hear-10q_20200331.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 March 31, 2020

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 April 30, 2020 was 14,572,756.

 

 

 

 


 

INDEX

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements (unaudited)

3

 

 

 

 

  Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

3

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019

4

 

 

 

 

Consolidated Condensed Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2020 and 2019

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

6

 

 

 

 

Condensed Consolidated Statement of Stockholder's Equity (Deficit) for the Three Months Ended March 31, 2020 and 2019

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

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

37

 

 

 

Item 5.

Other Information

37

 

 

 

Item 6.

Exhibits

38

 

 

SIGNATURES

39

 

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Turtle Beach Corporation

Condensed Consolidated Balance Sheets

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

(in thousands, except par value and share amounts)

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,733

 

 

$

8,249

 

Accounts receivable, net

 

 

12,402

 

 

 

44,530

 

Inventories

 

 

39,291

 

 

 

45,711

 

Prepaid expenses and other current assets

 

 

5,172

 

 

 

4,057

 

Total Current Assets

 

 

65,598

 

 

 

102,547

 

Property and equipment, net

 

 

4,002

 

 

 

3,962

 

Deferred income taxes

 

 

9,316

 

 

 

7,439

 

Goodwill

 

 

8,515

 

 

 

8,515

 

Intangible assets, net

 

 

5,740

 

 

 

6,011

 

Other assets

 

 

2,563

 

 

 

2,877

 

Total Assets

 

$

95,734

 

 

$

131,351

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Revolving credit facility

 

$

301

 

 

$

15,655

 

Accounts payable

 

 

11,503

 

 

 

22,511

 

Other current liabilities

 

 

20,786

 

 

 

26,422

 

Total Current Liabilities

 

 

32,590

 

 

 

64,588

 

Deferred income taxes

 

 

140

 

 

 

153

 

Other liabilities

 

 

3,021

 

 

 

3,223

 

Total Liabilities

 

 

35,751

 

 

 

67,964

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value - 25,000,000 shares authorized; 14,506,140 and 14,488,152 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

 

 

15

 

 

 

14

 

Additional paid-in capital

 

 

177,745

 

 

 

176,776

 

Accumulated deficit

 

 

(117,074

)

 

 

(113,519

)

Accumulated other comprehensive income (loss)

 

 

(703

)

 

 

116

 

Total Stockholders’ Equity

 

 

59,983

 

 

 

63,387

 

Total Liabilities and Stockholders’ Equity

 

$

95,734

 

 

$

131,351

 

 

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

3


 

Turtle Beach Corporation

Condensed Consolidated Statements of Operations

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(in thousands, except per-share data)

 

Net revenue

 

$

35,007

 

 

$

44,846

 

Cost of revenue

 

 

24,222

 

 

 

30,059

 

Gross profit

 

 

10,785

 

 

 

14,787

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling and marketing

 

 

7,648

 

 

 

6,881

 

Research and development

 

 

2,427

 

 

 

1,456

 

General and administrative

 

 

5,723

 

 

 

4,649

 

Total operating expenses

 

 

15,798

 

 

 

12,986

 

Operating income (loss)

 

 

(5,013

)

 

 

1,801

 

Interest expense

 

 

169

 

 

 

244

 

Other non-operating expense (income), net

 

 

197

 

 

 

(1,662

)

Income (loss) before income tax

 

 

(5,379

)

 

 

3,219

 

Income tax expense (benefit)

 

 

(1,824

)

 

 

164

 

Net income (loss)

 

$

(3,555

)

 

$

3,055

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share

 

 

 

 

 

 

 

 

Basic

 

$

(0.25

)

 

$

0.21

 

Diluted

 

$

(0.25

)

 

$

0.09

 

Weighted average number of shares:

 

 

 

 

 

 

 

 

Basic

 

 

14,495

 

 

 

14,336

 

Diluted

 

 

14,495

 

 

 

16,260

 

 

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

 

 

 

March 31,

2020

 

 

March 31,

2019

 

 

(in thousands)

 

Net income (loss)

 

$

(3,555

)

 

$

3,055

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(819

)

 

 

165

 

Other comprehensive income (loss)

 

 

(819

)

 

 

165

 

Comprehensive income (loss)

 

$

(4,374

)

 

$

3,220

 

 

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

5


 

Turtle Beach Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

 

 

(in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(3,555

)

 

$

3,055

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,033

 

 

 

1,040

 

Amortization of intangible assets

 

 

222

 

 

 

62

 

Amortization of debt financing costs

 

 

47

 

 

 

47

 

Stock-based compensation

 

 

999

 

 

 

522

 

Deferred income taxes

 

 

(1,891

)

 

 

 

Provision for (reversal of) sales returns reserve

 

 

(2,553

)

 

 

(2,532

)

Provision for obsolete inventory

 

 

439

 

 

 

783

 

Unrealized loss (gain) on financial instrument obligation

 

 

 

 

 

(1,601

)

Increase in fair value of contingent consideration

 

 

21

 

 

 

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

34,681

 

 

 

42,868

 

Inventories

 

 

5,981

 

 

 

4,210

 

Accounts payable

 

 

(11,192

)

 

 

(4,493

)

Prepaid expenses and other assets

 

 

(1,091

)

 

 

(317

)

Income taxes payable

 

 

(132

)

 

 

132

 

Other liabilities

 

 

(5,483

)

 

 

(2,814

)

Net cash provided by operating activities

 

 

17,526

 

 

 

40,962

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(890

)

 

 

(557

)

Net cash used for investing activities

 

 

(890

)

 

 

(557

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Borrowings on revolving credit facilities

 

 

48,426

 

 

 

48,119

 

Repayment of revolving credit facilities

 

 

(63,780

)

 

 

(85,504

)

Proceeds from exercise of stock options and warrants

 

 

18

 

 

 

23

 

Repurchase of common stock to satisfy employee tax withholding obligations

 

 

(48

)

 

 

(101

)

Net cash used for financing activities

 

 

(15,384

)

 

 

(37,463

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(768

)

 

 

136

 

Net increase in cash and cash equivalents

 

 

484

 

 

 

3,078

 

Cash and cash equivalents - beginning of period

 

 

8,249

 

 

 

7,078

 

Cash and cash equivalents - end of period

 

$

8,733

 

 

$

10,156

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

161

 

 

$

268

 

Cash paid for income taxes

 

$

175

 

 

$

 

Reclassification of financial instrument obligation

 

$

 

 

$

6,248

 

 

 

 

 

 

 

 

 

 

 

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, 2019

 

 

14,488

 

 

$

14

 

 

$

176,776

 

 

$

(113,519

)

 

$

116

 

 

$

63,387

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,555

)

 

 

 

 

 

(3,555

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(819

)

 

 

(819

)

Issuance of restricted stock

 

 

19

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Repurchase of common stock and retirement of related treasury shares

 

 

(7

)

 

 

 

 

 

(48

)

 

 

 

 

 

 

 

 

(48

)

Stock options exercised

 

 

6

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

18

 

Stock-based compensation

 

 

 

 

 

 

 

 

999

 

 

 

 

 

 

 

 

 

999

 

Balance at March 31, 2020

 

 

14,506

 

 

$

15

 

 

$

177,745

 

 

$

(117,074

)

 

$

(703

)

 

$

59,983

 

 

 

 

 

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

 

 

 

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 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® 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 in the PC peripherals market.

 

VTB Holdings, Inc. (“VTBH”), a wholly-owned subsidiary of Turtle Beach 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 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, 2019 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, 2020 (“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 accompanying unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These estimates may change, as new events occur and additional information is obtained, and will be recognized in the consolidated financial statements in the period in which such changes occur. Future actual results could differ materially from these estimates. The novel coronavirus (“COVID-19”) pandemic has disrupted worldwide economic markets and the extent to which COVID-19 impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict. As of March 31, 2020, our liquidity and operations have not been significantly impacted. However, the Company will continue to monitor and assess the impact of the pandemic.

 

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.

 

8


 

Recent Accounting Pronouncements

 In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies how an entity is required to test goodwill for impairment. A goodwill impairment will be measured by the amount by which a reporting unit’s carrying value exceeds its fair value, with the amount of impairment not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, and must be adopted on a prospective basis. The Company adopted the ASU prospectively on January 1, 2020, which did not have a material impact on the consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which amends ASC Topic 740 by removing certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The pronouncement is effective for fiscal years beginning after December 15, 2020, or for any interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2019-12 on January 1, 2020 and does not expect the adoption of this guidance to have a material impact on its financial statements.

 

 

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 at the closing and up to $3.4 million in potential earn-outs based on revenues for the years ending 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 totaled $3.9 million, of which $0.3 million was recorded as a component of “General and administrative” expenses in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2020.

 

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

 

(In thousands)

 

Amount

 

Receivables

 

$

1,257

 

Inventories

 

 

6,986

 

Property and equipment

 

 

1,110

 

Intangible assets

 

 

5,589

 

Other long-term assets

 

 

461

 

Accounts payable

 

 

(5,510

)

Accrued and other current liabilities

 

 

(3,821

)

Contingent consideration

 

 

(1,592

)

Other non-current liabilities

 

 

(328

)

Total identifiable net assets

 

 

4,152

 

Goodwill

 

 

8,515

 

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 combining 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

 

$

2,119

 

Tradenames

 

10 Years

 

 

2,686

 

Developed technology

 

7 Years

 

 

784

 

Total

 

 

 

$

5,589

 

 

For the three months ended March 31, 2020, revenue related to ROCCAT products was $4.3 million. The Company is unable to provide the results of operations attributable to ROCCAT as those operations were substantially integrated into our legacy business.

 

The Company has not presented combined pro forma financial information of the Company and the pre-acquisition ROCCAT business because the results of operations of the acquired business are considered immaterial.

 

In connection with the $1.6 million fair value of the potential $3.4 million earn-outs, for the year ended December 31, 2019, the fair value of the contingent consideration decreased $0.5 million primarily as a result of the revenues not achieving the stated threshold in the asset purchase agreement.

 

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, 2020 and December 31, 2019, 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 at March 31, 2020 and December 31, 2019

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Reported

 

 

Fair Value

 

 

Reported

 

 

Fair Value

 

 

 

(in thousands)

 

Financial Assets and Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,733

 

 

$

8,733

 

 

$

8,249

 

 

$

8,249

 

Revolving credit facility

 

$

301

 

 

$

301

 

 

$

15,655

 

 

$

15,655

 

Contingent consideration liabilities

 

$

1,142

 

 

$

1,142

 

 

$

1,121

 

 

$

1,121

 

 

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 equals fair value as the stated interest rate approximates market rates currently available to the Company, which is considered a Level 2 input. The Company values contingent consideration related to business combinations using a weighted probability calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows.

 

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

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Balance, beginning of period

 

$

8,815

 

 

$

9,212

 

Reserve accrual

 

 

2,651

 

 

 

2,621

 

Recoveries and deductions, net

 

 

(5,204

)

 

 

(5,153

)

Balance, end of period

 

$

6,262

 

 

$

6,680

 

 

Note 6. Composition of Certain Financial Statement Items

Inventories

Inventories consist of the following:

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(in thousands)

 

Raw materials

 

$

1,502

 

 

$

1,288

 

Finished goods

 

 

37,789

 

 

 

44,423

 

Total inventories

 

$

39,291

 

 

$

45,711

 

 

Property and Equipment, net

Property and equipment, net, consists of the following:

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(in thousands)

 

Machinery and equipment

 

$

1,835

 

 

$

1,783

 

Software and software development

 

 

446

 

 

 

439

 

Furniture and fixtures

 

 

992

 

 

 

601

 

Tooling

 

 

5,358

 

 

 

5,340

 

Leasehold improvements

 

 

1,324

 

 

 

1,326

 

Demonstration units and convention booths

 

 

12,652

 

 

 

12,051

 

Total property and equipment, gross

 

 

22,607

 

 

 

21,540

 

Less: accumulated depreciation and amortization

 

 

(18,605

)

 

 

(17,578

)

Total property and equipment, net

 

$

4,002

 

 

$

3,962

 

 

Other Current Liabilities

Other current liabilities consist of the following:

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(in thousands)

 

Accrued customer fees

 

$

2,787

 

 

$

3,147

 

Accrued royalty

 

 

2,436

 

 

 

3,880

 

Accrued employee expenses

 

 

4,575

 

 

 

3,674

 

Accrued marketing

 

 

2,149

 

 

 

3,695

 

Foreign tax liability

 

 

1,340

 

 

 

2,504

 

Accrued expenses

 

 

7,499

 

 

 

9,522

 

Total other current liabilities

 

$

20,786

 

 

$

26,422

 

 

11


 

Other non-operating expense (income), net

Other non-operating expense (income), net consists of the following:

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Unrealized gain on financial instrument obligation

 

$

 

 

$

(1,601

)

Other non-operating expense (income)

 

 

176

 

 

 

(61

)

Change in fair value of contingent consideration

 

 

21

 

 

 

 

Total other non-operating expense (income),net

 

$

197

 

 

$

(1,662

)

 

Note 7. Goodwill and Other Intangible Assets

Acquired Intangible Assets

Acquired identifiable intangible assets, and related accumulated amortization, as of March 31, 2020 and December 31, 2019 consist of:

 

 

March 31, 2020

 

 

 

Gross

Carrying

Value

 

 

Accumulated

Amortization

 

 

Net Book

Value

 

 

 

(in thousands)

 

Customer relationships

 

$

7,915

 

 

$

5,163

 

 

$

2,752

 

Tradenames

 

 

2,686

 

 

 

224

 

 

 

2,462

 

Developed technology

 

 

784

 

 

 

93

 

 

 

691

 

Foreign currency

 

 

(1,282

)

 

 

(1,118

)

 

 

(165

)

Total Intangible Assets

 

$

10,103

 

 

$

4,362

 

 

$

5,740

 

 

 

 

December 31, 2019

 

 

 

Gross

Carrying

Value

 

 

Accumulated

Amortization

 

 

Net Book

Value

 

 

 

(in thousands)

 

Customer relationships

 

$

7,915

 

 

$

5,024

 

 

$

2,891

 

Tradenames

 

$

2,686

 

 

$

157

 

 

$

2,529

 

Developed technology

 

$

784

 

 

$

65

 

 

$

719

 

Foreign currency

 

 

(1,004

)

 

 

(876

)

 

 

(128

)

Total Intangible Assets

 

$

10,381

 

 

$

4,370

 

 

$

6,011

 

 

In connection with the October 2012 acquisition of TB Europe, the acquired intangible assets related to customer relationships is being amortized over an estimated useful life of thirteen years with the amortization being included within sales and marketing expense.

 

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. Refer to Note 3, “Acquisitions” for additional information related to ROCCAT’s identifiable intangible assets.

Amortization expense related to definite lived intangible assets of $0.2 million was recognized for the three months ended March 31, 2020, and $0.1 million for the three months ended March 31, 2019.

12


 

As of March 31, 2020, estimated annual amortization expense related to definite lived intangible assets in future periods is as follows:

 

 

(in thousands)

 

2020

 

$

708

 

2021

 

 

901

 

2022

 

 

866

 

2023

 

 

837

 

2024

 

 

813

 

Thereafter

 

 

1,780

 

Total

 

$

5,905

 

 

Note 8. Revolving Credit Facility and Long-Term Debt

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(in thousands)

 

Revolving credit facility, maturing March 2024

 

$

301

 

 

$

15,655

 

 

Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was $0.2 million for both the three months ended March 31, 2020 and 2019.

Amortization of deferred financing costs was $47,000 for both the three months ended March 31, 2020 and 2019.

Revolving Credit Facility

On December 17, 2018, Turtle Beach and certain of its subsidiaries entered into an amended and restated loan, guaranty and security agreement (“Credit Facility”) with Bank of America, N.A. (“Bank of America”), as Agent, Sole Lead Arranger and Sole Bookrunner, which replaced the then existing asset-based revolving loan agreement. The Credit Facility, which expires on March 5, 2024, provides for a line of credit of up to $80 million inclusive of a sub-facility limit of $12 million for TB Europe, a wholly-owned subsidiary of Turtle Beach. In addition, the Credit Facility provides for a $40 million accordion feature and the ability to increase the borrowing base with a FILO Loan of up to $6.8 million. 

On May 31, 2019, the Company amended the Credit Facility to provide for, amongst other items, (i) the addition of TBC Holding Company LLC, a wholly-owned subsidiary of VTB, as an obligor and (ii) the ability to make investments in TB Germany GmbH, a wholly-owned subsidiary of TB Europe, of up to $4 million in connection with the acquisition of the business and assets of ROCCAT and up to an additional $4 million annually.

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 either a rate published by Bank of America or the LIBOR rate, plus in each case, an applicable margin, which is between 0.50% to 1.25% for base rate loans and between 1.25% to 2.00% for U.S. LIBOR loans and U.K. loans, and between 2.00% to 2.75% for the FILO loan. In addition, Turtle Beach is required to pay a commitment fee on the unused revolving loan commitment at a rate ranging from 0.25% to 0.50% and letter of credit fees and agent fees. As of March 31, 2020, interest rates for outstanding borrowings were 3.75% for base rate loans and 3.00% for LIBOR rate loans.

The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met or certain other events occur (as defined 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.

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.

13


 

As of March 31, 2020, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $21.4 million.

Note 9. Income Taxes

In order to determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate (“ETR”), 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, the Company determines the provision for income taxes based on actual year-to-date income (loss). 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,

 

 

 

2020

 

 

2019

 

 

(in thousands)

 

Income tax expense (benefit)

 

$

(1,824

)

 

$

164

 

Effective income tax rate

 

 

33.9

%

 

 

5.1

%

 

Income tax benefit for the three months ended March 31, 2020 was $1.8 million at an effective tax rate of 33.9%, compared to income tax expense of $0.2 million at an effective tax rate of 5.1% for the three months ended March 31, 2019. The effective tax rate for the three months ended March 31, 2020 was primarily impacted by permanent items including global intangible low taxed income and executive compensation and, certain state tax expense.

The Company is subject to income taxes domestically and in various foreign jurisdictions. Significant judgment is required in evaluating uncertain tax positions and determining the provision for income taxes.

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, 2020, the Company had uncertain tax positions of $2.2 million, inclusive of $0.7 million of interest and penalties.

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 2017 through 2018, and the state tax years open under the statute of limitations are 2015 through 2018.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in March 2020. The CARES Act includes several U.S. income tax provisions related to, among other things, net operating loss carrybacks, alternative minimum tax credits, modifications to the net interest deduction limitations, and technical amendments regarding the income tax depreciation of qualified improvement property placed in service after December 31, 2017. The CARES Act is not expected to have a material impact on the Company’s financial results.

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,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Cost of revenue

 

$

58

 

 

$

(125

)

Selling and marketing

 

 

199

 

 

 

116

 

Research and development

 

 

125

 

 

 

74

 

General and administrative

 

 

617

 

 

 

457

 

Total stock-based compensation

 

$

999

 

 

$

522

 

 

14


 

The following table presents the stock activity and the total number of shares available for grant as of March 31, 2020:

<

 

 

(in thousands)

 

Balance at December 31, 2019

 

 

1,777

 

Options granted

 

 

(49

)

Options cancelled

 

 

26

 

Restricted stock granted