What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-07 · 53 added, 36 removed, 192 unchanged (32% of the section changed)

17 unchanged sentences

Gaming peripherals, such as headsets, keyboards, mice, microphones, controllers, and simulation controls are estimated to be an $8.7 billion business globally.

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.

The console and PC gaming accessory markets are 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:

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Gamers can even further customize their controllers with unique thumbsticks and better grips/textures, weights, and more.

Game controllers also range in price from ~$40 to $300+ for ultra premium options, with premium controllers featuring improved materials, cooling, swappable parts and more.

Game controllers also range in price from ~$40 to more than $300 for ultra premium options, with premium controllers featuring improved materials, cooling, swappable parts and more.

Turtle Beach entered the controllers market in 2021 with the introduction of its wired Recon Controller for Xbox and PC.

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Racing simulation gaming follows a similar trajectory as flight simulation gaming.

The audience of racing sim gamers is also niche, dedicated, slightly older and willing to spend more on creating high-end racing simulation setups predominantly on PC, but also on consoles.

The audience of racing sim gamers is also niche, dedicated, slightly older and willing to spend more on creating high-end racing simulation setups predominantly on PC, but also on gaming consoles.

There are also a variety of long-running, successful racing game franchises including Forza, Assetto Corsa, and more that allow drivers to get behind the wheel and experience the rush of racing.

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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.

While semiconductor availability and freight costs significantly improved in 2023 compared to 2022, we continue to closely monitor component availability and freight cost including global supply chain threats within the post-pandemic business environment.

While semiconductor availability and freight costs have significantly improved compared to 2022, we continue to closely monitor component availability and freight cost including global supply chain threats within the post-pandemic business environment.

Results of Operations

1 unchanged sentence

Three Months Ended

Six Months Ended

(in thousands)

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Operating loss

Interest expense

Interest expense (income)

Other non-operating expense, net

Loss before income tax

Income tax benefit

Net income (loss)

Income tax expense (benefit)

Net Revenue and Gross Profit

1 unchanged sentence

Three Months Ended

Six Months Ended

(in thousands)

Comparison of the Three Months Ended March 31, 2024 to the Three Months Ended March 31, 2023

Net revenue for the three months ended March 31, 2024 was $55.8 million, a $4.4 million increase from $51.4 million driven by the revenue from the PDP acquisition, partially offset by slightly lower console headset revenue.

For the three months ended March 31, 2024, gross margin increased to 31.8% from 27.5% in the comparable prior year period driven by lower freight costs, favorable product mix as well as less promotional spend.

Comparison of the Three Months Ended June 30, 2024 to the Three Months Ended June 30, 2023

Net revenue for the three months ended June 30, 2024 was $76.5 million, a $28.5 million increase from $48.0 million driven by incremental revenue from the PDP acquisition and growth in our product markets.

For the three months ended June 30, 2024, gross margin increased to 30.2%, inclusive of a $1.3 million purchase accounting driven charge to step-up the value of PDP inventory at the time of acquisition and a $1.6 million reserve for ROCCAT inventory on-hand as part of the PC product brand transition to Turtle Beach, from 24.7% in the comparable prior year period.

Excluding these two charges, gross margins improved to 34.0% as a result of lower product costs, freight costs and lower promotional spend.

The lower product costs are a result of the benefit of our platforming and portfolio rationalization efforts over the past several quarters beginning to be realized in Q2 2024 with the launch of our new console wireless models.

Comparison of the Six Months Ended June 30, 2024 to the Six Months Ended June 30, 2023

Net revenue for the six months ended June 30, 2024 was $132.3 million, a $32.9 million increase from $99.4 million driven by incremental revenue from the PDP acquisition and growth in our product markets.

For the six months ended June 30, 2024, gross margin increased to 30.9%, inclusive of a $1.3 million purchase accounting driven charge to step-up the value of PDP inventory at the time of acquisition and a $1.6 million reserve for ROCCAT inventory on-hand as part of the PC product brand transition to Turtle Beach, from 26.2% in the comparable prior year period.

Excluding these two charges, gross margins improved to 33.1% as a result of lower product costs, freight costs and lower promotional spend.

Operating Expenses

Three Months Ended

Six Months Ended

(in thousands)

6 unchanged sentences

Selling and Marketing

Selling and marketing expenses for the three months ended March 31, 2024 totaled $9.0 million, compared to $9.5 million for the three months ended March 31, 2023 due to lower revenue-based expenses, reduction of marketing investments to align with strategic priorities.

Selling and marketing expenses for the three and six months ended June 30, 2024 totaled $13.7 million and $22.8 million, respectively, compared to $10.4 million and $19.9 million for the three and six months ended June 30, 2023, respectively, due to incremental intangible assets amortization and operating expenses related to the PDP acquisition, and integration related severance costs partially offset by spending reductions taken in second half of 2023.

Research and Development

Research and development costs for the three months ended March 31, 2024 was $3.9 million compared to $4.1 million for the three months ended March 31, 2023, which reflects certain expense management, including lower headcount and costs associated with our product portfolio plans.

Research and development costs for the three and six months ended June 30, 2024 was $4.6 million and $8.5 million, respectively, compared to $4.2 million and $8.3 million for the three and six months ended June 30, 2023, respectively, which reflects incremental expense related to the PDP acquisition and certain integration related severance partially offset by lower headcount and costs associated with our product portfolio plans.

General and Administrative

General and administrative expenses for the three months ended March 31, 2024 totaled $5.7 million compared to $7.0 million for the three months ended March 31, 2023.

Excluding certain restructuring and non-recurring activism related costs, but inclusive of incremental costs from PDP operations, expenses decreased $0.8 million primarily due to lower non-cash employees compensation and professional fees.

General and administrative expenses for the three months ended June 30, 2024 totaled $7.5 million compared to $13.1 million for the three months ended June 30, 2023.

Excluding non-recurring transaction and $1.3 million of activism related costs, but inclusive of incremental costs from PDP operations, expenses decreased $4.3 million as the comparable period included severance charges associated with the CEO transition.

General and administrative expenses for the six months ended June 30, 2024 totaled $13.1 million compared to $20.1 million for the six months ended June 30, 2023.

Excluding non-recurring transaction and $1.8 million of activism related costs, but inclusive of incremental costs from PDP operations, expenses decreased $4.6 million primarily due to lower severance and non-cash stock-based compensation.

Acquisition-related cost

Acquisition-related costs included costs incurred in connection with acquisitions including professional fees such as legal and accounting along with other certain integration related costs of the acquisition.

Income tax benefit for the three months ended March 31, 2024 was ($6.4) million at an effective tax rate of 102.5% compared to income tax benefit for the three months ended March 31, 2023 of ($0.1) million at an effective tax rate of 1.0%.

The effective tax rate for the three months ended March 31, 2024 was primarily impacted the by reversal of a portion of the Company’s deferred tax asset valuation allowance.

Income tax benefit for the six months ended June 30, 2024 was ($5.5) million at an effective tax rate of 42.9% compared to income tax benefit for the six months ended June 30, 2023 of ($0.1) million at an effective tax rate of 0.5%.

The effective tax rate for the six months ended June 30, 2024 was primarily impacted the by reversal of a portion of the Company’s deferred tax asset valuation allowance.

Key Performance Indicators and Non-GAAP Measures

1 unchanged sentence

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;

(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;

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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 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 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 months ended March 31, 2024 and March 31, 2023, are as follows:

Adjusted EBITDA (and a reconciliation to Net income (loss), the nearest GAAP financial measure) for the three and six months ended June 30, 2024 and June 30, 2023, are as follows:

Three Months Ended

Six Months Ended

(in thousands)

Net income (loss)

Interest expense (income)

3 unchanged sentences

Restructuring expense (2)

CEO transition related costs (3)

Business transaction expense (4)

Incremental costs on acquired inventory (5)

Proxy contest and other (6)

3 unchanged sentences

These costs primarily include severance and related benefits.

(3) 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 accelerated vesting of stock-based compensation.

(4) Business transaction expense includes one-time costs we incurred in connection with acquisitions including professional fees such as legal and accounting along with other certain integration related costs of the acquisition.

(5) Costs relate to the step up of acquired finished goods inventory to fair market value as required under purchase accounting.

This step up in value over original cost is recorded as a charge to cost of revenue as such inventory is sold.

(6) Proxy contest and other primarily includes one-time legal and other professional fees associated with proxy challenges presented by certain shareholder activists.

Comparison of the Three Months Ended March 31, 2024 to the Three Months Ended March 31, 2023

Adjusted EBITDA for the three months ended March 31, 2024 was $1.4 million, compared to $(2.8) 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.

Comparison of the Three Months Ended June 30, 2024 to the Three Months Ended June 30, 2023

Adjusted EBITDA for the three months ended June 30, 2024 was $3.0 million, compared to $(5.7) 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

2 unchanged sentences

The following table summarizes our sources and uses of cash:

Three Months Ended

Six Months Ended

(in thousands)

6 unchanged sentences

Operating activities

Cash provided by operating activities for the three months ended March 31, 2024 was $27.3 million, a decrease of $1.7 million as compared to $29.0 million for the three months ended March 31, 2023.

Cash provided by operating activities for the six months ended June 30, 2024 was $14.6 million, a decrease of $9.6 million as compared to $24.2 million for the six months ended June 30, 2023.

The decrease is primarily the result of certain acquisition-related business costs.

Investing activities

Cash used for investing activities was $76.2 million for the three months ended March 31, 2024, which was primarily related to the acquisition of the Performance Designed Products business, compared to $0.9 million for the three months ended March 31, 2023 related to certain capital investments.

Cash used for investing activities was $79.3 million for the six months ended June 30, 2024, which was primarily related to the acquisition of the Performance Designed Products business, compared to $1.3 million for the six months ended June 30, 2023 related to certain capital investments.

Financing activities

Net cash provided by financing activities was $48.0 million during the three months ended March 31, 2024 compared to net cash used for financing activities of $19.0 million during the three months ended March 31, 2023.

Financing activities during the three months ended March 31, 2024 consisted primarily of the $50 million term loan and $1.3 million of stock option exercise proceeds, partially offset by $3.2 million of debt issuance costs.

Net cash provided by financing activities was $58.2 million during the six months ended June 30, 2024 compared to net cash used for financing activities of $18.7 million during the six months ended June 30, 2023.

Financing activities during the six months ended June 30, 2024 consisted primarily of the $50 million term loan and $2.9 million of stock option exercise proceeds, partially offset by $3.2 million of debt issuance costs.

Management assessment of liquidity

2 unchanged sentences

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 March 31, 2024 and December 31, 2023 were $4.2 million and $8.0 million, respectively.

Foreign cash balances at June 30, 2024 and December 31, 2023 were $4.1 million and $8.0 million, respectively.

Revolving Credit Facility

7 unchanged sentences

(ii) revised the calculation of the U.S.

Borrowing Base to include certain acquired assets of PDP equal to the lesser of (a) the sum of the Project Tide Accounts Formula Amount and the Project Tide Inventory Formula Amount (each as defined in the Fourth Amendment), (b) $15,000,000, and (c) 30% of the aggregate Revolver Commitments;

Borrowing Base to include certain acquired assets of PDP equal to the lesser of (a) the sum of the accounts formula amount and the inventory formula amount (each as defined in the Fourth Amendment), (b) $15,000,000, and (c) 30% of the aggregate Revolver Commitments;

(iii) extending the maturity date of the Credit Facility from April 1, 2025 to March 13, 2027;

9 unchanged sentences

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 March 31, 2024, interest rates for outstanding borrowings were 9.00% 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.

As of June 30, 2024, interest rates for outstanding borrowings were 9.10% for base rate loans and 7.19% for Term SOFR loans.

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).

2 unchanged sentences

Obligations under the Credit Facility are secured by a security interest and lien upon substantially all of the Company’s assets.

As of March 31, 2024, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $43.8 million.

As of June 30, 2024, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $34.6 million.

On March 13, 2024, Turtle Beach and certain of its subsidiaries entered into a new financing agreement with Blue Torch Finance, LLC, (“Blue Torch”), pursuant to which Blue Torch for an aggregate amount of $50 million (the “Term Loan Facility”), the proceeds of which were used to (i) fund a portion of the PDP acquisition purchase price;

6 unchanged sentences

and (c) is subject to certain affirmative, negative and financial covenants, including a minimum liquidity covenant and a quarterly total net leverage ratio covenant.

As of March 31, 2024, the Company was in compliance with all financial covenants under the Term Loan.

As of June 30, 2024, interest rates for outstanding borrowings was 13.69%.

As of June 30, 2024, the Company was in compliance with all financial covenants under the Term Loan.

Critical Accounting Estimates

11 unchanged sentences

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.

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 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 March 31, 2024 and December 31, 2023, we did not have any derivative financial instruments.

As of June 30, 2024 and December 31, 2023, we did not have any derivative financial instruments.

Foreign Currency Exchange Risk

The Company has exchange rate exposure primarily with respect to the British Pound and Euro.

As of March 31, 2024 and December 31, 2023, 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.

As of June 30, 2024 and December 31, 2023, 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.

8 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis