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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, 2024

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

img253761762_0.jpg

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 No.)

 

 

44 South Broadway, 4th Floor

White Plains, New York

10601

(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

The Nasdaq Global Market

Preferred Stock Purchase Rights

N/A

The Nasdaq Global Market

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, 2024 was 20,754,274.

 


 

INDEX

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

2

 

 

 

Item 1.

Financial Statements (unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2024 and 2023

2

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2024 and 2023

3

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023

5

 

 

 

 

Condensed Consolidated Statement of Stockholder's Equity for the Three and Six Months Ended June 30, 2024 and 2023

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

PART II. OTHER INFORMATION

29

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 5.

Other Information

29

 

 

 

Item 6.

Exhibits

30

 

 

SIGNATURES

31

 

 

1


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Turtle Beach Corporation

Condensed Consolidated Statements of Operations

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands, except per-share data)

 

Net revenue

 

$

76,478

 

 

$

47,982

 

 

$

132,326

 

 

$

99,426

 

Cost of revenue

 

 

53,402

 

 

 

36,110

 

 

 

91,464

 

 

 

73,415

 

Gross profit

 

 

23,076

 

 

 

11,872

 

 

 

40,862

 

 

 

26,011

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

 

13,741

 

 

 

10,351

 

 

 

22,754

 

 

 

19,874

 

Research and development

 

 

4,589

 

 

 

4,189

 

 

 

8,491

 

 

 

8,290

 

General and administrative

 

 

7,463

 

 

 

13,125

 

 

 

13,137

 

 

 

20,132

 

Acquisition-related cost

 

 

1,394

 

 

 

 

 

 

6,304

 

 

 

 

Total operating expenses

 

 

27,187

 

 

 

27,665

 

 

 

50,686

 

 

 

48,296

 

Operating loss

 

 

(4,111

)

 

 

(15,793

)

 

 

(9,824

)

 

 

(22,285

)

Interest expense (income)

 

 

2,220

 

 

 

(17

)

 

 

2,370

 

 

 

146

 

Other non-operating expense, net

 

 

352

 

 

 

198

 

 

 

722

 

 

 

318

 

Loss before income tax

 

 

(6,683

)

 

 

(15,974

)

 

 

(12,916

)

 

 

(22,749

)

Income tax expense (benefit)

 

 

841

 

 

 

(54

)

 

 

(5,547

)

 

 

(124

)

Net loss

 

$

(7,524

)

 

$

(15,920

)

 

$

(7,369

)

 

$

(22,625

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.35

)

 

$

(0.93

)

 

$

(0.37

)

 

$

(1.34

)

Diluted

 

$

(0.35

)

 

$

(0.93

)

 

$

(0.37

)

 

$

(1.34

)

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

21,252

 

 

 

17,156

 

 

 

19,795

 

 

 

16,869

 

Diluted

 

 

21,252

 

 

 

17,156

 

 

 

19,795

 

 

 

16,869

 

 

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

2


 

Turtle Beach Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,
2024

 

 

June 30,
2023

 

 

June 30,
2024

 

 

June 30,
2023

 

 

 

(in thousands)

 

Net loss

 

$

(7,524

)

 

$

(15,920

)

 

$

(7,369

)

 

$

(22,625

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

236

 

 

 

(35

)

 

 

(182

)

 

 

410

 

Other comprehensive income (loss)

 

 

236

 

 

 

(35

)

 

 

(182

)

 

 

410

 

Comprehensive loss

 

$

(7,288

)

 

$

(15,955

)

 

$

(7,551

)

 

$

(22,215

)

 

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

3


 

Turtle Beach Corporation

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2024

 

 

2023

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

(in thousands, except par value and share amounts)

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,462

 

 

$

18,726

 

Accounts receivable, net

 

 

46,474

 

 

 

54,390

 

Inventories

 

 

73,347

 

 

 

44,019

 

Prepaid expenses and other current assets

 

 

11,380

 

 

 

7,720

 

Total Current Assets

 

 

143,663

 

 

 

124,855

 

Property and equipment, net

 

 

6,295

 

 

 

4,824

 

Goodwill

 

 

56,762

 

 

 

10,686

 

Intangible assets, net

 

 

46,683

 

 

 

1,734

 

Other assets

 

 

10,985

 

 

 

7,868

 

Total Assets

 

$

264,388

 

 

$

149,967

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Revolving credit facility

 

$

24,029

 

 

$

 

Accounts payable

 

 

48,380

 

 

 

26,908

 

Other current liabilities

 

 

30,827

 

 

 

29,424

 

Total Current Liabilities

 

 

103,236

 

 

 

56,332

 

Debt, non-current

 

 

45,772

 

 

 

 

Income tax payable

 

 

1,508

 

 

 

1,546

 

Other liabilities

 

 

8,611

 

 

 

7,012

 

Total Liabilities

 

 

159,127

 

 

 

64,890

 

Commitments and Contingencies

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Common stock, $0.001 par value - 25,000,000 shares authorized; 20,753,358 and 17,531,702 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively

 

 

21

 

 

 

18

 

Additional paid-in capital

 

 

247,917

 

 

 

220,185

 

Accumulated deficit

 

 

(141,646

)

 

 

(134,277

)

Accumulated other comprehensive income (loss)

 

 

(1,031

)

 

 

(849

)

Total Stockholders’ Equity

 

 

105,261

 

 

 

85,077

 

Total Liabilities and Stockholders’ Equity

 

$

264,388

 

 

$

149,967

 

 

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

4


 

Turtle Beach Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Six Months Ended

 

 

 

June 30, 2024

 

 

June 30, 2023

 

 

 

(in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(7,369

)

 

$

(22,625

)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

2,084

 

 

 

1,948

 

Costs recognized on sale of acquired inventory

 

 

1,251

 

 

 

 

Amortization of intangible assets

 

 

2,698

 

 

 

513

 

Amortization of debt financing costs

 

 

348

 

 

 

75

 

Stock-based compensation

 

 

1,951

 

 

 

6,929

 

Deferred income taxes

 

 

(6,339

)

 

 

(209

)

Change in sales returns reserve

 

 

(3,209

)

 

 

(2,419

)

Provision for obsolete inventory

 

 

2,081

 

 

 

(1,098

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Accounts receivable

 

 

32,616

 

 

 

32,685

 

Inventories

 

 

(11,238

)

 

 

5,457

 

Accounts payable

 

 

11,281

 

 

 

7,452

 

Prepaid expenses and other assets

 

 

(1,300

)

 

 

691

 

Income taxes payable

 

 

192

 

 

 

(261

)

Other liabilities

 

 

(10,434

)

 

 

(4,928

)

Net cash provided by operating activities

 

 

14,613

 

 

 

24,210

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,967

)

 

 

(1,252

)

Acquisition of a business, net of cash acquired

 

 

(77,294

)

 

 

 

Net cash used for investing activities

 

 

(79,261

)

 

 

(1,252

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Borrowings on revolving credit facilities

 

 

80,288

 

 

 

99,785

 

Repayment of revolving credit facilities

 

 

(56,259

)

 

 

(118,838

)

Proceeds of term loan

 

 

50,000

 

 

 

 

Repayment of term loan

 

 

(417

)

 

 

 

Proceeds from exercise of stock options and warrants

 

 

2,941

 

 

 

1,358

 

Repurchase of common stock

 

 

(15,207

)

 

 

(974

)

Debt issuance costs

 

 

(3,170

)

 

 

(80

)

Net cash provided by (used for) financing activities

 

 

58,176

 

 

 

(18,749

)

Effect of exchange rate changes on cash and cash equivalents

 

 

208

 

 

 

182

 

Net increase (decrease) in cash and cash equivalents

 

 

(6,264

)

 

 

4,391

 

Cash and cash equivalents - beginning of period

 

 

18,726

 

 

 

11,396

 

Cash and cash equivalents - end of period

 

$

12,462

 

 

$

15,787

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF INFORMATION

 

 

 

 

 

 

Cash paid for interest

 

$

2,224

 

 

$

226

 

Cash paid (received) for income taxes

 

$

159

 

 

$

(137

)

 

 

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

5


 

Turtle Beach Corporation

Condensed Consolidated Statement of StockholdersEquity

(unaudited)

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Accumulated
Other
Comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

 

 

(in thousands)

 

Balance at December 31, 2023

 

 

17,532

 

 

$

18

 

 

$

220,185

 

 

$

(134,277

)

 

$

(849

)

 

$

85,077

 

Net income

 

 

 

 

 

 

 

 

 

 

 

155

 

 

 

 

 

 

155

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(418

)

 

 

(418

)

Issuance of acquisition-related stock

 

 

3,450

 

 

 

3

 

 

 

38,047

 

 

 

 

 

 

 

 

 

38,050

 

Issuance of restricted stock

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

171

 

 

 

 

 

 

1,257

 

 

 

 

 

 

 

 

 

1,257

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,105

 

 

 

 

 

 

 

 

 

1,105

 

Balance at March 31, 2024

 

 

21,165

 

 

$

21

 

 

$

260,594

 

 

$

(134,122

)

 

$

(1,267

)

 

$

125,226

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(7,524

)

 

 

 

 

 

(7,524

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

236

 

 

 

236

 

Issuance of restricted stock

 

 

365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Stock options exercised

 

 

176

 

 

 

1

 

 

 

1,683

 

 

 

 

 

 

 

 

 

1,684

 

Stock-based compensation

 

 

 

 

 

 

 

 

846

 

 

 

 

 

 

 

 

 

846

 

Repurchase of common stock

 

 

(952

)

 

 

(1

)

 

 

(15,206

)

 

 

 

 

 

 

 

 

(15,207

)

Balance at June 30, 2024

 

 

20,754

 

 

$

21

 

 

$

247,917

 

 

$

(141,646

)

 

$

(1,031

)

 

$

105,261

 

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Accumulated
Other
Comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

 

 

(in thousands)

 

Balance at December 31, 2022

 

 

16,569

 

 

$

17

 

 

$

206,916

 

 

$

(116,598

)

 

$

(1,394

)

 

$

88,941

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(6,705

)

 

 

 

 

 

(6,705

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

445

 

 

 

445

 

Issuance of restricted stock

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

21

 

 

 

 

 

 

124

 

 

 

 

 

 

 

 

 

124

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,959

 

 

 

 

 

 

 

 

 

1,959

 

Balance at March 31, 2023

 

 

16,604

 

 

$

17

 

 

$

208,999

 

 

$

(123,303

)

 

$

(949

)

 

$

84,764

 

Net income

 

 

 

 

 

 

 

 

 

 

 

(15,920

)

 

 

 

 

 

(15,920

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35

)

 

 

(35

)

Issuance of restricted stock

 

 

469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

322

 

 

 

 

 

 

1,234

 

 

 

 

 

 

 

 

 

1,234

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,986

 

 

 

 

 

 

 

 

 

4,986

 

Repurchase of common stock

 

 

(86

)

 

 

 

 

 

(974

)

 

 

 

 

 

 

 

 

(974

)

Balance at June 30, 2023

 

 

17,309

 

 

 

17

 

 

 

214,245

 

 

 

(139,223

)

 

 

(984

)

 

 

74,055

 

 

 

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

6


 

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 White Plains, New York 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®, PDP® 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 on the PC peripherals market. Acquired in March 2024, Performance Designed Products, LLC (“PDP”) is a gaming accessories leader that designs and distributes video game accessories, including controllers, headsets, power supplies, cases, and other accessories.

VTB Holdings, Inc. (“VTBH”), a wholly-owned subsidiary of Turtle Beach Corporation 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 White Plains, 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, 2023 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, 2024 (“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 financial statements in conformity with generally accepted accounting principles requires management to use estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The significant estimates and assumptions used by management affect: sales return reserve, allowances for cash discounts, warranty reserve, valuation of inventory, valuation of long-lived assets, goodwill and other intangible assets, depreciation and amortization of long-lived assets, valuation of deferred tax assets, probability of performance shares vesting and forfeiture rates utilized in issuing stock-based compensation awards. The Company evaluates estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates, and those differences could be material to the consolidated financial statements.

 

Note 2. Summary of Significant Accounting Policies

The preparation of consolidated annual and quarterly financial statements in conformity with GAAP 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.

7


 

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

 

Note 3. Acquisitions

 

On March 13, 2024, the Company acquired all the issued and outstanding equity of Performance Designed Products, LLC (“PDP”, collectively with FSAR, “PDP Group”) for consideration that included cash and common stock. PDP was a privately held gaming accessories leader that designs and distributes video game accessories, including controllers, headsets, power supplies, cases, and other accessories. As a result of the acquisition, the Company will strengthen its leadership position in hardware gaming accessories and expand its product portfolio.

 

Consideration for the Transaction consisted of the issuance of 3.45 million shares of Company common stock and approximately $78.9 million in cash, subject to customary post-closing adjustments for working capital, closing cash, closing debt and closing third party expenses. On a fully-diluted basis, issued stock represented approximately 16.4% of the total issued and outstanding shares of the Company as of the closing date. The fair value of the 3.45 million common shares issued as part of the consideration was determined on the basis of the closing market price of the Company’s common shares on the acquisition date, or $11.03 per share. As a result, the total preliminary purchase consideration was $116.9 million, partially funded by borrowing on the new term loan facility (see Note 8). Additionally, the Company recognized $6.3 million of acquisition-related costs that were expensed during the six months ended June 30, 2024, and are included as a component of general & administrative expenses in the Condensed Consolidated Statement of Operations.

 

The following table summarizes preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed at the acquisition date:

 

(In thousands)

 

Amount

 

Cash

 

 

1,562

 

Accounts Receivable

 

 

21,491

 

Inventory

 

 

21,423

 

Prepaid and Other Current Assets

 

 

2,360

 

Property, Plant & Equipment

 

 

1,161

 

Other Assets

 

 

3,478

 

Intangible Assets

 

 

47,769

 

Accounts Payable

 

 

(11,009

)

Accrued Liabilities

 

 

(8,215

)

Lease Payable

 

 

(2,726

)

Deferred Tax Liability

 

 

(6,461

)

Total identifiable net assets

 

 

70,833

 

Goodwill

 

 

46,076

 

Total consideration paid

 

$

116,909

 

 

The fair values assigned to PDP’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. The final determination of the fair value of certain assets and liabilities will be completed as soon as the necessary information is available, but no later than one year from the acquisition date.

 

During the three months ended June 30, 2024, we recognized measurement period adjustments primarily to establish preliminary values for the opening balance sheet of the net assets acquired including intangibles assets, which also resulted in a reduction in goodwill from the previously reported preliminary amount.

 

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

 

The preliminary fair value of PDP’s identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method.

8


 

Such forecasts are based on inputs that are unobservable and significant to the overall fair value measurement, and as such, are classified as Level 3 inputs (see Note 4). 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 the preliminary allocation of purchase consideration to identifiable intangible assets:

(In thousands)

 

Life

 

Amount

 

Tradenames

 

7 Years

 

$

15,607

 

Customer relationships

 

6 Years

 

 

4,456

 

Developed technology

 

6 Years

 

 

27,706

 

Total

 

 

 

$

47,769

 

 

PDP's net revenue included in the Company’s consolidated results was $21.8 million and $27.7 million for the three and six months ended June 30, 2024, respectively. PDP’s net income included in the Company’s consolidated results for the same period was not material.

 

Pro Forma Financial Information (Unaudited)

 

The following table reflects the unaudited pro forma operating results of the Company for the three and six months ended June 30, 2024 and 2023, which give effect to the acquisition of PDP as if it had occurred on January 1, 2023.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Net revenue

 

$

76,478

 

 

$

65,709

 

 

$

152,344

 

 

$

135,702

 

Net loss

 

$

(4,541

)

 

$

(24,045

)

 

$

(14,434

)

 

$

(35,380

)

 

The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisition been effective January 1, 2023, nor are they intended to be indicative of results that may occur in the future.

 

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, 2024 and December 31, 2023, 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 as of June 30, 2024 and December 31, 2023:

 

 

 

June 30, 2024

 

 

December 31, 2023

 

 

 

Reported

 

 

Fair Value

 

 

Reported

 

 

Fair Value

 

 

 

(in thousands)

 

Financial Assets and Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,462

 

 

$

12,462

 

 

$

18,726

 

 

$

18,726

 

Term Loan

 

$

49,583

 

 

$

49,583

 

 

$

 

 

$

 

Revolving credit facility

 

$

24,029

 

 

$

24,029

 

 

$

 

 

$

 

 

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

9


 

short time to the expected receipt or payment. The carrying value of the Credit Facility and Term Loan due 2027 equals fair value as the stated interest rate approximates market rates currently available to the Company. The carrying value of the Credit Facility approximates fair value, due to the variable rate nature of the debt, as of June 30, 2024 and December 31, 2023.

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,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Balance, beginning of period

 

$

6,039

 

 

$

6,639

 

 

$

8,449

 

 

$

7,817

 

Reserve accrual

 

 

2,692

 

 

 

2,556

 

 

 

5,433

 

 

 

6,150

 

Recoveries and deductions, net

 

 

(3,491

)

 

 

(3,797

)

 

 

(8,642

)

 

 

(8,569

)

Balance, end of period

 

$

5,240

 

 

$

5,398

 

 

$

5,240

 

 

$

5,398

 

 

Note 6. Composition of Certain Financial Statement Items

Inventories

Inventories consist of the following:

 

 

 

June 30,
2024

 

 

December 31,
2023

 

 

 

(in thousands)

 

Finished goods

 

$

62,379

 

 

$

43,579

 

Raw materials

 

 

10,968

 

 

 

440

 

Total inventories

 

$

73,347

 

 

$

44,019

 

 

Property and Equipment, net

Property and equipment, net, consists of the following:

 

 

 

June 30,
2024

 

 

December 31,
2023

 

 

 

(in thousands)

 

Machinery and equipment

 

$

2,781

 

 

$

2,597

 

Software and software development

 

 

2,858

 

 

 

2,438

 

Furniture and fixtures

 

 

1,686

 

 

 

1,700

 

Tooling

 

 

14,071

 

 

 

11,250

 

Leasehold improvements

 

 

2,327

 

 

 

1,988

 

Demonstration units and convention booths

 

 

16,008

 

 

 

15,767

 

Total property and equipment, gross

 

 

39,731

 

 

 

35,740

 

Less: accumulated depreciation and amortization

 

 

(33,436

)

 

 

(30,916

)

Total property and equipment, net

 

$

6,295

 

 

$

4,824

 

 

10


 

 

Other Current Liabilities

Other current liabilities consist of the following:

 

 

 

June 30,
2024

 

 

December 31,
2023

 

 

 

(in thousands)

 

Accrued employee expenses

 

$

3,009

 

 

$

3,944

 

Accrued royalty

 

 

6,596

 

 

 

5,275

 

Accrued tax-related payables

 

 

4,350

 

 

 

5,206

 

Accrued freight

 

 

2,215

 

 

 

2,917

 

Accrued marketing

 

 

1,858

 

 

 

3,335

 

Accrued expenses

 

 

12,799

 

 

 

8,747

 

Total other current liabilities

 

$

30,827

 

 

$

29,424

 

 

Note 7. Goodwill and Other Intangible Assets

 

Acquired Intangible Assets

Acquired identifiable intangible assets, and related accumulated amortization, as of June 30, 2024 and December 31, 2023 consisted of:

 

 

 

June 30, 2024

 

 

 

Gross
Carrying
Value

 

 

Accumulated
Amortization