What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-05 · 57 added, 49 removed, 160 unchanged (40% of the section changed)

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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®.

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.

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Gaming Headset Market

Gaming headsets are part of a global software and accessories gaming market which is expected to grow to $196 billion by the end of 2021, a roughly 7% year-over-year increase.

The global gaming audience now exceeds global cinema and music markets with over 2.9 billion active gamers worldwide.

Gaming headsets are part of a $185 billion global software and accessories gaming market.

The global gaming audience now exceeds global cinema and music markets with over 2.9 billion active gamers worldwide, with the gaming industry worth over $145 billion.

Gaming peripherals, such as headsets, keyboards, mice and controllers are estimated to be a $7.9 billion business globally with over 80% of that market in the Americas and Europe where the Company’s business is focused.

Gaming headsets are expected to represent more than a $2.9 billion global market in 2021, or more than 35% of the total gaming peripherals market.

Gaming headsets are expected to represent about $2.9 billion global market in 2021, or more than 35% 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.

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PlayStation® and Xbox consoles continue to be dominant gaming platforms in North America and Europe for games that drive headset

Consistent with a historical pattern of major new console launches every 7-8 years, Microsoft and Sony released their next generation consoles, Xbox and PlayStation®5 platforms just ahead of holiday 2020.

Consistent with a historical pattern of major new console launches every 7-8 years, Microsoft and Sony released their next generation consoles, Xbox and PlayStation®5, just ahead of the 2020 holiday season.

Demand for the new consoles has been very strong and exceeded supply which is a good indicator of the enthusiasm for the latest consoles.

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PC Accessories Market

The market for PC gaming headsets, mice and keyboards grew in 2020 to $3.6 billion.

The same gaming, work-from-home, and school/learn-from-home factors associated with COVID-19 that benefitted the accessories market also resulted in headsets, keyboards, mice and other accessories developed for PC gaming having increased consumer demand.

In 2021, the demand for such PC gaming accessories is forecasted to decline as COVID-19 related factors subside.

PC gaming in the U.S.

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and precision of mouse/keyboard controls, and the ability for customization.

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, and software suites to customize and control devices and settings.

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, 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

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keystrokes faster than others, offer options for mechanical key switches that feel and sound different, and utilize customizable lighting.

The $3.6 billion market for PC gaming headsets, mice and keyboards grew at 42% in 2020 and is forecasted to drop by 9% in 2021 to almost $3.3 billion.

The same gaming, work-from-home, and school/learn-from-home factors benefitted the accessories market where headsets, keyboards, mice and other accessories developed for PC gaming have seen an increase in consumer demand.

In 2021, the numbers are likely to fall off since the same COVID-19 related surges as 2020 are not expected.

PC and console gaming markets are also driven by major game launches and franchises that encourage players to buy equipment and

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franchises that prominently feature online multiplayer modes which encourage communication and tend to drive increased gaming headset

Many of these established franchises launch new titles annually leading into the holidays and as a result which can cause an additional

Many of these established franchises launch new titles annually leading into the holidays and which can cause an additional

boost to the normally strong holiday sales of gaming accessories.

Microphone Market

The microphone market is estimated to be $2.3 billion in size with roughly $700 million of that estimated to be for digital USB microphones.

The microphone market is estimated to be approximately $2.3 billion in size with roughly $700 million of that estimated to be for digital USB microphones.

The market for high-quality microphones, specifically digital microphones is experiencing significant growth as consumers on YouTube, Twitch and other popular platforms are gravitating toward using high-quality professional equipment for their workstations.

Additionally, with the increasing trend to remote work furthered by stay-at-home orders, the need for a great sounding desktop microphone has become an important tool when it comes to working from home, as well as learning from home and staying connected with family and friends.

Additionally, with the increasing trend toward remote work furthered by stay-at-home orders, the need for a great sounding desktop microphone has become an important tool for working from home, as well as learning from home and staying connected with family and friends.

The 2021 acquisition of Neat Microphones expands Turtle Beach’s reach into the global microphone market, including, in particular, the market for digital/USB microphones which are often used by gamers, streamers, and influencers who also use other PC accessories.

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Cash Margin is defined as gross margin excluding depreciation and amortization, and stock-based compensation.

Adjusted EBITDA (and a reconciliation to Net income, the nearest GAAP financial measure) for the three months ended March 31, 2021 and 2020, are as follows:

Adjusted EBITDA (and a reconciliation to Net income, the nearest GAAP financial measure) for the three and six months ended June 30, 2021 and 2020, are as follows:

Three Months Ended

Six Months Ended

(in thousands)

Net income (loss)

Interest expense

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Income tax expense (benefit)

Acquisition-related settlement

Change in fair value of contingent consideration

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Adjusted EBITDA

Comparison of the Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020

Net income for the three months ended March 31, 2021 was $8.8 million with Adjusted EBITDA of $15.3 million, compared to net loss of $3.6 million with Adjusted EBITDA of ($2.7) million for the prior year, due to higher revenue and favorable business mix as consumer demand for gaming accessories has remained above pre-pandemic levels.

Comparison of the Three Months Ended June 30, 2021 to the Three Months Ended June 30, 2020

Net income for the three months ended June 30, 2021 was $1.7 million with Adjusted EBITDA of $5.0 million, compared to net income of $8.2 million with Adjusted EBITDA of $12.9 million for the prior year, as a result of the PC product portfolio expansion and entry into new gaming accessory categories and higher professional fees.

Comparison of the Six Months Ended June 30, 2021 to the Six Months Ended June 30, 2020

Net income for the six months ended June 30, 2021 was $10.6 million with Adjusted EBITDA of $20.3 million compared to net income of $4.6 million with adjusted EBITDA of $10.2 million for the prior period, due to higher revenue as consumer demand for gaming accessories has remained above pre-pandemic levels, partially offset by PC product portfolio expansion investments, business mix and higher freight costs.

Results of Operations

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Three Months Ended

Six Months Ended

(in thousands)

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Operating expenses

Operating income (loss)

Operating income

Interest expense

Other non-operating expense, net

Income (loss) before income tax

Other non-operating expense (income), net

Income before income tax

Income tax expense (benefit)

Net income (loss)

Net Revenue and Gross Profit

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Three Months Ended

Six Months Ended

(in thousands)

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(1) Excludes depreciation and amortization, and stock-based compensation

Comparison of the Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020

Net revenue for the three months ended March 31, 2021 was $93.1 million, a $58.0 million increase from $35.0 million in the comparable prior year period due to increased demand as our GEN 2 models continued as top-selling models and encouraging growth in our expanding PC product line.

For the three months ended March 31, 2021, gross profit as a percentage of net revenue increased to 37.5% from 30.8% in the comparable prior year period.

The increase was primarily due to margins that were positively impacted by volume-driven fixed cost leverage and lower than normal promotional activity.

Comparison of the Three Months Ended June 30, 2021 to the Three Months Ended June 30, 2020

Net revenue for the three months ended June 30, 2021 was $78.6 million, a $1.1 million decrease from $79.7 million in the comparable prior year period in which the overall gaming accessories market surged across all our major geographic channels due to stay-at-home orders.

For the three months ended June 30, 2021, gross profit as a percentage of net revenue decreased to 36.5% from 36.7% in the comparable prior year period.

The decrease was primarily due to increased product costs on global supply demands and a more normalized level of promotional spend, offset by lower air freight costs.

Comparison of the Six Months Ended June 30, 2021 to the Six Months Ended June 30, 2020

Net revenue for the six months ended June 30, 2021 was $171.6 million, a $56.9 million increase from $114.7 million in the comparable prior year period as strong consumer demand for gaming accessories continued and retailers increased channel supply in response to potential supply constraints.

For the six months ended June 30, 2021, gross profit as a percentage of net revenue increased to 37.0% from 34.9% in the comparable prior year period.

The increase was primarily due to margins that were positively impacted by lower air freight costs and volume-driven fixed cost leverage, partially offset by higher freight costs and business mix.

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, 2021 totaled $11.5 million compared to $7.6 million for the three months ended March 31, 2020.

This increase was primarily due to volume-based direct sales related fees and commissions, and certain ROCCAT brand marketing initiatives.

Selling and marketing expenses for the three and six months ended June 30, 2021 totaled $15.7 million and $27.2 million, respectively, compared to $9.6 million and $17.2 million for the three and six months ended June 30, 2020, respectively.

This increase was primarily due to certain PC product-focused digital marketing initiatives to drive awareness and growth and volume-based direct sales related fees.

Research and Development

Research and development costs for the three months ended March 31, 2021 were $4.0 million compared to $2.4 million for the three months ended March 31, 2020.

The year-over-year increases were primarily due to the expansion of PC accessories development capabilities.

Research and development costs for the three and six months ended June 30, 2021 were $4.4 million and $8.4 million compared to $3.0 million and $5.4 million for the three and six months ended June 30, 2020.

The year-over-year increases were primarily due to additional resources and infrastructure to support new product line development.

General and Administrative

General and administrative expenses for the three months ended March 31, 2021 totaled $7.0 million compared to $5.7 million for the three months ended March 31, 2020.

The year-over-year increase was primarily due to increased legal defense costs, higher variable compensation costs and incremental Neat Microphones-acquisition related expense, offset by reduced professional fees.

Income tax expense for the three months ended March 31, 2021 was $2.8 million at an effective rate of 23.8%.

Income tax benefit for the three months ended March 31, 2020 was $1.8 million at an effective tax rate of 33.9%.

The effective tax rate for the three months ended March 31, 2021 was primarily impacted by the tax effect of disallowed compensation and state income tax expense, offset by benefits on stock option exercises.

General and administrative expenses for the three months ended June 30, 2021 totaled $8.2 million compared to $6.7 million for the three months ended June 30, 2020 as a result of certain increased professional fees.

General and administrative expenses for the six months ended June 30, 2021 totaled $15.2 million compared to $12.4 million for the six months ended June 30, 2020.

The year-over-year increase was primarily due to increased professional fees, and the inclusion of acquired NEAT-related headcount, offset by lower variable compensation costs.

Income tax benefit for the three months ended June 30, 2021 was $1.3 million at an effective tax rate of (295.6%) and income tax expense for the six months ended June 30, 2021 was $1.5 million at an effective tax rate of 12.3%.

Income tax expense for the three and six months ended June 30, 2020 was $3.3 million at an effective tax rate of 28.6% and $1.5 million at an effective tax rate of 23.9%, respectively.

The effective tax rate for the three and six months ended June 30, 2021 was primarily impacted by discrete windfall tax benefits of $(1.8) million attributable to stock option exercises and restricted stock vestings, partially offset by the impact of disallowed compensation and state income tax expense on the estimated annual effective tax rate.

Liquidity and Capital Resources

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The following table summarizes our sources and uses of cash:

Three Months Ended

Six Months Ended

(in thousands)

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Operating activities

Cash provided by operating activities for the three months ended March 31, 2021 was $21.1 million, an increase of $3.6 million as compared to $17.5 million for the three months ended March 31, 2020.

The increase is primarily the result of higher gross receipts, partially offset by increased raw material procurements and product purchases to maintain inventory levels with elevated consumer demand.

Cash provided by operating activities for the six months ended June 30, 2021 was $12.4 million, a decrease of $19.4 million as compared to $31.8 million for the six months ended June 30, 2020.

The decrease is primarily the result of lower gross receipts combined with increased raw material procurements and product purchases to maintain inventory levels with elevated consumer demand and supply constraints.

Investing activities

Cash used for investing activities was $4.8 million for the three months ended March 31, 2021 related to certain capital investments, including $2.5 million related to the Neat Microphones acquisition, compared to $0.9 million for the three months ended March 31, 2020.

Cash used for investing activities was $5.8 million for the six months ended June 30, 2021 and related to certain capital investments, including $2.5 million related to the Neat Microphones acquisition, compared to $2.3 million for the six months ended June 30, 2020.

Financing activities

Net cash provided by financing activities was $0.7 million during the three months ended March 31, 2021 compared to $15.4 million during the three months ended March 31, 2020.

Financing activities during the three months ended March 31, 2021 primarily included stock option exercise proceeds of $0.9 million.

Financing activities during the three months ended March 31, 2020 consisted of net repayments on our revolving credit facility of $15.4 million.

Net cash provided by financing activities was $2.8 million during the six months ended June 30, 2021 compared to $15.7 million during the six months ended June 30, 2020.

Financing activities during the six months ended June 30, 2021 primarily included stock option exercise proceeds of $3.2 million.

Financing activities during the six months ended June 30, 2020 consisted of net repayments on our revolving credit facility of $15.6 million.

Management assessment of liquidity

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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 March 31, 2021 and December 31, 2020 were $6.8 million and $5.9 million, respectively.

Foreign cash balances at June 30, 2021 and December 31, 2020 were $5.2 million and $5.9 million , respectively.

At-the-Market Common Stock Issuance

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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.

There was no activity under this agreement during the three months ended March 31, 2021.

There was no activity under this agreement during the six months ended June 30, 2021.

Revolving Credit Facility

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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 0.25% to 0.50% and letter of credit fees and agent fees.

As of March 31, 2021, interest rates for outstanding borrowings were 3.75% for base rate loans and 3.00% for LIBOR rate loans.

As of March 31, 2021, there were no outstanding borrowings under the Credit Facility.

As of June 30, 2021, interest rates for outstanding borrowings were 3.75% for base rate loans and 3.00% for LIBOR rate loans.

As of June 30, 2021, there were no outstanding borrowings under the Credit Facility.

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).

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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, 2021, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $49.7 million.

As of June 30, 2021, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $49.7 million.

Critical Accounting Estimates

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

As of March 31, 2021 and December 31, 2020, we did not have any derivative financial instruments.

As of June 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, 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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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