What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-08-07 compared with 2025-05-08 · 67 added, 38 removed, 145 unchanged (42% of the section changed)

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Turtle Beach Corporation’s PC product portfolio includes headsets, gaming keyboards, mice and other gaming accessories focused on the PC gaming platform and it has recently expanded its brand beyond gaming headsets and launched its gaming controller product line, as well as, gaming flight simulation and racing simulation accessories.

In March 2024, Turtle Beach acquired Performance Designed Products (“PDP”), another leading gaming accessory brand with a robust slate of products, including gaming controllers/gamepads for all platforms and licensing deals with popular gaming and entertainment properties, including Call of Duty and Fortnite among others.

The Company has started the process of transitioning all gaming accessories under its best-selling Turtle Beach brand, with products for consoles and PC, including multiplatform gaming headsets, controllers, mice, keyboards, microphones, and flight/racing simulation accessories under one of the industry’s most recognized and trusted brand names.

In March 2024, Turtle Beach acquired Performance Designed Products LLC (“PDP”), another leading gaming accessory brand with a robust slate of products, including gaming controllers/gamepads for all platforms and licensing deals with popular gaming and entertainment properties.

The Company has transitioned all gaming accessories under its best-selling Turtle Beach brand, with products for consoles and PC, including multiplatform gaming headsets, controllers, mice, keyboards, microphones, and flight/racing simulation accessories under one of the industry’s most recognized and trusted brand names.

Business Trends

Turtle Beach operates in nearly $200 billion global games and accessories market.

Turtle Beach operates in the approximately $200 billion global games and accessories market.

The global gaming audience now exceeds global cinema and music markets with over 3.4 billion active gamers worldwide.

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Many of these established franchises launch new titles annually, leading into the holidays and beyond, and as a result can cause an additional boost to the normally strong holiday sales for gaming accessories.

Additionally, some larger franchise games, for example Call of Duty and Fortnite, follow-up with multiple post-launch downloadable content or new content update packs, to keep interest and fan engagement/momentum going for months following a game’s initial release.

Additionally, some larger franchise games, for example Call of Duty and Fortnite, follow-up with post-launch downloadable content or new content update packs, to keep interest and fan engagement/momentum going for months following a game’s initial release.

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.

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Three Months Ended

Six Months Ended

Cost of revenue

Operating expenses

Operating income (loss)

Operating (loss) income

Interest expense

Other non-operating expense, net

Other expense, net

Loss before income tax

Income tax benefit

Net (loss) income

Income tax (benefit) expense

Net Revenue and Gross Profit

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Three Months Ended

Comparison of the Three Months Ended March 31, 2025 to the Three Months Ended March 31, 2024

Net revenue for the three months ended March 31, 2025 was $63.9 million, a $8.1 million increase from $55.8 million driven by incremental revenue from the PDP acquisition.

For the three months ended March 31, 2025, gross margin increased to 36.6% from 31.8% in the comparable prior year period primarily due to operating leverage from higher revenue from the PDP acquisition and lower promotional spend and freight costs.

Six Months Ended

Comparison of the Three Months Ended June 30, 2025 to the Three Months Ended June 30, 2024

Net revenue for the three months ended June 30, 2025 was $56.8 million, a $19.7 million decrease from $76.5 million driven by a significant reduction in market demand for computer gaming accessories.

For the three months ended June 30, 2025, gross margin increased to 32.2% from 30.2% in the comparable prior year period primarily due to unfavorable impact of fair value step-up adjustment in prior period, partially offset by higher tariffs in 2025.

Comparison of the Six Months Ended June 30, 2025 to the Six Months Ended June 30, 2024

Net revenue for six months ended June 30, 2025 was $120.7 million, an $11.6 million decrease from $132.3 million that included incremental revenue from the PDP acquisition, due to lower market demand and the launch of certain wireless products in the comparable period.

For the six months ended June 30, 2025, gross margin increased to 34.5% from 30.9% in the comparable prior year period primarily due to unfavorable impact of fair value step-up adjustment and incremental warehouse costs in the prior period from the PDP acquisition.

Operating Expenses

Three Months Ended

Six Months Ended

(in thousands)

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Selling and Marketing

Selling and marketing expenses for the three months ended March 31, 2025 totaled $12.5 million, compared to $9.0 million for the three months ended March 31, 2024, primarily due to increased direct media marketing and incremental intangible assets amortization expenses related to the PDP acquisition.

Selling and marketing expenses decreased by approximately $1.0 million, or 7.4% for the three months ended June 30, 2025 as compared to the same period in the prior year due to lower market demand driven direct media marketing.

Selling and marketing expenses increased by $2.4 million, or 10.7% for the six months ended June 30, 2025 due to certain employee-related expenses, professional fees, certain marketing initiatives and incremental intangible assets amortization expenses related to the PDP acquisition.

Research and Development

Research and development costs for the three months ended March 31, 2025 was $4.0 million, compared to $3.9 million for the three months ended March 31, 2024, due to incremental expenses related to the PDP acquisition.

Research and development costs were consistent for the three and six months ended June 30, 2025 as compared to the same period in the prior year.

General and Administrative

General and administrative expenses for the three months ended March 31, 2025 totaled $8.2 million compared to $5.7 million for the three months ended March 31, 2024 due to professional service costs and incremental expenses related to the PDP acquisition.

General and administrative expenses were consistent for the three months ended June 30, 2025 at $7.4 million compared to the same period in the prior year.

General and administrative expenses increased by approximately $2.4 million for the six months ended June 30, 2025 as compared to the same period in the prior year due to filing-related legal costs, professional service and certain system investments.

Insurance recovery

Insurance recovery relates to the recognition of certain initial insurance claim receivables from the previously disclosed loss of inventory while in transit that occurred in the fourth quarter of 2024.

Insurance recovery for the three and six months ended June 30, 2025 totaled $6.0 million and $9.4 million, respectively, and relates to the receipt of certain insurance claims from the previously disclosed loss of inventory while in transit that occurred in the fourth quarter of 2024.

Acquisition-related cost

Acquisition-related costs include one-time costs incurred in connection with the PDP acquisition including professional fees such as legal and accounting along with other certain integration related costs.

Income tax benefit for the three months ended March 31, 2025 was $0.1 million at an effective tax rate of 14.1% compared to income tax benefit for the three months ended March 31, 2024 of $6.4 million at an effective tax rate of 102.5%.

The effective tax rate for the three months ended March 31, 2025 was primarily impacted the by the reversal of a portion of the Company’s deferred tax asset valuation allowance.

Income tax expense for the three months ended June 30, 2025 was $(0.2) million at an effective tax rate of 7.7% compared to income tax expense of $0.8 million for the three months ended June 30, 2024 at an effective tax rate of (12.6%).

The effective tax rate for the three months ended June 30, 2025 was primarily impacted by the change in U.S.

valuation allowance, foreign taxes and Federal and State current tax.

Income tax expense for the six months ended June 30, 2025 was $(0.4) million at an effective tax rate of 9.0% compared to income tax benefit for the six months ended June 30, 2024 of $5.5 million at an effective tax rate of 42.9%.

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

Key Performance Indicators and Non-GAAP Measures

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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, 2025 and March 31, 2024, are as follows (in thousands):

Adjusted EBITDA (and a reconciliation to Net loss, the nearest GAAP financial measure) for the three and six months ended June 30, 2025 and June 30, 2024, are as follows (in thousands):

Three Months Ended

Net (loss) income

Six Months Ended

Interest expense

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Acquisition-related cost (3)

Fair value step-up adjustment to acquired inventory (4)

Insurance recovery (5)

Loss on inventory in transit and other costs (6)

Litigation proceedings and other (7)

Adjusted EBITDA

(1) An income tax benefit of $7.0 million in the three months ended March 31, 2024 was recorded as a result of the reversal of a portion of the Company’s deferred tax asset valuation allowance.

(2) Restructuring charges are expenses that are paid in connection with reorganization of operations.

(1) An income tax benefit of $7.0 million was recorded in the three months ended March 31, 2024 as a result of the reversal of a

portion of the Company’s deferred tax asset valuation allowance.

(2) Restructuring expenses are costs in connection with reorganization of operations.

These costs primarily include severance and related benefits.

(3) Acquisition-related cost includes one-time costs we incurred in connection with acquisitions including warehouse lease impairment, professional fees such as legal and accounting along with other integration related costs.

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

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

(5) Insurance proceeds from claims related to a loss of inventory while in transit that occurred in the fourth quarter of 2024.

(6) Certain professional fees related to recovery initiatives in connection with a loss of inventory while in transit that occurred in the fourth quarter of 2024.

(7) Litigation and other primarily includes one-time legal and other professional fees associated with certain proceedings and settlements.

Liquidity and Capital Resources

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The following table summarizes our sources and uses of cash (in thousands):

Three Months Ended

Six Months Ended

Cash and cash equivalents at beginning of period

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Operating activities

Cash provided by operating activities for the three months ended March 31, 2025 was $40.5 million, an increase of $13.2 million as compared to $27.3 million for the three months ended March 31, 2024.

The increase is primarily due to higher gross receipts as a result of incremental PDP revenue.

Cash provided by operating activities for the six months ended June 30, 2025 was $37.3 million, an increase of $22.7 million as compared to $14.6 million for the six months ended June 30, 2024.

The increase is primarily due to higher gross receipts, insurance proceeds from claims related to a loss of inventory, lower acquisition-related costs and reduced spending levels.

Investing activities

Cash provided by investing activities was $2.3 million for the three months ended March 31, 2025, which was primarily related to a $2.5 million working capital adjustment payment, compared to $76.2 million used for the three months ended March 31, 2024 primarily related to the acquisition of the PDP business.

Cash provided by investing activities was $2.0 million for the six months ended June 30, 2025, which was primarily related to purchase price working capital adjustments of $2.5 million, compared to $79.3 million used for the six months ended June 30, 2024 primarily related to the acquisition of the PDP business.

Financing activities

Net cash used for financing activities was $44.9 million during the three months ended March 31, 2025 compared to net cash provided by financing activities of $48.0 million during the three months ended March 31, 2024.

Financing activities during the three months ended March 31, 2025 consisted primarily of $42.8 million revolving credit facility net repayments, $1.8 million of share repurchases, and $0.3 million of term loan repayments.

Net cash used for financing activities was $41.7 million during the six months ended June 30, 2025 compared to net cash provided by financing activities of $58.2 million during the six months ended June 30, 2024.

Financing activities during the six months ended June 30, 2025 consisted primarily of $29.5 million revolving credit facility net repayments, $6.7 million of share repurchases and $5.6 million of term loan repayments.

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

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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, 2025 and December 31, 2024 were $2.7 million and $4.5 million, respectively.

Foreign cash balances at June 30, 2025 and December 31, 2024 were $4.7 million and $4.5 million, respectively.

Revolving Credit Facility

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(“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 March 13, 2027 and provides for a line of credit of up to $50 million inclusive of a sub-facility limit of $10 million for TB Europe, a wholly owned subsidiary of Turtle Beach.

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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, 2025, interest rates for outstanding borrowings were 8.10% for base rate loans and 6.19% for Term SOFR loans.

As of June 30, 2025, interest rates for outstanding borrowings were 8.10% for base rate loans and 4.32% for Term SOFR loans.

The Company is subject to financial covenant testing if certain availability thresholds are not met or certain other events occur (as defined in the Credit Facility).

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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, 2025, the Company was in compliance with all the financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $51.2 million.

As of June 30, 2025, the Company was in compliance with all the financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $36.2 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”), 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;

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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, 2025, the interest rate for outstanding borrowings was 12.19%.

On August 7, 2024, the Company and Blue Torch amended the Term Loan Facility to, among other things, permit the Company to repurchase Company common stock in an aggregate amount not to exceed $30 million prior to March 31, 2025, subject to the satisfaction of certain conditions.

The other material terms of the Term Loan Facility were unchanged.

As of March 31, 2025, the Company was in compliance with all financial covenants under the Term Loan Facility.

As of June 30, 2025, the interest rate for outstanding borrowings was 12.19%.

As of June 30, 2025, the Company was in compliance with all financial covenants under the Term Loan Facility.

Credit Agreement

On August 1, 2025, the Company entered into the Credit Agreement (the “Credit Agreement”) with Bank of America, as the administrative agent, the swingline lender and the line of credit issuer, replacing the Company’s previous debt arrangements.

The Credit Agreement, matures on August 1, 2028 and includes a $60 million term loan facility and a $90 million revolving credit facility with designated sub-facility limits of (i) $15 million for the U.K.

Borrower, (ii) $10 million or a swingline facility and (iii) $5 million for letters of credit.

Actual credit availability under the revolving facility is subject to a borrowing base limitation that is calculated based on a percentage of eligible trade accounts receivable and inventories, the balances of which fluctuate, and is subject to discretionary reserves and revaluation adjustments.

The Company may utilize the facilities for borrowings as well as for the issuance of letters of credit, repaying existing indebtedness outstanding as of the effective date of the Credit Agreement and ongoing working capital and general corporate purposes as defined by the Credit Agreement.

The facilities under the Credit Agreement replaced the Company’s previous debt arrangements.

Borrowings will bear interest at a rate that varies depending on the type of loan calculated using a floating rate plus a margin.

Depending on the type of loan, the floating rate will either be the prime rate announced by Bank of America, Term SOFR, Daily Simple SOFR, EURIBOR or SONIA.

The margin will range from 2.00% to 2.75% for base rate loans and SONIA based loans and from 3.00% to 3.75% for Term SOFR, Daily Simple SOFR and EURIBOR loans.

The Credit Agreement also provides for an unused line fee, letter of credit fees, and agent fees.

The Credit Agreement requires the Company and its subsidiaries to (i) maintain a fixed charge coverage ratio, defined as the ratio, determined on a consolidated basis for the Company and its subsidiaries for the applicable measurement period, of (a) EBITDA minus unfinanced capital expenditures and cash taxes paid for such period to (b) consolidated interest charges for such period plus principal payments or redemptions of outstanding debt plus certain restricted payments and (ii) maintain a consolidated leverage ratio, defined as the ratio, determined on a consolidated basis for the Company and its subsidiaries for the applicable measurement period, of (a) certain funded indebtedness minus unrestricted cash up to a maximum of $12 million to (b) EBITDA.

The Credit Agreement also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions, including our 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.

Critical Accounting Estimates

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The Company does not use derivative financial instruments for speculative or trading purposes.

As of March 31, 2025 and December 31, 2024, we did not have any derivative financial instruments.

As of June 30, 2025 and December 31, 2024, 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, 2025 and December 31, 2024, 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, 2025 and December 31, 2024, 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.

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In recent years, our business has been affected by global supply chain constraints and unfavorable changes in economic or political conditions in the countries and markets where we operate.

Such inflationary pressures have been and could continue to be exacerbated by higher oil prices, geopolitical turmoil, and economic policy actions and could lead to a recessionary environment.

In 2025, the United States introduced trade policy actions that have increased import tariffs across a wide range of countries.

The incremental tariffs have had and may continue to have an adverse impact on the Company's result of operations.

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, and may result in reduced sales.

The global and regional economic and political conditions, as well as changes in trade policies, have caused and may continue to cause volatility in demand for the Company's products as well as the cost of tariffs, materials and logistics, and transportation delays, and as a result have impacted and may continue to impact the pricing of the Company's products, product availability and the Company's results of operations.

We continue to experience the on-going impacts of a higher interest rate environment, as compared to prior years, which resulted in higher cost of goods, selling expenses, and general and administrative expenses.

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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