Turtle Beach Corp (Form: 10-Q, Received: 08/06/2020 06:22:18)

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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, 2020

☐ 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, 2020 was 14,594,759.

INDEX

		Page

PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements (unaudited)	3

	Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	3

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2020 and 2019	5

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019	6

	Condensed Consolidated Statement of Stockholder's Equity (Deficit) for the Three and Six Months Ended June 30, 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	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	39

Item 6.	Exhibits	40

SIGNATURES		41

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Turtle Beach Corporation

Condensed Consolidated Balance Sheets


	June 30,			December 31,
	2020			2019
	(unaudited)
ASSETS	(in thousands, except par value and share amounts)
Current Assets:
Cash and cash equivalents	$	21,206		$	8,249
Accounts receivable, net		37,007			44,530
Inventories		44,953			45,711
Prepaid expenses and other current assets		10,233			4,057
Total Current Assets		113,399			102,547
Property and equipment, net		4,366			3,962
Deferred income taxes		6,664			7,439
Goodwill		8,178			8,515
Intangible assets, net		5,518			6,011
Other assets		2,370			2,877
Total Assets	$	140,495		$	131,351
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Revolving credit facility	$	—		$	15,655
Accounts payable		41,694			22,511
Other current liabilities		26,331			26,422
Total Current Liabilities		68,025			64,588
Deferred income taxes		140			153
Other liabilities		2,869			3,223
Total Liabilities		71,034			67,964
Commitments and Contingencies
Stockholders’ Equity
Common stock, $0.001 par value - 25,000,000 shares authorized; 14,594,731 and 14,488,182 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively		15			14
Additional paid-in capital		179,132			176,776
Accumulated deficit		(108,870	)		(113,519	)
Accumulated other comprehensive income (loss)		(816	)		116
Total Stockholders’ Equity		69,461			63,387
Total Liabilities and Stockholders’ Equity	$	140,495		$	131,351

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

Turtle Beach Corporation

Condensed Consolidated Statements of Operations

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2020			2019			2020			2019
	(in thousands, except per-share data)
Net revenue	$	79,680		$	41,330		$	114,687		$	86,176
Cost of revenue		50,453			28,159			74,675			58,218
Gross profit		29,227			13,171			40,012			27,958
Operating expenses:
Selling and marketing		9,559			7,550			17,207			14,431
Research and development		3,001			1,734			5,428			3,190
General and administrative		6,710			6,194			12,433			10,843
Total operating expenses		19,270			15,478			35,068			28,464
Operating income (loss)		9,957			(2,307	)		4,944			(506	)
Interest expense		83			111			252			355
Other non-operating expense (income), net		(1,616	)		(70	)		(1,419	)		(1,732	)
Income (loss) before income tax		11,490			(2,348	)		6,111			871
Income tax expense		3,286			25			1,462			189
Net income (loss)	$	8,204		$	(2,373	)	$	4,649		$	682

Net income (loss) per share
Basic	$	0.56		$	(0.16	)	$	0.32		$	0.05
Diluted	$	0.51		$	(0.16	)	$	0.30		$	(0.06	)
Weighted average number of shares:
Basic		14,581			14,586			14,538			14,462
Diluted		16,229			14,586			15,363			15,699

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

Turtle Beach Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
	(in thousands)
Net income (loss)	$	8,204		$	(2,373	)	$	4,649		$	682
Other comprehensive income (loss):
Foreign currency translation adjustment		(113	)		(158	)		(932	)		7
Other comprehensive income (loss)		(113	)		(158	)		(932	)		7
Comprehensive income (loss)	$	8,091		$	(2,531	)	$	3,717		$	689

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

Turtle Beach Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Six Months Ended
	June 30, 2020			June 30, 2019
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,649		$	682
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,061			2,180
Amortization of intangible assets		443			221
Amortization of debt financing costs		94			94
Stock-based compensation		2,405			1,525
Deferred income taxes		761			—
Reversal of sales returns reserve		(1,207	)		(5,166	)
Provision for obsolete inventory		1,493			1,602
Unrealized gain on financial instrument obligation		—			(1,601	)
Increase in fair value of contingent consideration		335			—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		8,730			40,979
Inventories		(734	)		4,461
Accounts payable		19,020			(1,066	)
Prepaid expenses and other assets		(6,124	)		(950	)
Income taxes payable		135			(405	)
Other liabilities		(219	)		(4,384	)
Net cash provided by operating activities		31,842			38,172
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(2,303	)		(1,007	)
Acquisition of a business, net of cash acquired		-			(12,667	)
Net cash used for investing activities		(2,303	)		(13,674	)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving credit facilities		48,426			99,453
Repayment of revolving credit facilities		(64,081	)		(126,036	)
Proceeds from exercise of stock options and warrants		59			94
Repurchase of common stock		-			(1,499	)
Repurchase of common stock to satisfy employee tax withholding obligations		(108	)		(145	)
Net cash used for financing activities		(15,704	)		(28,133	)
Effect of exchange rate changes on cash and cash equivalents		(878	)		3
Net increase in cash and cash equivalents		12,957			(3,632	)
Cash and cash equivalents - beginning of period		8,249			7,078
Cash and cash equivalents - end of period	$	21,206		$	3,446

SUPPLEMENTAL DISCLOSURE OF INFORMATION
Cash paid for interest	$	198		$	308
Cash paid for income taxes	$	44		$	447
Reclassification of financial instrument obligation	$	—		$	6,248

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

Turtle Beach Corporation

Condensed Consolidated Statement of Stockholders’ Equity (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
Net income		—			—		—			8,204			—			8,204
Other comprehensive income, net of tax		—			—		—			—			(113	)		(113	)
Issuance of restricted stock		85			—		—			—			—			—
Repurchase of common stock and retirement of related treasury shares		(6	)		—		(60	)		—			—			(60	)
Stock options exercised		9			—		41			—			—			41
Stock-based compensation		—			—		1,406			—			—			1,406
Balance at June 30, 2020		14,594			15		179,132			(108,870	)		(816	)		69,461

	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

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

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 continues to affect the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict. During the first half of 2020, we experienced a significant increase in demand for our products due to the COVID-19-related stay-at-home orders, which resulted in increased revenue. Nonetheless, we continue to actively monitor and assess the impact of the pandemic on our business, operations, and financial condition.

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 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 $0.1 million and $0.3 million was recorded as a component of “General and administrative” expenses in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020, respectively.

The ROCCAT purchase price allocation is shown in the following table:

(In thousands)	Amount
Receivables	$	1,366
Inventories		6,986
Property and equipment		1,110
Intangible assets		5,589
Other long-term assets