10-Q 1 hear-20240331.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

 

Commission File Number: 001-35465

img253758880_0.jpg

TURTLE BEACH CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada

27-2767540

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

44 South Broadway, 4th Floor

White Plains, New York

10601

(Address of principal executive offices)

(Zip Code)

 

(888) 496-8001

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbols

Name of each exchange on which registered

Common Stock, par value $0.001

HEAR

The Nasdaq Global Market

Preferred Stock Purchase Rights

N/A

The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The number of shares of the registrant’s Common Stock, par value $0.001 per share, outstanding on April 30, 2024 was 21,522,744.

 


 

INDEX

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

2

 

 

 

Item 1.

Financial Statements (unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2024 and 2023

2

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2024 and 2023

3

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023

5

 

 

 

 

Condensed Consolidated Statement of Stockholder's Equity for the Three Months Ended March 31, 2024 and 2023

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

PART II. OTHER INFORMATION

27

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

Item 5.

Other Information

27

 

 

 

Item 6.

Exhibits

28

 

 

SIGNATURES

29

 

 

1


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Turtle Beach Corporation

Condensed Consolidated Statements of Operations

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2024

 

 

2023

 

 

(in thousands, except per-share data)

 

Net revenue

 

$

55,848

 

 

$

51,444

 

Cost of revenue

 

 

38,062

 

 

 

37,305

 

Gross profit

 

 

17,786

 

 

 

14,139

 

Operating expenses:

 

 

 

 

 

 

Selling and marketing

 

 

9,013

 

 

 

9,523

 

Research and development

 

 

3,902

 

 

 

4,101

 

General and administrative

 

 

5,674

 

 

 

7,007

 

Acquisition-related cost

 

 

4,910

 

 

 

 

Total operating expenses

 

 

23,499

 

 

 

20,631

 

Operating loss

 

 

(5,713

)

 

 

(6,492

)

Interest expense

 

 

150

 

 

 

163

 

Other non-operating expense, net

 

 

370

 

 

 

120

 

Loss before income tax

 

 

(6,233

)

 

 

(6,775

)

Income tax benefit

 

 

(6,388

)

 

 

(70

)

Net income (loss)

 

$

155

 

 

$

(6,705

)

 

 

 

 

 

 

 

Net income (loss) per share

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

(0.40

)

Diluted

 

$

0.01

 

 

$

(0.40

)

Weighted average number of shares:

 

 

 

 

 

 

Basic

 

 

18,321

 

 

 

16,578

 

Diluted

 

 

19,389

 

 

 

16,578

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)

2


 

Turtle Beach Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,
2024

 

 

March 31,
2023

 

 

(in thousands)

 

Net income (loss)

 

$

155

 

 

$

(6,705

)

Other comprehensive income (loss):

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(418

)

 

 

445

 

Other comprehensive income (loss)

 

 

(418

)

 

 

445

 

Comprehensive loss

 

$

(263

)

 

$

(6,260

)

 

See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)

3


 

Turtle Beach Corporation

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

(in thousands, except par value and share amounts)

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,816

 

 

$

18,726

 

Accounts receivable, net

 

 

42,908

 

 

 

54,390

 

Inventories

 

 

69,531

 

 

 

44,019

 

Prepaid expenses and other current assets

 

 

10,322

 

 

 

7,720

 

Total Current Assets

 

 

140,577

 

 

 

124,855

 

Property and equipment, net

 

 

5,533

 

 

 

4,824

 

Goodwill

 

 

52,907

 

 

 

10,686

 

Intangible assets, net

 

 

48,704

 

 

 

1,734

 

Other assets

 

 

10,668

 

 

 

7,868

 

Total Assets

 

$

258,389

 

 

$

149,967

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Revolving credit facility

 

$

 

 

$

 

Accounts payable

 

 

44,842

 

 

 

26,908

 

Other current liabilities

 

 

31,947

 

 

 

29,424

 

Total Current Liabilities

 

 

76,789

 

 

 

56,332

 

Debt, non-current

 

 

45,954

 

 

 

 

Income tax payable

 

 

1,527

 

 

 

1,546

 

Other liabilities

 

 

8,893

 

 

 

7,012

 

Total Liabilities

 

 

133,163

 

 

 

64,890

 

Commitments and Contingencies

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Common stock, $0.001 par value - 25,000,000 shares authorized; 21,167,504 and 17,531,702 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively

 

 

21

 

 

 

18

 

Additional paid-in capital

 

 

260,594

 

 

 

220,185

 

Accumulated deficit

 

 

(134,122

)

 

 

(134,277

)

Accumulated other comprehensive income (loss)

 

 

(1,267

)

 

 

(849

)

Total Stockholders’ Equity

 

 

125,226

 

 

 

85,077

 

Total Liabilities and Stockholders’ Equity

 

$

258,389

 

 

$

149,967

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)

4


 

Turtle Beach Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31, 2024

 

 

March 31, 2023

 

 

 

(in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income (loss)

 

$

155

 

 

$

(6,705

)

Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

916

 

 

 

978

 

Amortization of intangible assets

 

 

560

 

 

 

264

 

Amortization of debt financing costs

 

 

70

 

 

 

42

 

Stock-based compensation

 

 

1,105

 

 

 

1,959

 

Deferred income taxes

 

 

(6,716

)

 

 

(89

)

Change in sales returns reserve

 

 

(2,410

)

 

 

(1,178

)

Provision for obsolete inventory

 

 

794

 

 

 

(561

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Accounts receivable

 

 

35,918

 

 

 

20,578

 

Inventories

 

 

(3,063

)

 

 

7,111

 

Accounts payable

 

 

8,065

 

 

 

2,162

 

Prepaid expenses and other assets

 

 

(357

)

 

 

473

 

Income taxes payable

 

 

2

 

 

 

(271

)

Other liabilities

 

 

(7,782

)

 

 

4,226

 

Net cash provided by operating activities

 

 

27,257

 

 

 

28,989

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Purchases of property and equipment

 

 

(731

)

 

 

(887

)

Acquisition of a business, net of cash acquired

 

 

(75,494

)

 

 

 

Net cash used for investing activities

 

 

(76,225

)

 

 

(887

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Borrowings on revolving credit facilities

 

 

80,288

 

 

 

53,892

 

Repayment of revolving credit facilities

 

 

(80,288

)

 

 

(72,945

)

Proceeds of term loan

 

 

50,000

 

 

 

 

Repayment of term loan

 

 

(104

)

 

 

 

Proceeds from exercise of stock options and warrants

 

 

1,257

 

 

 

125

 

Debt issuance costs

 

 

(3,170

)

 

 

(80

)

Net cash provided by (used for) financing activities

 

 

47,983

 

 

 

(19,008

)

Effect of exchange rate changes on cash and cash equivalents

 

 

75

 

 

 

83

 

Net increase (decrease) in cash and cash equivalents

 

 

(910

)

 

 

9,177

 

Cash and cash equivalents - beginning of period

 

 

18,726

 

 

 

11,396

 

Cash and cash equivalents - end of period

 

$

17,816

 

 

$

20,573

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF INFORMATION

 

 

 

 

 

 

Cash paid for interest

 

$

370

 

 

$

190

 

Cash paid (received) for income taxes

 

$

 

 

$

 

See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)

5


 

Turtle Beach Corporation

Condensed Consolidated Statement of StockholdersEquity

(unaudited)

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Accumulated
Other
Comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

 

 

(in thousands)

 

Balance at December 31, 2023

 

 

17,532

 

 

$

18

 

 

$

220,185

 

 

$

(134,277

)

 

$

(849

)

 

$

85,077

 

Net income

 

 

 

 

 

 

 

 

 

 

 

155

 

 

 

 

 

 

155

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(418

)

 

 

(418

)

Issuance of acquisition-related stock

 

 

3,450

 

 

 

3

 

 

 

38,047

 

 

 

 

 

 

 

 

 

38,050

 

Issuance of restricted stock

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

171

 

 

 

 

 

 

1,257

 

 

 

 

 

 

 

 

 

1,257

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,105

 

 

 

 

 

 

 

 

 

1,105

 

Balance at March 31, 2024

 

 

21,165

 

 

$

21

 

 

$

260,594

 

 

$

(134,122

)

 

$

(1,267

)

 

$

125,226

 

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Accumulated
Other
Comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

 

 

(in thousands)

 

Balance at December 31, 2022

 

 

16,569

 

 

$

17

 

 

$

206,916

 

 

$

(116,598

)

 

$

(1,394

)

 

$

88,941

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(6,705

)

 

 

 

 

 

(6,705

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

445

 

 

 

445

 

Issuance of restricted stock

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

21

 

 

 

 

 

 

124

 

 

 

 

 

 

 

 

 

124

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,959

 

 

 

 

 

 

 

 

 

1,959

 

Balance at March 31, 2023

 

 

16,604

 

 

$

17

 

 

$

208,999

 

 

$

(123,303

)

 

$

(949

)

 

$

84,764

 

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited)

6


 

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Note 1. Background and Basis of Presentation

Organization

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®, PDP® 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. Acquired in March 2024, Performance Designed Products, LLC (“PDP”) is a gaming accessories leader that designs and distributes video game accessories, including controllers, headsets, power supplies, cases, and other accessories.

VTB Holdings, Inc. (“VTBH”), a wholly-owned subsidiary of Turtle Beach Corporation and the owner of Voyetra Turtle Beach, Inc. (“VTB”), was incorporated in the state of Delaware in 2010. VTB, the owner of Turtle Beach Europe Limited (“TB Europe”), was incorporated in the state of Delaware in 1975 with operations principally located in White Plains, New York.


Basis of Presentation

The accompanying interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. All intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire fiscal year.

The December 31, 2023 Condensed Consolidated Balance Sheet has been derived from the Company’s audited financial statements included in its Annual Report on Form 10-K filed with the SEC on March 13, 2024 (“Annual Report”).

These financial statements should be read in conjunction with the annual financial statements and the notes thereto included in the Annual Report that contains information useful to understanding the Company’s businesses and financial statement presentations.

Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to use estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The significant estimates and assumptions used by management affect: sales return reserve, allowances for cash discounts, warranty reserve, valuation of inventory, valuation of long-lived assets, goodwill and other intangible assets, depreciation and amortization of long-lived assets, valuation of deferred tax assets, probability of performance shares vesting and forfeiture rates utilized in issuing stock-based compensation awards. The Company evaluates estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates, and those differences could be material to the consolidated financial statements.

 

Note 2. Summary of Significant Accounting Policies

The preparation of consolidated annual and quarterly financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Company’s consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. The Company can give no assurance that actual results will not differ from those estimates.

7


 

There have been no material changes to the significant accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report.

 

Note 3. Acquisitions

 

On March 13, 2024, the Company acquired all the issued and outstanding equity of Performance Designed Products, LLC (“PDP”, collectively with FSAR, “PDP Group”) for consideration that included cash and common stock. PDP was a privately held gaming accessories leader that designs and distributes video game accessories, including controllers, headsets, power supplies, cases, and other accessories. As a result of the acquisition, the Company will strengthen its leadership position in hardware gaming accessories and expand its product portfolio.

Consideration for the Transaction consisted of the issuance of 3.45 million shares of Company common stock and approximately $78.9 million in cash, subject to customary post-closing adjustments for working capital, closing cash, closing debt and closing third party expenses. On a fully-diluted basis, issued stock represented approximately 16.4% of the total issued and outstanding shares of the Company as of the closing date. The fair value of the 3.45 million common shares issued as part of the consideration was determined on the basis of the closing market price of the Company’s common shares on the acquisition date, or $11.03 per share. As a result, the total preliminary purchase consideration was $116.9 million, partially funded by borrowing on the new term loan facility (see Note 8). Additionally, the Company recognized $4.9 million of acquisition-related costs that were expensed during the three months ended March 31, 2024, and are included as a component of general & administrative expenses in the Condensed Consolidated Statement of Operations.

 

The following table summarizes preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed at the acquisition date:

 

(In thousands)

 

Amount

 

Cash

 

 

3,362

 

Accounts Receivable

 

 

22,026

 

Inventory

 

 

23,243

 

Prepaid and Other Current Assets

 

 

2,244

 

Property, Plant & Equipment

 

 

1,161

 

Other Assets

 

 

3,056

 

Intangible Assets

 

 

47,649

 

Accounts Payable

 

 

(10,135

)

Accrued Liabilities

 

 

(9,031

)

Lease Payable

 

 

(1,890

)

Deferred Tax Liability

 

 

(6,996

)

Total identifiable net assets

 

 

74,689

 

Goodwill

 

 

42,221

 

Total consideration paid

 

$

116,910

 

 

The fair values assigned to PDP’s assets and liabilities are provisional and were determined based on preliminary estimates and assumptions that management believes are reasonable. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. The final determination of the fair value of certain assets and liabilities will be completed as soon as the necessary information is available, but no later than one year from the acquisition date.

 

The goodwill from the acquisition, which is fully deductible for tax purposes, consists largely of synergies and economies of scale expected from adding the operations of PDP's and the Company’s existing business and supply channels.

 

The preliminary fair value of PDP’s identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method. Such forecasts are based on inputs that are unobservable and significant to the overall fair value measurement, and as such, are classified as Level 3 inputs (see Note 4). Some of the more significant assumptions inherent in the development of intangible asset values include: the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, the

8


 

assessment of the intangible asset’s life cycle, as well as other factors. The following table summarizes the preliminary allocation of purchase consideration to identifiable intangible assets:

(In thousands)

 

Life

 

Amount

 

Tradenames

 

7 Years

 

$

15,159

 

Customer relationships

 

6 Years

 

 

2,067

 

Developed technology

 

6 Years

 

 

30,423

 

Total

 

 

 

$

47,649

 

 

PDP's net revenue included in the Company’s consolidated results was $5.9 million for the three months ended March 31, 2024. PDP’s net income included in the Company’s consolidated results for the same period was not material.

 

Pro Forma Financial Information (Unaudited)

 

The following table reflects the unaudited pro forma operating results of the Company for the three months ended March 31, 2024 and 2023, which give effect to the acquisition of PDP as if it had occurred on January 1, 2023.

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2024

 

 

2023

 

 

(in thousands)

 

Net revenue

 

$

77,832

 

 

$

69,993

 

Net income (loss)

 

$

(2,516

)

 

$

(20,814

)

 

The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisition been effective January 1, 2023, nor are they intended to be indicative of results that may occur in the future.

 

Note 4. Fair Value Measurement

The Company follows a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt instruments and certain warrants. As of March 31, 2024 and December 31, 2023, the Company had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted. The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of March 31, 2024 and December 31, 2023:

 

 

 

March 31, 2024

 

 

December 31, 2023

 

 

 

Reported

 

 

Fair Value

 

 

Reported

 

 

Fair Value

 

 

 

(in thousands)

 

Financial Assets and Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,816

 

 

$

17,816

 

 

$

18,726

 

 

$

18,726

 

Term Loan

 

$

49,896

 

 

$

49,896

 

 

$

 

 

$

 

Revolving credit facility

 

$

 

 

$

 

 

$

 

 

$

 

 

Cash equivalents are stated at amortized cost, which approximates fair value as of the consolidated balance sheet dates, due to the short period of time to maturity; and accounts receivable and accounts payable are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment. The carrying value of the Credit Facility and Term Loan Due 2027 equals fair value as the stated interest rate approximates market rates currently available to the Company. The carrying value of the Credit Facility approximates fair value, due to the variable rate nature of the debt, as of March 31, 2024 and December 31, 2023.

9


 

Note 5. Allowance for Sales Returns

The following table provides the changes in our sales return reserve, which is classified as a reduction of accounts receivable:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2024

 

 

2023

 

 

(in thousands)

 

Balance, beginning of period

 

$

8,449

 

 

$

7,817

 

Reserve accrual

 

 

2,741

 

 

 

3,594

 

Recoveries and deductions, net

 

 

(5,151

)

 

 

(4,772

)

Balance, end of period

 

$

6,039

 

 

$

6,639

 

 

Note 6. Composition of Certain Financial Statement Items

Inventories

Inventories consist of the following:

 

 

 

March 31,
2024

 

 

December 31,
2023

 

 

 

(in thousands)

 

Finished goods

 

$

66,328

 

 

$

43,579

 

Raw materials

 

 

3,203

 

 

 

440

 

Total inventories

 

$

69,531

 

 

$

44,019

 

 

Property and Equipment, net

Property and equipment, net, consists of the following:

 

 

 

March 31,
2024

 

 

December 31,
2023

 

 

 

(in thousands)

 

Machinery and equipment

 

$

2,553

 

 

$

2,597

 

Software and software development

 

 

2,437

 

 

 

2,438

 

Furniture and fixtures

 

 

1,684

 

 

 

1,700

 

Tooling

 

 

12,793

 

 

 

11,250

 

Leasehold improvements

 

 

2,008

 

 

 

1,988

 

Demonstration units and convention booths

 

 

15,765

 

 

 

15,767

 

Total property and equipment, gross

 

 

37,240

 

 

 

35,740

 

Less: accumulated depreciation and amortization

 

 

(31,707

)

 

 

(30,916

)

Total property and equipment, net

 

$

5,533

 

 

$

4,824

 

 

Other Current Liabilities

Other current liabilities consist of the following:

 

 

 

March 31,
2024

 

 

December 31,
2023

 

 

 

(in thousands)

 

Accrued employee expenses

 

$

5,226

 

 

$

3,944

 

Accrued royalty

 

 

4,490

 

 

 

5,275

 

Accrued tax-related payables

 

 

3,529

 

 

 

5,206

 

Accrued freight

 

 

2,472

 

 

 

2,917

 

Accrued marketing

 

 

1,187

 

 

 

3,335

 

Accrued expenses

 

 

15,043

 

 

 

8,747

 

Total other current liabilities

 

$

31,947

 

 

$

29,424

 

 

10


 

 

Note 7. Goodwill and Other Intangible Assets

 

Acquired Intangible Assets

Acquired identifiable intangible assets, and related accumulated amortization, as of March 31, 2024 and December 31, 2023 consisted of:

 

 

 

March 31, 2024

 

 

 

Gross
Carrying
Value

 

 

Accumulated
Amortization

 

 

Net Book
Value

 

 

 

(in thousands)

 

Customer relationships

 

$

10,152

 

 

$

7,336

 

 

$

2,816

 

Tradenames

 

 

18,225

 

 

 

2,812

 

 

 

15,413

 

Developed technology

 

 

32,307

 

 

 

1,853

 

 

 

30,454

 

Foreign currency

 

 

(1,121

)

 

 

(1,142

)

 

 

21

 

Total Intangible Assets (1)

 

$

59,563

 

 

$

10,859

 

 

$

48,704

 

 

 

 

December 31, 2023

 

 

 

Gross
Carrying
Value

 

 

Accumulated
Amortization

 

 

Net Book
Value

 

 

 

(in thousands)

 

Customer relationships

 

$

8,085

 

 

$

7,214

 

 

$

871

 

Tradenames

 

 

3,066

 

 

 

2,607

 

 

 

459

 

Developed technology

 

 

1,884

 

 

 

1,613

 

 

 

271

 

Foreign currency

 

 

(1,159

)

 

 

(1,292

)

 

 

133

 

Total Intangible Assets (1)

 

$

11,876

 

 

$

10,142

 

 

$

1,734

 

 

(1) The accumulated amortization includes $1.9 million of accumulated impairment charges as of March 31, 2024 and December 31, 2023.

 

In May 2019, the Company completed its acquisition of the business and assets of ROCCAT. The acquired intangible assets relating to developed technology, customer relationships, and trade name are subject to amortization. In January 2021, the Company completed its acquisition of the business and assets relating to the Neat Microphones business. The acquired intangible assets relating to developed technology, customer relationships, and trade name are subject to amortization.

 

In March 2024, the Company completed its acquisition of the business and assets of PDP. The acquired intangible assets relating to developed technology, customer relationships, and trade name are subject to amortization. Refer to Note 3, “Acquisitions” for additional information related to PDP’s identifiable intangible assets.

 

Amortization expense related to definite lived intangible assets of $0.6 million was recognized for the three months ended March 31, 2024, respectively, and $0.3 million was recognized for the three months ended March 31, 2023.

 

As of March 31, 2024, estimated annual amortization expense related to definite lived intangible assets in future periods was as follows:

 

 

 

(in thousands)

 

2024

 

$

6,440

 

2025

 

 

8,006

 

2026

 

 

7,751

 

2027

 

 

7,581

 

Thereafter

 

 

18,905

 

Total

 

$

48,683

 

 

11


 

 

Changes in the carrying values of goodwill for the three months ended March 31, 2024 from the balance as of December 31, 2023.

 

 

 

(in thousands)

 

Balance as of January 1, 2024

 

$

10,686

 

PDP acquisition

 

 

42,221

 

Balance as of March 31, 2024

 

$

52,907

 

 

Note 8. Revolving Credit Facility and Long-Term Debt

 

 

 

March 31,
2024

 

 

December 31,
2023

 

 

 

(in thousands)

 

Revolving credit facility, maturing March 2027

 

$

 

 

$

 

Term loan Due 2027

 

$

49,896

 

 

$

 

 

Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was $0.4 million for the three months ended March 31, 2024 and $0.2 million for the three months ended March 31, 2023.

Amortization of deferred financing costs was $0.1 million for the three months ended March 31, 2024 and $42 thousand for the three months ended March 31, 2023.

Revolving Credit Facility

On March 5, 2018, Turtle Beach and certain of its subsidiaries entered into an amended and restated loan, guaranty and security agreement (the “Credit Facility”) with Bank of America, N.A. (“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.

On March 13, 2024, the Company entered into a Fourth Amendment, dated as of March 13, 2024 (the “Fourth Amendment”), by and among the Company, VTB, TBC Holding Company LLC, TB Europe, VTBH, the financial institutions party thereto from time to time and Bank of America, as administrative agent, collateral agent and security trustee for the lenders.

The Fourth Amendment provided for, among other things: (i) the acquisition of PDP; (ii) revised the calculation of the U.S. Borrowing Base to include certain acquired assets of PDP equal to the lesser of (a) the sum of the Project Tide Accounts Formula Amount and the Project Tide Inventory Formula Amount (each as defined in the Fourth Amendment), (b) $15,000,000, and (c) 30% of the aggregate Revolver Commitments; (iii) extending the maturity date of the Credit Facility from April 1, 2025 to March 13, 2027; and (iv) updated the interest rate and margin terms such that the loans will bear interest at a rate equal to (1) SOFR, (2) the U.S. Base Rate, (3) the Sterling Overnight Index Average Reference Rate (“SONIA”) for loans denominated in Sterling, and (4) the Euro Interbank Offered Rate (“EUIBOR”) for loans denominated in Euros, plus in each case, an applicable margin, which is between 0.50% and 2.50% for Base Rate Loans and 1.75% and 3.50% for Term SOFR Loans, SONIA Rate Loans and EUIBOR Loans.

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 (i) a rate published by Bank of America or the U.S. Bloomberg Short-Term Bank Yield Index (“BSBY”) rate for loans denominated in U.S. Dollars, (ii) the Sterling Overnight Index Average Reference Rate (“SONIA”) for loans denominated in Sterling, (iii) and the Euro Interbank Offered Rate (“EUIBOR”) for loans denominated in Euros, plus in each case, an applicable margin, which is between 0.50% to 2.50% for base rate loans and UK base rate loans, and 1.75% to 3.50% for U.S. BSBY rate loans, U.S. BSBY daily floating rate loans and UK alternative currency loans. In addition, Turtle Beach is required to pay a commitment fee on the unused revolving loan commitment at a rate ranging from 0.375% to 0.50% and letter of credit fees and agent fees. As of March 31, 2024, interest rates for outstanding borrowings were 9.00% for base rate loans and 8.90% for LIBOR rate loans, which reference interest rates were still in effect prior to the Libor Transition Amendments.

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

12


 

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

Term Loan

On March 13, 2024, Turtle Beach and certain of its subsidiaries entered into a new financing agreement with Blue Torch Finance, LLC, (“Blue Torch”), pursuant to which Blue Torch for an aggregate amount of $50 million (the “Term Loan Facility”), the proceeds of which were used to (i) fund a portion of the PDP acquisition purchase price; (ii) repay certain existing indebtedness of the acquired business; (iii) to pay fees and expenses related to such transactions and (iv) for general corporate purposes. The Term Loan Facility will amortize in a monthly amount equal to 0.208333% during the first two years and 0.416667% during the third year and may be prepaid at any time subject to a prepayment premium during the first year of the interest payments payable during the first year plus 3.00%. The Term Loan Facility is secured by substantially all of the assets of the Company and its subsidiaries which are party to the Term Loan Facility.

The Term Loan Facility (a) matures on March 13, 2027; (b) bears interest at a rate equal to (i) a base rate plus 7.25% per annum for Reference Rate Loans and Secured Overnight Financing Rate (“SOFR”) plus 8.25% per annum for SOFR Loans if the total net leverage ratio is greater than or equal to 2.25x and (ii) a base rate plus 6.75% per annum for Reference Rate Loans and SOFR plus 7.75% per annum for SOFR Loans if the total net leverage ratio is less than 2.25x; and (c) is subject to certain affirmative, negative and financial covenants, including a minimum liquidity covenant and a quarterly total net leverage ratio covenant.

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

 

Note 9. Income Taxes

Generally, in order to determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions. However, to the extent that application of the estimated annual effective tax rate is not representative of the quarterly portion of actual tax expense expected to be recorded for the year in a jurisdiction, the Company determines the provision for income taxes based on actual year-to-date income (loss) which it has done for certain jurisdictions for the quarter ended March 31, 2024. Certain significant or unusual items are separately recognized as discrete items in the period during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

The following table presents the Company’s income tax expense and effective income tax rate:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2024

 

 

2023

 

 

(in thousands)

 

Income tax benefit

 

$

(6,388

)

 

$

(70

)

Effective income tax rate

 

 

102.5

%

 

 

1.0

%

 

The effective tax rate for the three months ended March 31, 2024 was primarily impacted by the change in U.S. valuation allowance related to the acquisition of PDP, foreign taxes, state tax and interest on uncertain tax positions.

The Company recognizes only those tax positions that meet the more-likely-than-not recognition threshold and establishes tax reserves for uncertain tax positions that do not meet this threshold. Interest and penalties associated with income tax matters are included in the provision for income taxes in the condensed consolidated statements of operations. As of March 31, 2024, the Company had uncertain tax positions of $2.8 million, inclusive of $0.6 million of interest and penalties.

As required by the authoritative guidance on accounting for income taxes, the Company evaluates the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred taxes will not be realized. The Company considers all positive and negative evidence in determining if, based on the weight of such evidence, a valuation allowance is required. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, the Company establishes a valuation allowance. Due to the significant 2022 pre-tax loss, coupled with cumulative book losses projected in early future years, the Company recorded a valuation allowance on its net U.S. deferred tax assets as of December 31, 2022. While the Company continues to maintain this valuation allowance for the three months ended March 31, 2024, it did release $6.7 million of valuation allowance for PDP acquired net deferred tax liabilities.

13


 

The Company is subject to income taxes domestically and in various foreign jurisdictions. The Company files U.S., state and foreign income tax returns in jurisdictions with various statutes of limitations. The federal tax years open under the statute of limitations are 2019 through 2021, and the state tax years open under the statute of limitations are 2019 through 2022.

Note 10. Stock-Based Compensation

Total estimated stock-based compensation expense for employees and non-employees, related to all of the Company’s stock-based awards, was as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Cost of revenue

 

$

131

 

 

$

175

 

Selling and marketing

 

 

487

 

 

 

490

 

Research and development

 

 

224

 

 

 

356

 

General and administrative

 

 

263

 

 

 

938

 

Total stock-based compensation

 

$

1,105

 

 

$

1,959

 

 

The following table presents the stock activity and the total number of shares available for grant as of March 31, 2024:

 

 

 

(in thousands)

 

Balance at December 31, 2023

 

 

1,059

 

Restricted Stock Granted

 

 

(2

)

Restricted Stock Forfeited

 

 

14

 

Balance at March 31, 2024

 

 

1,071

 

 

Stock Option Activity

 

 

 

Options Outstanding

 

 

 

Number of
Shares
Underlying
Outstanding
Options

 

 

Weighted-
Average
Exercise
Price

 

 

Weighted-
Average
Remaining
Contractual
Term

 

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

 

 

(in years)

 

 

 

 

Outstanding at December 31, 2023

 

 

1,041,452

 

 

$

9.10

 

 

 

4.22

 

 

$

3,137,285

 

Options Granted

 

 

-

 

 

 

-

 

 

 

 

 

 

 

Options Exercised

 

 

(170,919

)

 

 

7.81

 

 

 

 

 

 

 

Options Forfeited

 

 

(824

)

 

 

60.87

 

 

 

 

 

 

 

Outstanding at March 31, 2024

 

 

869,709

 

 

$

9.30

 

 

 

4.45

 

 

$

7,234,873

 

Vested and expected to vest at March 31, 2024

 

 

871,245

 

 

$

9.53

 

 

 

4.45

 

 

$

7,234,613

 

Exercisable at March 31, 2024

 

 

848,910

 

 

$

9.50

 

 

 

4.41

 

 

$

7,077,588

 

 

Stock options are time-based and the majority are exercisable within 10 years of the date of grant, but only to the extent they have vested. The options generally vest as specified in the option agreements subject to acceleration in certain circumstances. In the event participants in the plan cease to be employed or engaged by the Company, all vested options would be forfeited if they are not exercised within 90 days. Forfeitures on option grants are estimated at 10% for non-executives and 0% for executives based on evaluation of historical and expected future turnover. Stock-based compensation expense was recorded net of estimated forfeitures, such that expense was recorded only for those stock-based awards expected to vest. The Company reviews this assumption periodically and will adjust it if it is not representative of future forfeiture data and trends within employee types (executive vs. non-executive).

14


 

Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. The aggregate intrinsic value of options exercised was $1.2 million for the three months ended March 31, 2024.

 

The Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted as of the grant date. There were no new options granted during the three months ended March 31, 2024. The total estimated fair value of employee options vested during the three months ended March 31, 2024 was $1.1 million. As of March 31, 2024, total unrecognized compensation cost related to non-vested stock options granted to employees was $0.1 million, which is expected to be recognized over a remaining weighted average vesting period of 0.3 years.

Restricted Stock Activity

 

 

 

Shares

 

 

Weighted
Average
Grant Date
Fair Value
Per Share

 

Nonvested restricted stock at December 31, 2023

 

 

764,942

 

 

$

14.76

 

Granted

 

 

1,850

 

 

 

12.12

 

Vested

 

 

(12,066

)

 

 

21.24

 

Shares forfeited

 

 

(13,935

)

 

 

9.10

 

Nonvested restricted stock at March 31, 2024

 

 

740,791

 

 

$

14.75

 

 

As of March 31, 2024, total unrecognized compensation costs related to the nonvested restricted stock awards was $7.0 million, which will be recognized over a remaining weighted average vesting period of 3.4 years.

Performance-Based Restricted Share Units

 

As of March 31, 2024, the Company had 162,672 performance-based restricted share units outstanding. The vesting of performance-based restricted share units is determined over a three-year period based on (i) the amount by which revenue growth exceeds a defined baseline market growth each year and (ii) the achievement of specified tiers of adjusted EBITDA as a percentage of net revenue each year, with the ability to earn and vest into such units ranging from 0% to 200%. As of March 31, 2024, achievement of the performance conditions associated with the 2023, 2022 and 2021 performance shares was deemed not probable.

Note 11. Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share of common stock attributable to common stockholders:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2024

 

 

2023

 

 

(in thousands, except per-share data)

 

Net income (loss)

 

$

155