Turtle Beach (US:HEAR)2025-03-17 20:17Part I Business Turtle Beach, a leading gaming accessories company, expanded its product portfolio in 2024 with the acquisition of Performance Designed Products (PDP), maintaining market leadership in console gaming headsets for 15 consecutive years - The company has been a market share leader in console gaming headsets for 15 consecutive years1617 - In 2024, Turtle Beach acquired Performance Designed Products (PDP) to expand its product portfolio, particularly in gaming controllers1737 Gaming Peripherals Market Size Estimates | Market Segment | Estimated Global Size | | :--- | :--- | | Total Gaming Peripherals | $11 billion | | Console and PC Gaming Headsets | $2.9 billion | | Gamepad/Controllers | $3.0 billion | | PC Gaming Mice, Keyboards, Microphones | $3.9 billion | | Gaming Simulation Accessories | $1.2 billion | - The business is seasonal, with over 45% of revenues historically generated between September and December47 - Significant customer concentration exists, with the five largest customers accounting for approximately 69% of gross sales in 2024, including Walmart, Amazon, and Best Buy46 Risk Factors The company faces substantial risks from inflation, intense competition, supply chain disruptions, customer concentration, and identified material weaknesses in internal controls over financial reporting - Inflationary pressures adversely impact business costs and consumer discretionary spending6061 - Reliance on limited third-party manufacturers and logistics providers exposes the company to supply chain risks, including a $3.4 million inventory loss due to misappropriation in 2024646992 - 69% of gross sales in 2024 derived from five large customers, posing a material risk if any are lost79 - Material weaknesses in internal controls over revenue recognition and supply chain monitoring led to a $3.4 million misappropriation of in-transit inventory92 - Dependence on third-party licenses, such as from Microsoft for Xbox-compatible products requiring proprietary chips, is a key risk104105106 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None Cybersecurity Turtle Beach employs a risk-based cybersecurity strategy overseen by the Board's Audit Committee, with no material breaches in the last five years - The company integrates processes for assessing and managing material cybersecurity risks into its overall risk management framework147 - Cybersecurity oversight is managed by the Board's Audit Committee, with daily operations handled by the CFO and Senior Director of Information Technology154155 - No material information security breaches have occurred in the last five years153 Properties The company leases all principal facilities, including its corporate headquarters in San Diego, CA, and administrative offices globally, which are deemed adequate for current needs Principal Leased Facilities as of December 31, 2024 | Location | Principal Business Activity | Approx. Square Feet | | :--- | :--- | :--- | | White Plains, NY | Administration | 15,800 | | San Diego, CA | Corporate Headquarters | 16,150 | | New Taipei City, TW | Administration | 14,800 | | Basingstoke, U.K. | Administration | 7,030 | Legal Proceedings The company is involved in legal proceedings, including an appealed EUR 1.4 million insolvency ruling in Germany and a resolved 2013 shareholder class action in its favor - A shareholder class action lawsuit related to the 2013 merger was fully resolved in the defendants' favor on June 6, 2024163412 - A German court ruled on February 28, 2025, that a subsidiary is liable for EUR 1.4 million plus interest and costs in an insolvency dispute, which the company intends to appeal164413 Mine Safety Disclosures This item is not applicable to the company - Not applicable Part II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "TBCH"; it does not pay dividends but has an active stock repurchase program, expanded to $55.0 million in April 2024, with 162,278 shares repurchased for $2.4 million in Q4 2024 - The company does not pay cash dividends and does not anticipate doing so in the foreseeable future174 - On April 9, 2024, the Board expanded the stock repurchase program to up to $55.0 million of common shares175 Issuer Purchases of Equity Securities (Q4 2024) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value of Shares that May Yet Be Purchased | | :--- | :--- | :--- | :--- | | October 1 - 31, 2024 | 162,278 | $15.01 | — | | November 1 - 30, 2024 | 0 | $— | — | | December 1 - 31, 2024 | 0 | $— | — | | Total | 162,278 | $15.01 | $18,841,094 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2024, the PDP acquisition drove 44.5% net revenue growth to $372.8 million, improving gross margin to 34.6% and achieving $16.2 million net income, with Adjusted EBITDA surging to $56.4 million despite $3.4 million inventory loss and $10.8 million integration costs Consolidated Statements of Operations Summary | (in thousands) | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net revenue | $372,766 | $258,122 | $240,166 | | Gross profit | $128,982 | $75,504 | $49,187 | | Gross margin | 34.6% | 29.3% | 20.5% | | Operating income (loss) | $20,029 | $(16,443) | $(51,480) | | Net income (loss) | $16,183 | $(17,679) | $(59,546) | - Net revenue increased by $114.8 million (44.5%) in 2024, primarily due to the PDP acquisition198 - A $3.4 million loss of in-transit inventory was recorded in 'Cost of revenue' for Q4 2024200352 - Acquisition integration costs for the PDP acquisition totaled $10.8 million in 2024201205 Adjusted EBITDA Reconciliation | (in thousands) | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net income (loss) | $16,183 | $(17,679) | $(59,546) | | Adjustments | $40,234 | $24,173 | $29,657 | | Adjusted EBITDA | $56,417 | $6,494 | $(29,889) | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on variable-rate debt, foreign currency exchange rates (British Pound and Euro), and inflation, which impacts costs and consumer demand - Primary market risks include interest rates, foreign currency exchange rates, and inflation243 - Exposure to British Pound and Euro fluctuations is considered immaterial as of December 31, 2024245 - Inflation has increased costs and may negatively impact profit margins if selling prices cannot be adjusted246248 Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2022-2024, including an adverse opinion from Ernst & Young LLP on internal controls as of December 31, 2024, due to material weaknesses, and details on the PDP acquisition and debt facilities - Ernst & Young LLP issued an adverse opinion on internal control over financial reporting as of December 31, 2024, due to material weaknesses in revenue recognition254434435 - On March 13, 2024, the company acquired PDP for $116.9 million, comprising $78.9 million cash and 3.45 million shares, adding $42.3 million in goodwill341342345 - A new $50 million Term Loan Facility with Blue Torch Finance was entered into on March 13, 2024, to partially fund the PDP acquisition226375 - The Revolving Credit Facility was amended, extending maturity to March 13, 2027, and increasing the line of credit to $50 million218365 - In 2022, impairment charges of $0.8 million for the ROCCAT tradename and $1.1 million for Neat intangible assets were recorded due to brand transition strategies357358 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2024, due to material weaknesses in customer purchase order initiation and monitoring of third-party logistics, leading to a $3.4 million inventory misappropriation - Management concluded that disclosure controls and procedures were not effective as of December 31, 2024420 - A material weakness was identified in the customer purchase order initiation process, specifically regarding controls over product quantity and type424 - Ineffective monitoring of third-party logistics providers led to a second material weakness, resulting in the $3.4 million misappropriation of in-transit inventory425 Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement in the fourth quarter of 2024 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement in Q4 2024431 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable Part III Directors, Executive Officers, Corporate Governance, Compensation, Security Ownership, and Accountant Fees Information for Items 10-14, covering directors, executive officers, corporate governance, compensation, and security ownership, is incorporated by reference from the forthcoming 2025 Proxy Statement - All information required by Part III (Items 10-14) is incorporated by reference from the forthcoming 2025 Proxy Statement444446447 Part IV Exhibits and Financial Statement Schedules This section lists financial statements, valuation and qualifying accounts schedules, and all exhibits filed with the Form 10-K, including credit agreements and the PDP merger agreement - This section provides a comprehensive list of all documents filed with the report, including financial statements, schedules, and exhibits450453 - Schedule II - Valuation and Qualifying Accounts details allowances for sales returns, cash discounts, and deferred tax asset valuation allowances for 2022, 2023, and 2024470 Form 10-K Summary No summary is provided in this section of the report - None