Turtle Beach (HEAR) - 2025 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides a comprehensive overview of the company's financial performance, position, and cash flows for the quarter ended March 31, 2025 Financial Statements Q1 2025 financial statements show increased revenue and operating income, a net loss, reduced debt, and improved operating cash flow, driven by the PDP acquisition Condensed Consolidated Statements of Operations Net revenue increased 14.4% to $63,901 thousand, achieving operating income, but a net loss due to higher interest and lower tax benefit Consolidated Statements of Operations (Q1 2025 vs Q1 2024) | Financial Metric | Three Months Ended March 31, 2025 (in thousands) | Three Months Ended March 31, 2024 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Net revenue | $63,901 | $55,848 | +14.4% | | Gross profit | $23,367 | $17,786 | +31.4% | | Operating income (loss) | $1,536 | $(5,713) | Improvement | | Net (loss) income | $(664) | $155 | Decline | | Diluted (loss) income per share | $(0.03) | $0.01 | Decline | - Total operating expenses decreased to $21,800 thousand from $23,500 thousand year-over-year, mainly due to $4,900 thousand in Q1 2024 acquisition-related costs and a $3,400 thousand insurance recovery in Q1 2025[10] Condensed Consolidated Balance Sheets Total assets decreased to $247,024 thousand due to reduced accounts receivable, while total liabilities decreased to $126,150 thousand from credit facility paydown Balance Sheet Comparison (in thousands) | Account | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $11,684 | $12,995 | | Inventories | $73,664 | $71,251 | | Total Assets | $247,024 | $298,861 | | Revolving credit facility | $6,592 | $49,412 | | Total Liabilities | $126,150 | $178,257 | | Total Stockholders' Equity | $120,874 | $120,604 | Condensed Consolidated Statements of Cash Flows Operating cash flow increased to $40,452 thousand, investing activities provided $2,349 thousand from a PDP adjustment, and financing activities used $44,877 thousand for debt and repurchases Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $40,452 | $27,257 | | Net cash provided by (used for) investing activities | $2,349 | $(76,225) | | Net cash (used for) provided by financing activities | $(44,877) | $47,983 | | Net decrease in cash and cash equivalents | $(1,311) | $(910) | Notes to Condensed Consolidated Financial Statements Notes detail the PDP acquisition's post-closing adjustment, current debt facilities and compliance, and the expanded stock repurchase program - The acquisition of Performance Designed Products, LLC (PDP) on March 13, 2024, was for a total final purchase consideration of $114,400 thousand, consisting of cash and common stock[34][35] - In January 2025, the company finalized post-closing adjustments for the PDP acquisition, resulting in a $2,500 thousand payment from the sellers to the company, treated as a reduction of purchase consideration[36] - As of March 31, 2025, the company had $6,592 thousand outstanding on its Revolving Credit Facility and $48,600 thousand on its Term Loan, with excess borrowing availability of approximately $51,200 thousand[54][63] - The company's stock repurchase program was expanded to $55,000 thousand, with 0.1 million shares repurchased for $1,800 thousand during Q1 2025[84] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 14.4% revenue growth from PDP acquisition, improved gross margin, lower operating expenses due to an insurance recovery, and doubled Adjusted EBITDA Results of Operations Net revenue increased to $63,901 thousand due to PDP, gross margin expanded to 36.6%, operating expenses decreased, and Adjusted EBITDA rose to $4,050 thousand Net Revenue and Gross Profit (in thousands) | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net Revenue | $63,901 | $55,848 | | Gross Profit | $23,367 | $17,786 | | Gross Margin | 36.6% | 31.8% | - The increase in gross margin was primarily due to operating leverage from higher revenue from the PDP acquisition, lower promotional spend, and reduced freight costs[105] Adjusted EBITDA Reconciliation (in thousands) | Line Item | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net (loss) income | $(664) | $155 | | Interest expense | 2,006 | 150 | | Depreciation and amortization | 3,126 | 1,476 | | Stock-based compensation | 1,912 | 1,105 | | Income tax provision | (109) | (6,388) | | Acquisition-related cost | 608 | 4,910 | | Insurance recovery | (3,439) | — | | Adjusted EBITDA | $4,050 | $1,449 | Liquidity and Capital Resources Liquidity is supported by $40,452 thousand in operating cash flow and the Revolving Credit Facility, with $44,877 thousand used in financing activities for debt repayments - Cash provided by operating activities increased by $13,200 thousand year-over-year to $40,452 thousand in Q1 2025, primarily due to higher gross receipts from incremental PDP revenue[117] - Net cash used for financing activities was $44,877 thousand in Q1 2025, consisting primarily of $42,800 thousand in revolving credit facility net repayments and $1,800 thousand of share repurchases[119] - As of March 31, 2025, the company was in compliance with all financial covenants and had excess borrowing availability of approximately $51,200 thousand[130] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations and inflation, impacting costs and consumer demand, with no derivative instruments held as of March 31, 2025 - The company's primary market risk exposures are from foreign currency exchange rates (British Pound and Euro) and inflation[138] - Inflationary pressures have negatively impacted consumer demand for the company's products and increased costs, and the company may not be able to fully offset increased costs by raising selling prices[141][142] - As of March 31, 2025, the company did not have any derivative financial instruments to hedge foreign currency risk[139] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2025, and the company is remediating identified material weaknesses - Based on an evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were ineffective as of March 31, 2025[144] - The company is in the process of remediating material weaknesses identified in its 2024 Annual Report on Form 10-K[145] PART II. OTHER INFORMATION This section details legal proceedings, key risk factors, and information regarding the company's stock repurchase program Legal Proceedings The company is involved in legal matters including a resolved shareholder lawsuit, an appealed unfavorable German insolvency ruling, and an intellectual property claim against its PDP subsidiary - A shareholder lawsuit (PAMTP LLC) was fully resolved in the company's favor, with the Nevada Supreme Court affirming the judgment for the defendants in June 2024[72] - In a German insolvency dispute, a court ruled against the company's subsidiary for EUR 1.4 million plus interest, which the company has appealed but accrued for the potential loss contingency[73] - Subsidiary PDP received a letter from Nyko Technologies claiming patent infringement on a product no longer sold in the U.S., and PDP is investigating the claims[74] Risk Factors Key risks include dependency on third-party gaming platforms and game releases, alongside potential adverse impacts from changes in U.S. or foreign trade policies and tariffs - The company's business is highly dependent on the success of third-party gaming platforms (Microsoft Xbox, Sony PlayStation, Nintendo Switch) and the timely release of popular game titles[151][152] - Changes in U.S. or foreign trade policies, especially tariffs on goods manufactured in China, pose a significant risk, potentially increasing costs and decreasing demand for the company's products[153][154] Unregistered Sales of Equity Securities and Use of Proceeds The Board authorized a $55,000 thousand stock repurchase program, with 121,321 shares repurchased for $14.43 per share in Q1 2025 - The Board of Directors has authorized a stock repurchase program for up to $55,000 thousand of the company's common stock[157] Issuer Purchases of Equity Securities (March 2025) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value of Shares that May Yet Be Purchased | | :--- | :--- | :--- | :--- | | March 1-31, 2025 | 121,321 | $14.43 | $17,088,682 |