hear-10q_20190630.htm

 

 

 

 

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 June 30, 2019

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

 

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 Number)

 

 

11011 Via Frontera, Suite A/B

San Diego, California

92127

(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

Nasdaq

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 July 31, 2019 was 14,497,016.

 

 

 


 

INDEX

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements (unaudited)

3

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018

3

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2019 and 2018

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018

6

 

 

 

 

Condensed Consolidated Statement of Stockholders' Equity (Deficit) for the Three and Six Months Ended June 30, 2019 and 2018

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

26

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

PART II. OTHER INFORMATION

28

 

 

 

Item 1.

Legal Proceedings

28

 

 

 

Item 1A.

Risk Factors

28

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

Item 5.

Other Information

38

 

 

 

Item 6.

Exhibits

39

 

 

SIGNATURES

40

 

 

2


 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Turtle Beach Corporation

Condensed Consolidated Balance Sheets

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

(in thousands, except par value and share amounts)

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,446

 

 

$

7,078

 

Accounts receivable, net

 

 

18,402

 

 

 

52,797

 

Inventories

 

 

50,420

 

 

 

49,472

 

Prepaid expenses and other current assets

 

 

5,418

 

 

 

4,469

 

Total Current Assets

 

 

77,686

 

 

 

113,816

 

Property and equipment, net

 

 

5,717

 

 

 

5,856

 

Goodwill

 

 

5,940

 

 

 

 

Intangible assets, net

 

 

8,324

 

 

 

1,036

 

Other assets

 

 

4,158

 

 

 

1,212

 

Total Assets

 

$

101,825

 

 

$

121,920

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Revolving credit facility

 

$

10,802

 

 

$

37,385

 

Accounts payable

 

 

22,116

 

 

 

17,724

 

Other current liabilities

 

 

19,649

 

 

 

18,488

 

Total Current Liabilities

 

 

52,567

 

 

 

73,597

 

Deferred income taxes

 

 

187

 

 

 

187

 

Financial instrument obligation

 

 

 

 

 

7,848

 

Other liabilities

 

 

4,663

 

 

 

2,792

 

Total Liabilities

 

 

57,417

 

 

 

84,424

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value - 100,000,000 shares authorized; 14,493,544 and 14,268,184 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively

 

 

14

 

 

 

14

 

Additional paid-in capital

 

 

175,644

 

 

 

169,421

 

Accumulated deficit

 

 

(130,781

)

 

 

(131,463

)

Accumulated other comprehensive loss

 

 

(469

)

 

 

(476

)

Total Stockholders’ Equity

 

 

44,408

 

 

 

37,496

 

Total Liabilities and Stockholders’ Equity

 

$

101,825

 

 

$

121,920

 

 

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

3


 

Turtle Beach Corporation

Condensed Consolidated Statements of Operations

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in thousands, except per-share data)

 

Net revenue

 

$

41,330

 

 

$

60,805

 

 

$

86,176

 

 

$

101,691

 

Cost of revenue

 

 

28,159

 

 

 

40,528

 

 

 

58,218

 

 

 

66,385

 

Gross profit

 

 

13,171

 

 

 

20,277

 

 

 

27,958

 

 

 

35,306

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

 

7,550

 

 

 

6,818

 

 

 

14,431

 

 

 

12,747

 

Research and development

 

 

1,734

 

 

 

1,327

 

 

 

3,190

 

 

 

2,656

 

General and administrative

 

 

6,194

 

 

 

3,863

 

 

 

10,843

 

 

 

7,848

 

Total operating expenses

 

 

15,478

 

 

 

12,008

 

 

 

28,464

 

 

 

23,251

 

Operating income (loss)

 

 

(2,307

)

 

 

8,269

 

 

 

(506

)

 

 

12,055

 

Interest expense

 

 

111

 

 

 

1,258

 

 

 

355

 

 

 

3,263

 

Other non-operating expense (income), net

 

 

(70

)

 

 

9,029

 

 

 

(1,732

)

 

 

8,784

 

Income (loss) before income tax

 

 

(2,348

)

 

 

(2,018

)

 

 

871

 

 

 

8

 

Income tax expense

 

 

25

 

 

 

300

 

 

 

189

 

 

 

364

 

Net income (loss)

 

$

(2,373

)

 

$

(2,318

)

 

$

682

 

 

$

(356

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.16

)

 

$

(0.17

)

 

$

0.05

 

 

$

(0.03

)

Diluted

 

$

(0.16

)

 

$

(0.17

)

 

$

(0.06

)

 

$

(0.03

)

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,586

 

 

 

13,401

 

 

 

14,462

 

 

 

12,877

 

Diluted

 

 

14,586

 

 

 

13,401

 

 

 

15,699

 

 

 

12,877

 

 

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

4


 

Turtle Beach Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

2019

 

 

June 30,

2018

 

 

June 30,

2019

 

 

June 30,

2018

 

 

 

(in thousands)

 

Net income (loss)

 

$

(2,373

)

 

$

(2,318

)

 

$

682

 

 

$

(356

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(158

)

 

 

(270

)

 

 

7

 

 

 

(115

)

Other comprehensive income (loss)

 

 

(158

)

 

 

(270

)

 

 

7

 

 

 

(115

)

Comprehensive income (loss)

 

$

(2,531

)

 

$

(2,588

)

 

$

689

 

 

$

(471

)

 

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

5


 

Turtle Beach Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

(in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income (loss)

 

$

682

 

 

$

(356

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,180

 

 

 

2,204

 

Amortization of intangible assets

 

 

221

 

 

 

156

 

Amortization of debt financing costs

 

 

94

 

 

 

642

 

Stock-based compensation

 

 

1,525

 

 

 

822

 

Accrued interest on Series B redeemable preferred stock

 

 

 

 

 

501

 

Paid-in-kind interest

 

 

 

 

 

1,256

 

Deferred income taxes

 

 

 

 

 

235

 

Reversal of sales returns reserve

 

 

(5,166

)

 

 

(489

)

Provision for doubtful accounts

 

 

 

 

 

144

 

Provision for obsolete inventory

 

 

1,602

 

 

 

1,766

 

Loss on disposal of property and equipment

 

 

 

 

 

93

 

Unrealized loss (gain) on financial instrument obligation

 

 

(1,601

)

 

 

8,619

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

40,979

 

 

 

15,692

 

Inventories

 

 

4,461

 

 

 

(2,291

)

Accounts payable

 

 

(1,066

)

 

 

16,461

 

Prepaid expenses and other assets

 

 

(950

)

 

 

(1,723

)

Income taxes payable

 

 

(405

)

 

 

293

 

Other liabilities

 

 

(4,384

)

 

 

2,316

 

Net cash provided by operating activities

 

 

38,172

 

 

 

46,341

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,007

)

 

 

(402

)

Acquisition of a business, net of cash acquired

 

 

(12,667

)

 

 

 

Net cash used for investing activities

 

 

(13,674

)

 

 

(402

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Borrowings on revolving credit facilities

 

 

99,453

 

 

 

81,991

 

Repayment of revolving credit facilities

 

 

(126,036

)

 

 

(120,458

)

Proceeds of term loan

 

 

 

 

 

3,265

 

Repayment of term loan

 

 

 

 

 

(2,485

)

Repayment of subordinated notes - related party

 

 

 

 

 

(3,265

)

Settlement of Series B Preferred Stock

 

 

 

 

 

(1,390

)

Proceeds from exercise of stock options and warrants

 

 

94

 

 

 

734

 

Repurchase of common stock

 

 

(1,499

)

 

 

 

Repurchase of common stock to satisfy employee tax withholding obligations

 

 

(145

)

 

 

 

Debt financing costs

 

 

 

 

 

(405

)

Net cash used for financing activities

 

 

(28,133

)

 

 

(42,013

)

Effect of exchange rate changes on cash and cash equivalents

 

 

3

 

 

 

(65

)

Net increase (decrease) in cash and cash equivalents

 

 

(3,632

)

 

 

3,861

 

Cash and cash equivalents - beginning of period

 

 

7,078

 

 

 

5,247

 

Cash and cash equivalents - end of period

 

$

3,446

 

 

$

9,108

 

SUPPLEMENTAL DISCLOSURE OF INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

308

 

 

$

763

 

Cash paid for income taxes

 

$

447

 

 

$

 

Reclassification of financial instrument obligation

 

$

6,248

 

 

$

 

Exchange of Series B Preferred Stock

 

$

 

 

$

18,032

 

 

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

6


 

Turtle Beach Corporation

Condensed Consolidated Statement of StockholdersEquity (Deficit)

(unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Income

(Loss)

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Balance at December 31, 2018

 

 

14,268

 

 

$

14

 

 

$

169,421

 

 

$

(131,463

)

 

$

(476

)

 

$

37,496

 

Net income

 

 

 

 

 

 

 

 

 

 

 

3,055

 

 

 

 

 

 

3,055

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

165

 

 

 

165

 

Reclassification of financial instrument obligation

 

 

 

 

 

 

 

 

6,248

 

 

 

 

 

 

 

 

 

6,248

 

Issuance of restricted stock

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock and retirement of related treasury shares

 

 

(6

)

 

 

 

 

 

(101

)

 

 

 

 

 

 

 

 

(101

)

Issuance of common stock upon exercise of warrants

 

 

295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

6

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

23

 

Stock-based compensation

 

 

 

 

 

 

 

 

522

 

 

 

 

 

 

 

 

 

522

 

Balance at March 31, 2019

 

 

14,575

 

 

 

14

 

 

 

176,113

 

 

 

(128,408

)

 

 

(311

)

 

 

47,408

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,373

)

 

 

 

 

 

(2,373

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(158

)

 

 

(158

)

Issuance of restricted stock

 

 

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock and retirement of related treasury shares

 

 

(4

)

 

 

 

 

 

(44

)

 

 

 

 

 

 

 

 

(44

)

Common stock buyback

 

 

(156

)

 

 

 

 

 

(1,499

)

 

 

 

 

 

 

 

 

(1,499

)

Stock options exercised

 

 

22

 

 

 

 

 

 

71

 

 

 

 

 

 

 

 

 

71

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,003

 

 

 

 

 

 

 

 

 

1,003

 

Balance at June 30, 2019

 

 

14,493

 

 

$

14

 

 

$

175,644

 

 

$

(130,781

)

 

$

(469

)

 

$

44,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

12,349

 

 

$

12

 

 

$

148,082

 

 

$

(170,048

)

 

$

(203

)

 

$

(22,157

)

Cumulative effect of the adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

 

(605

)

 

 

 

 

 

(605

)

Net income

 

 

 

 

 

 

 

 

 

 

 

1,962

 

 

 

 

 

 

1,962

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

155

 

 

 

155

 

Stock-based compensation

 

 

 

 

 

 

 

 

223

 

 

 

 

 

 

 

 

 

223

 

Balance at March 31, 2018

 

 

12,349

 

 

 

12

 

 

 

148,305

 

 

 

(168,691

)

 

 

(48

)

 

 

(20,422

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,318

)

 

 

 

 

 

(2,318

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(270

)

 

 

(270

)

Issuance of common stock in exchange for Series B preferred stock, net of issuance costs

 

 

1,307

 

 

 

1

 

 

 

15,474

 

 

 

 

 

 

 

 

 

15,475

 

Issuance of restricted stock

 

 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

110

 

 

 

1

 

 

 

733

 

 

 

 

 

 

 

 

 

734

 

Stock-based compensation

 

 

 

 

 

 

 

 

599

 

 

 

 

 

 

 

 

 

599

 

Balance at June 30, 2018

 

 

13,794

 

 

$

14

 

 

$

165,111

 

 

$

(171,009

)

 

$

(318

)

 

$

(6,202

)

 

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

7


 

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 San Diego, California and incorporated in the state of Nevada in 2010, is a premier gaming accessory company with expertise and experience in developing, commercializing and marketing innovative products across a range of large addressable markets under the Turtle Beach® and ROCCAT® brands. Turtle Beach is a worldwide leading provider of feature-rich headset solutions for use across multiple platforms, including video game and entertainment consoles, handheld consoles, personal computers, tablets and mobile devices. ROCCAT is a leading provider of gaming keyboards, mice and other accessories focused in the personal computer peripherals market.

VTB Holdings, Inc. (“VTBH”), a wholly-owned subsidiary of Turtle Beach and the owner of Voyetra Turtle Beach, Inc. (“VTB”) and Turtle Beach Europe Limited (“TB Europe”), was incorporated in the state of Delaware in 2010. VTB was incorporated in the state of Delaware in 1975 with operations principally located in Valhalla, 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, 2018 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 18, 2019 (“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.

 

Note 2. Summary of Significant Accounting Policies

The preparation of consolidated annual and quarterly financial statements in conformity with generally accepted accounting principles 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.

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

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02,  Leases , that introduced the recognition of a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term and, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis for all leases (with the exception of short-term leases). The Company adopted this standard on its effective date of January 1, 2019, using the optional alternative approach, which applies the provisions of the new guidance at the effective date without adjusting the comparative periods. As part of the adoption of the new standard, the Company elected the package of practical expedients that permits entities to not reassess prior conclusions regarding lease identification, lease classification, and initial direct costs under the new standard. Upon adoption of the new standard as it relates to the Company's accounting for real estate operating leases, assets and liabilities increased by approximately $3.3 million. Refer to Note 13, “Commitments and Contingencies” for further details.

8


 

In June 2018, the FASB issued ASU 2018-07, Improvements to Non-employee Share-Based Payment Accounting, that expands the scope of Topic 718, Compensation—Stock Compensation, to include share-based payments issued to non-employees for goods or services and substantially aligned the accounting for share-based payments to non-employees and employees. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is evaluating the effect that this guidance will have on its financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement, that removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. Certain disclosures in the new guidance will need to be applied on a retrospective basis and others on a prospective basis.

 

 

Note 3. Acquisitions

 

ROCCAT

 

On May 31, 2019, the Company completed its acquisition of the business and assets of ROCCAT, a provider of gaming keyboards, mice and other accessories for a purchase price of approximately $12.7 million and up to $3.4 million in potential earn-outs based on revenues for the years ended December 31, 2019 and 2020 as provided in the asset purchase agreement. The purchase price was paid in cash at closing and was funded by the Company’s cash reserves and additional borrowings under its credit facility. In addition, business transaction costs incurred in connection with the acquisition of $1.5 million and $2.3 million for the three and six months ended June 30, 2019, respectively, were recorded as a component of “General and administrative” expenses in the Condensed Consolidated Statements of Operations.

 

The preliminary ROCCAT purchase price allocation as of May 31, 2019, is shown in the following table:

 

(In thousands)

 

Amount

 

Receivables

 

$

1,418

 

Inventories

 

 

7,012

 

Property and equipment

 

 

1,110

 

Intangible assets

 

 

7,511

 

Other long-term assets

 

 

461

 

Accounts payable

 

 

(5,535

)

Accrued and other current liabilities

 

 

(3,211

)

Contingent consideration

 

 

(1,711

)

Other non-current liabilities

 

 

(328

)

Total identifiable net assets

 

 

6,727

 

Goodwill

 

 

5,940

 

Total consideration

 

$

12,667

 

 

The fair values of ROCCAT’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. These adjustments will primarily relate to certain short-term assets, intangible assets, and certain liabilities including contingent consideration. The final determination of the fair value of certain assets and liabilities will be completed as soon as the necessary information is available, including the completion of a valuation of the tangible and intangible assets and the contingent consideration, but no later than one year from the acquisition date.

 

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

 

9


 

The estimate of fair value of ROCCAT’s identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method. 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 assessment of the intangible asset’s life cycle, as well as other factors.  The following table summarizes key information underlying intangible assets related to the ROCCAT acquisition:

 

(In thousands)

Life

Amount

 

Customer relationships

7 Years

$

5,028

 

Tradenames

5 Years

 

1,602

 

Developed technology

7 Years

 

833

 

Non-compete agreements

3 Years

 

48

 

Total

 

$

7,511

 

 

For the three and six months ended June 30, 2019, ROCCAT had revenue and an operating loss of $1.3 million and $0.4 million, respectively.

 

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 June 30, 2019 and December 31, 2018, the Company had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted, and the only outstanding financial assets and liabilities recorded at fair value on a recurring basis were the wholly-funded warrants reported as a financial instrument obligation as of December 31, 2018. The following is a summary of the carrying amounts and estimated fair values of our financial instruments at June 30, 2019 and December 31, 2018:

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

Reported

 

 

Fair Value

 

 

Reported

 

 

Fair Value

 

 

 

(in thousands)

 

Financial Assets and Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,446

 

 

$

3,446

 

 

$

7,078

 

 

$

7,078

 

Revolving credit facility

 

$

10,802

 

 

$

10,802

 

 

$

37,385

 

 

$

37,385

 

Financial instrument obligation

 

$

 

 

$

 

 

$

7,848

 

 

$

7,848

 

 

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 revolving credit facility equals fair value as the stated interest rate approximates market rates currently available to the Company, which are considered Level 2 inputs. The liability-classified warrants reported as a financial instrument obligation were classified within Level 3 because the Company uses a Black-Scholes pricing model to estimate the fair value based on inputs that are not observable in any market.

10


 

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Balance, beginning of period

 

$

6,680

 

 

$

4,260

 

 

$

9,212

 

 

$

5,533

 

Reserve accrual

 

 

2,659

 

 

 

5,184

 

 

 

5,280

 

 

 

8,441

 

Recoveries and deductions, net

 

 

(5,293

)

 

 

(4,400

)