hear-10q_20190930.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 September 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 October 31, 2019 was 14,517,229.

 

 

 


 

INDEX

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements (unaudited)

3

 

 

 

 

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

3

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018

4

 

 

 

 

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

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018

6

 

 

 

 

Condensed Consolidated Statement of Stockholder's Equity (Deficit) for the Three and Nine Months Ended September 30, 2019 and 2018

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

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

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

28

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

PART II. OTHER INFORMATION

30

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

Item 5.

Other Information

40

 

 

 

Item 6.

Exhibits

41

 

 

SIGNATURES

42

 

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Turtle Beach Corporation

Condensed Consolidated Balance Sheets

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

(in thousands, except par value and share amounts)

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,037

 

 

$

7,078

 

Accounts receivable, net

 

 

28,468

 

 

 

52,797

 

Inventories

 

 

67,032

 

 

 

49,472

 

Prepaid expenses and other current assets

 

 

5,500

 

 

 

4,469

 

Total Current Assets

 

 

108,037

 

 

 

113,816

 

Property and equipment, net

 

 

4,909

 

 

 

5,856

 

Goodwill

 

 

9,096

 

 

 

 

Intangible assets, net

 

 

4,836

 

 

 

1,036

 

Other assets

 

 

3,719

 

 

 

1,212

 

Total Assets

 

$

130,597

 

 

$

121,920

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Revolving credit facility

 

$

26,561

 

 

$

37,385

 

Accounts payable

 

 

37,490

 

 

 

17,724

 

Other current liabilities

 

 

20,489

 

 

 

18,488

 

Total Current Liabilities

 

 

84,540

 

 

 

73,597

 

Deferred income taxes

 

 

187

 

 

 

187

 

Financial instrument obligation

 

 

 

 

 

7,848

 

Other liabilities

 

 

4,264

 

 

 

2,792

 

Total Liabilities

 

 

88,991

 

 

 

84,424

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value - 100,000,000 shares authorized; 14,512,599 and 14,268,184 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively

 

 

15

 

 

 

14

 

Additional paid-in capital

 

 

176,295

 

 

 

169,421

 

Accumulated deficit

 

 

(133,905

)

 

 

(131,463

)

Accumulated other comprehensive loss

 

 

(799

)

 

 

(476

)

Total Stockholders’ Equity

 

 

41,606

 

 

 

37,496

 

Total Liabilities and Stockholders’ Equity

 

$

130,597

 

 

$

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in thousands, except per-share data)

 

Net revenue

 

$

46,723

 

 

$

74,427

 

 

$

132,899

 

 

$

176,118

 

Cost of revenue

 

 

31,680

 

 

 

43,925

 

 

 

89,898

 

 

 

110,310

 

Gross profit

 

 

15,043

 

 

 

30,502

 

 

 

43,001

 

 

 

65,808

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

 

10,150

 

 

 

8,517

 

 

 

24,581

 

 

 

21,264

 

Research and development

 

 

2,198

 

 

 

1,400

 

 

 

5,388

 

 

 

4,056

 

General and administrative

 

 

5,214

 

 

 

4,063

 

 

 

16,057

 

 

 

11,911

 

Total operating expenses

 

 

17,562

 

 

 

13,980

 

 

 

46,026

 

 

 

37,231

 

Operating income (loss)

 

 

(2,519

)

 

 

16,522

 

 

 

(3,025

)

 

 

28,577

 

Interest expense

 

 

240

 

 

 

1,093

 

 

 

595

 

 

 

4,356

 

Other non-operating expense (income), net

 

 

302

 

 

 

99

 

 

 

(1,430

)

 

 

8,883

 

Income (loss) before income tax

 

 

(3,061

)

 

 

15,330

 

 

 

(2,190

)

 

 

15,338

 

Income tax expense

 

 

63

 

 

 

398

 

 

 

252

 

 

 

762

 

Net income (loss)

 

$

(3,124

)

 

$

14,932

 

 

$

(2,442

)

 

$

14,576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.22

)

 

$

1.07

 

 

$

(0.17

)

 

$

1.10

 

Diluted

 

$

(0.22

)

 

$

0.91

 

 

$

(0.17

)

 

$

1.05

 

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,506

 

 

 

14,019

 

 

 

14,477

 

 

 

13,263

 

Diluted

 

 

14,506

 

 

 

16,229

 

 

 

14,477

 

 

 

13,828

 

 

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

 

 

Nine Months Ended

 

 

 

September 30,

2019

 

 

September 30,

2018

 

 

September 30,

2019

 

 

September 30,

2018

 

 

 

(in thousands)

 

Net income (loss)

 

$

(3,124

)

 

$

14,932

 

 

$

(2,442

)

 

$

14,576

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(330

)

 

 

(81

)

 

 

(323

)

 

 

(196

)

Other comprehensive income (loss)

 

 

(330

)

 

 

(81

)

 

 

(323

)

 

 

(196

)

Comprehensive income (loss)

 

$

(3,454

)

 

$

14,851

 

 

$

(2,765

)

 

$

14,380

 

 

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

5


 

Turtle Beach Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

 

 

(in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,442

)

 

$

14,576

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,477

 

 

 

2,944

 

Amortization of intangible assets

 

 

413

 

 

 

230

 

Amortization of debt financing costs

 

 

142

 

 

 

956

 

Stock-based compensation

 

 

2,555

 

 

 

1,409

 

Accrued interest on Series B redeemable preferred stock

 

 

 

 

 

501

 

Paid-in-kind interest

 

 

 

 

 

1,747

 

Deferred income taxes

 

 

 

 

 

714

 

Provision for (reversal of) sales returns reserve

 

 

(4,262

)

 

 

1,097

 

Provision for doubtful accounts

 

 

(8

)

 

 

373

 

Provision for obsolete inventory

 

 

2,081

 

 

 

2,273

 

Loss on disposal of property and equipment

 

 

 

 

 

93

 

Unrealized loss (gain) on financial instrument obligation

 

 

(1,601

)

 

 

8,410

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

30,017

 

 

 

19,463

 

Inventories

 

 

(12,622

)

 

 

(48,103

)

Accounts payable

 

 

14,426

 

 

 

35,223

 

Prepaid expenses and other assets

 

 

(1,005

)

 

 

(1,727

)

Income taxes payable

 

 

(1,569

)

 

 

431

 

Other liabilities

 

 

(2,298

)

 

 

2,748

 

Net cash provided by operating activities

 

 

27,304

 

 

 

43,358

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,628

)

 

 

(2,046

)

Acquisition of a business, net of cash acquired

 

 

(12,667

)

 

 

 

Net cash used for investing activities

 

 

(14,295

)

 

 

(2,046

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Borrowings on revolving credit facilities

 

 

148,087

 

 

 

205,810

 

Repayment of revolving credit facilities

 

 

(158,911

)

 

 

(240,753

)

Proceeds of term loan

 

 

 

 

 

3,265

 

Repayment of term loan

 

 

 

 

 

(2,485

)

Repayment of subordinated notes - related party

 

 

 

 

 

(8,265

)

Settlement of Series B Preferred Stock

 

 

 

 

 

(1,390

)

Proceeds from exercise of stock options and warrants

 

 

214

 

 

 

4,097

 

Repurchase of common stock

 

 

(1,941

)

 

 

 

Repurchase of common stock to satisfy employee tax withholding obligations

 

 

(201

)

 

 

(141

)

Debt financing costs

 

 

 

 

 

(405

)

Net cash used for financing activities

 

 

(12,752

)

 

 

(40,267

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(298

)

 

 

(114

)

Net increase (decrease) in cash and cash equivalents

 

 

(41

)

 

 

931

 

Cash and cash equivalents - beginning of period

 

 

7,078

 

 

 

5,247

 

Cash and cash equivalents - end of period

 

$

7,037

 

 

$

6,178

 

SUPPLEMENTAL DISCLOSURE OF INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

488

 

 

$

1,062

 

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

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

 

 

(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

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,124

)

 

 

 

 

 

(3,124

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(330

)

 

 

(330

)

Issuance of restricted stock

 

 

43

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Repurchase of common stock and retirement of related treasury shares

 

 

(6

)

 

 

 

 

 

(56

)

 

 

 

 

 

 

 

 

(56

)

Common stock buyback

 

 

(50

)

 

 

 

 

 

(442

)

 

 

 

 

 

 

 

 

(442

)

Stock options exercised

 

 

33

 

 

 

 

 

 

120

 

 

 

 

 

 

 

 

 

120

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,030

 

 

 

 

 

 

 

 

 

1,030

 

Balance at September 30, 2019

 

 

14,513

 

 

$

15

 

 

$

176,295

 

 

$

(133,905

)

 

$

(799

)

 

$

41,606

 

 

 

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

7


 

Turtle Beach Corporation

Condensed Consolidated Statement of StockholdersEquity (Deficit)

(unaudited) (continued)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

 

 

(in thousands)

 

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

)

Net income

 

 

 

 

 

 

 

 

 

 

 

14,932

 

 

 

 

 

 

 

14,932

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(81

)

 

 

(81

)

Issuance of restricted stock

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock and retirement of related treasury shares

 

 

(6

)

 

 

 

 

 

(141

)

 

 

 

 

 

 

 

 

(141

)

Issuance of common stock upon exercise of warrant

 

 

77

 

 

 

 

 

 

778

 

 

 

 

 

 

 

 

 

778

 

Stock options exercised

 

 

349

 

 

 

 

 

 

2,585

 

 

 

 

 

 

 

 

 

2,585

 

Stock-based compensation