidays and as a result can cause an additional boost to the normally strong holiday sales for gaming accessories.
Competitive esports is a global video game industry.phenomenon where professional gamers train and compete to win prize money, partner with major brands, and attract dedicated fans – similar to traditional professional sports. In 2013,2022, there were over 530 million esports viewers, approximately 50% of whom considered themselves “esports enthusiasts,” and that number is expected to increase to roughly 650 million viewers by 2025 according to an April 2022 report from Newzoo.
Many gamers play online where a gaming headset, which includes a microphone, is required because it allows players to communicate with each other in real-time, provides a more immersive experience, and delivers a competitive advantage.
Console Headset Market
Turtle Beach is the leading console gaming industry experiencedheadset manufacturer in the U.S. and other major console markets. Turtle Beach has achieved these global market shares by delivering high-quality products that often include first-to-market innovations, robust features, superior sound, unmatched comfort, and top customer support – all key factors that consumers seek when shopping for a cyclical event asgaming headset.
18
The global market for console gaming headsets, in which Turtle Beach has been the market leader for the past 13 years, is estimated to be approximately $1.4 billion. PlayStation and Xbox consoles continue to be dominant gaming platforms in North America and Europe for games that drive headset usage. Consistent with a historical pattern of major new console launches every 7-8 years, Microsoft and Sony each announced newlaunched their latest consoles, Xbox Series X|S and PlayStation 5, ahead of the 2020 holiday season, and in 2021/2022 demand for the first time in eight years,latest Xbox and PlayStation consoles exceeded the consumer responseavailable supply for consumers to purchase. In 2023, 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 marketdemand for new-gen headsets.
Nintendo has sold over 122.5 million units of its highly popular Nintendo Switch since the platform's release in early 2017. Nintendo continues adding and expanding its library of games, including 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.
PC Accessories Market
The market uncharacteristically slowedfor PC gaming headsets, mice, and keyboards is estimated to be approximately $3.2 billion. PC gaming continues to be a main gaming platform in the 2016 holiday season, leadingU.S. and 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 mouse/keyboard controls, and the ability for deeper customization. Gaming mice and keyboards are engineered to higher-than-normal channel inventory entering 2017, as consumer deferred purchases ahead of mid-cycle console refreshesprovide 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-playerdifferent 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 LED lighting and software to unify the lighting with 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.
Controllers and Gaming Simulation Market
In 2022, we further expanded our gaming simulation and gaming controller product lines. For the flight simulation market, we launched the VelocityOneTM Pedals and VelocityOneTM Stand, which perfectly pair with the VelocityOne FlightTM simulation control system for the complete, most immersive flight simulation experience on the market, and also launched the VelocityOneTM Flightstick, which is a single stick joystick controller for air and space flight combat games. By mid-year channel inventory normalized, however, retailer business model initiativesFor the gamepads/controllers market, we added new colorways for its original Recon Controller, as well as launched the lower-cost REACT-R controller, and mobile-focused Recon Cloud and Atom controller offerings. These markets increased our total addressable market by $1 billion, with third-party game controllers at roughly $500 million and PC/console flight simulation hardware at roughly $500 million in the global market.
Supply Chain and Operations
We have a global network of suppliers that manufacture products to meet the quality standards sought by our customers and our cost objectives. We have worked closely with component, manufacturing, and global logistic partners to build a supply chain that we consider dependable, scalable, and efficient to provide high-quality, reliable products employing leading cost management practices. The use of outsourced manufacturing facilities is designed to take advantage of specific expertise and allow for flexibility and scalability to respond to both seasonality and changing demands for our products.
We have experienced and may continue to experience increased freight costs and component availability challenges, which have begun to abate in 2023. As a result, Turtle Beach continues to take proactive steps to limit the impact of these challenges and are working closely with our manufacturing and freight providers to reduce channels inventory levels have shifted the anticipated timing of revenue. We believe these actions are not an indication of an overall industry decline, but will require the Company to maintain higher inventory levels to meet customer demands with shorter lead times.
Key Performance Indicators and Non-GAAP Measures
Management routinely reviews key performance indicators, including revenue, operating income and margins, and earnings per share, among others. In addition, we believe certain other measures provide useful information to management and investors about us and our financial condition and results of operations for the following reasons: (i) 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
19
adjustments made are often viewed as either non-recurring or not reflective of ongoing financial performance and/or have no cash impact on operations; and (iv) it isthe measures are used by securities analysts, investors and other interested parties as a common operating performance measure to compare results across companies in our industry by 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). These other metrics, however, are not measures of financial performance under accounting principles generally accepted in the United States of America (“GAAP”) and given the limitations of these metrics as analytical tools, should not be considered a substitute for gross profit, gross margins, net income (loss) or other consolidated income statement data as determined in accordance with GAAP. We consider the following non-GAAP measure,measures, 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.
Adjusted EBITDA (and a reconciliation to Net loss,income (loss), the nearest GAAP financial measure) for the three and ninesix months ended SeptemberJune 30, 20172023 and 2016June 30, 2022, 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, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (in thousands) |
| |||||||||||||
Net loss |
| $ | (15,920 | ) |
| $ | (17,826 | ) |
| $ | (22,625 | ) |
| $ | (24,302 | ) |
Interest expense (income) |
|
| (17 | ) |
|
| 84 |
|
|
| 146 |
|
|
| 193 |
|
Depreciation and amortization |
|
| 1,219 |
|
|
| 1,577 |
|
|
| 2,461 |
|
|
| 3,081 |
|
Stock-based compensation |
|
| 4,970 |
|
|
| 2,030 |
|
|
| 6,929 |
|
|
| 3,567 |
|
Income tax benefit |
|
| (54 | ) |
|
| (4,740 | ) |
|
| (124 | ) |
|
| (7,379 | ) |
Restructuring expense |
|
| — |
|
|
| 527 |
|
|
| — |
|
|
| 527 |
|
CEO transition related costs |
|
| 2,874 |
|
|
| — |
|
|
| 2,874 |
|
|
| — |
|
Proxy contest and other |
|
| 1,333 |
|
|
| 6,267 |
|
|
| 2,419 |
|
|
| 6,499 |
|
Adjusted EBITDA |
| $ | (5,595 | ) |
| $ | (12,081 | ) |
| $ | (7,920 | ) |
| $ | (17,814 | ) |
Comparison of the Three Months Ended SeptemberJune 30, 20172023 to the Three Months Ended SeptemberJune 30, 2016
Net loss for the three months ended SeptemberJune 30, 20172023 was $0.5$(15.9) million with Adjusted EBITDA of $(5.6) million, compared to a net loss$(17.8) million with Adjusted EBITDA of $44.8$(12.1) million infor the prior year, period, including $0.5 million and $0.3 million of net loss attributable to the Headset segment, respectively.
Net loss for the ninesix months ended SeptemberJune 30, 20172023 was $17.5$(22.6) million with Adjusted EBITDA of $(7.9) million, compared to a net loss$(24.3) million with Adjusted EBITDA of $99.4$(17.8) million infor the prior year, period, including $16.1 million and $14.4 million of net loss attributable to the Headset segment, respectively.
20
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, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (in thousands) |
| |||||||||||||
Net revenue |
| $ | 47,982 |
|
| $ | 41,300 |
|
| $ | 99,426 |
|
| $ | 87,962 |
|
Cost of revenue |
|
| 36,110 |
|
|
| 33,418 |
|
|
| 73,415 |
|
|
| 66,051 |
|
Gross profit |
|
| 11,872 |
|
|
| 7,882 |
|
|
| 26,011 |
|
|
| 21,911 |
|
Operating expenses |
|
| 27,665 |
|
|
| 29,255 |
|
|
| 48,296 |
|
|
| 51,571 |
|
Operating loss |
|
| (15,793 | ) |
|
| (21,373 | ) |
|
| (22,285 | ) |
|
| (29,660 | ) |
Interest expense (income) |
|
| (17 | ) |
|
| 84 |
|
|
| 146 |
|
|
| 193 |
|
Other non-operating expense, net |
|
| 198 |
|
|
| 1,109 |
|
|
| 318 |
|
|
| 1,828 |
|
Loss before income tax |
|
| (15,974 | ) |
|
| (22,566 | ) |
|
| (22,749 | ) |
|
| (31,681 | ) |
Income tax benefit |
|
| (54 | ) |
|
| (4,740 | ) |
|
| (124 | ) |
|
| (7,379 | ) |
Net loss |
| $ | (15,920 | ) |
| $ | (17,826 | ) |
| $ | (22,625 | ) |
| $ | (24,302 | ) |
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, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (in thousands) |
| |||||||||||||
Net Revenue |
| $ | 47,982 |
|
| $ | 41,300 |
|
| $ | 99,426 |
|
| $ | 87,962 |
|
Gross Profit |
| $ | 11,872 |
|
| $ | 7,882 |
|
| $ | 26,011 |
|
| $ | 21,911 |
|
Gross Margin |
|
| 24.7 | % |
|
| 19.1 | % |
|
| 26.2 | % |
|
| 24.9 | % |
Cash Margin (1) |
|
| 26.1 | % |
|
| 20.8 | % |
|
| 27.5 | % |
|
| 26.4 | % |
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, 20172023 to the Three Months Ended SeptemberJune 30, 2016
Net revenuesrevenue for the three months ended SeptemberJune 30, 2017 were $35.92023 was $48.0 million, a $2.3$6.7 million decreaseincrease from $41.3 million 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 theconsumer demand for our products increased and channel inventory levels stabilized led by console gaming console headset market recovery ahead of a solid lineup of expected new game launchesheadsets 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 Kingdom and Europe.
For the three months ended SeptemberJune 30, 2017,2023, gross profit as a percentage of net revenuemargin increased to 34.3%24.7% from 33.3%19.1% in the comparable prior year. Headset margins were positively impacted by product cost savingsyear period driven by our supply chainlower freight costs including air freight, a less promotional environment and logistics teams and product mix, partially offset by the loss of fixed cost leverage.
Comparison of the NineSix Months Ended SeptemberJune 30, 20172023 to the NineSix Months Ended SeptemberJune 30, 2016
Net revenuesrevenue for the ninesix months ended SeptemberJune 30, 2017 decreased $21.92023 was $99.4 million, or 24.0%, as compared to ninea $6.7 million increase from $88.0 million reflecting a stronger U.S. console gaming headset market and increased consumer demand.
For the six months ended SeptemberJune 30, 2016, due2023, gross margin increased to 26.2% from 24.9% in the negative impact of 2016 holiday channel overhang,comparable prior year period as a result of lower industry-wide demand as limited sales of marquee games disrupted holiday purchasing behavior,freight and retailer business model initiatives to reduce on-hand inventory levels.
21
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, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (in thousands) |
| |||||||||||||
Selling and marketing |
| $ | 10,351 |
|
| $ | 11,587 |
|
| $ | 19,874 |
|
| $ | 22,416 |
|
Research and development |
|
| 4,189 |
|
|
| 5,136 |
|
|
| 8,290 |
|
|
| 10,388 |
|
General and administrative |
|
| 13,125 |
|
|
| 12,532 |
|
|
| 20,132 |
|
|
| 18,767 |
|
Total operating expenses |
| $ | 27,665 |
|
| $ | 29,255 |
|
| $ | 48,296 |
|
| $ | 51,571 |
|
Selling and Marketing
Selling and marketing expenses for the three and six months ended SeptemberJune 30, 20172023 totaled $5.6$10.4 million or 15.5% as a percentage of net revenues,and $19.9 million, respectively, compared to $7.0$11.6 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 comparablethree and six months ended June 30, 2023 were $4.2 million and $8.3 million, respectively, compared to $5.1 million and $10.4 million for the three and six months ended June 30, 2022, respectively, due to expense management initiatives during the prior year period.
General and Administrative
General and administrative expenses for the three months ended SeptemberJune 30, 20172023 totaled $3.5$13.1 million or 9.7% as a percentage of net revenues, compared to $4.6$12.5 million or 12.0% as a percentage of net revenues, for the three months ended SeptemberJune 30, 2016. The decrease was2022. Excluding certain non-recurring executive compensation, proxy contest and shareholders' litigation costs, expenses decreased $1.3 million primarily due to lower non-cash charges, legalstock-based compensation and professional service fees and headcount reductions.
General and administrative expenses for the ninesix months ended SeptemberJune 30, 20172023 totaled $11.7$20.1 million or 16.9% as a percentage of net revenues, compared to $15.2$18.8 million or 16.5% as a percentage of net revenues, for the ninesix months ended SeptemberJune 30, 2016. The decrease was2022. Excluding certain non-recurring executive compensation, proxy contest and shareholders' litigation costs, expenses decreased $1.4 million primarily due to lower non-cash chargesstock-based compensation, employee expenses and employee expenses.
Income Taxes
Income tax benefit for the three and ninesix 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, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
Cash and cash equivalents at beginning of period |
| $ | 11,396 |
|
| $ | 37,720 |
|
Net cash provided by (used for) operating activities |
|
| 24,210 |
|
|
| (41,247 | ) |
Net cash used for investing activities |
|
| (1,252 | ) |
|
| (1,207 | ) |
Net cash provided by (used for) financing activities |
|
| (18,749 | ) |
|
| 16,245 |
|
Effect of foreign exchange on cash |
|
| 182 |
|
|
| (634 | ) |
Cash and cash equivalents at end of period |
| $ | 15,787 |
|
| $ | 10,877 |
|
22
Operating activities
Cash provided by operating activities for the ninesix months ended SeptemberJune 30, 20172023 was $9.3$24.2 million, an increase of $6.2$65.5 million as compared to $3.1cash used for operating activities of $41.2 million for the ninesix months ended SeptemberJune 30, 2016.2022. The increase 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 lowermarket-driven inventory management activity, higher gross receipts due to reduced sales volumes.
Investing activities
Cash used for investing activities was $2.6$1.3 million duringfor the
Financing activities
Net cash used for financing activities was $12.6($18.7) million during the ninesix months ended SeptemberJune 30, 20172023 compared to $4.6net cash provided by financing activities of $16.2 million during the ninesix months ended SeptemberJune 30, 2016.2022. Financing activities during the ninesix months ended SeptemberJune 30, 2017 included net payments on our2023 consisted primarily of $19.1 million revolving credit facility of $11.1 million and term loan repayments of $1.4 million. Financing activities during the nine months ended September 30, 2016 included net payments on our revolving credit facility of $6.2 million and term loan repayments of $3.6 million with cash from operations and the issuance of common stock.
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 least the next 12 months.including amounts to develop new products, fund future stock repurchases and to pursue strategic opportunities. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements.
In addition, the combination of our revolving credit facility, long-term debtCompany monitors the capital markets on an ongoing basis and cash flow generated by our gaming headset business and reduced costs related to the HyperSound business will provide the necessary liquidity to fund our annual workingmay consider raising capital needs.
Foreign cash balances at SeptemberJune 30, 20172023 and December 31, 20162022 were $0.1$4.3 million and $0.2$6.5 million, respectively.
Revolving Credit Facility
On March 31, 2014,5, 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(the “Credit Facility”)
On March 10, 2023, the issuanceCompany entered into a Third Amendment to Amended and Restated Loan, Guaranty and Security Agreement (the “Third Amendment”), by and among the Company, VTB, TBC Holding Company LLC, TB Europe, VTBH, the financial institutions party thereto from time to time and Bank of bank guarantees,
The Third Amendment provides for, among other things: (i) extending the maturity date of creditthe Credit Facility from March 5, 2024 to April 1, 2025; (ii) updating the interest rate 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.23
Amounts outstanding under the Credit Facility bear interest at a rate equal to
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.
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 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 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
24
reduced sales. In 2022, we experienced a highhigher rate of inflation than in the futurerecent years resulting in higher cost of 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 ChiefPrincipal Executive Officer (our principal executive officer, or(or PEO) and our ChiefPrincipal Financial Officer (our principal financial officer, or(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
In our annual report on Form 10-K for the year ended December 31, 2022, we identified a material weakness in internal control related to the proper design and implementation of certain controls over our income tax provision and management’s review of the income tax provision. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Corporation's annual or interim financial statements will not be prevented or detected on a timely basis.
Management implemented its plan to remediate the material weakness described above, which consisted of the following elements:
As of June 30, 2023, management has determined that the material weakness identified has been remediated.
Other than the material weakness remediated above, there have been no changes in our internal control over financial reporting during the period covered that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.
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.
25
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
Information regarding risk factors contains forward-looking statements. These risk factors may be important to
Item 2 “Management’s Discussion
On April 9, 2019, the Company’s financial condition and operating
|
| Issuer Purchases of Equity Securities |
| |||||||||||||
|
| Total |
|
| Average |
|
| Total Number |
|
| Approximate |
| ||||
Period |
|
|
|
|
|
|
|
|
|
|
|
| ||||
April 1-30, 2023 |
|
| — |
|
| $ | — |
|
|
| — |
|
|
| — |
|
May 1-31, 2023 |
|
| — |
|
| $ | — |
|
|
| — |
|
|
| — |
|
June 1-30, 2023 |
|
| 85,903 |
|
| $ | 11.34 |
|
|
| 85,903 |
|
| $ | 16,619,836 |
|
Total |
|
| 85,903 |
|
| $ | 11.34 |
|
|
| 85,903 |
|
|
|
|
Item 5 - Other Information
Rule 10b5-1 Trading Plans
On May 15, 2023, Juergen Stark, who served as our Chairman, President and Chief Executive Officer at the time of adoption, adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to 50,000 shares of the Company’s common stock and exercise and sale of up to 250,000 options to purchased shares of the Company’s common stock until December 29, 2023.
26
Item 6. Exhibits
3.1 | |||
3.2 | |||
4.1 | |||
4.2 | |||
10.1† | |||
10.2† | |||
10.3† | |||
10.4†** | Turtle Beach Corporation 2023 Stock-Based Incentive Compensation Plan, as amended. | ||
10.5†** | |||
10.6†** | |||
10.7†** | |||
10.8 | |||
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 |
27
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.
28
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 7, 2023 | By: | / | |
John T. Hanson Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
29