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 13, 2020 (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 (including the effects related to the coronavirus ( “ COVID-19 ” ) pandemic) 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 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. Business Trends Gaming Headset Market Gaming headsets are part of a global software and accessories gaming market that is expected to grow to $175 billion by the end of 2020, a 19.6% year-over-year increase. The global gaming audience now exceeds global cinema and music markets with over 2.5 billion active gamers worldwide. Gaming peripherals, such as headsets, are expected to grow to a $5.1 billion business globally with over 75% of that market in the Americas and Europe, where the Company’s business is focused. Gaming headsets represent more than a $3.2 billion global market, or more than 60% of the total gaming peripherals market. Competitive esports is a global phenomenon where professional gamers train and compete to win prize money, partner with major brands, and attract/gain dedicated fans – similar to traditional professional sports. There were approximately 443 million esports viewers in 2019, and that is expected to surge to roughly 495 million viewers in 2020 (11.7% YOY), according to a report from Newzoo. Of those 495 million projected viewers, 272 million will identify as “occasional viewers” and 223 million will consider themselves “esports enthusiasts.” Many gamers play online, where a gaming headset (which typically includes a microphone and allows players to communicate in real-time) provides a more immersive experience in the industry’s most popular games and franchises. Xbox and PlayStation® consoles are still the dominant gaming platforms in North America and Europe; however, Nintendo’s Switch™ console continues to perform well three years into its lifecycle. In addition to consoles, personal computers are a popular gaming platform where players utilize a similar style headset. Gaming on mobile/tablet devices represents about a third of the global gaming market, and while headsets can be used for mobile gaming, console and PC gaming are by far the largest drivers of gaming headset use. Historically, Microsoft and Sony have gone through cycles where their respective consoles changed significantly or were updated to a new version. When Microsoft and Sony launched Pro versions of their existing consoles in 2016 and 2017, respectively, that did not result in the same levels of disruption as previous cycles in the gaming headset business. Turtle Beach believes this is a good indication that any potential future console transitions will not be as disruptive. In 2019, Microsoft and Sony confirmed plans to release their next generation consoles, Xbox Series X and PlayStation®5, respectively, in late 2020. Further, industry guidance suggests that with the launch of the new systems, and continued sales of the current consoles, combined console hardware sales will drive market growth in 2021 and 2022. 22 In 2019, the Nintendo Switch™ completed its second full year in the market with more than 52 million units sold through the end of December 2019, during which there has been an expanding library of games and an increased number of multiplayer chat-enabled games. In addition, Nintendo launched a follow-on product, the Nintendo Switch™ Lite, which is the handheld-only version of their popular gaming console. In addition to console sales, we believe the Xbox, PlayStation ® , Nintendo, and PC gaming markets are driven by major game launches and franchises that encourage players to buy equipment and accessories. On Xbox and PlayStation ® , flagship games like Call of Duty ® , Destiny, Star Wars: Battlefront, Battlefield, Grand Theft Auto , and battle royale games like Fortnite, Apex Legends and PlayerUnknown’s Battlegrounds , are examples of major franchises that prominently feature online multiplayer modes which encourage communication and tend to drive increased gaming headset sales. Many of these established franchises launch new titles annually leading into the holidays and as a result, more than 45% of headset business revenues are generated during the period from September through December. PC Accessories Market PC gaming in the U.S. has seen a resurgence in popularity the past few years as it continues to be a main gaming platform internationally, driven by big AAA game launches, PC-specific esports leagues, teams and players, content creators and influencers, cross-platform play, and more. While most games are available on multiple platforms, gaming on PC offers advantages that included improved graphics, increased speed and precision of mouse/keyboard controls, and more. Gaming mice and keyboards are engineered to provide gamers with higher-end performance and a superior gaming experience through benefits including faster response times, improved materials and build quality, programmable buttons and keys, software suites to customize and control devices and settings, and more. 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 lighting and software to unify with the lighting on other devices for a visually pleasing PC gaming appearance. Similarly, PC gaming keyboards deliver a competitive advantage by registering keystrokes faster than others, offer options for mechanical key switches that feel and sound different, and utilize customizable lighting. The $2.5 billion market for PC gaming headsets, mice and keyboards grew at 6.2% in 2019 and is forecasted to grow by another 35% in 2020 to almost $3.4 billion. COVID-19 Outlook The effects of the global pandemic and the measures being taken in response are uncertain and difficult to predict. As a result of government mandated stay-at-home orders, the Company’s March through September 2020 revenues have exceeded historical levels as the overall gaming and headset markets have experienced an unprecedented surge in demand. However, the risk of a global economic recession may adversely impact the long-term demand and/or pricing for our products, constrain retail sales of our products, constrain supply of our products, or delay the launch or supply at launch of the next generation Xbox and PlayStation consoles. 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 or have no cash impact on operations; and (iv) they 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 metrics, however, are not measures of financial performance under accounting principles generally accepted in the United States of America (“GAAP”) and, given the limitations of these metrics as analytical tools, should not be considered a substitute for gross profit, gross margins, net income (loss) or other consolidated income statement data as determined in accordance with GAAP. We consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicator • Adjusted EBITDA is defined as net income (loss) before interest, taxes, depreciation and amortization, stock-based compensation (non-cash) and certain special items that we believe are not representative of core operations. • Cash Margin is defined as gross margin excluding depreciation and amortization, and stock-based compensation. 23 Adjusted EBITDA (and a reconciliation to Net income, the nearest GAAP financial measure) for the three and nine months ended September 30, 2020 and 2019 , are as follows: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (in thousands) Net income (loss) $ 17,794 $ (3,124 ) $ 22,443 $ (2,442 ) Interest expense $ 103 $ 240 $ 355 $ 595 Depreciation and amortization $ 1,464 $ 1,489 $ 3,967 $ 3,890 Stock-based compensation $ 1,572 $ 1,030 $ 3,977 $ 2,555 Income tax expense $ 6,424 $ 63 $ 7,886 $ 252 Unrealized gain on financial instrument obligation $ - $ - $ - $ (1,601 ) Acquisition-related settlement $ - $ - $ (1,702 ) $ - Change in fair value of contingent consideration $ 175 $ - $ 510 $ - Business transaction expense $ 37 $ 618 $ 381 $ 2,961 Adjusted EBITDA $ 27,569 $ 316 $ 37,817 $ 6,210 Comparison of the Three Months Ended September 30, 2020 to the Three Months Ended September 30, 2019 Net income for the three months ended September 30, 2020 was $17.8 million with Adjusted EBITDA of $27.6 million, compared to net loss of $3.1 million with Adjusted EBITDA of $0.3 million for the prior year, due to higher revenue and favorable business mix as consumer demand for gaming accessories increased as a result of state and local stay-at-home orders related to COVID-19. Comparison of the Nine Months Ended September 30, 2020 to the Nine Months Ended September 30, 2019 Net income for the nine months ended September 30, 2020 was $22.4 million with an adjusted EBITDA of $37.8 million compared to net loss of $2.4 million with adjusted EBITDA of $6.2 million in the prior year period, due to higher revenue and favorable business mix as consumer demand for gaming accessories increased as a result of state and local stay-at-home orders related to COVID-19. 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, 2020 2019 2020 2019 (in thousands) Net revenue $ 112,494 $ 46,723 $ 227,181 $ 132,899 Cost of revenue 66,358 31,680 141,033 89,898 Gross profit 46,136 15,043 86,148 43,001 Operating expenses 21,916 17,562 56,984 46,026 Operating income (loss) 24,220 (2,519 ) 29,164 (3,025 ) Interest expense 103 240 355 595 Other non-operating expense (income), net (101 ) 302 (1,520 ) (1,430 ) Income (loss) before income tax 24,218 (3,061 ) 30,329 (2,190 ) Income tax expense 6,424 63 7,886 252 Net income (loss) $ 17,794 $ (3,124 ) $ 22,443 $ (2,442 ) 24 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, 2020 2019 2020 2019 (in thousands) Net Revenue $ 112,494 $ 46,723 $ 227,181 $ 132,899 Gross Profit $ 46,136 $ 15,043 $ 86,148 $ 43,001 Gross Margin 41.0 % 32.2 % 37.9 % 32.4 % Cash Margin (1) 41.8 % 33.6 % 39.0 % 33.4 % (1) Excludes depreciation and amortization, and stock-based compensation Comparison of the Three Months Ended September 30, 2020 to the Three Months Ended September 30, 2019 Net revenue for the three months ended September 30, 2020 was $112.5 million, a $65.8 million increase from $46.7 million in the comparable prior year period due to increased demand from a continued surge in gaming activity resulting from stay-at-home orders and, the success of the Recon 70 series wired headsets, plus our newly revealed Gen 2 Stealth 600 and Stealth 700 headsets. For the three months ended September 30, 2020, gross profit as a percentage of net revenue increased to 41.0% from 32.2% in the comparable prior year period. Margins were positively impacted by volume-driven fixed cost leverage, lower than normal promotional activity given surging demand and favorable business mix, partially offset by higher freight costs to replenish channel supply and facilitate new product introductions. Comparison of the Nine Months Ended September 30, 2020 to the Nine Months Ended September 30, 2019 Net revenue for the nine months ended September 30, 2020 was $227.2 million, a $94.3 million increase from $132.9 million in the comparable prior year period. This is due to a surge in gaming activity, including an influx of new gamers, returning gamers and non-gaming headset use, ignited by state and local stay-at-home orders in place for a significant part of 2020. For the nine months ended September 30, 2020, gross profit as a percentage of net revenue increased to 37.9% from 32.4% in the comparable prior year period. Margins were positively impacted by favorable business mix, volume-driven fixed costs leverage and lower promotional activity, partially offset by certain air freight to enable retail supply and higher tariffs costs. Operating Expenses Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (in thousands) Selling and marketing $ 11,857 $ 10,150 $ 29,064 $ 24,581 Research and development 3,260 2,198 8,688 5,388 General and administrative 6,799 5,214 19,232 16,057 Total operating expenses $ 21,916 $ 17,562 $ 56,984 $ 46,026 Selling and Marketing Selling and marketing expenses for the three months ended September 30, 2020 totaled $11.9 million compared to $10.2 million for the three months ended September 30, 2019. This increase was primarily due to volume-based direct sales related fees and commissions, partially offset by lower marketing event spend. Selling and marketing expenses for the nine months ended September 30, 2020 totaled $29.1 million compared to $24.6 million for the nine months ended September 30, 2019. This increase was primarily due to the inclusion of acquired ROCCAT-related headcount, volume-based direct sales related fees and commissions, and increased media spend, partially offset by decreases in marketing event spend, retail marketing initiatives and advertising display depreciation. 25 Research and Development Research and development costs for the three and nine months ended September 30, 2020 were $3.3 million and $8.7 million, respectively, compared to $2.2 million and $5.4 million for the three and nine months ended September 30, 2019, respectively. The year-over-year increases were primarily due to the expansion of PC accessories development and patent transition expenses. General and Administrative General and administrative expenses for the three months ended September 30, 2020 totaled $6.8 million compared to $5.2 million for the three months ended September 30, 2019. Excluding the acquisition integration costs of $0.6 million in the prior year, the year-over-year increase was primarily due to certain legal settlements and higher variable compensation costs. General and administrative expenses for the nine months ended September 30, 2020 totaled $19.2 million compared to $16.1 million for the nine months ended September 30, 2019. Excluding the acquisition integration costs of $3.0 million in the prior year, the year-over-year increase was primarily due to the inclusion of acquired ROCCAT-related expenses, certain legal settlements, higher variable compensation costs and, increased professional and legal services. Other Non-Operating Expense (Income) Other non-operating income totaled $1.5 million for the nine months ended September 30, 2020, which included a $1.7 million acquisition-related settlement gain partially offset by a $0.5 million in contingent consideration revaluation, compared to other non-operating income of $1.4 million for the nine months ended September 30, 2019, which included a $1.6 million unrealized gain related to the change in fair value of a financial instrument obligation. Income Taxes Income tax expense for the three and nine months ended September 30, 2020 was $6.4 million at an effective rate of 26.5% and $7.9 million at an effective tax rate of 26.0%, respectively. Income tax expense for the three and nine months ended September 30, 2019 was $0.1 million at an effective tax rate of (2.1%) and $0.3 million at an effective tax rate of (11.5%), respectively. The effective tax rate for the three and nine months ended September 30, 2020 was primarily impacted by permanent items including global intangible low income taxed income and executive compensation, and certain state tax expense. 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. The following table summarizes our sources and uses of cash: Nine Months Ended September 30, 2020 2019 (in thousands) Cash and cash equivalents at beginning of period $ 8,249 $ 7,078 Net cash provided by operating activities 32,638 27,304 Net cash used for investing activities (3,918 ) (14,295 ) Net cash used for financing activities (9,343 ) (12,752 ) Effect of foreign exchange on cash (361 ) (298 ) Cash and cash equivalents at end of period $ 27,265 $ 7,037 Operating activities Cash provided by operating activities for the nine months ended September 30, 2020 was $32.6 million, an increase of $5.3 million as compared to $27.3 million for the nine months ended September 30, 2019. The increase is primarily the result of higher gross receipts, partially offset by increased product purchases, and related air freight costs, to align inventory levels with elevated consumer demand. 26 Investing activities Cash used for investing activities was $3.9 million for the nine months ended September 30, 2020 related to certain capital investments compared to $14.3 million for the nine months ended September 30, 2019, which included the $12.7 million ROCCAT acquisition. Financing activities Net cash used for financing activities was $9.3 million during the nine months ended September 30, 2020 compared to $12.8 million during the nine months ended September 30, 2019. Financing activities during the nine months ended September 30, 2020 consisted of net repayments on our revolving credit facility of $15.7 million, equity sales totaling $4.4 million under our existing at-the-market program and stock option exercise proceeds of $2.2 million. Financing activities during the nine months ended September 30, 2019 consisted of net repayments on our revolving credit facility of $10.8 million and $1.9 million of common stock repurchases. Management assessment of liquidity Management believes that our current cash and cash equivalents, the amounts available under our revolving credit facility and cash flows derived from operations will be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next twelve months. In addition, the Company monitors the capital markets on an ongoing basis and may consider raising capital if favorable market conditions develop. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements. Foreign cash balances at September 30, 2020 and December 31, 2019 were $5.5 million and $5.9 million, respectively. At-the-Market Common Stock Issuance  On August 7, 2020, the Company entered into an ATM Equity Offering Sales Agreement (the “Sales Agreement”) with BofA Securities, Inc. (the “Sales Agent”). Pursuant to the terms of the Sales Agreement, the Company may sell from time to time through the Sales Agent shares of the Company’s common stock, par value $0.001 per share, having an aggregate offering price of up to $30 million. The Company intends to use the net proceeds from the offering, after deducting the Sales Agent’s commissions and the Company’s offering expenses, to support its strategic growth plans, as well as for general corporate purposes. During the three months ended September 30, 2020, the Company sold a total of 237,813 shares of its common stock under the Sales Agreement in the open market at an average gross selling price of $18.39 per share for net proceeds of $4.4 million. Revolving Credit Facility On December 17, 2018, Turtle Beach and certain of its subsidiaries entered into an amended and restated loan, guaranty and security agreement (“Credit Facility”) with Bank of America, N.A. (“Bank of America”), as Agent, Sole Lead Arranger and Sole Bookrunner, which replaced the then existing asset-based revolving loan agreement. The Credit Facility, which expires on March 5, 2024, provides for a line of credit of up to $80 million inclusive of a sub-facility limit of $12 million for TB Europe, a wholly-owned subsidiary of Turtle Beach. In addition, the Credit Facility provides for a $40 million accordion feature and the ability to increase the borrowing base with a FILO Loan of up to $6.8 million. On May 31, 2019, the Company amended the Credit Facility to provide for, amongst other items, (i) the addition of TBC Holding Company LLC, a wholly-owned subsidiary of VTB, as an obligor and (ii) the ability to make investments in TB Germany GmbH, a wholly-owned subsidiary of TB Europe, of up to $4 million in connection with the acquisition of ROCCAT and up to an additional $4 million annually. 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 either a rate published by Bank of America or the LIBOR rate, plus in each case, an applicable margin, which is between 0.50% to 1.25% for base rate loans and between 1.25% to 2.00% for U.S. LIBOR loans and U.K. loans, and between 2.00% to 2.75% for the FILO loan. In addition, Turtle Beach is required to pay a commitment fee on the unused revolving loan commitment at a rate ranging from 0.25% to 0.50% and letter of credit fees and agent fees. As of September 30, 2020, interest rates for outstanding borrowings were 3.75% for base rate loans and 3.00% for LIBOR rate loans. The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met or certain other events occur (as defined 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. 27 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, 2020, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $79.8 million. 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. 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, 2020 and December 31, 2019, 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. As of September 30, 2020 and December 31, 2019, 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 the possibility of inflation, such as increases in the cost of its products. Although the Company does not believe that inflation has had a material impact on its financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on the Company’s ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenue if the selling prices of products do not increase with these increased costs. 28 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 Chief Executive Officer (our principal executive officer, or PEO) and our Chief Financial Officer (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, 2020. 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. 29 PART II. OTHER INFORMATION Item 1 - Legal Proceedings Please refer to Note 14, “Commitments and Contingencies” in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report on Form 10-Q, which is incorporated into this item by reference.