Turtle Beach Corp 10-Q

Item 1. Financial Statements. Turtle Beach Corporation Condensed Consolidated Balance Sheets September 30, December 31, 2020 2019 (unaudited) ASSETS (in thousands, except par value and share amounts) Current Assets: Cash and cash equivalents $ 27,265 $ 8,249 Accounts receivable, net 53,825 44,530 Inventories 79,453 45,711 Prepaid expenses and other current assets 8,451 4,057 Total Current Assets 168,994 102,547 Property and equipment, net 5,004 3,962 Deferred income taxes 7,800 7,439 Goodwill 8,178 8,515 Intangible assets, net 5,325 6,011 Other assets 6,230 2,877 Total Assets $ 201,531 $ 131,351 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Revolving credit facility $ — $ 15,655 Accounts payable 63,699 22,511 Other current liabilities 34,432 26,422 Total Current Liabilities 98,131 64,588 Deferred income taxes 140 153 Other liabilities 7,524 3,223 Total Liabilities 105,795 67,964 Commitments and Contingencies Stockholders’ Equity Common stock, $ 0.001 par value - 25,000,000 shares authorized; 15,186,990 and 14,488,182 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively 15 14 Additional paid-in capital 187,065 176,776 Accumulated deficit ( 91,076 ) ( 113,519 ) Accumulated other comprehensive income (loss) ( 268 ) 116 Total Stockholders’ Equity 95,736 63,387 Total Liabilities and Stockholders’ Equity $ 201,531 $ 131,351 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 3 Turtle Beach Corporation Condensed Consolidated Statements of Operations (unaudited) Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2020 2019 2020 2019 (in thousands, except per-share data) Net revenue $ 112,494 $ 46,723 $ 227,181 $ 132,899 Cost of revenue 66,358 31,680 141,033 89,898 Gross profit 46,136 15,043 86,148 43,001 Operating expenses: Selling and marketing 11,857 10,150 29,064 24,581 Research and development 3,260 2,198 8,688 5,388 General and administrative 6,799 5,214 19,232 16,057 Total operating expenses 21,916 17,562 56,984 46,026 Operating income (loss) 24,220 ( 2,519 ) 29,164 ( 3,025 ) Interest expense 103 240 355 595 Other non-operating expense (income), net ( 101 ) 302 ( 1,520 ) ( 1,430 ) Income (loss) before income tax 24,218 ( 3,061 ) 30,329 ( 2,190 ) Income tax expense 6,424 63 7,886 252 Net income (loss) $ 17,794 $ ( 3,124 ) $ 22,443 $ ( 2,442 ) Net income (loss) per share Basic $ 1.20 $ ( 0.22 ) $ 1.53 $ ( 0.17 ) Diluted $ 1.04 $ ( 0.22 ) $ 1.41 $ ( 0.17 ) Weighted average number of shares: Basic 14,845 14,506 14,642 14,477 Diluted 17,154 14,506 15,961 14,477 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 4 Turtle Beach Corporation Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 (in thousands) Net income (loss) $ 17,794 $ ( 3,124 ) $ 22,443 $ ( 2,442 ) Other comprehensive income (loss): Foreign currency translation adjustment 548 ( 330 ) ( 384 ) ( 323 ) Other comprehensive income (loss) 548 ( 330 ) ( 384 ) ( 323 ) Comprehensive income (loss) $ 18,342 $ ( 3,454 ) $ 22,059 $ ( 2,765 ) See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 5 Turtle Beach Corporation Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30, 2020 September 30, 2019 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 22,443 $ ( 2,442 ) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,302 3,477 Amortization of intangible assets 665 413 Amortization of debt financing costs 142 142 Stock-based compensation 3,977 2,555 Deferred income taxes ( 375 ) — Change in sales returns reserve 2,173 ( 4,262 ) Provision for obsolete inventory 2,216 2,081 Provision for doubtful accounts — ( 8 ) Unrealized gain on financial instrument obligation — ( 1,601 ) Increase in fair value of contingent consideration 510 — Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ( 11,468 ) 30,017 Inventories ( 35,957 ) ( 12,622 ) Accounts payable 40,763 14,426 Prepaid expenses and other assets ( 4,322 ) ( 1,005 ) Income taxes payable 6,769 ( 1,569 ) Other liabilities 1,800 ( 2,298 ) Net cash provided by operating activities 32,638 27,304 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment ( 3,918 ) ( 1,628 ) Acquisition of a business, net of cash acquired — ( 12,667 ) Net cash used for investing activities ( 3,918 ) ( 14,295 ) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on revolving credit facilities 185,486 148,087 Repayment of revolving credit facilities ( 201,141 ) ( 158,911 ) Proceeds from sale of equity securities 4,372 — Proceeds from exercise of stock options and warrants 2,155 214 Repurchase of common stock — ( 1,941 ) Repurchase of common stock to satisfy employee tax withholding obligations ( 215 ) ( 201 ) Net cash used for financing activities ( 9,343 ) ( 12,752 ) Effect of exchange rate changes on cash and cash equivalents ( 361 ) ( 298 ) Net increase (decrease) in cash and cash equivalents 19,016 ( 41 ) Cash and cash equivalents - beginning of period 8,249 7,078 Cash and cash equivalents - end of period $ 27,265 $ 7,037 SUPPLEMENTAL DISCLOSURE OF INFORMATION Cash paid for interest $ 245 $ 488 Cash paid for income taxes $ 800 $ 447 Reclassification of financial instrument obligation $ — $ 6,248 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 6 Turtle Beach Corporation Condensed Consolidated Statement of 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 Net income — — — 17,794 — 17,794 Other comprehensive income, net of tax — — — — 548 548 Issuance of restricted stock 34 — — — — — Repurchase of common stock and retirement of related treasury shares ( 6 ) — ( 107 ) — — ( 107 ) Stock options exercised 327 — 2,096 — — 2,096 Proceeds of sales of equity securities 238 — 4,372 — — 4,372 Stock-based compensation — — 1,572 — — 1,572 Balance at September 30, 2020 15,187 $ 15 $ 187,065 $ ( 91,076 ) $ ( 268 ) $ 95,736 7 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, 2018 14,268 $ 14 $ 169,421 $ ( 131,463 ) $ ( 476 ) $ 37,496 Net income — — — 3,055 — 3,055 Other comprehensive income, net of tax — — — — 165 165 Reclassification of financial instrument obligation — — 6,248 — — 6,248 Issuance of restricted stock 12 — — — — — Repurchase of common stock and retirement of related treasury shares ( 6 ) — ( 101 ) — — ( 101 ) Issuance of common stock upon exercise of warrants 295 — — — — — Stock options exercised 6 — 23 — — 23 Stock-based compensation — — 522 — — 522 Balance at March 31, 2019 14,575 $ 14 $ 176,113 $ ( 128,408 ) $ ( 311 ) $ 47,408 Net loss — — — ( 2,373 ) — ( 2,373 ) Other comprehensive income, net of tax — — — — ( 158 ) ( 158 ) Issuance of restricted stock 56 — — — — — Repurchase of common stock and retirement of related treasury shares ( 4 ) — ( 44 ) — — ( 44 ) Common stock buyback ( 156 ) — ( 1,499 ) — — ( 1,499 ) Stock options exercised 22 — 71 — — 71 Stock-based compensation — — 1,003 — — 1,003 Balance at June 30, 2019 14,493 14 175,644 ( 130,781 ) ( 469 ) 44,408 Net loss — — — ( 3,124 ) ( 3,124 ) Other comprehensive income, net of tax — — — — ( 330 ) ( 330 ) Issuance of restricted stock 43 1 ( 1 ) — — — Repurchase of common stock and retirement of related treasury shares ( 6 ) — ( 56 ) — — ( 56 ) Common stock buyback ( 50 ) — ( 442 ) — — ( 442 ) Stock options exercised 33 — 120 — — 120 Stock-based compensation - — 1,030 — — 1,030 Balance at September 30, 2019 14,513 $ 15 $ 176,295 $ ( 133,905 ) $ ( 799 ) $ 41,606 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 8 Turt le 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® 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 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, 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 nine months 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. 9 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 , which did not have a material impact on the consolidated 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 there were no expenses for the three months ended September 30, 2020, and $ 0.4 million recorded as a component of “General and administrative” expenses in the Condensed Consolidated Statements of Operations for the nine months ended September 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 461 Accounts payable ( 5,399 ) Accrued and other current liabilities ( 3,704 ) Contingent consideration ( 1,592 ) Other non-current liabilities ( 328 ) Total identifiable net assets 4,489 Goodwill 8,178 Total consideration $ 12,667 The fair value of ROCCAT’s assets and liabilities was determined based on estimates and assumptions that management believes are reasonable. These adjustments primarily relate to certain short-term assets, intangible assets, and certain liabilities including contingent consideration. The Company and the sellers of ROCCAT have agreed to settle an amount related to sales returns and allowances for approximately $ 1.8 million, which is included in “Accrued and other current liabilities” in the table above. The goodwill from the acquisition of ROCCAT, which is fully deductible for tax purposes, consists largely of synergies and economies of scale expected from combining the operations of ROCCAT and the Company’s existing business. 10 The fair value of ROCCAT’s identifiable intangible assets was determined using the “income approach,” which requires a forecast of all of the expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method. Some of the more significant assumptions inherent in the development of intangible asset values include: the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, the assessment of the intangible asset’s life cycle, as well as other factors. The following table summarizes key information underlying intangible assets related to the ROCCAT acquisition: (In thousands) Life Amount Customer relationships 7 Years $ 2,119 Tradenames 10 Years 2,686 Developed technology 7 Years 784 Total $ 5,589 For the three and nine months ended September 30, 2020, revenue related to ROCCAT products was $ 9.6 million and $ 22.0 million, respectively. The Company is unable to provide the results of operations attributable to ROCCAT as those operations were substantially integrated into our legacy business. The Company has not presented combined pro forma financial information of the Company and the pre-acquisition ROCCAT business because the results of operations of the acquired business are considered immaterial. In connection with the $ 1.6 million fair value of the potential $ 3.4 million earn-outs, for the year ended December 31, 2019, the fair value of the contingent consideration has increased as a result of current year revenue performance. 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 September 30, 2020 and December 31, 2019, the Company had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted . The following is a summary of the carrying amounts and estimated fair values of our financial instruments at September 30, 2020 and December 31, 2019 . September 30, 2020 December 31, 2019 Reported Fair Value Reported Fair Value (in thousands) Financial Assets and Liabilities: Cash and cash equivalents $ 27,265 $ 27,265 $ 8,249 $ 8,249 Revolving credit facility $ — $ — $ 15,655 $ 15,655 Contingent consideration liabilities $ 1,631 $ 1,631 $ 1,121 $ 1,121 Cash equivalents are stated at amortized cost, which approximates fair value as of the consolidated balance sheet dates, due to the short period of time to maturity; and accounts receivable and accounts payable are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment. The carrying value of the Credit Facility equals fair value as the stated interest rate approximates market rates currently available to the Company, which is considered a Level 2 input. The Company values contingent consideration related to business combinations using a weighted probability calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows. 11 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 Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (in thousands) Balance, beginning of period $ 7,608 $ 4,046 $ 8,815 $ 9,212 Reserve accrual 7,243 4,477 14,731 9,757 Recoveries and deductions, net ( 3,863 ) ( 3,573 ) ( 12,558 ) ( 14,019 ) Balance, end of period $ 10,988 $ 4,950 $ 10,988 $ 4,950 Note 6. Composition of Certain Financial Statement Items Inventories Inventories consist of the following: September 30, 2020 December 31, 2019 (in thousands) Raw materials $ 1,106 $ 1,288 Finished goods 78,347 44,423 Total inventories $ 79,453 $ 45,711 Property and Equipment, net Property and equipment, net, consists of the following: September 30, 2020 December 31, 2019 (in thousands) Machinery and equipment $ 2,116 $ 1,783 Software and software development 963 439 Furniture and fixtures 1,083 601 Tooling 6,203 5,340 Leasehold improvements 1,687 1,326 Demonstration units and convention booths 13,803 12,051 Total property and equipment, gross 25,855 21,540 Less: accumulated depreciation and amortization ( 20,851 ) ( 17,578 ) Total property and equipment, net $ 5,004 $ 3,962 Other Current Liabilities Other current liabilities consist of the following: September 30, 2020 December 31, 2019 (in thousands) Accrued royalty 3,690 3,880 Accrued freight 4,701 1,977 Accrued employee expenses 4,171 3,674 Accrued marketing 3,467 3,695 Accrued expenses 18,403 13,196 Total other current liabilities $ 34,432 $ 26,422 12 Other non-operating expense (income), net Other non-operating expense (income), net consists of the following: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (in thousands) Unrealized gain on financial instrument obligation $ — $ — $ — $ ( 1,601 ) Acquisition-related settlement — — ( 1,702 ) — Other non-operating expense (income) ( 276 ) 302 ( 328 ) 171 Change in fair value of contingent consideration 175 — 510 — Total other non-operating expense (income),net $ ( 101 ) $ 302 $ ( 1,520 ) $ ( 1,430 ) In the nine months ended September 30, 2020, the Company recorded income of approximately $ 1.7 million for a settlement of claims unrelated to purchase price pursuant to a previously closed acquisition. Note 7. Goodwill and Other Intangible Assets Acquired Intangible Assets Acquired identifiable intangible assets, and related accumulated amortization, as of September 30, 2020 and December 31, 2019 consist of: September 30, 2020 Gross Carrying Value Accumulated Amortization Net Book Value (in thousands) Customer relationships $ 7,915 $ 5,444 $ 2,471 Tradenames 2,686 358 2,328 Developed technology 784 149 635 Foreign currency ( 1,111 ) ( 1,002 ) ( 109 ) Total Intangible Assets $ 10,274 $ 4,949 $ 5,325 December 31, 2019 Gross Carrying Value Accumulated Amortization Net Book Value (in thousands) Customer relationships $ 7,915 $ 5,024 $ 2,891 Tradenames 2,686 157 2,529 Developed technology 784 65 719 Foreign currency ( 1,004 ) ( 876 ) ( 128 ) Total Intangible Assets $ 10,381 $ 4,370 $ 6,011 In connection with the October 2012 acquisition of TB Europe, the acquired intangible assets related to customer relationships is being amortized over an estimated useful life of thirteen years with the amortization being included within sales and marketing expense. In May 2019, the Company completed its acquisition of the business and assets of ROCCAT. The acquired intangible assets relating to developed technology, customer relationships and trade name are subject to amortization. Refer to Note 3, “Acquisitions” for additional information related to ROCCAT’s identifiable intangible assets. Amortization expense related to definite lived intangible assets of $ 0.2 million and $ 0.7 million was recognized for the three and nine months ended September 30, 2020, respectively, and $ 0.2 million and $ 0.4 million for the three and nine months ended September 30, 2019, respectively. 13 As of September 30, 2020, estimated annual amortization expense related to definite lived intangible assets in future periods is as follows: (in thousands) 2020 $ 237 2021 901 2022 866 2023 837 2024 813 Thereafter 1,780 Total $ 5,434 Changes in the carrying values of goodwill for the nine months ended September 30, 2020 are as follows: (in thousands) Balance as of January 1, 2020 $ 8,515 ROCCAT acquisition opening balance adjustment ( 337 ) Balance as of September 30, 2020 $ 8,178 Note 8. Revolving Credit Facility and Long-Term Debt September 30, 2020 December 31, 2019 (in thousands) Revolving credit facility, maturing March 2024 $ - $ 15,655 Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was $ 0.1 million and $ 0.4 million for the three and nine months ended September 30, 2020, respectively, and $ 0.2 million and $ 0.6 million for the three and nine months ended September 30, 2019, respectively. Amortization of deferred financing costs was $ 47,000 and $ 0.1 million for the three and nine months ended September 30, 2020, respectively, and $ 47,000 and $ 0.1 million for the three and nine months ended September 30, 2019, respectively. Revolving Credit Facility On December 17, 2018, Turtle Beach and certain of its subsidiaries entered into an amended and restated loan, guaranty and security agreement (“Credit Facility”) with Bank of America, N.A. (“Bank of America”), as Agent, Sole Lead Arranger and Sole Bookrunner, which replaced the then existing asset-based revolving loan agreement. The Credit Facility, which expires on March 5, 2024 , provides for a line of credit of up to $ 80 million inclusive of a sub-facility limit of $ 12 million for TB Europe, a wholly-owned subsidiary of Turtle Beach. In addition, the Credit Facility provides for a $ 40 million accordion feature and the ability to increase the borrowing base with a FILO Loan of up to $ 6.8 million. On May 31, 2019, the Company amended the Credit Facility to provide for, amongst other items, (i) the addition of TBC Holding Company LLC, a wholly-owned subsidiary of VTB, as an obligor and (ii) the ability to make investments in TB Germany GmbH, a wholly-owned subsidiary of TB Europe, of up to $ 4 million in connection with the acquisition of the business and assets of ROCCAT and up to an additional $ 4 million annually. The maximum credit availability for loans and letters of credit under the Credit Facility is governed by a borrowing base determined by the application of specified percentages to certain eligible assets, primarily eligible trade accounts receivable and inventories, and is subject to discretionary reserves and revaluation adjustments. The Credit Facility may be used for working capital, the issuance of bank guarantees, letters of credit and other corporate purposes. 14 Amounts outstanding under the Credit Facility bear interest at a rate equal to either a rate published by Bank of America or the LIBOR rate, plus in each case, an applicable margin, which is between 0.50 % to 1.25 % for base rate loans and between 1.25 % to 2.00 % for U.S. LIBOR loans and U.K. loans, and between 2.00 % to 2.75 % for the FILO loan. In addition, Turtle Beach is required to pay a commitment fee on the unused revolving loan commitment at a rate ranging from 0.25 % to 0.50 % and letter of credit fees and agent fees. As of September 30, 2020, interest rates for outstanding borrowings were 3.75 % for base rate loans and 3.00 % for LIBOR rate loans. As of September 30, 2020, there were no outstanding borrowings under the Credit Facility. The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met or certain other events occur (as defined in the Credit Facility). At such times, the Credit Facility requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the last day of each fiscal quarter. The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions, including the Company’s ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and consolidations, engage in sale leaseback transactions and transactions with affiliates, and encumber and dispose of assets. Obligations under the Credit Facility are secured by a security interest and lien upon substantially all of the Company’s assets. As of September 30, 2020, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $ 79.8 million. Note 9. Income Taxes In order to determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate (“ETR”), which is based on expected annual income and statutory tax rates in the various jurisdictions. However, to the extent that application of the estimated annual effective tax rate is not representative of the quarterly portion of actual tax expense expected to be recorded for the year, the Company determines the provision for income taxes based on actual year-to-date income (loss). Certain significant or unusual items are separately recognized as discrete items in the period during which they occur and can be a source of variability in the effective tax rates from quarter to quarter. The following table presents the Company’s income tax expense and effective income tax rate: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (in thousands) Income tax expense $ 6,424 $ 63 $ 7,886 $ 252 Effective income tax rate 26.5 % ( 2.1 %) 26.0 % ( 11.5 %) Income tax expense for the three and nine months ended September 30, 2020 was $ 6.4 million at an effective tax rate of 26.5 % and $ 7.9 million at an effective tax rate of 26.0 %, respectively. Income tax expense for the three and nine months ended September 30, 2019 was $ 63 thousand at an effective tax rate of ( 2.1 %) and $ 0.3 million at an effective tax rate of ( 11.5 %), respectively. The effective tax rate for the three and nine months ended September 30, 2020 was primarily impacted by permanent items including global intangible low taxed income and executive compensation and, certain state tax expense. The Company is subject to income taxes domestically and in various foreign jurisdictions. Significant judgment is required in evaluating uncertain tax positions and determining the provision for income taxes. The Company recognizes only those tax positions that meet the more-likely-than-not recognition threshold and establishes tax reserves for uncertain tax positions that do not meet this threshold. Interest and penalties associated with income tax matters are included in the provision for income taxes in the condensed consolidated statements of operations. As of September 30, 2020, the Company had uncertain tax positions of $ 2.9 million, inclusive of $ 0.7 million of interest and penalties. 15 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 201 7 through 201 9 , and the state tax years open under the statute of limitations are 201 5 through 201 9 . The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in March 2020. The CARES Act includes several U.S. income tax provisions related to, among other things, net operating loss carrybacks, alternative minimum tax credits, modifications to the net interest deduction limitations, and technical amendments regarding the income tax depreciation of qualified improvement property placed in service after December 31, 2017. The CARES Act is not expected to have a material impact on the Company’s financial results. Note 10. Stock-Based Compensation Total estimated stock-based compensation expense for employees and non-employees, related to all of the Company’s stock-based awards, was as follows: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (in thousands) Cost of revenue $ 284 $ 108 $ 622 $ 76 Selling and marketing 331 200 809 490 Research and development 196 123 492 311 General and administrative 761 599 2,054 1,678 Total stock-based compensation $ 1,572 $ 1,030 $ 3,977 $ 2,555 The following table presents the stock activity and the total number of shares available for grant as of September 30, 2020: (in thousands) Balance at December 31, 2019 1,777 Options granted ( 894 ) Options cancelled 45 Restricted stock granted ( 425 ) Forfeited/Expired restricted stock added back 9 Balance at September 30, 2020 512 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, 2019 2,142,925 $ 7.83 7.13 $ 6,545,982 Granted 894,254 7.12 Exercised ( 342,542 ) 6.29 Forfeited ( 45,463 ) 9.71 Outstanding at September 30, 2020 2,649,174 $ 7.76 7.53 $ 28,415,143 Vested and expected to vest at September 30, 2020 2,571,844 $ 7.78 7.48 $ 27,650,352 Exercisable at September 30, 2020 1,111,996 $ 7.38 5.59 $ 12,566,658 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, then all of the 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 16 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 $ 3.9 million for the nine months ended September 30, 2020. The Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted as of the grant date. The following are the assumptions for options granted during the nine months ended September 30, 2020 . Expected term (in years) 6.1 Risk-free interest rate 0.4%- 1.4% Expected volatility 50.1%- 58.9% Dividend rate 0 % Each of these inputs is subjective and generally requires significant judgment to determine. The weighted average grant date fair value of options granted during the nine months ended September 30, 2020 was $ 3.70 . The total estimated fair value of employee options vested during the nine months ended September 30, 2020 was $ 1.4 million. As of September 30, 2020, total unrecognized compensation cost related to nonvested stock options granted to employees was $ 5.7 million, which is expected to be recognized over a remaining weighted average vesting period of 2.8 years. Restricted Stock Activity Shares Weighted Average Grant Date Fair Value Per Share Nonvested restricted stock at December 31, 2019 421,490 $ 15.06 Granted 424,952 7.18 Vested ( 141,424 ) 16.33 Shares forfeited ( 8,789 ) 9.88 Nonvested restricted stock at September 30, 2020 696,229 $ 10.06 As of September 30, 2020, total unrecognized compensation costs related to the nonvested restricted stock awards was $ 6.5 million, which will be recognized over a remaining weighted average vesting period of 2.8 years. Note 11. Stockholder’s Equity At-the-Market Common Stock Issuance  On August 7, 2020, the Company entered into an ATM Equity Offering Sales Agreement (the “Sales Agreement”) with BofA Securities, Inc. (the “Sales Agent”). Pursuant to the terms of the Sales Agreement, the Company may sell from time to time through the Sales Agent shares of the Company’s common stock, par value $ 0.001 per share, having an aggregate offering price of up to $ 30 million. The Company intends to use the net proceeds from the offering, after deducting the Sales Agent’s commissions and the Company’s offering expenses, to support its strategic growth plans, as well as for general corporate purposes. During the three months ended September 30, 2020, the Company sold a total of 237,813 shares of its common stock under the Sales Agreement in the open market at an average gross selling price of $ 18.39 per share for net proceeds of $ 4.4 million. 17 Note 12. 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 Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (in thousands, except per-share data) Net income (loss) $ 17,794 $ ( 3,124 ) $ 22,443 $ ( 2,442 ) Weighted average common shares outstanding — Basic 14,845 14,506 14,642 14,477 Plus incremental shares from assumed conversions: Dilutive effect of restricted stock 364 — 179 — Dilutive effect of stock options 1,396 — 774 — Dilutive effect of warrants 550 — 367 — Weighted average common shares outstanding — Diluted 17,154 14,506 15,961 14,477 Net income (loss) per share: Basic $ 1.20 $ ( 0.22 ) $ 1.53 $ ( 0.17 ) Diluted $ 1.04 $ ( 0.22 ) $ 1.41 $ ( 0.17 ) 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 Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (in thousands) Stock options 126 2,135 783 1,961 Warrants — 550 — 729 Unvested restricted stock awards 79 404 129 330 Total 205 3,089 912 3,020 Note 13. Segment Information The following table represents total net revenues based on where customers are physically located: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (in thousands) North America $ 84,597 $ 33,295 $ 166,779 $ 97,019 United Kingdom 11,498 4,965 24,506 13,111 Europe 12,219 6,489 26,800 18,065 Other 4,180 1,974 9,096 4,704 Total net revenues $ 112,494 $ 46,723 $ 227,181 $ 132,899 18 Note 14. 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, 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 approval 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 CEO, 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. Discovery is ongoing and the case is scheduled for trial in August 2021. Commercial Dispute : On July 20, 2016, BigBen Interactive S.A. (“BigBen”) filed a statement of claim against VTB before the Regional Court of Berlin, Germany. The statement of claim alleged that VTB’s termination of a distribution agreement by and between BigBen and VTB breached the terms thereof and was invalid, and that BigBen was entitled to damages as a result. On September 30, 2020, the Company and BigBen mutually agreed to resolve this claim. 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. 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. Discovery is closed and the case was set for trial on April 6, 2020 in San Diego County Superior Court. Due to the continued closure of the Court, the April 6, 2020 trial date was vacated and the current trial date is February 26, 2021. Settlement of Disputes : On May 5, 2020, Jöllenbeck GmbH and First Wise Media GmbH, two of our distributors and affiliates of the sellers of the ROCCAT business, filed for insolvency in Germany. On June 30, 2020, the Company entered into a Settlement Agreement with those companies and the sellers of the ROCCAT business pursuant to which, among other things, the Company received a payment for certain 19 outstanding claims and accounts receivable. On July 1, 2020, the insolvency proceedings for the two companies formally commenced. The Company has filed a claim in those proceedings for approximately € 130,000 with respect to the remaining outstanding accounts receivable. The Company will continue to vigorously defend itself in the foregoing 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 September 30, 2020 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 Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (in thousands) Warranty, beginning of period $ 813 $ 752 $ 743 $ 668 Warranty costs accrued 464 162 1,022 663 Settlements of warranty claims ( 316 ) ( 169 ) ( 804 ) ( 586 ) Warranty, end of period $ 961 $ 745 $ 961 $ 745 Operating Leases - Right of Use Assets The Company adopted ASU 2016-02, Leases , on January 1, 2019. 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 year s, 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 September 30, 2020 (in thousands) Right-of-use assets Other assets $ 5,297 Lease liability obligations, current Other current liabilities $ 684 Lease liability obligations, noncurrent Other liabilities 4,764 Total lease liability obligations $ 5,448 Weighted-average remaining lease term (in years) 6.5 Weighted-average discount rate 3.75 % During the nine months ended September 30, 2020, the Company recognized approximately $ 1.0 million of lease costs in operating expenses and approximately $ 0.5 million of operating cash flows from operating leases. 20 Approximate future minimum lease payments for the Company’s right of use assets over the remaining lease periods as of September 30, 2020, are as follows: (in thousands) 2020 $ 164 2021 981 2022 671 2023 556 2024 564 Thereafter 3,506 Total minimum payments 6,442 Less: Imputed interest ( 994 ) Total $ 5,448 21