Turtle Beach Corp 10-Q for FY2023 Q3
Turtle Beach Corp (TBCH)
About this 10-Q
Turtle Beach Corp filed this 10-Q on November 7, 2023, covering the quarter ended September 30, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $59.16M
- up 15.3% from $51.3M a year earlier
- Net loss
- $3.61M
- compared with a net loss of $12.01M a year earlier
- Diluted EPS
- -$0.21
- compared with -$0.73 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
(
(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 |
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 every Interactive Data File required to be submitted 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 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 |
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Non-accelerated filer |
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Smaller reporting company |
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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 Section 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). ☐ Yes
The number of shares of the registrant’s Common Stock, par value $0.001 per share, outstanding on October 31, 2023 was
INDEX
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Item 1. |
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Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 5. |
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Item 6. |
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1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Turtle Beach Corporation
Condensed Consolidated Statements of Operations
(unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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September 30, |
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September 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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(in thousands, except per-share data) |
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Net revenue |
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$ |
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$ |
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Cost of revenue |
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Gross profit |
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Operating expenses: |
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Selling and marketing |
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Research and development |
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General and administrative |
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Total operating expenses |
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Operating loss |
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Interest expense |
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Other non-operating expense, net |
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Loss before income tax |
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Income tax expense (benefit) |
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Net loss |
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$ |
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$ |
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$ |
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Net loss per share |
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Basic |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of shares: |
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Basic |
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Diluted |
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See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)
2
Turtle Beach Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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September 30, |
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September 30, |
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(in thousands) |
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Net loss |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
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Other comprehensive income (loss) |
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Comprehensive loss |
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$ |
( |
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$ |
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$ |
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$ |
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See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)
3
Turtle Beach Corporation
Condensed Consolidated Balance Sheets
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September 30, |
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December 31, |
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2023 |
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2022 |
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(unaudited) |
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ASSETS |
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(in thousands, except par value and share amounts) |
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Current Assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventories |
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Prepaid expenses and other current assets |
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Total Current Assets |
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Property and equipment, net |
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Goodwill |
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Intangible assets, net |
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Other assets |
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Total Assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Revolving credit facility |
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$ |
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$ |
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Accounts payable |
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Other current liabilities |
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Total Current Liabilities |
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Income tax payable |
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Other liabilities |
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Total Liabilities |
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Stockholders’ Equity |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive income (loss) |
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( |
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( |
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Total Stockholders’ Equity |
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Total Liabilities and Stockholders’ Equity |
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$ |
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$ |
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See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)
4
Turtle Beach Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)
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Nine Months Ended |
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September 30, 2023 |
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September 30, 2022 |
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(in thousands) |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: |
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Depreciation and amortization |
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Amortization of intangible assets |
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Amortization of debt financing costs |
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Stock-based compensation |
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Deferred income taxes |
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( |
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( |
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Change in sales returns reserve |
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( |
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( |
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Provision for obsolete inventory |
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Changes in operating assets and liabilities, net of acquisitions: |
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Accounts receivable |
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Inventories |
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( |
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Accounts payable |
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Prepaid expenses and other assets |
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Income taxes payable |
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Other liabilities |
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( |
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( |
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Net cash provided by (used for) operating activities |
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( |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchases of property and equipment |
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( |
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Net cash used for investing activities |
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( |
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( |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Borrowings on revolving credit facilities |
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Repayment of revolving credit facilities |
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( |
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( |
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Proceeds from exercise of stock options and warrants |
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Repurchase of common stock |
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( |
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— |
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Debt issuance costs |
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( |
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— |
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Net cash provided by (used for) financing activities |
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( |
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Effect of exchange rate changes on cash and cash equivalents |
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( |
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Net increase (decrease) in cash and cash equivalents |
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( |
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Cash and cash equivalents - beginning of period |
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Cash and cash equivalents - end of period |
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$ |
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$ |
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SUPPLEMENTAL DISCLOSURE OF INFORMATION |
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Cash paid for interest |
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$ |
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$ |
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Cash paid (received) for income taxes |
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$ |
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$ |
( |
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See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)
5
Turtle Beach Corporation
Condensed Consolidated Statement of Stockholders’ Equity
(unaudited)
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Common Stock |
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Additional |
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Accumulated |
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Accumulated |
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Shares |
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Amount |
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Capital |
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Deficit |
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Income (Loss) |
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Total |
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(in thousands) |
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Balance at December 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Other comprehensive income, net of tax |
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— |
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— |
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— |
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— |
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Issuance of restricted stock |
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— |
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— |
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— |
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— |
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- |
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Stock options exercised |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Balance at March 31, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Other comprehensive loss, net of tax |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Issuance of restricted stock |
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— |
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— |
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— |
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— |
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- |
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Stock options exercised |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Repurchase of common stock |
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( |
) |
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— |
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( |
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— |
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— |
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( |
) |
Balance at June 30, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Other comprehensive loss, net of tax |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Issuance of restricted stock |
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— |
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— |
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— |
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— |
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- |
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Stock options exercised |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Balance at September 30, 2023 |
|
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Common Stock |
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Additional |
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Accumulated |
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Accumulated |
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Shares |
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Amount |
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Capital |
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Deficit |
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Income (Loss) |
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Total |
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(in thousands) |
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Balance at December 31, 2021 |
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|
$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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|||||
Net loss |
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— |
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— |
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— |
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( |
) |
|
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— |
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( |
) |
Other comprehensive loss, net of tax |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Issuance of restricted stock |
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— |
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— |
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— |
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— |
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— |
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Stock options exercised |
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— |
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— |
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— |
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|||
Stock-based compensation |
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— |
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— |
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— |
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— |
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||
Balance at March 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Net income |
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— |
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— |
|
|
|
— |
|
|
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( |
) |
|
|
— |
|
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|
( |
) |
Other comprehensive income, net of tax |
|
|
— |
|
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|
— |
|
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— |
|
|
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— |
|
|
|
( |
) |
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( |
) |
Issuance of restricted stock |
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— |
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— |
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— |
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|
|
— |
|
|
|
— |
|
|
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at June 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Other comprehensive loss, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issuance of restricted stock |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock options exercised |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Stock-based compensation |
|
|
- |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at September 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)
6
Turtle Beach Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1. Background and Basis of Presentation
Organization
Turtle Beach Corporation (“Turtle Beach” or the “Company”), headquartered in White Plains, New York and incorporated in the state of Nevada in 2010, is a premier audio and gaming technology company with expertise and experience in developing, commercializing, and marketing innovative products across a range of large addressable markets under the Turtle Beach® and ROCCAT® brands. Turtle Beach is a worldwide leader of feature-rich headset solutions for use across multiple platforms, including video game and entertainment consoles, handheld consoles, personal computers (“PC”), tablets and mobile devices. ROCCAT is a gaming keyboards, mice and other accessories brand focused on the PC peripherals market.
VTB Holdings, Inc. (“VTBH”), a wholly-owned subsidiary of Turtle Beach Corporation and the owner of Voyetra Turtle Beach, Inc. (“VTB”), was incorporated in the state of Delaware in 2010. VTB, the owner of Turtle Beach Europe Limited (“TB Europe”), was incorporated in the state of Delaware in 1975 with operations principally located in White Plains, New York.
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, 2022 Condensed Consolidated Balance Sheet has been derived from the Company’s audited financial statements included in its Annual Report on Form 10-K filed with the SEC on March 29, 2023 (“Annual Report”).
These financial statements should be read in conjunction with the annual financial statements and the notes thereto included in the Annual Report that contains information useful to understanding the Company’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.
Note 2. Summary of Significant Accounting Policies
The preparation of consolidated annual and quarterly financial statements in conformity with GAAP 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 the 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 significant 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 certain warrants. As of September 30, 2023 and December 31, 2022, the Company had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted.
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||||||||||
|
|
Reported |
|
|
Fair Value |
|
|
Reported |
|
|
Fair Value |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Financial Assets and Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revolving credit facility |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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 approximates fair value, due to the variable rate nature of the debt, as of September 30, 2023 and December 31, 2022.
Note 4. 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 |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Balance, beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Reserve accrual |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Recoveries and deductions, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance, end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Note 5. Composition of Certain Financial Statement Items
Inventories
Inventories consist of the following:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
(in thousands) |
|
|||||
Finished goods |
|
$ |
|
|
$ |
|
||
Raw materials |
|
|
|
|
|
|
||
Total inventories |
|
$ |
|
|
$ |
|
||
8
Property and Equipment, net
Property and equipment, net, consists of the following:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
(in thousands) |
|
|||||
Machinery and equipment |
|
$ |
|
|
$ |
|
||
Software and software development |
|
|
|
|
|
|
||
Furniture and fixtures |
|
|
|
|
|
|
||
Tooling |
|
|
|
|
|
|
||
Leasehold improvements |
|
|
|
|
|
|
||
Demonstration units and convention booths |
|
|
|
|
|
|
||
Total property and equipment, gross |
|
|
|
|
|
|
||
Less: accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Total property and equipment, net |
|
$ |
|
|
$ |
|
||
Other Current Liabilities
Other current liabilities consist of the following:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
(in thousands) |
|
|||||
Accrued employee expenses |
|
$ |
|
|
$ |
|
||
Accrued tax-related payables |
|
|
|
|
|
|
||
Accrued marketing |
|
|
|
|
|
|
||
Accrued royalty |
|
|
|
|
|
|
||
Accrued freight |
|
|
|
|
|
|
||
Accrued expenses |
|
|
|
|
|
|
||
Total other current liabilities |
|
$ |
|
|
$ |
|
||
Note 6. Goodwill and Other Intangible Assets
Acquired Intangible Assets
Acquired identifiable intangible assets, and related accumulated amortization, as of September 30, 2023 and December 31, 2022 consisted of:
|
|
September 30, 2023 |
|
|||||||||
|
|
Gross |
|
|
Accumulated |
|
|
Net Book |
|
|||
|
|
(in thousands) |
|
|||||||||
Customer relationships |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Tradenames |
|
|
|
|
|
|
|
|
|
|||
Developed technology |
|
|
|
|
|
|
|
|
|
|||
Foreign currency |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Total Intangible Assets |
|
$ |
|
|
$ |
|
|
$ |
|
|||
9
|
|
December 31, 2022 |
|
|||||||||
|
|
Gross |
|
|
Accumulated |
|
|
Net Book |
|
|||
|
|
(in thousands) |
|
|||||||||
Customer relationships |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Tradenames |
|
|
|
|
|
|
|
|
|
|||
Developed technology |
|
|
|
|
|
|
|
|
|
|||
Foreign currency |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total Intangible Assets |
|
$ |
|
|
$ |
|
|
$ |
|
|||
In connection with the October 2012 acquisition of TB Europe, the acquired intangible assets related to customer relationships is being amortized over an estimated useful life of
In May 2019, the Company completed its acquisition of the business and assets of ROCCAT. The acquired intangible assets relating to developed technology, customer relationships, and trade name are subject to amortization. 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 time. 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 $
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 Neat brand. In the fourth quarter 2022, the Company recorded an impairment charge of $
Amortization expense related to definite lived intangible assets of $
As of September 30, 2023, estimated annual amortization expense related to definite lived intangible assets in future periods was as follows:
|
|
(in thousands) |
|
|
2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
There were
Note 7. Revolving Credit Facility and Long-Term Debt
|
|
September 30, |
|
|
December 31, |
|
||
|
|
(in thousands) |
|
|||||
Revolving credit facility, maturing |
|
$ |
|
|
$ |
|
||
Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was $
Amortization of deferred financing costs was $
10
Revolving Credit Facility
On March 5, 2018, Turtle Beach and certain of its subsidiaries entered into an amended and restated loan, guaranty and security agreement (the “Credit Facility”) with Bank of America, N.A. (“Bank of America”), as administrative agent, collateral agent and security trustee for Lenders (as defined therein), which replaced the then existing asset-based revolving loan agreement. The Credit Facility was amended on each of December 17, 2018, May 31, 2019, and March 10, 2023. The Credit Facility, as amended, expires on
On March 10, 2023, the Company 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 America, as administrative agent, collateral agent and security trustee for the lenders.
The Third Amendment provides for, among other things: (i) extending the maturity date of the Credit Facility from March 5, 2024 to April 1, 2025; (ii) updating the interest rate and margin terms; (iii) removing the FILO Loan facility; (iv) updating the sub-facility limit for TB Europe to $
The maximum credit availability for loans and letters of credit under the Credit Facility is governed by a borrowing base determined by the application of specified percentages to certain eligible assets, primarily eligible trade accounts receivable and inventories, and is subject to discretionary reserves and revaluation adjustments. The Credit Facility may be used for working capital, the issuance of bank guarantees, letters of credit and other corporate purposes.
Amounts outstanding under the Credit Facility bear interest at a rate equal to (i) a rate published by Bank of America or the U.S. Bloomberg Short-Term Bank Yield Index (“BSBY”) rate for loans denominated in U.S. Dollars, (ii) the Sterling Overnight Index Average Reference Rate (“SONIA”) for loans denominated in Sterling, (iii) and the Euro Interbank Offered Rate (“EUIBOR”) for loans denominated in Euros, plus in each case, an applicable margin, which is between
The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met or certain other events occur (as set forth in the Credit Facility). At such times, the Credit Facility requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least
The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions, including the 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’s assets.
As of September 30, 2023, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $
Note 8. Income Taxes
In order to determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, 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, the Company 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 period during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
The following table presents the Company’s income tax expense and effective income tax rate:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Income tax expense (benefit) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Effective income tax rate |
|
|
( |
%) |
|
|
% |
|
|
( |
%) |
|
|
% |
||
11
The effective tax rate for the three and nine months ended September 30, 2023 was primarily impacted by the change in U.S. valuation allowance, foreign taxes, state tax and interest on uncertain tax positions.
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 statements of operations. As of September 30, 2023, the Company had uncertain tax positions of $
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 and nine months ended September 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 2019 through 2021, and the state tax years open under the statute of limitations are 2018 through 2021.
Note 9. Stock-Based Compensation
Total estimated stock-based compensation expense for employees and non-employees, related to all of the Company’s stock-based awards, was as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Cost of revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Selling and marketing |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total stock-based compensation |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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 nine months ended September 30, 2023, the Company recorded a total of $
The following table presents the stock activity and the total number of shares available for grant as of September 30, 2023:
|
|
(in thousands) |
|
|
Balance at December 31, 2022 |
|
|
|
|
Plan Amendment |
|
|
|
|
Options Cancelled |
|
|
|
|
Restricted Stock Granted |
|
|
( |
) |
Restricted Stock Forfeited |
|
|
|
|
Performance Shares Unearned |
|
|
|
|
Performance Shares Granted |
|
|
( |
) |
Balance at September 30, 2023 |
|
|
|
|
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 $
Stock Option Activity
|
|
Options Outstanding |
|
|||||||||||||
|
|
Number of |
|
|
Weighted- |
|
|
Weighted- |
|
|
Aggregate |
|
||||
|
|
|
|
|
|
|
|
(in years) |
|
|
|
|
||||
Outstanding at December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Options Granted |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||
Options Exercised |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Options Forfeited |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Outstanding at September 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Vested and expected to vest at September 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Exercisable at September 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Stock options are time-based and the majority are exercisable within
Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. The aggregate intrinsic value of options exercised was $
The Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted as of the grant date. There were
Restricted Stock Activity
|
|
Shares |
|
|
Weighted |
|
||
Nonvested restricted stock at December 31, 2022 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Shares forfeited |
|
|
( |
) |
|
|
|
|
Nonvested restricted stock at September 30, 2023 |
|
|
|
|
$ |
|
||
As of September 30, 2023, total unrecognized compensation costs related to the nonvested restricted stock awards was $
Performance-Based Restricted Share Units
13
As of September 30, 2023, the Company had
Note 10. Net Loss Per Share
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 |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands, except per-share data) |
|
|||||||||||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding — Basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
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 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Incremental shares from stock options and restricted stock awards are computed using 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.
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Unvested restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Note 11. Segment Information
The following table represents total net revenues based on where customers are physically located:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
North America |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Europe and Middle East |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asia Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total net revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
14
Note 12. 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 August 5, 2013, VTB Holdings, Inc. (“VTBH”) and the Company (f/k/a Parametric Sound Corporation) announced that they had entered into the Merger Agreement pursuant to which VTBH would acquire an approximately
On May 22, 2020, PAMTP LLC, which purports to hold the claims of
Employment Litigation: On April 20, 2017, a former employee filed an action in the Superior Court for the County of San Diego, State of California. The complaint alleges claims including wrongful termination, retaliation and various other provisions of the California Labor Code. The complaint seeks unspecified economic and non-economic losses, as well as allegedly unpaid wages, unreimbursed business expenses statutory penalties, interest, punitive damages and 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 October 8, 2021 a jury rendered a unanimous verdict in favor of the Company on the employment claims. The Court granted a directed verdict to the Company on its Cross- Complaint against the former employee. Judgment was entered in favor of the Company on October 27, 2021. On December 20, 2021, the former employee filed a notice of appeal of the judgment.
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 September 30, 2023 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
15
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.
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Warranty, beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Warranty costs accrued |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Settlements of warranty claims |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Warranty, end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating Leases - Right of Use Assets
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
The components of the right-of-use assets and lease liabilities were as follows:
|
|
Balance Sheet Classification |
|
September 30, 2023 |
|
|
|
|
|
|
(in thousands) |
|
|
|
Other assets |
|
$ |
|
||
|
|
|
|
|
|
|
|
Other current liabilities |
|
$ |
|
||
|
Other liabilities |
|
|
|
||
Total lease liability obligations |
|
|
|
$ |
|
|
Weighted-average remaining lease term (in years) |
|
|
|
|
|
|
Weighted-average discount rate |
|
|
|
|
% |
|
During the nine months ended September 30, 2023, the Company recognized approximately $
Approximate future minimum lease payments for the Company’s right of use assets over the remaining lease periods as of September 30, 2023, are as follows:
|
|
(in thousands) |
|
|
2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total minimum payments |
|
|
|
|
Less: Imputed interest |
|
|
( |
) |
Total |
|
$ |
|
|
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our operations should be read together with our unaudited condensed consolidated financial statements and the related notes included in Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 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 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, 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 (“Turtle Beach” or the “Company”), headquartered in White Plains, New York, and incorporated in the state of Nevada in 2010, is a premier audio and gaming technology company with expertise and experience in developing, commercializing, and marketing innovative products across a range of large addressable markets under the Turtle Beach® and ROCCAT® brands. Turtle Beach is a worldwide leader of feature-rich gaming solutions for use across multiple platforms, including video game and entertainment consoles, handheld consoles, personal computers (“PC”), tablets and mobile devices. ROCCAT is a gaming headsets, keyboards, mice, and other accessories brand focused on the personal computer peripherals market.
Business Trends
Turtle Beach participates in the global software and accessories gaming market, which is estimated to be approximately $193 billion. The global gaming audience now exceeds global cinema and music markets with over three billion active gamers worldwide. Gaming peripherals, such as headsets, keyboards, mice, microphones, controllers, and simulation 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 accessory markets are also 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 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 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 headset 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 gaming headset.
17
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 launched their latest consoles, Xbox Series X|S and PlayStation 5, ahead of the 2020 holiday season, and in 2021/2022 demand for the latest Xbox and PlayStation consoles exceeded the available supply for consumers to purchase. In 2023, the demand for gaming consoles is expected to improve as additional supplies are available, which is expected to help the overall console market reach single digit percentage growth.
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 for 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 U.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 provide gamers with high-end performance and a superior 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 different 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. For 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 costs.
18
Results of Operations
The following table sets forth the Company’s statements of operations for the periods presented:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Net revenue |
|
$ |
59,158 |
|
|
$ |
51,304 |
|
|
$ |
158,584 |
|
|
$ |
139,266 |
|
Cost of revenue |
|
|
41,469 |
|
|
|
44,046 |
|
|
|
114,884 |
|
|
|
110,097 |
|
Gross profit |
|
|
17,689 |
|
|
|
7,258 |
|
|
|
43,700 |
|
|
|
29,169 |
|
Operating expenses |
|
|
20,206 |
|
|
|
20,956 |
|
|
|
68,502 |
|
|
|
72,527 |
|
Operating loss |
|
|
(2,517 |
) |
|
|
(13,698 |
) |
|
|
(24,802 |
) |
|
|
(43,358 |
) |
Interest expense |
|
|
107 |
|
|
|
450 |
|
|
|
253 |
|
|
|
643 |
|
Other non-operating expense, net |
|
|
481 |
|
|
|
2,255 |
|
|
|
799 |
|
|
|
4,083 |
|
Loss before income tax |
|
|
(3,105 |
) |
|
|
(16,403 |
) |
|
|
(25,854 |
) |
|
|
(48,084 |
) |
Income tax expense (benefit) |
|
|
501 |
|
|
|
(4,392 |
) |
|
|
377 |
|
|
|
(11,771 |
) |
Net loss |
|
$ |
(3,606 |
) |
|
$ |
(12,011 |
) |
|
$ |
(26,231 |
) |
|
$ |
(36,313 |
) |
Net Revenue and Gross Profit
The following table summarizes net revenue and gross profit for the periods presented:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Net Revenue |
|
$ |
59,158 |
|
|
$ |
51,304 |
|
|
$ |
158,584 |
|
|
$ |
139,266 |
|
Gross Profit |
|
$ |
17,689 |
|
|
$ |
7,258 |
|
|
$ |
43,700 |
|
|
$ |
29,169 |
|
Gross Margin |
|
|
29.9 |
% |
|
|
14.1 |
% |
|
|
27.6 |
% |
|
|
20.9 |
% |
Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022
Net revenue for the three months ended September 30, 2023 was $59.2 million, a $7.9 million increase from $51.3 million driven primarily by an increase in North America sales led by console gaming headsets and flight simulation products, as well as the impact of share gains across key categories and geographies.
For the three months ended September 30, 2023, gross margin increased to 29.9% from 14.1%, or 24.5% excluding $5.3 million of excess components and product inventory impairment charges from pandemic related supply chain challenges, in the comparable prior year period driven by lower freight costs and less promotional spend.
Comparison of the Nine Months Ended September 30, 2023 to the Nine Months Ended September 30, 2022
Net revenue for the nine months ended September 30, 2023 was $158.6 million, a $19.3 million increase from $139.3 million as consumer demand for our products increased and channel inventory levels stabilized led by console gaming headsets and flight simulation products.
For the nine months ended September 30, 2023, gross margin increased to 27.6% from 20.9%, or 24.8% excluding $5.3 million of excess components and product inventory impairment charges, in the comparable prior year period as a result of lower freight and logistics costs as the elevated freight rates caused by the pandemic normalized.
19
Operating Expenses
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Selling and marketing |
|
$ |
10,583 |
|
|
$ |
10,550 |
|
|
$ |
30,457 |
|
|
$ |
32,966 |
|
Research and development |
|
|
4,380 |
|
|
|
4,400 |
|
|
|
12,670 |
|
|
|
14,788 |
|
General and administrative |
|
|
5,243 |
|
|
|
6,006 |
|
|
|
25,375 |
|
|
|
24,773 |
|
Total operating expenses |
|
$ |
20,206 |
|
|
$ |
20,956 |
|
|
$ |
68,502 |
|
|
$ |
72,527 |
|
Selling and Marketing
Selling and marketing expenses for the three and nine months ended September 30, 2023 totaled $10.6 million and $30.5 million, respectively, compared to $10.6 million and $33.0 million for the three and nine months ended September 30, 2022, respectively, due to alignment of marketing to support demand and product launches.
Research and Development
Research and development costs for the three and nine months ended September 30, 2023 were $4.4 million and $12.7 million, respectively, compared to $4.4 million and $14.8 million for the three and nine months ended September 30, 2022, respectively, due to expense management initiatives during the prior year to align headcount with new product and portfolio expansion strategies.
General and Administrative
General and administrative expenses for the three months ended September 30, 2023 totaled $5.2 million compared to $6.0 million for the three months ended September 30, 2022 as a result of lower corporate legal costs and non-cash stock-based compensation.
General and administrative expenses for the nine months ended September 30, 2023 totaled $25.4 million compared to $24.8 million for the nine months ended September 30, 2022. Excluding certain non-recurring executive compensation, proxy contest and shareholders' litigation costs, expenses decreased $2.3 million primarily due lower non-cash stock-based compensation, employee expenses and certain corporate legal costs, partially offset by higher professional services costs.
Income Taxes
Income tax benefit for the nine months ended September 30, 2023 was $0.4 million at an effective tax rate of (1.5%) compared to income tax benefit for the nine months ended September 30, 2022 of ($11.8) million at an effective tax rate of 24.5%. The effective tax rate for the nine months ended September 30, 2023 was primarily impacted by the change in U.S. valuation allowance, foreign taxes, state tax and interest on uncertain tax positions.
Key Performance Indicators and Non-GAAP Measures
Management routinely reviews key performance indicators, including revenue, operating income and margins, and earnings per share, among others. In addition, we believe certain other measures provide useful information to management and investors about us and our financial condition and results of operations for the following reasons: (i) they are measures used by our Board of Directors and management team to evaluate our operating performance; (ii) they are measures used by our management team to make day-to-day operating decisions; (iii) the adjustments made are often viewed as either non-recurring or not reflective of ongoing financial performance and/or have no cash impact on operations; and (iv) the 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 adjusting for potential differences caused by variations in capital structures (affecting relative interest expense), and the age and book value of facilities and equipment (affecting relative depreciation and amortization expense). These 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 believe that the presentation of Adjusted EBITDA, defined as net income (loss) before interest, taxes, depreciation and amortization, stock-based compensation (non-cash) and certain non-recurring special items that we believe are not representative of core operations, 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
20
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 income (loss), the nearest GAAP financial measure) for the three and nine months ended September 30, 2023 and September 30, 2022, are as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Net loss |
|
$ |
(3,606 |
) |
|
$ |
(12,011 |
) |
|
$ |
(26,231 |
) |
|
$ |
(36,313 |
) |
Interest expense (income) |
|
|
107 |
|
|
|
450 |
|
|
|
253 |
|
|
|
643 |
|
Depreciation and amortization |
|
|
1,212 |
|
|
|
1,383 |
|
|
|
3,673 |
|
|
|
4,464 |
|
Stock-based compensation (1) |
|
|
1,625 |
|
|
|
2,208 |
|
|
|
8,554 |
|
|
|
5,775 |
|
Income tax expense (benefit) |
|
|
501 |
|
|
|
(4,392 |
) |
|
|
377 |
|
|
|
(11,771 |
) |
Inventory and component related reserves (2) |
|
|
— |
|
|
|
5,300 |
|
|
|
— |
|
|
|
5,300 |
|
Restructuring expense (3) |
|
|
1,104 |
|
|
|
— |
|
|
|
1,104 |
|
|
|
527 |
|
CEO transition related costs (4) |
|
|
— |
|
|
|
— |
|
|
|
2,874 |
|
|
|
— |
|
Proxy contest and other (5) |
|
|
94 |
|
|
|
114 |
|
|
|
2,513 |
|
|
|
6,613 |
|
Adjusted EBITDA |
|
$ |
1,037 |
|
|
$ |
(6,948 |
) |
|
$ |
(6,883 |
) |
|
$ |
(24,762 |
) |
Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022
Adjusted EBITDA for the three months ended September 30, 2023 was $1.0 million, compared to $(6.9) million for the prior year, due to higher revenue and improved margins that were positively impacted by less promotional activity, lower freight costs and operating expense control actions.
Liquidity and Capital Resources
Our primary sources of working capital are cash flows from operations and availability under our revolving credit facility. We have funded operations and acquisitions in recent periods with operating cash flows and borrowings under our revolving credit facility.
21
The following table summarizes our sources and uses of cash:
|
|
Nine Months Ended |
|
|||||
|
|
September 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 |
|
|
7,944 |
|
|
|
(69,522 |
) |
Net cash used for investing activities |
|
|
(1,924 |
) |
|
|
(1,895 |
) |
Net cash provided by (used for) financing activities |
|
|
(5,128 |
) |
|
|
45,244 |
|
Effect of foreign exchange on cash |
|
|
52 |
|
|
|
(1,042 |
) |
Cash and cash equivalents at end of period |
|
$ |
12,340 |
|
|
$ |
10,505 |
|
Operating activities
Cash provided by operating activities for the nine months ended September 30, 2023 was $7.9 million, an increase of $77.5 million as compared to cash used for operating activities of $69.5 million for the nine months ended September 30, 2022. The increase is primarily the result of lower working capital driven by reductions in inventory levels, higher gross receipts and expense management initiatives.
Investing activities
Cash used for investing activities was $1.9 million for the nine months ended September 30, 2023, which was related to certain capital investments, compared to $1.9 million for the nine months ended September 30, 2022.
Financing activities
Net cash used for financing activities was $5.1 million during the nine months ended September 30, 2023 compared to net cash provided by financing activities of $45.2 million during the nine months ended September 30, 2022. Financing activities during the nine months ended September 30, 2023 consisted primarily of $5.8 million revolving credit facility net repayments and $1.0 million of common stock repurchases, partially offset by $1.7 million of stock option exercise proceeds.
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 short-term and long-term funding for working capital and capital expenditures 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 Company monitors the capital markets on an ongoing basis and may consider raising capital if favorable market conditions develop.
Foreign cash balances at September 30, 2023 and December 31, 2022 were $3.2 million and $6.5 million, respectively.
Revolving Credit Facility
On March 5, 2018, Turtle Beach and certain of its subsidiaries entered into an amended and restated loan, guaranty and security agreement (the “Credit Facility”) with Bank of America, N.A. (“Bank of America”), as administrative agent, collateral agent and security trustee for Lenders (as defined therein), which replaced the then existing asset-based revolving loan agreement. The Credit Facility was amended on each of December 17, 2018, May 31, 2019, and March 10, 2023. The Credit Facility, as amended, expires on April 1, 2025 and provides for a line of credit of up to $80 million inclusive of a sub-facility limit of $15 million for TB Europe, a wholly-owned subsidiary of Turtle Beach. In addition, the Credit Facility provides for a $40 million accordion feature.
On March 10, 2023, the Company 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 America, as administrative agent, collateral agent and security trustee for the lenders.
22
The Third Amendment provides for, among other things: (i) extending the maturity date of the Credit Facility from March 5, 2024 to April 1, 2025; (ii) updating the interest rate and margin terms; (iii) removing the FILO Loan facility; (iv) updating the sub-facility limit for TB Europe to $15 million; (v) increasing our undrawn commitment fee by 0.125%; and (vi) transitioning the reference interest rates from LIBOR to BSBY, SONIA and EUIBOR, as applicable.
The maximum credit availability for loans and letters of credit under the Credit Facility is governed by a borrowing base determined by the application of specified percentages to certain eligible assets, primarily eligible trade accounts receivable and inventories, and is subject to discretionary reserves and revaluation adjustments. The Credit Facility may be used for working capital, the issuance of bank guarantees, letters of credit and other corporate purposes.
Amounts outstanding under the Credit Facility bear interest at a rate equal to (i) a rate published by Bank of America or the U.S. Bloomberg Short-Term Bank Yield Index (“BSBY”) rate for loans denominated in U.S. Dollars, (ii) the Sterling Overnight Index Average Reference Rate (“SONIA”) for loans denominated in Sterling, (iii) and the Euro Interbank Offered Rate (“EUIBOR”) for loans denominated in Euros, plus in each case, an applicable margin, which is between 0.50% to 2.50% for base rate loans and UK base rate loans, and 1.50% to 3.50% for U.S. BSBY rate loans, U.S. BSBY daily floating rate loans and UK alternative currency loans. In addition, Turtle Beach is required to pay a commitment fee on the unused revolving loan commitment at a rate ranging from 0.375% to 0.50% and letter of credit fees and agent fees. As of September 30, 2023, interest rates for outstanding borrowings were 11.00% for base rate loans and 8.90% for LIBOR rate loans, which reference interest rates were still in effect prior to the Libor Transition Amendments.
The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met or certain other events occur (as set forth in the Credit Facility). At such times, the Credit Facility requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the last day of each fiscal quarter.
The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions, including the 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’s assets.
Critical Accounting Estimates
Our discussion and analysis of our results of operations and capital resources are based on our consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances.
Different assumptions and judgments would change the estimates used in the preparation of the condensed consolidated financial statements, which, in turn, could change the results from those reported. Management evaluates its estimates, assumptions and judgments on an ongoing basis. For a discussion of the critical estimates that affect the condensed consolidated financial statements, see “Critical Accounting Estimates” included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.
See Note 2, “Summary of Significant Accounting Policies,” to the unaudited 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 About Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. The Company’s market risk exposure is primarily a result of fluctuations in interest rates, 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 September 30, 2023 and December 31, 2022, we did not have any derivative financial instruments.
23
Foreign Currency Exchange Risk
The Company has exchange rate exposure primarily with respect to the British Pound and Euro. As of September 30, 2023 and December 31, 2022, our monetary assets and liabilities that are subject to this exposure are immaterial, therefore the potential immediate loss to us that would result from a hypothetical 10% change in foreign currency exchange rates would not be expected to have a material impact on our earnings or cash flows. This sensitivity analysis assumes an unfavorable 10% fluctuation in the exchange rates affecting the foreign currencies in which monetary assets and liabilities are denominated and does not take into account the offsetting effect of such a change on our foreign currency denominated revenues.
Inflation Risk
The Company is exposed to market risk due to inflationary pressures, including higher labor-related costs, increases in the costs of the goods and services we purchase as part of the manufacture and distribution of our products, increased costs from supply chain and logistic headwinds and in our operations generally. Such inflationary pressures have been and could continue to be exacerbated by higher oil prices, geopolitical turmoil, and economic policy actions. Inflationary pressures can also have a negative impact on demand for the products we sell. Reduced or delayed discretionary spending by consumers in response to inflationary pressures has reduced consumer demand for our products, resulting in reduced sales. In 2022, we experienced a higher rate of inflation than in recent years resulting in higher cost of goods, selling expenses, and general and administrative expenses. Such increases have had and may continue to have a negative impact on the Company’s profit margins if selling prices of products do not increase with the increased costs.
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 Principal Executive Officer (or PEO) and our Principal Financial Officer (or PFO), of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our PEO and PFO concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, were effective as of September 30, 2023.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the period covered that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
24
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 appears in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchase of Equity Securities
On April 9, 2019, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $15.0 million of its common stock. Any repurchases under the program will be made from time to time on the open market at prevailing market prices. On April 1, 2021, the Board of Directors approved an extension and expansion of this stock repurchase program up to $25.0 million of its common shares, expiring April 9, 2023. On March 3, 2023, the Company’s Board of Directors approved a two-year extension of this stock repurchase plan.
|
|
Issuer Purchases of Equity Securities |
|
|||||||||||||
|
|
Total |
|
|
Average |
|
|
Total Number |
|
|
Approximate |
|
||||
Period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
July 1-31, 2023 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
August 1-31, 2023 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
September 1-30, 2023 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
16,619,836 |
|
Total |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
|
|
Item 5 - Other Information
During the three months ended September 30, 2023,
25
Item 6. Exhibits
3.1 |
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
31.1 ** |
|
||
|
|
|
|
31.2 ** |
|
||
|
|
|
|
32.1 ** |
|
||
|
|
|
|
|
|
|
Extensible Business Reporting Language (XBRL) Exhibits |
|
|
|
|
101.INS |
|
Inline XBRL Instance Document |
|
|
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Labels Linkbase Document |
|
|
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|
|
|
|
|
|
|
|
|
** Filed herewith.
26
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: |
November 7, 2023 |
|
By: |
/s/ JOHN T. HANSON |
|
|
|
|
John T. Hanson Chief Financial Officer and Treasurer |
|
|
|
|
(Principal Financial and Accounting Officer) |
27
Exhibit 31.1
CERTIFICATION
I, Cris Keirn, certify that:
Date: |
|
November 7, 2023 |
By: |
/s/ CRIS KEIRN |
|
|
|
|
Cris Keirn |
|
|
|
|
Interim Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, John T. Hanson, certify that:
Date: |
|
November 7, 2023 |
By: |
/s/ JOHN T. HANSON |
|
|
|
|
John T. Hanson |
|
|
|
|
Chief Financial Officer and Treasurer |
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his or her capacity as an officer of Turtle Beach Corporation (the "Company"), that, to his or her knowledge, the Quarterly Report of the Company on Form 10-Q for the period ended September 30, 2023, fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: |
|
November 7, 2023 |
By: |
/s/ CRIS KEIRN |
|
|
|
|
Cris Keirn |
|
|
|
|
Interim Chief Executive Officer |
|
|
|
|
(Principal Executive Officer) |
Date: |
|
November 7, 2023 |
By: |
/s/ JOHN T. HANSON |
|
|
|
|
John T. Hanson |
|
|
|
|
Chief Financial Officer and Treasurer |
|
|
|
|
(Principal Financial Officer) |