Turtle Beach Corp 10-Q

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 Consolida ted 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 S tatements 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 o f Stockholders ’ Equity (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 Net Book Value (in thousands) Customer relationships $ 12,541 $ 7,530 $ 5,011 Tradenames 18,673 3,468 15,205 Developed technology 29,590 3,148 26,442 Foreign currency ( 1,189 ) ( 1,214 ) 25 Total Intangible Assets (1) $ 59,615 $ 12,932 $ 46,683 December 31, 2023 Gross Carrying Value Accumulated Amortization Net Book Value (in thousands) Customer relationships $ 8,085 $ 7,214 $ 871 Tradenames 3,066 2,607 459 Developed technology 1,884 1,613 271 Foreign currency ( 1,159 ) ( 1,292 ) 133 Total Intangible Assets (1) $ 11,876 $ 10,142 $ 1,734 11 (1) The accumulated amortization includes $ 1.9 million of accumulated impairment charges as of June 30, 2024 and December 31, 2023. 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. In January 2021, the Company completed its acquisition of the business and assets relating to the Neat Microphones business. The acquired intangible assets relating to developed technology, customer relationships, and trade name are subject to amortization. In March 2024, the Company completed its acquisition of the business and assets of PDP. 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 PDP’s identifiable intangible assets. Amortization expense related to definite lived intangible assets of $ 2.1 million and $ 2.7 million was recognized for the three and six months ended June 30, 2024, respectively, and $ 0.2 million and $ 0.5 million was recognized for the three and six months ended June 30, 2023, respectively. As of June 30, 2024, estimated annual amortization expense related to definite lived intangible assets in future periods was as follows: (in thousands) 2024 $ 4,299 2025 8,016 2026 7,761 2027 7,591 Thereafter 18,991 Total $ 46,658 Changes in the carrying values of goodwill for the six months ended June 30, 2024 from the balance as of December 31, 2023. (in thousands) Balance as of January 1, 2024 $ 10,686 PDP acquisition 46,076 Balance as of June 30, 2024 $ 56,762 Note 8. Revolving Credit Facility and Long-Term Debt June 30, 2024 December 31, 2023 (in thousands) Revolving credit facility, maturing March 2027 $ 24,029 $ — Term loan Due 2027 $ 49,583 $ — Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was $ 2.2 million and $ 2.7 million for the three and six months ended June 30, 2024, respectively, and $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2023, respectively. Amortization of deferred financing costs was $ 0.3 million for the three and six months ended June 30, 2024 and $ 33 thousand and $ 75 thousand for the three and six months ended June 30, 2023, respectively. Revolving Credit Facility On March 5, 2018, Turtle Beach and certain of its subsidiaries entered into an amended and restated loan, guaranty and security agreement (the “Credit Facility”) with Bank of America, N.A. (“Bank of America”), as administrative agent, collateral agent and security trustee for Lenders (as defined therein), which replaced the then existing asset-based revolving loan agreement. The Credit Facility was amended on each of December 17, 2018, May 31, 2019, and March 10, 2023. The Credit Facility, as amended, expires on March 13, 2027 and provides for a line of credit of up to $ 50 million inclusive of a sub-facility limit of $ 10 million for TB Europe, a wholly-owned subsidiary of Turtle Beach. On March 13, 2024, the Company entered into a Fourth Amendment, dated as of March 13, 2024 (the “Fourth Amendment”), by and among the Company, VTB, TBC Holding Company LLC, TB Europe, VTBH, the financial institutions party thereto from time to time and Bank of America, as administrative agent, collateral agent and security trustee for the lenders. 12 The Fourth Amendment provided for, among other things: (i) the acquisition of PDP; (ii) revised the calculation of the U.S. Borrowing Base to include certain acquired assets of PDP equal to the lesser of (a) the sum of the accounts formula amount and the inventory formula amount (each as defined in the Fourth Amendment), (b) $ 15,000,000 , and (c) 30 % of the aggregate Revolver Commitments; (iii) extending the maturity date of the Credit Facility from April 1, 2025 to March 13, 2027 ; and (iv) updated the interest rate and margin terms such that the loans will bear interest at a rate equal to (1) SOFR, (2) the U.S. Base Rate, (3) the Sterling Overnight Index Average Reference Rate (“SONIA”) for loans denominated in Sterling, and (4) the Euro Interbank Offered Rate (“EUIBOR”) for loans denominated in Euros, plus in each case, an applicable margin, which is between 0.50 % and 2.50 % for Base Rate Loans and 1.75 % and 3.50 % for Term SOFR Loans, SONIA Rate Loans and EUIBOR Loans. 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 (i) a rate published by Bank of America or the U.S. Bloomberg Short-Term Bank Yield Index (“BSBY”) rate for loans denominated in U.S. Dollars, (ii) the Sterling Overnight Index Average Reference Rate (“SONIA”) for loans denominated in Sterling, (iii) and the Euro Interbank Offered Rate (“EUIBOR”) for loans denominated in Euros, plus in each case, an applicable margin, which is between 0.50 % to 2.50 % for base rate loans and UK base rate loans, and 1.75 % to 3.50 % for U.S. BSBY rate loans, U.S. BSBY daily floating rate loans and UK alternative currency loans. In addition, Turtle Beach is required to pay a commitment fee on the unused revolving loan commitment at a rate ranging from 0.375 % to 0.50 % and letter of credit fees and agent fees. As of June 30, 2024, interest rates for outstanding borrowings were 9.10 % for base rate loans and 7.19 % for Term SOFR loans. The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met or certain other events occur (as set forth 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. As of June 30, 2024, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $ 34.6 million. Term Loan On March 13, 2024, Turtle Beach and certain of its subsidiaries entered into a new financing agreement with Blue Torch Finance, LLC, (“Blue Torch”), pursuant to which Blue Torch for an aggregate amount of $ 50 million (the “Term Loan Facility”), the proceeds of which were used to (i) fund a portion of the PDP acquisition purchase price; (ii) repay certain existing indebtedness of the acquired business; (iii) to pay fees and expenses related to such transactions and (iv) for general corporate purposes. The Term Loan Facility will amortize in a monthly amount equal to 0.208333 % during the first two years and 0.416667 % during the third year and may be prepaid at any time subject to a prepayment premium during the first year of the interest payments payable during the first year plus 3.00 %. The Term Loan Facility is secured by substantially all of the assets of the Company and its subsidiaries which are party to the Term Loan Facility. The Term Loan Facility (a) matures on March 13, 2027 ; (b) bears interest at a rate equal to (i) a base rate plus 7.25 % per annum for Reference Rate Loans and Secured Overnight Financing Rate (“SOFR”) plus 8.25 % per annum for SOFR Loans if the total net leverage ratio is greater than or equal to 2.25 x and (ii) a base rate plus 6.75 % per annum for Reference Rate Loans and SOFR plus 7.75 % per annum for SOFR Loans if the total net leverage ratio is less than 2.25 x; and (c) is subject to certain affirmative, negative and financial covenants, including a minimum liquidity covenant and a quarterly total net leverage ratio covenant. As of June 30, 2024 , interest rates for outstanding borrowings was 13.69 %. As of June 30, 2024 , the Company was in compliance with all financial covenants under the Term Loan. Note 9. Income Taxes Generally, in order to determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, 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 in a jurisdiction, the Company determines the provision for income taxes based on actual year-to-date income (loss) which it has done for certain jurisdictions for the quarter ended June 30, 2024. 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. 13 The following table presents the Company’s income tax expense and effective income tax rate: Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 (in thousands) Income tax expense (benefit) $ 841 $ ( 54 ) $ ( 5,547 ) $ ( 124 ) Effective income tax rate ( 12.6 %) 0.3 % 42.9 % 0.5 % The effective tax rate for the three and six months ended June 30, 2024 was primarily impacted by the change in U.S. valuation allowance related to the acquisition of PDP, foreign taxes, state tax and interest on uncertain tax positions. 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 June 30, 2024, the Company had uncertain tax positions of $ 2.8 million , inclusive of $ 0.6 million of interest and penalties. As required by the authoritative guidance on accounting for income taxes, the Company evaluates the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred taxes will not be realized. The Company considers all positive and negative evidence in determining if, based on the weight of such evidence, a valuation allowance is required. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, the Company establishes a valuation allowance. Due to the significant 2022 pre-tax loss, coupled with cumulative book losses projected in early future years, the Company recorded a valuation allowance on its net U.S. deferred tax assets as of December 31, 2022. While the Company continues to maintain this valuation allowance for the three and six months ended June 30, 2024 , it did release $ 6.4 million of valuation allowance for PDP acquired net deferred tax liabilities. The Company is subject to income taxes domestically and in various foreign jurisdictions. 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 2019 through 2021, and the state tax years open under the statute of limitations are 2019 through 2022. Note 10. Equity and Stock-Based Compensation Stock Repurchase Activity On April 9, 2019, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $ 15.0 million of its common stock. Any repurchases under the program will be made from time to time on the open market at prevailing market prices. On April 1, 2021, the Board of Directors approved an extension and expansion of this stock repurchase program up to $ 25.0 million of its common shares, expiring April 9, 2023 . On March 3, 2023, the Company’s Board of Directors approved a two-year extension of this stock repurchase plan. On April 9, 2024, the Board of Directors approved an additional expansion of this stock repurchase program to up to $ 55 million of the Company’s common shares. During the three and six months ended June 30, 2024 , the Company has repurchased 1.0 million shares of its common stock for a total cost of $ 15.2 million. 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 Six Months Ended June 30, June 30, 2024 2023 2024 2023 (in thousands) Cost of revenue $ 159 $ 162 $ 290 $ 337 Selling and marketing 375 410 862 900 Research and development 273 324 497 680 General and administrative 39 4,074 302 5,012 Total stock-based compensation $ 846 $ 4,970 $ 1,951 $ 6,929 14 The following table presents the stock activity and the total number of shares available for grant as of June 30, 2024: (in thousands) Balance at December 31, 2023 1,059 Options Cancelled 1 Restricted Stock Granted ( 205 ) Restricted Stock Forfeited 19 Performance Shares Granted ( 171 ) Balance at June 30, 2024 703 Stock Option Activity Options Outstanding Number of Shares Underlying Outstanding Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value (in years) Outstanding at December 31, 2023 1,041,452 $ 9.10 4.22 $ 3,137,285 Options Granted - - Options Exercised ( 346,842 ) 8.27 Options Forfeited ( 824 ) 60.87 Outstanding at June 30, 2024 693,786 $ 9.45 4.85 $ 4,060,476 Vested and expected to vest at June 30, 2024 695,434 $ 9.53 4.85 $ 4,060,476 Exercisable at June 30, 2024 693,421 $ 9.49 4.85 $ 4,060,476 Stock options are time-based and the majority are exercisable within 10 years of the date of grant, but only to the extent they have vested. The options generally vest as specified in the option agreements subject to acceleration in certain circumstances. In the event participants in the plan cease to be employed or engaged by the Company, all vested options would be forfeited if they are not exercised within 90 days. Forfeitures on option grants are estimated at 10 % for non-executives and 0 % for executives based on evaluation of historical and expected future turnover. Stock-based compensation expense was recorded net of estimated forfeitures, such that expense was recorded only for those stock-based awards expected to vest. The Company reviews this assumption periodically and will adjust it if it is not representative of future forfeiture data and trends within employee types (executive vs. non-executive). Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. The aggregate intrinsic value of options exercised was $ 2.3 million for the six months ended June 30, 2024. The Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted as of the grant date. There were no new options granted during the six months ended June 30, 2024. The total estimated fair value of employee options vested during the six months ended June 30, 2024 was $ 1.2 million . As of June 30, 2024 , total unrecognized compensation cost related to non-vested stock options granted to employees was less than $ 0.1 million, which is expected to be recognized over a remaining weighted average vesting period of 0.5 years. Restricted Stock Activity Shares Weighted Average Grant Date Fair Value Per Share Nonvested restricted stock at December 31, 2023 764,942 $ 14.76 Granted 205,268 17.05 Vested ( 317,552 ) 14.16 Shares forfeited ( 19,236 ) 10.47 Nonvested restricted stock at June 30, 2024 633,422 $ 15.93 15 As of June 30, 2024, total unrecognized compensation costs related to the nonvested restricted stock awards was $ 9.1 million , which will be recognized over a remaining weighted average vesting period of 1.5 years. Performance-Based Restricted Share Units As of June 30, 2024 , the Company had 253,395 performance-based restricted share units outstanding. On April 1, 2024, the Company granted 171,393 PSUs to certain executives, of which 50 % vest based on achievement of defined Company stock price appreciation over the period of April 1, 2024 through May 9, 2025, and 50 % vest based on defined Adjusted EBITDA targets for the period commencing on the second fiscal quarter in 2024 through the first fiscal quarter of 2025. The awards granted on April 1, 2024 are also subject to three year service-based vesting periods with the ability to earn and vest into such units ranging from 0 % to 200 % of the granted PSUs. The remaining 82,002 PSUs outstanding were granted to executives on April 1, 2023 and 2022, and will vest over a three-year period from the respective grant dates based on (i) the amount by which revenue growth exceeds a defined baseline market growth each year and (ii) the achievement of specified tiers of Adjusted EBITDA as a percentage of net revenue each year, with the ability to earn and vest into such units ranging from 0 % to 200 % of the granted PSUs. As of June 30, 2024 , achievement of the performance conditions associated with the outstanding 2024, 2023 and 2022 performance shares was deemed not probable. Note 11. Net Income (Loss) Per Share The following table sets forth the computation of basic and diluted net income (loss) per share of common stock attributable to common stockholders: Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 (in thousands, except per-share data) Net income (loss) $ ( 7,524 ) $ ( 15,920 ) $ ( 7,369 ) $ ( 22,625 ) Weighted average common shares outstanding — Basic 21,252 17,156 19,795 16,869 Plus incremental shares from assumed conversions: Dilutive effect of restricted stock — — — — Dilutive effect of stock options — — — — Dilutive effect of warrants — — — — Weighted average common shares outstanding — Diluted 21,252 17,156 19,795 16,869 Net income (loss) per share: Basic $ ( 0.35 ) $ ( 0.93 ) $ ( 0.37 ) $ ( 1.34 ) Diluted $ ( 0.35 ) $ ( 0.93 ) $ ( 0.37 ) $ ( 1.34 ) Incremental shares from stock options and restricted stock awards are computed using the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 (in thousands) Stock options 782 1,363 820 1,384 Unvested restricted stock awards 646 908 676 860 Warrants 550 550 550 550 Total 1,978 2,821 2,046 2,794 16 Note 12. Segment Information The following table represents total net revenues based on where customers are physically located: Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 (in thousands) North America $ 61,993 $ 32,356 $ 104,152 $ 73,068 Europe and Middle East 11,983 11,861 22,944 21,587 Asia Pacific 2,502 3,765 5,230 4,771 Total net revenues $ 76,478 $ 47,982 $ 132,326 $ 99,426 Note 13. Commitments and Contingencies Litigation The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the amount of any liability that could arise with respect to these actions cannot be determined with certainty, in the Company’s opinion, any such liability will not have a material adverse effect on its consolidated financial position, consolidated results of operations or liquidity. Shareholders Class Action : On August 5, 2013, VTB Holdings, Inc. (“VTBH”) and the Company (f/k/a Parametric Sound Corporation) announced that they had entered into the Merger Agreement pursuant to which VTBH would acquire an approximately 80 % ownership interest and existing shareholders would maintain an approximately 20 % ownership interest in the combined company (the “Merger”). Following the announcement, several shareholders filed class action lawsuits in California and Nevada seeking to enjoin the Merger. The plaintiffs in each case alleged that members of the Company’s Board of Directors breached their fiduciary duties to the shareholders by agreeing to a merger that allegedly undervalued the Company. VTBH and the Company were named as defendants in these lawsuits under the theory that they had aided and abetted the Company’s Board of Directors in allegedly violating their fiduciary duties. The plaintiffs in both cases sought a preliminary injunction seeking to enjoin closing of the Merger, which, by agreement, was heard by the Nevada court with the California plaintiffs invited to participate. On December 26, 2013, the court in the Nevada case denied the plaintiffs’ motion for a preliminary injunction. Following the closing of the Merger, the Nevada plaintiffs filed a second amended complaint, which made essentially the same allegations and sought monetary damages as well as an order rescinding the Merger. The California plaintiffs dismissed their action without prejudice, and sought to intervene in the Nevada action, which was granted. Subsequent to the intervention, the plaintiffs filed a third amended complaint, which made essentially the same allegations as prior complaints and sought monetary damages. On June 20, 2014, VTBH and the Company moved to dismiss the action, but that motion was denied on August 28, 2014. On September 14, 2017, a unanimous en banc panel of the Nevada Supreme Court granted defendants’ petition for writ of mandamus and ordered the trial court to dismiss the complaint but provided a limited basis upon which plaintiffs could seek to amend their complaint. Plaintiffs amended their complaint on December 1, 2017 to assert the same claims in a derivative capacity on behalf of the Company, as a well as in a direct capacity, against VTBH, Stripes Group, LLC, SG VTB Holdings, LLC, and the former members of the Company’s Board of Directors. All defendants moved to dismiss this amended complaint on January 2, 2018, and those motions were denied on March 13, 2018. Defendants petitioned the Nevada Supreme Court to reverse this ruling on April 18, 2018. On June 15, 2018, the Nevada Supreme Court denied defendants’ writ petition without prejudice. The district court subsequently entered a pretrial schedule and set trial for November 2019. On January 18, 2019, the district court certified a class of shareholders of the Company as of January 15, 2014. On October 11, 2019, the parties notified the district court that they had reached a settlement that would resolve the pending action if ultimately approved by the Court. On January 13, 2020, the district court preliminarily approved the settlement between the plaintiffs and all defendants. A final hearing was held on May 18, 2020, wherein the Court approved the settlement and entered final judgment. On May 22, 2020, PAMTP LLC, which purports to hold the claims of eight shareholders who opted out of the class settlement described above, brought suit against the Company, the Company’s former Chief Executive Officer, Juergen Stark, Stripes Group, LLC, SG VTB Holdings, LLC, Kenneth Fox, and former members of the Company’s Board of Directors in Nevada state court. This opt-out action asserts the same direct claims that were asserted by the class of shareholders described above. The defendants filed two motions to dismiss this complaint, which were heard on August 10, 2020. The Court denied those motions by order of August 20, 2020. The case was tried in August 2021 and all remaining defendants, including the Company, prevailed on all counts with final judgment entered in their favor on September 3, 2021. Plaintiff appealed that judgment. On June 6, 2024, the Nevada Supreme Court affirmed the judgment in Defendants’ favor and subsequently denied Plaintiff’s petition for rehearing on July 22, 2024. Employment Litigation: On April 20, 2017, a former employee filed an action in the Superior Court for the County of San Diego, State of California. The complaint alleges claims including wrongful termination, retaliation and various other provisions of the California Labor Code. 17 The complaint seeks unspecified economic and non-economic losses, as well as allegedly unpaid wages, unreimbursed business expenses statutory penalties, interest, punitive damages and attorneys’ fees. The Company filed a cross-complaint against the former employee on May 25, 2017 for certain activities related to his employment with the Company. The matter was tried between September 24 and October 7, 2021. On October 8, 2021 a jury rendered a unanimous verdict in favor of the Company on the employment claims. The Court granted a directed verdict to the Company on its cross-complaint against the former employee. Judgment was entered in favor of the Company on October 27, 2021. On December 20, 2021, the former employee filed a notice of appeal of the judgment. On November 14, 2023, the court of appeal issued its opinion affirming the judgment in favor of the Company. On the Company’s cross-complaint, the court of appeal directed the Company to elect either punitive or statutory treble damages, but otherwise affirmed. On March 8, 2024, the Superior Court entered an amended judgment in favor of the Company and awarding the Company monetary damages, injunctive relief, attorneys’ fees and costs. Insolvency Dispute in Germany: On February 15, 2024, TBC Holding Company LLC (“TBCH”), a wholly-owned subsidiary of Turtle Beach Corporation, was served with a lawsuit that was brought to the German Higher Regional Court in Stade by the insolvency administrator of KJE Europe GmbH, a company registered and existing under the laws of Germany. In his complaint, the insolvency administrator claims that TBCH is liable to reimburse any payments received by the TBCH under a certain settlement agreement with KJE Europe GmbH dated June 30, 2020. TBCH filed its statement of defense to the complaint on April 30, 2024 and the insolvency administrator filed his response in a brief on June 11, 2024. TBCH does not believe the claims have merit and intends to defend itself in this proceeding. The Company will continue to vigorously defend itself in the foregoing unresolved matters. However, litigation and investigations are inherently uncertain. Accordingly, the Company cannot predict the outcome of these matters. The Company has not recorded any accrual at June 30, 2024 for contingent losses associated with these matters based on its belief that losses, while possible, are not probable. Further, any possible range of loss cannot be reasonably estimated at this time. The unfavorable resolution of these matters could have a material adverse effect on the Company’s business, results of operations, financial condition, or cash flows. The Company is engaged in other legal actions, not described above, arising in the ordinary course of its business and, while there can be no assurance, believes that the ultimate outcome of these other legal actions will not have a material adverse effect on its business, results of operations, financial condition, or cash flows. Warranties The Company warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product. Warranties are generally fulfilled by replacing defective products with new products. The following table provides the changes in our product warranty reserve, which are included in accrued liabilities: Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 (in thousands) Warranty, beginning of period $ 687 $ 616 $ 670 $ 618 Warranty costs accrued 263 190 483 375 Settlements of warranty claims ( 215 ) ( 166 ) ( 418 ) ( 353 ) Warranty, end of period $ 735 $ 640 $ 735 $ 640 Operating Leases - Right of Use Assets The Company determines whether an arrangement is a lease at inception. The Company leases office spaces that provide for future minimum rental lease payments under non-cancelable operating leases that have remaining lease terms of one year to nine years , and do not contain any material residual value guarantees or material restrictive covenants. The components of the right-of-use assets and lease liabilities were as follows: Balance Sheet Classification June 30, 2024 (in thousands) Right-of-use assets Other assets $ 9,717 Lease liability obligations, current Other current liabilities $ 2,108 Lease liability obligations, noncurrent Other liabilities 7,714 Total lease liability obligations $ 9,822 Weighted-average remaining lease term (in years) 4.5 Weighted-average discount rate 8.6 % 18 During the six months ended June 30, 2024, the Company recognized approximately $ 0.8 million of lease costs in operating expenses and approximately $ 0.9 million of operating cash flows from operating leases. Approximate future minimum lease payments for the Company’s right of use assets over the remaining lease periods as of June 30, 2024, are as follows: (in thousands) 2024 $ 1,174 2025 2,360 2026 2,314 2027 2,284 2028 1,282 Thereafter 2,007 Total minimum payments 11,421 Less: Imputed interest ( 1,599 ) Total $ 9,822 19