What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 78 added, 73 removed, 144 unchanged (51% of the section changed)

15 unchanged sentences

Gaming headsets are part of a $184 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 about $2.9 billion global market in 2021, or more than 35% of the total gaming peripherals market.

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

Gaming peripherals, such as headsets, keyboards, mice and controllers are estimated to be a $8.3 billion business globally with 80% of that market in the Americas and Europe where the Company’s business is focused.

Gaming headsets are expected to represent about $3.3 billion global market in 2021, or around 39% 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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Many gamers play online where a gaming headset (which typically includes a microphone allowing players to communicate in real-time) provides a more immersive experience and a competitive advantage in the industry’s most popular games and franchises.

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

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

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

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Further, industry guidance suggests that with the launch of the new systems, and continued sales of the current consoles, combined console hardware sales will set records in 2021 and 2022.

In 2020, the Nintendo Switch™ completed its third full year in the market with more than 70 million units sold through the end of

December 2020, during which there has been an expanding library of games and an increased number of multiplayer chat-enabled games.

addition, Nintendo launched a follow-on product, the Nintendo Switch™ Lite, which is the handheld-only version of their popular gaming console.

In 2020, the Nintendo Switch™ completed its third full year in the market with more than 70 million units sold through the end of December 2020, 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.

While gaming on mobile/tablet devices represents about 50% of the global gaming market, and headsets can be used for mobile gaming, console and PC gaming are by-far the largest drivers of gaming headset use.

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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.

In 2021, the demand for such PC gaming accessories is forecasted to increase to $3.8 billion.

PC gaming in the U.S.

has seen a resurgence in popularity the past few years and 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

While most games are available on multiple platforms, gaming on PC offers advantages that include improved graphics, increased speed

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

has seen a resurgence in popularity the past few years and 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 include improved graphics, increased speed 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.

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.

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

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.

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

On Xbox ® , PlayStation®, and PC flagship games like Call of Duty®, Destiny, Star Wars:

Battlefront, Battlefield, Grand Theft Auto,

and battle royale games like Fortnite, Call of Duty Warzone, Apex Legends and PlayerUnknown’s Battlegrounds, are examples of major

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

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.

Battlefront, Battlefield, Grand Theft Auto, and battle royale games like Fortnite, Call of Duty Warzone, Apex Legends and PlayerUnknown’s Battlegrounds, are examples of major franchises that prominently feature online multiplayer modes 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 which can cause an additional boost to the normally strong holiday sales of gaming accessories.

Microphone Market

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COVID-19 Outlook

During 2020, as the pandemic created stay-at-home guidance, the gaming accessory market experienced a significant surge in demand

as existing gamers began gaming more and new gamers entered the market.

During 2020, as the pandemic created stay-at-home guidance, the gaming accessory market experienced a significant surge in demand as existing gamers began gaming more and new gamers entered the market.

In addition, the increase in working from home and learning from home created additional demand for accessories, particularly gaming headsets which work well for video and audio calls.

As a result, the

Company’s 2020 revenues exceeded historical levels as the overall gaming and headset markets experienced an unprecedented surge

As a result, the Company’s 2020 revenues exceeded historical levels as the overall gaming and headset markets experienced an unprecedented surge in demand.

Going forward, the effects of the global pandemic and the measures being taken in response are uncertain and difficult to predict.

While there were likely certain one-time purchases caused by the stay-at-home orders, we believe millions of new gamers have joined

the market which should create an ongoing, larger installed base of players.

While there were likely certain one-time purchases caused by the stay-at-home orders, we believe millions of new gamers have joined the market which should create an ongoing, larger installed base of players.

Supply Chain and Logistic Outlook

The ongoing global economic recovery from the COVID-19 pandemic has created significant challenges for global supply chains resulting in inflationary cost pressures and component shortages.

We have also experienced logistical challenges related to transportation delays and have incurred incremental costs for commodities and components used in our products as well as component shortages that have negatively impacted our sales and results of operations.

We expect that these challenges will continue to have an impact on our businesses for the foreseeable future.

As a result, we continue to take proactive steps to continue to limit the impact of these challenges and, are working closely with our suppliers to manage availability of products and implement other cost savings initiatives.

Key Performance Indicators and Non-GAAP Measures

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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 and six months ended June 30, 2021 and 2020, are as follows:

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Adjusted EBITDA

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.

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

Net income for the three months ended September 30, 2021 was $2.6 million with Adjusted EBITDA of $6.7 million, compared to net income of $17.8 million with Adjusted EBITDA of $27.6 million for the prior year, due to lower revenue as compared to higher demand from the stay at home orders and channel replenishment, increased logistics costs caused by supply chain challenges and increased operating expenses to support PC product portfolio expansion and entry into new product categories.

Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020

Net income for the nine months ended September 30, 2021 was $13.2 million with Adjusted EBITDA of $27.0 million compared to net income of $22.4 million with adjusted EBITDA of $37.8 million for the prior period due to certain brand development and product portfolio expansion investments and increased costs as a result of supply chain and logistic challenges.

Results of Operations

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Interest expense

Other non-operating expense (income), net

Other non-operating expense, net

Income before income tax

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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

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.

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

Net revenue for the three months ended September 30, 2021 was $85.3 million, a $27.2 million decrease from $112.5 million in the elevated comparable prior year period brought on by stay-at-home orders and channel replenishments.

For the three months ended September 30, 2021, gross profit as a percentage of net revenue decreased to 34.3% from 41.0% in the comparable prior year period.

The decrease was primarily due to unfavorable business mix and higher logistics costs.

Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020

Net revenue for the nine months ended September 30, 2021 was $256.9 million, a $29.7 million increase from $227.2 million in the comparable prior year period as consumer demand for console headsets remained at elevated levels early in the year, and retailers increased channel levels in response to on-going global supply chain concerns.

For the nine months ended September 30, 2021, gross profit as a percentage of net revenue decreased to 36.1% from 37.9% in the comparable prior year period.

The decrease was primarily due to margins that were negatively impacted by increased costs as a result of higher logistics costs, partially offset by volume-driven fixed cost leverage.

Operating Expenses

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Selling and Marketing

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.

Selling and marketing expenses for the three and nine months ended September 30, 2021 totaled $14.3 million and $41.5 million, respectively, compared to $11.9 million and $29.1 million for the three and nine months ended September 30, 2020, respectively.

This increase was primarily due to certain digital marketing initiatives to support PC product portfolio expansion and entry into new product categories.

Research and Development

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.

Research and development costs for the three and nine months ended September 30, 2021 were $4.5 million and $12.9 million compared to $3.3 million and $8.7 million for the three and nine months ended September 30, 2020.

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

General and Administrative

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.

General and administrative expenses for the three months ended September 30, 2021 totaled $9.0 million compared to $6.8 million for the three months ended September 30, 2020 as a result of higher professional fees.

General and administrative expenses for the nine months ended September 30, 2021 totaled $24.2 million compared to $19.2 million for the nine months ended September 30, 2020.

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

Income tax benefit for the three months ended September 30, 2021 was $1.8 million at an effective tax rate of (226.2%) and income tax benefit for the nine months ended September 30, 2021 was $0.3 million at an effective tax rate of (2.6%).

Income tax expense for the three and nine months ended September 30, 2020 was $6.4 million at an effective tax rate of 26.5% and $7.9 million at an effective tax rate of 26.0%, respectively.

The effective tax rate for the three and nine months ended September 30, 2021 was primarily impacted by discrete stock-based compensation related tax benefits of $(2.3) million attributable to stock option exercises and restricted stock vestings, Research and Development (“R&D”) credits and the reduced tax rate on our Foreign Derived Intangible Income (“FDII”).

These tax benefits were partially offset by the impact of disallowed compensation and state income tax expense on the estimated annual effective tax rate.

During the third quarter of 2021, we substantially completed a federal R&D study for the 2018-2020 tax years, recognizing tax benefits of $0.5 million, net of reserves.

In addition, we completed an analysis of our foreign sales and recognized a tax benefit of $0.8 million on our FDII.

Liquidity and Capital Resources

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The following table summarizes our sources and uses of cash:

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

Cash and cash equivalents at beginning of period

Net cash provided by operating activities

Net cash provided by (used for) operating activities

Net cash used for investing activities

Net cash provided by (used for) financing activities

Net cash used for financing activities

Effect of foreign exchange on cash

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Operating activities

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.

Cash used for operating activities for the nine months ended September 30, 2021 was $10.3 million, a decrease of $42.9 million as compared to cash provided by $32.6 million for the nine months ended September 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 consistent with expected demand, supply chain challenges and new product introductions.

Investing activities

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.

Cash used for investing activities was $7.0 million for the nine months ended September 30, 2021 and related to certain capital investments, including $2.5 million related to the Neat Microphones acquisition, compared to $3.9 million for the nine months ended September 30, 2020.

Financing activities

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.

Net cash used for financing activities was $0.9 million during the nine months ended September 30, 2021 compared to $9.3 million during the nine months ended September 30, 2020.

Financing activities during the nine months ended September 30, 2021 primarily included stock option exercise proceeds of $4.4 million and repurchases of common stock of $4.9 million.

Financing activities during the nine months ended September 30, 2020 consisted of net repayments on our revolving credit facility of $15.6 million and stock option exercise proceeds of $2.2 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 June 30, 2021 and December 31, 2020 were $5.2 million and $5.9 million , respectively.

Foreign cash balances at September 30, 2021 and December 31, 2020 were $5.0 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 six months ended June 30, 2021.

There was no activity under this agreement during the nine months ended September 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 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.

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

As of September 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 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.

As of September 30, 2021, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $54.6 million.

Critical Accounting Estimates

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

As of June 30, 2021 and December 31, 2020, we did not have any derivative financial instruments.

As of September 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 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.

As of September 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