Turtle Beach Corp 10-Q

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 VelocityOne TM Pedals and VelocityOne TM Stand, which perfectly pair with the VelocityOne Flight TM simulation control system for the complete, most immersive flight simulation experience on the market, and also launched the VelocityOne TM 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 ) (1) Increase in stock-based compensation in the nine months ended September 30, 2023 over the comparable prior year period primarily driven by $4.0 million charge related to the accelerated vesting of equities associated with the separation of our former CEO. (2) Inventory and component related reserves includes (a) $3.3 million of costs associated with certain component parts that resulted from the effects of the global constrained semiconductor availability due to the Covid 19 pandemic and (b) $2.0 million of reserves primarily related to the buildup of excess inventory in the distribution channels. (3) Restructuring charges are expenses that are paid in connection with reorganization of our operations. These costs primarily include severance and related benefits. (4) CEO transition related expense includes one-time costs associated with the separation of its former CEO. Such costs included severance, bonus, medical benefits and the tax impact of vesting of stock-based compensation. (5) Proxy contest and other primarily includes one-time legal, other professional fees, as well as employee retention costs associated with proxy challenges presented by certain shareholder activists. 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 Quantitat ive 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 - Control s 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 - Lega l 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 - R isk 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.