Turtle Beach Corp 10-K

Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. This discussion summarizes the significant factors affecting our results of operations and the financial condition of our business during each of the fiscal years in the three-year period ended December 31, 2020. Turtle Beach Corporation (herein referred to as the “Company,” “we,” “us,” or “our”), headquartered in White Plains, New York, and incorporated in the state of Nevada in 2010, is a premier audio 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 headsets, keyboards, mice and other accessories brand focused in the personal computer peripherals market. Business Trends Gaming Headset Market Based on sales tracking data from The NPD Group, Inc. (“NPD Group”), the console gaming headset market in our largest market, the United States, increased by 41.3% in 2020. This was the result of unprecedented growth in the console gaming headset market during the pandemic when new gamers entered the market, lapsed gamers started playing again, existing gamers played more, and non-gamers bought headsets for remote learning. The Company’s market share in the United States was over 45% in 2020. Traditionally, the gaming market has grown as new gamers enter and some existing gamers upgraded headsets. However, the emergence of battle royale games that are highly social, collaborative and competitive, contributed to a higher growth in the video game industry and a higher proportion of gamers using headsets. And given that the vast majority of the gaming headset market is driven by replacement and upgrading, this large influx of new gaming headset users could drive an increase in demand for gaming headsets in future years. Additionally, with the COVID-19 pandemic and consumers following stay-at-home guidance, gaming headsets have seen increase driven by an overall increase in gaming, and by work-from-home, school/learn-from-home, and because chatting with friends during online play has become a main form of daily interactivity and communication for many. PC Accessories Market PC gaming in the U.S. has seen a resurgence in popularity the past few years while it continues to be a main gaming platform internationally, driven by big AAA game launches, PC-specific esports leagues, teams and players, content creators and influencers, cross-platform play, and more. While most games are available on multiple platforms, gaming on PC offers advantages including improved graphics, the increased speed and precision of mouse/keyboard controls, and more. Gaming mice and keyboards are engineered to provide gamers with higher-end performance and a superior gaming experience through benefits including faster response times, improved materials and build quality, programmable buttons and keys, software suites to customize and control devices and settings, and more. Audio Accessories Market On January 12, 2021, we announced the acquisition of Neat Microphones (“Neat”) that creates, manufactures and sells high-quality digital USB and analog microphones. Neat‘s accomplished leadership team includes the former founders of Blue Microphones, inventors of the first high-performance USB microphone, and pioneers behind other award-winning microphones that have revolutionized how professionals and consumers capture their voice, music and more. The acquisition enables our entry into the $2.3 billion global microphone market, which is experiencing rapid growth in the digital/USB accessories segment where Neat’s product innovation is focused. Seasonality Our gaming accessories business is seasonal with a significant portion of sales and profits typically occurring around the holiday period. Historically, more than 45% of revenues are generated during the period from September through December as new products are introduced and consumers engage in holiday shopping. In connection with the seasonality of the business, historically the Company’s borrowings on the revolving credit facility increased as a result of the holiday inventory build leading up to year-end and declined on gross receipts during the first quarter of the following year. In 2020, as a result of the unprecedented revenue, the Company ended the year with no outstanding borrowings under its revolving credit facility. 21 COVID-19 Outlook The effects of the global pandemic and the measures being taken in response are uncertain and difficult to predict. As a result of government mandated stay-at-home orders, the Company’s 2020 revenues have exceeded historical levels as the overall gaming and headset markets have experienced an unprecedented surge in demand. However, the risk of a global economic recession may adversely impact the long-term demand and/or pricing for our products, constrain retail sales of our products, constrain supply of our products, or delay the supply of the next generation Xbox and PlayStation ® consoles. Results of Operations Management Overview During 2020, driven by stay-at-home orders, demand surged for everything related to gaming, and supporting the remote “work-from-home” environment, including hardware, software and accessories for both consoles and PC; and Turtle Beach capitalized on this demand and outpaced the market based on the strength of our products and brand as well as our supply and retail execution. In 2020, overall console headset sales increased by $235M over 2019 for North America, of which Turtle Beach revenue increased by $127M, an increase of 52% vs. 42% for the market. Further, our investments to drive growth resulted in the Elo series PC gaming headsets, the first products that blend ROCCAT’s award-winning design and innovation with Turtle Beach’s gaming audio expertise and exclusive audio technologies. As a result, combined with the newly released Vulcan Keyboards and Burst Pro Mouse, revenue related to our ROCCAT products more than doubled in 2020. For 2020, our reported net income was $38.7 million, or diluted net income per share of $2.37, with cash from operating activities of $51 million reflective of higher gross receipts, which was partially offset by certain costs to align inventory levels with elevated consumer demand. Forward looking, we continue to be very excited about the recent launches for PlayStation®5 and Microsoft's new Xbox platform consoles, and to step up our investments to capitalize on new opportunities and, with the integration of the ROCCAT acquisition, the recent Neat acquisition, the excellent team we have here, and our strong continued execution, we will continue to take actions to enable and drive further expansion and growth. This year, ROCCAT introduced its groundbreaking optical switch technology that registers key strokes and mouse clicks that are significantly more responsive than standard switches and, in 2021, ROCCAT will continue filling out its entire lineup with additional keyboard, mouse and headset offerings targeting various price points and performance minded gamers. Whereas, the acquisition of Neat Microphones, whose leadership team includes the former founders of Blue Microphones, inventors of the first high-performance USB microphone, further expands Turtle Beach’s portfolio with a variety of advanced microphone products slated to launch throughout 2021 to meet the growing demand for high-quality, affordable microphones. Finally, we believe the strong underlying consumer demand continues to be driven by greater overall engagement of existing gamers as well as new and lapsed gamers joining the market as new gaming headset users. In addition, non-gamers continue to buy headsets for at-home work, school and socializing. Key Performance Indicators and Non-GAAP Measures Management routinely reviews key performance indicators including revenue, operating income and margins, and earnings per share, among others. In addition, we believe certain other measures provide useful information to management and investors about us and our financial condition and results of operations for the following reasons: (i) they are measures used by our board of directors and management team to evaluate our operating performance; (ii) they are measures used by our management team to make day-to-day operating decisions; (iii) the adjustments made are often viewed as either non-recurring or not reflective of ongoing financial performance and/or have no cash impact on operations; and (iv) the metrics are used by securities analysts, investors and other interested parties as a common operating performance measure to compare results across companies in our industry by adjusting for potential differences caused by variations in capital structures (affecting relative interest expense), and the age and book value of facilities and equipment (affecting relative depreciation and amortization expense). These metrics, however, are not measures of financial performance under accounting principles generally accepted in the United States of America (“GAAP”) and, given the limitations of these metrics as analytical tools, should not be considered a substitute for gross profit, gross margins, net income (loss) or other consolidated income statement data as determined in accordance with GAAP. We consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators: • Adjusted EBITDA is defined as net income (loss) before interest, taxes, depreciation and amortization, stock-based compensation (non-cash) and certain non-recurring special items that we believe are not representative of core operations. • Cash Margins is defined as gross margin excluding depreciation, amortization and stock-based compensation. 22 Adjusted EBITDA Adjusted EBITDA (and a reconciliation to net income, the nearest GAAP financial measure) for the years ended December 31, 2020, 2019 and 2018 are as follows: Year Ended December 31, 2020 2019 2018 (in thousands) Net income $ 38,746 $ 17,944 $ 39,190 Interest expense 467 929 5,335 Depreciation and amortization 5,248 5,198 4,257 Stock-based compensation 5,549 3,558 1,877 Income tax expense (benefit) 13,711 (6,237 ) 1,737 Unrealized loss (gain) on financial instrument obligation — (1,601 ) 5,291 Acquisition-related settlement (1,702 ) — — Change in fair value of contingent consideration (1,121 ) (471 ) — Business transaction expense 550 3,516 — Adjusted EBITDA $ 61,448 $ 22,836 $ 57,687 Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019 Net income for the year ended December 31, 2020 was $38.7 million compared to a net income of $17.9 million in the prior year for the years ended December 31, 2020 and 2019, respectively. For the year ended December 31, 2020, Adjusted EBITDA was $61.4 million compared to $22.8 million, for the year ended December 31, 2019. Net income and Adjusted EBITDA increased primarily due to higher revenue and favorable business mix as the Company capitalized on the surging stay-at-home driven gaming consumer demand and outpaced the market based on brand strength and product availability. Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018 Net income for the year ended December 31, 2019 was $17.9 million compared to a net income of $39.2 million in the prior year, inclusive of a $1.6 million unrealized financial instrument obligation gain and a $5.3 million unrealized financial instrument obligation loss, for the years ended December 31, 2019 and 2018, respectively. For the year ended December 31, 2019, Adjusted EBITDA was $22.8 million compared to $57.7 million, for the year ended December 31, 2018. Net income and Adjusted EBITDA decreased primarily due to a decline in the gaming accessory market from the battle royale driven record levels in the prior year and, certain initial investments in the recently acquired ROCCAT branded products. 23 Financial Results The following table sets forth the Company’s statements of operations for the periods presented: Year Ended December 31, 2020 2019 2018 (in thousands) Net revenue $ 360,093 $ 234,663 $ 287,437 Cost of revenue 226,305 155,950 178,738 Gross profit 133,788 78,713 108,699 Gross margin 37.2 % 33.5 % 37.8 % Operating expenses 84,621 68,286 54,658 Operating income 49,167 10,427 54,041 Interest expense 467 929 5,335 Other non-operating expense (income), net (3,757 ) (2,209 ) 7,779 Income before income tax 52,457 11,707 40,927 Income tax expense (benefit) 13,711 (6,237 ) 1,737 Net income $ 38,746 $ 17,944 $ 39,190 Net Revenue and Gross Profit The following table summarizes net revenue and gross profit for the periods presented: Year Ended December 31, 2020 2019 2018 (in thousands) Net Revenue $ 360,093 $ 234,660 $ 287,378 Gross Profit $ 133,788 $ 78,713 $ 108,784 Gross Margin 37.2 % 33.5 % 37.9 % Cash Margin (1) 38.1 % 34.4 % 38.2 % (1) Excludes non-cash charges of $3.3 million for 2020, $2.1 million for 2019, and $0.9 million for 2018. Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019 Net revenues for year ended December 31, 2020 was $360.1 million, a $125.4 million, or 53.5%, increase from $234.7 million in 2019. This is due to a surge in gaming activity, including an influx of new gamers, returning gamers, and non-gaming headset use, ignited by state and local stay-at-home orders in place for a significant part of 2020 along with strong execution to rapidly increase supply to meet the increase in demand. For the year ended December 31, 2020, gross profit as a percentage of net revenue increased to 37.2% from 33.5% in the prior year. Margins were positively impacted by lower promotional activity, favorable business mix, and volume-driven fixed costs leverage, partially offset by certain air freight to enable retail supply and higher tariff costs. Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018 Net revenues for year ended December 31, 2019 decreased $52.7 million, or 18.3%, as a result of the decrease in demand from the prior period when battle royale driven consumer demand reached record levels. While the overall gaming accessory market declined across all channels, the Company held 43.4% of the North American console market revenue share on the strong performance of the Stealth 600 Series, which continued to be the top selling console model, and the recently released Recon 70 Series. For the year ended December 31, 2019, gross profit as a percentage of net revenue decreased to 33.5% from 37.9% in the prior year. Margins were impacted by a more normal level of promotions, product mix, increased refurbishment and warehouse costs, and a decline in volume-based fixed cost leveraging. 24 Operating Expenses Year Ended December 31, 2020 2019 2018 (in thousands) Selling and marketing $ 46,779 $ 38,634 $ 32,389 Research and development 12,265 7,856 5,611 General and administrative 25,027 18,280 16,658 Acquisition integration costs 550 3,516 — Total operating expenses $ 84,621 $ 68,286 $ 54,658 Selling and Marketing Selling and marketing expense for the year ended December 31, 2020 totaled $46.8 million, or 13.0% as a percentage of net revenues, compared to $38.6 million, or 16.5% as a percentage of net revenues, for the prior year. This increase was primarily due to the inclusion of acquired ROCCAT-related headcount, volume-based direct sales related fees and commissions, and increased digital media spend to build ROCCAT brand awareness, partially offset by decreases in marketing event spend, retail marketing initiatives and advertising display depreciation. Selling and marketing expense for the year ended December 31, 2019 totaled $38.6 million, or 16.5% as a percentage of net revenues, compared to $32.4 million, or 11.3% as a percentage of net revenues, for the year ended December 31, 2018. This increase was primarily due to incremental costs associated with ROCCAT related headcount and expenses and certain digital and sponsorship initiatives, partially offset by decreases in revenue-based commissions and advertising display depreciation. Research and Development For the year ended December 31, 2020, we invested $12.3 million in research and development, an increase from prior years attributable to the expansion of PC accessories development capability and, the Stealth 600 and Stealth 700 Gen 2 wireless gaming headsets for the recently-launched Xbox and PlayStation®5 platforms, investments to increase the company’s software capabilities, and investments to begin work on several new product categories launching in 2021. For the years ended December 31, 2019 and 2018, we expended $7.9 million and $5.6 million, respectively, reflective of new product initiatives, patent related costs and ROCCAT headcount expenses for 2019, and new headset portfolio expansion to launch the Atlas line of PC gaming headsets for 2018. General and Administrative General and administrative expenses for the year ended December 31, 2020 increased $6.7 million to $25.0 million compared to $18.3 million for the year ended December 31, 2019. The year-over-year increase was primarily due to the inclusion of acquired ROCCAT-related expenses ($1.5 million), higher variable compensation costs, increased professional and legal services, and certain legal settlements. General and administrative expenses for the year ended December 31, 2019 increased $1.6 million to $18.3 million compared to $16.7 million for the year ended December 31, 2018. The year-over-year increase was primarily due to the inclusion of acquired ROCCAT-related expenses ($1.9 million) and higher non-cash stock expense, partially offset by lower variable compensation costs. Interest Expense Interest expense decreased $0.5 million for the year ended December 31, 2020 compared to the prior year due to reduced revolver usage during the record revenue year, increasing cash-on-hand balances. Interest expense decreased $4.4 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 due to the full repayment of the subordinated notes and term loans, and the exchange of the Series B redeemable preferred stock, both of which occurred in 2018. Income Taxes Income tax expense for the year ended December 31, 2020 was $13.7 million at an effective tax rate of 26.1% compared to income tax benefit of $6.2 million for the year ended December 31, 2019 at an effective tax rate of (53.3%). The effective tax rate was primarily impacted by permanent items including state taxes, executive compensation, and reserves for uncertain tax positions. 25 Income tax benefit for the year ended December 31, 2019 was $6.2 million at an effective tax rate of (53.3%) compared to income tax expense of $ 1.7 million for the year ended December 31, 2018 at an effective tax rate of 4.2 %. The effective tax rate was primarily impacted by a change in the valuation allowance for deferred tax assets of $10.1 million, which included a $7.4 million benefit related to the release of the valuation allowance in certain jurisdictions. Other Non-Operating Expense (Income) Other non-operating income totaled $3.8 million for the year ended December 31, 2020, including a $1.7 million acquisition-related settlement gain and $1.2 million fair value of contingent consideration reversal, compared to other non-operating income of $2.2 million for the year ended December 31, 2019, which included a $1.6 million unrealized gain related to the change in value of a financial instrument obligation. Other non-operating expense totaled $7.8 million for the year ended December 31, 2018, which included a $5.3 million loss from the change in fair value of a financial instrument, $1.6 million loss on extinguishment related to the prepayment of our Term Loan and Subordinated Notes and the negative exchange impact of the stronger U.S. dollar on our foreign operations. Liquidity and Capital Resources Our primary sources of working capital are cash flow from operations and availability of capital under our revolving credit facility, which was minimally used in the last year. We have funded operations and acquisitions in recent periods with operating cash flows and proceeds from debt and equity financings. The following table summarizes our sources and uses of cash: Year Ended December 31, 2020 2019 2018 (in thousands) Cash and cash equivalents at beginning of period $ 8,249 $ 7,078 $ 5,247 Net cash provided by operating activities 51,050 39,374 42,249 Net cash used for investing activities (5,663 ) (14,579 ) (5,079 ) Net cash used for financing activities (7,413 ) (24,180 ) (35,129 ) Effect of foreign exchange on cash 458 556 (210 ) Cash and cash equivalents at end of period $ 46,681 $ 8,249 $ 7,078 Operating activities Cash provided by operating activities for the year ended December 31, 2020 was $51.1 million, an increase of $11.7 million as compared to $39.4 million for the year ended December 31, 2019. This is primarily the result of higher gross receipts, partially offset by increased product purchases, and related air freight costs, to align inventory levels with elevated consumer demand. Cash provided by operating activities for the year ended December 31, 2019 was $39.4 million, a decrease of $2.9 million as compared to cash used in operating activities of $42.2 million for the year ended December 31, 2018. This is primarily the result of lower gross receipts, incremental ROCCAT costs, increased sales and marketing-related expenditures, partially offset by a reduction in inventory purchases. Investing activities Cash used for investing activities was $5.7 million of capital expenditures primarily related to in-store advertising displays, new product manufacturing tooling and internal system upgrades during the year ended December 31, 2020 compared to $14.6 million in 2019, which included $12.7 million related to the ROCCAT acquisition and $1.9 million of capital expenditures. Cash used for investing activities was $14.6 million during the year ended December 31, 2019 compared to $5.1 million in 2018, as a result of the $12.7 million related to the ROCCAT acquisition and $1.9 million of capital expenditures, compared to $5.1 million of capital expenditures in the prior year. 26 Financing activities Net cash used for financing activities was $7.4 million during the year ended December 31, 2020 compared to net cash used for financing activities of $24.2 million and net cash used for financing activities of $35.1 million during the years ended December 31, 2019 and 2018, respectively. Financing activities during the year included net repayments on our revolving credit facility of $15.7 million, offset by $4.3 million received from the sale of equity securities and proceeds from exercise of stock options of $4.2 million. Financing activities in 2019 included net repayments on our revolving credit facility of $21.7 million and $2.5 million of common stock repurchases. Financing activities in 2018 included the repayment of certain subordinated notes of $23.9 million, net term loan repayments of $11.7 million, the exchange of the Series B redeemable preferred stock of $1.4 million and net repayments on our revolving credit facilities of $1.1 million, partially offset by proceeds from exercise of stock options and warrants of $4.2 million. Management assessment of liquidity Management believes that our current cash and cash equivalents, the amounts available under our revolving credit facility and cash flows derived from operations will be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements. Foreign cash balances at December 31, 2020 and December 31, 2019 were both $5.9 million. 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 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. 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 ROCCAT and up to an additional $4 million annually. The maximum credit availability for loans and letters of credit under the Credit Facility is governed by a borrowing base determined by the application of specified percentages to certain eligible assets, primarily eligible trade accounts receivable and inventories, and is subject to discretionary reserves and revaluation adjustments. The Credit Facility may be used for working capital, the issuance of bank guarantees, letters of credit and other corporate purposes. Amounts outstanding under the Credit Facility bear interest at a rate equal to either a rate published by Bank of America or the LIBOR rate, plus in each case, an applicable margin, which is between 0.50% to 1.25% for base rate loans, 1.25% to 2.00% for U.S. LIBOR loans and U.K. loans and 2.00% and 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 December 31, 2020, interest rates for outstanding borrowings were 3.75% for base rate loans and 3.00% for LIBOR rate loans. 27 The Company is subject to financial covenant testing if certain availability thresholds are not met or certain other events occur (as defined in the Credit Facility). 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 our 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 December 31, 2020, the Company was in compliance with all the financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $67.5 million. Critical Accounting Estimates Our discussion and analysis of our results of operations and capital resources are based on our consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of the condensed consolidated financial statements, which, in turn, could change the results from those reported. Management evaluates its estimates, assumptions and judgments on an ongoing basis. Based on the above, we have determined that our most critical accounting policies are those related to revenue recognition and sales return reserve, inventory valuation, asset impairment, and income taxes. Revenue Recognition and Sales Return Reserve Net revenue consists primarily of revenue from the sale of gaming headsets and accessories to wholesalers, retailers and to a lesser extent, on-line customers. Our products function on a standalone basis (in connection with a readily available gaming console, personal computer or stereo) and are not sold with additional services or rights to future goods or services. Revenue is recorded for a contract through the following steps: (i) identifying the contract with the customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations; and (v) recognizing revenue when or as each performance obligation is satisfied. Each contract at inception is evaluated to determine whether the contract should be accounted for as having one or more performance obligations. Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs at a point in time when the risk and title to the product transfers to the customer. Our standard terms of delivery are included in our contracts of sale, order confirmation documents, and invoices. The Company excludes sales taxes collected from customers from “Net Revenue” in its Consolidated Statements of Operations. Certain customers may receive cash-based incentives (including cash discounts, quantity rebates, and price concessions), which are accounted for as variable consideration. Provisions for sales returns are recognized in the period the sale is recorded based upon our prior experience and current trends. These revenue reductions are established by the Company based upon management’s best estimates at the time of sale following the historical trend, adjusted to reflect known changes in the factors that impact such reserves and allowances, and the terms of agreements with customers. We do not expect to have significant changes in our estimates for variable considerations. Inventory Valuation Inventories are valued at the lower of weighted average cost or market, at the individual item level. Market is determined based on the estimated net realizable value, which is generally the selling price. Inventory levels are monitored to identify slow-moving items and markdowns are used to increase sales of such products. Physical inventory counts are performed annually in January and estimates are made for any shortage between the date of the physical inventory count and the balance sheet date. Asset Impairment Historically, we have had significant long-lived tangible and intangible assets, including goodwill with indefinite lives, which are susceptible to valuation adjustments as a result of changes in various factors or conditions. We assess the potential impairment of intangible and fixed assets whenever events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question. Goodwill and indefinite-lived intangible assets are assessed at least annually, but also whenever events or changes in circumstances indicate the carrying values may not be recoverable. Factors we consider important, which could trigger an impairment of such assets include significant underperformance relative to historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for our overall business; significant negative industry or economic trends; significant decline in our stock price for a sustained period; and a decline in our market capitalization below net book value. 28 Management estimates future pre-tax cash flows based on historical experience, knowledge and market data. Estimates of future cash flows require that we make assumptions and apply judgment, including forecasting future sales and expenses and estimating useful lives of the assets. These estimates can be affected by factors such as future product development and economic conditions that can be difficult to predict, as well as other factors such as those outlined in “Risk Factors.” If the expected future cash flows related to the long-lived assets are less than the assets’ carrying value, an impairment loss would be recognized for the difference between estimated fair value and carrying value. There are inherent assumptions and estimates used in developing future cash flows requiring management judgment including projecting revenues, interest rates and the cost of capital. Many of the factors used in assessing fair value are outside our control and it is reasonably likely that assumptions and estimates will change in future periods. These changes can result in future impairments. Income Taxes We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates and laws expected to be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Inherent in the measurement of these deferred balances are certain judgments and interpretations of existing tax law and other published guidance as applied to our operations. Our effective tax rate considers our judgment of expected tax liabilities in the various jurisdictions within which we are subject to tax. The determination of the need for a valuation allowance on deferred tax assets requires management to make assumptions and to apply judgment, including forecasting future earnings, taxable income, and the mix of earnings in the jurisdictions in which we operate. The tax effects of uncertain tax positions taken or expected to be taken in income tax returns are recognized only if they are “more likely-than-not” to be sustained on examination by the taxing authorities based on the technical merits as of the reporting date. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. We recognize estimated accrued interest and penalties related to uncertain tax positions in income tax expense. There have been no material changes to the critical accounting policies and estimates. See Note 1, “Summary of Significant Accounting Policy,” in the notes to the consolidated financial statements for a complete discussion of recent accounting pronouncements. We are currently evaluating the impact of certain recently issued guidance on our financial condition and results of operations in future periods. Off-Balance Sheet Arrangements Off-balance sheet arrangements are transactions, agreements, or other contractual arrangements with an unconsolidated entity for which we have an obligation to the entity that is not recorded in the consolidated financial statements. As of December 31, 2020, there are no significant off-balance sheet arrangements. Contractual Obligations Our principal commitments primarily consist of obligations for minimum payment commitments to lessors for office space and the revolving credit facility. As of December 31, 2020, the future non-cancelable minimum payments under these commitments were as follows: Payments Due by Period (in thousands) Total Less Than One Year 1 - 3 Years 3 - 5 Years More Than Five Years Contractual Obligations: (1) (3) Operating lease obligations (2) $ 7,076 $ 1,123 $ 2,303 $ 1,294 2,356 Total $ 7,076 $ 1,123 $ 2,303 $ 1,294 $ 2,356 (1) Contractual obligations exclude tax liabilities of $2.4 million related to uncertain tax positions because we are unable to make a reasonably reliable estimate of the timing of settlement, if any, of these future payments. (2) Operating lease agreements represent obligations to make payments under non-cancelable lease agreements for its facilities. (3) On December 17, 2018, the Company entered into an amended Credit Facility that expires on March 5, 2024. However, due to certain terms of the facility, the indebtedness is required to be classified as a current liability. Interest payments are not reflected under the Credit Facility because the amount that will be borrowed in future years is uncertain. 29 Item 7A. - Qualitative and Quantitative Disclosures about Market Risk Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. The Company’s market risk exposure is primarily a result of fluctuations in interest rates, foreign currency exchange rates and inflation. The Company has used derivative financial instruments, specifically foreign currency forward and option contracts, to manage exposure to foreign currency risks, by hedging a portion of its forecasted expenses denominated in British Pounds expected to occur within a year. The effect of exchange rate changes on foreign currency forward and option contracts is expected to offset the effect of exchange rate changes on the underlying hedged item. The Company does not use derivative financial instruments for speculative or trading purposes. As of December 31, 2020, we do not have any derivative financial instruments. Foreign Currency Exchange Risk The Company has exchange rate exposure, primarily, with respect to the British Pound and Euro. As of December 31, 2020 and 2019, our monetary assets and liabilities which are subject to this exposure are immaterial, therefore the potential immediate loss to us that would result from a hypothetical 10% change in foreign currency exchange rates would not be expected to have a material impact on our earnings or cash flows. This sensitivity analysis assumes an unfavorable 10% fluctuation in the exchange rates affecting the foreign currencies in which monetary assets and liabilities are denominated and does not take into account the offsetting effect of such a change on our foreign currency denominated revenues. Inflation Risk The Company is exposed to market risk due to the possibility of inflation, such as increases in the cost of its products. Although the Company does not believe that inflation has had a material impact on its financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on the Company’s ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenue if the selling prices of products do not increase with these increased costs. 30 Item 8. - Financial Statemen ts and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 32 Consolidated Financial Statements: Consolidated Balance Sheets as of December 2020 and 2019 34 Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018 35 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019 and 2018 36 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 37 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2020, 2019 and 2018 38 Notes to Consolidated Financial Statements 39 Supplemental Schedule - Schedule II Valuation and Qualifying Accounts 66 31 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and Board of Directors Turtle Beach Corporation White Plains, New York Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Turtle Beach Corporation and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 4, 2021 expressed an unqualified opinion thereon. Change in Accounting Principle Related to Leases As discussed in Note 14 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019, due to the adoption of Accounting Standards Codification Topic 842, Leases. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Sales Returns As discussed in Notes 1 and 4 to the consolidated financial statements, the Company provides certain customers the option to return defective goods back to the Company. A sales returns allowance is recorded in the period of the sale based upon an expected value method, which is based on the Company’s prior experience and current return trends. As of December 31, 2020 and 2019, the Company had accrued a sales returns allowance of approximately $11.2 million and $8.8 million, respectively. We identified the assessment of the allowance for certain sales returns as a critical audit matter. Auditor judgment was required to evaluate certain assumptions which had a higher degree of measurement uncertainty. Key assumptions included the determination of the period of sales for which the sales return rate should be applied. Auditing this element involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters. 32 The primary procedures we performed to address this critical audit matter included: • Evaluating the expected return period for a sample of defective return goods, which is based on newly released products and the time of first receipt of the defective goods. • Assessing the Company’s historical ability to estimate the key assumptions by comparing historical estimated sales return allowance in aggregate to actual returns received by customers in aggregate. • Evaluating the Company’s key assumptions by comparing to actual returns subsequent to year-end in the aggregate, as compared to the current sales return allowance at year-end. Allowance for Cash-Based Incentive Reserve As discussed in Note 1 to the consolidated financial statements, the Company provides certain customers cash-based incentives which include price concessions as a reduction to the customer sales invoice. All cash-based incentives are recorded in the period of the sale based upon the expected value method, which is based on the Company’s prior experience and current trends. As of December 31, 2020 and 2019, the Company had accrued an allowance for cash-based incentives of approximately $18.6 million and $16.0 million, respectively. We identified the assessment of the allowance for price concessions as a critical audit matter. Auditor judgment was required to evaluate certain assumptions which had a higher degree of measurement uncertainty. The key assumption includes the volume of sales to which these price concessions will be applied. Auditing this element involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters. The primary procedures we performed to address this critical audit matter included: • Assessing the Company’s historical ability to estimate key assumptions by comparing the prior year estimated price concessions in aggregate to actual subsequent credits issued. • Evaluating the Company’s key assumptions by comparing them to actual credits issued subsequent to year-end in aggregate, as compared to the current allowance for price concessions at year-end. /s/ BDO USA, LLP We have served as the Company’s auditor since 2014. New York, New York March 4, 2021 33 Turtle Beach Corporation Consolidated Balance Sheets December 31, December 31, 2020 2019 ASSETS (in thousands, except par value and share amounts) Current Assets: Cash and cash equivalents $ 46,681 $ 8,249 Accounts receivable, less allowances of $ 29,897 and $ 24,940 in 2020 and 2019, respectively 43,867 44,530 Inventories 71,301 45,711 Prepaid expenses and other current assets 8,127 4,057 Total Current Assets 169,976 102,547 Property and equipment, net 6,575 3,962 Deferred income taxes 6,946 7,439 Goodwill 8,178 8,515 Intangible assets, net 5,138 6,011 Other assets 6,640 2,877 Total Assets $ 203,453 $ 131,351 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Revolving credit facility $ — $ 15,655 Accounts payable 42,529 22,511 Other current liabilities 36,122 26,422 Total Current Liabilities 78,651 64,588 Deferred income taxes 128 153 Other liabilities 8,275 3,223 Total Liabilities 87,054 67,964 Commitments and Contingencies Stockholders’ Equity Common stock, $ 0.001 par value - 25,000,000 shares authorized; 15,475,504 and 14,488,152 shares issued and outstanding as of December 31, 2020 and 2019, respectively 15 14 Additional paid-in capital 190,568 176,776 Accumulated deficit ( 74,773 ) ( 113,519 ) Accumulated other comprehensive income 589 116 Total Stockholders’ Equity 116,399 63,387 Total Liabilities and Stockholders’ Equity $ 203,453 $ 131,351 See accompanying Notes to the Consolidated Financial Statements 34 Turtle Beach Corporation Consolidated Statements of Operations Year ended December 31, 2020 2019 2018 (in thousands, except per-share data) Net revenue $ 360,093 $ 234,663 $ 287,437 Cost of revenue 226,305 155,950 178,738 Gross profit 133,788 78,713 108,699 Operating expenses: Selling and marketing 46,779 38,634 32,389 Research and development 12,265 7,856 5,611 General and administrative 25,577 21,796 16,658 Total operating expenses 84,621 68,286 54,658 Operating income 49,167 10,427 54,041 Interest expense 467 929 5,335 Other non-operating expense (income), net ( 3,757 ) ( 2,209 ) 7,779 Income before income tax 52,457 11,707 40,927 Income tax expense (benefit) 13,711 ( 6,237 ) 1,737 Net income $ 38,746 $ 17,944 $ 39,190 Net income per share Basic $ 2.62 $ 1.24 $ 2.90 Diluted $ 2.37 $ 1.04 $ 2.74 Weighted average number of shares: Basic 14,801 14,483 13,512 Diluted 16,365 15,688 14,289 See accompanying Notes to the Consolidated Financial Statements 35 Turtle Beach Corporation Consolidated Statements of Comprehensive Income (Loss) Year ended December 31, 2020 2019 2018 (in thousands) Net income $ 38,746 $ 17,944 $ 39,190 Other comprehensive income (loss): Foreign currency translation adjustment 473 592 ( 273 ) Other comprehensive income (loss) 473 592 ( 273 ) Comprehensive income (loss) $ 39,219 $ 18,536 $ 38,917 See accompanying Notes to the Consolidated Financial Statements 36 Turtle Beach Corporation Consolidated Statements of Cash Flows Year Ended December 31, 2020 2019 2018 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 38,746 $ 17,944 $ 39,190 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,359 4,556 3,954 Amortization of intangible assets 889 642 303 Amortization of debt financing costs 189 189 1,081 Stock-based compensation 5,549 3,558 1,877 Accrued interest on Series B redeemable preferred stock — — 501 Paid-in-kind interest — — 2,028 Deferred income taxes 468 ( 7,473 ) 549 Change in sales returns reserve 2,418 ( 397 ) 3,679 Provision for doubtful accounts 215 ( 10 ) 431 Provision for obsolete inventory 5,085 3,483 3,437 Loss on disposal of property and equipment 42 28 111 Unrealized loss (gain) on financial instrument obligation — ( 1,601 ) 5,291 Decrease in unrecognized tax benefit — ( 686 ) — Decrease in fair value of contingent consideration ( 1,121 ) ( 471 ) — Loss on debt extinguishment — — 1,572 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ( 1,755 ) 9,931 ( 6,978 ) Inventories ( 30,675 ) 7,264 ( 25,391 ) Accounts payable 18,668 ( 393 ) 4,101 Prepaid expenses and other assets ( 4,108 ) ( 66 ) ( 481 ) Income taxes payable 4,178 ( 371 ) 562 Other liabilities 7,902 3,247 6,432 Net cash provided by operating activities 51,049 39,374 42,249 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment ( 5,663 ) ( 1,912 ) ( 5,079 ) Acquisition of a business, net of cash acquired — ( 12,667 ) — Net cash used for investing activities ( 5,663 ) ( 14,579 ) ( 5,079 ) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on revolving credit facilities 323,593 219,910 361,073 Repayment of revolving credit facilities ( 339,248 ) ( 241,640 ) ( 362,154 ) Proceeds of term loan — — 3,265 Proceeds from sale of equity securities 4,373 — — Repayment of term loan — — ( 14,985 ) Repayment of subordinated notes - related party — — ( 23,940 ) Settlement of Series B redeemable preferred stock — — ( 1,390 ) Proceeds from exercise of stock options and warrants 4,195 330 4,235 Repurchase of common stock — ( 2,525 ) — Repurchase of common stock to satisfy employee tax withholding obligations ( 325 ) ( 255 ) ( 246 ) Debt financing costs — — ( 612 ) Cash portion of loss on debt extinguishment — — ( 375 ) Net cash used for financing activities ( 7,412 ) ( 24,180 ) ( 35,129 ) Effect of exchange rate changes on cash and cash equivalents 458 556 ( 210 ) Net increase (decrease) in cash and cash equivalents 38,432 1,171 1,831 Cash and cash equivalents - beginning of period 8,249 7,078 5,247 Cash and cash equivalents - end of period $ 46,681 $ 8,249 $ 7,078 SUPPLEMENTAL DISCLOSURE OF INFORMATION Cash paid for interest $ 309 $ 769 $ 1,496 Cash paid for income taxes, net of refunds $ 8,041 $ 2,317 $ — Accrual for purchases of property and equipment $ 1,351 $ 16 $ 348 Reclassification of financial instrument obligation $ — $ 6,248 $ — Exchange of Series B redeemable preferred stock $ — $ — $ 18,032 See accompanying Notes to the Consolidated Financial Statements 37 Turtle Beach Corporation Consolidated Statement of Stockholders ’ Equity Common Stock Additional Paid-In Accumulated Accumulated Other Comprehensive Shares Amount Capital Deficit Income (Loss) Total (in thousands) Balance at December 31, 2017 12,349 12 148,082 ( 170,048 ) ( 203 ) ( 22,157 ) Cumulative effect of the adoption of ASC 606 — — — ( 605 ) — ( 605 ) Net income — — — 39,190 — 39,190 Other comprehensive loss — — — — ( 273 ) ( 273 ) Issuance of common stock in exchange for Series B redeemable preferred stock, net of issuance costs 1,307 1 15,474 — — 15,475 Issuance of restricted stock 56 — — — — — Repurchase of common stock and retirement of related treasury shares ( 12 ) — ( 246 ) — — ( 246 ) Issuance of common stock upon exercise of warrants 77 — 778 — — 778 Stock options exercised 491 1 3,456 — — 3,457 Stock-based compensation — — 1,877 — — 1,877 Balance at December 31, 2018 14,268 14 169,421 ( 131,463 ) ( 476 ) 37,496 Net income — — — 17,944 — 17,944 Other comprehensive income, net of tax — — — — 592 592 Reclassification of financial instrument obligation — — 6,248 — — 6,248 Issuance of restricted stock 130 — ( 1 ) — — ( 1 ) Repurchase of common stock and retirement of related treasury shares ( 23 ) — ( 255 ) — — ( 255 ) Common stock buyback ( 271 ) — ( 2,525 ) — — ( 2,525 ) Issuance of common stock upon exercise of warrants 296 — — — — — Stock options exercised 89 — 330 — — 330 Stock-based compensation — — 3,558 — — 3,558 Balance at December 31, 2019 14,488 $ 14 $ 176,776 $ ( 113,519 ) $ 116 $ 63,387 Net income — — — 38,746 — 38,746 Other comprehensive income, net of tax — — — — 473 473 Issuance of restricted stock 157 1 — — — 1 Repurchase of common stock and retirement of related treasury shares ( 25 ) — ( 325 ) — — ( 325 ) Proceeds of sales of equity securities 238 — 4,373 — — 4,373 Stock options exercised 618 — 4,195 — — 4,195 Stock-based compensation — — 5,549 — — 5,549 Balance at December 31, 2020 15,475 $ 15 $ 190,568 $ ( 74,773 ) $ 589 $ 116,399 See accompanying Notes to the Consolidated Financial Statements 38 Turtle Beach Corporation Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies 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 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 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. Reverse Split On April 6, 2018, the Company effected a one-for- four reverse stock split of its common stock pursuant to which every four shares of common stock outstanding immediately prior to the reverse split were combined into one share of common stock. As a result of the reverse split, all outstanding share amounts and computations using such amounts in the Company’s financial statements and notes thereto have been retroactively adjusted to reflect the reverse stock split. Uses 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, determination of fair value of stock-based awards, stock warrants and share-based compensation. 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. 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 2020, the Company experienced a significant increase in demand for its products due to the COVID-19-related stay-at-home orders, which resulted in increased revenue. Nonetheless, the Company continues to actively monitor and assess the impact of the pandemic on its business, operations, and financial condition. Revenue Recognition and Sales Return Reserve Net revenue consists primarily of revenue from the sale of gaming headsets and accessories to wholesalers, retailers and to a lesser extent, on-line customers. These products function on a standalone basis (in connection with a readily available gaming console, personal computer or stereo) and are not sold with additional services or rights to future goods or services. Revenue is recorded for a contract through the following steps: (i) identifying the contract with the customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations; and (v) recognizing revenue when or as each performance obligation is satisfied. Each contract at inception is evaluated to determine whether the contract should be accounted for as having one or more performance obligations. The Company's business activities were determined to be a single performance obligation with revenue recognized when 39 obligations under the terms of a contract with its customer are satisfied; generally this occurs at a point in time when the risk and title to the product transfers to the customer. The Company's standard terms of delivery are included in its contracts of sale, order confirmation documents, and invoices. The Company excludes sales taxes collected from customers from “Net Revenue” in its Consolidated Statements of Operations. Certain customers may receive cash-based incentives (including cash discounts, quantity rebates, and price concessions), which are accounted for as variable consideration. Provisions for sales returns are recognized in the period the sale is recorded based upon the Company's prior experience and current trends. These revenue reductions are established by the Company based upon management’s best estimates at the time of sale following the historical trend, adjusted to reflect known changes in the factors that impact such reserves and allowances, and the terms of agreements with customers. As of December 31, 2020 and 2019, the Company had an allowance for cash-based incentives of $ 18.6 million and $ 16.0 million, respectively, and an allowance for sales returns of $ 11.2 million and $ 8.8 million, respectively, and does not expect to have significant changes in its estimates for variable considerations. Cost of Revenue and Operating Expenses The following table illustrates the primary costs classified in each major expense category: Cost of Revenue Operating Expenses Cost to manufacture products; Payroll, bonus and benefit costs; Freight costs associated with moving product from suppliers to distribution centers and to customers; Costs incurred in the research and development of new products and enhancements to existing products; Costs associated with the movement of merchandise through customs; Depreciation related to demonstration units; Costs associated with material handling and warehousing; Legal, finance, information systems and other corporate overhead costs; and Global supply chain personnel costs; and Sales commissions, advertising and marketing costs. Product royalty costs. Product Warranty Obligations The Company provides for product warranties in accordance with the contract terms given to various customers by accruing estimated warranty costs at the time of revenue recognition. Warranties are generally fulfilled by replacing defective products with new products. Marketing Costs Costs associated with the production of advertising, such as print and other costs, as well as costs associated with communicating advertising that has been produced, such as magazine ads, are expensed when the advertising first appears in public. Advertising costs were approximately $ 8.5 million, $ 7.5 million and $ 6.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company also incurs co-operative advertising costs that represent reimbursements to customers for shared marketing expenses for sale of its products. These reimbursements are recorded as reductions of net revenue based on a percentage of sales for all period presented. Co-operative advertising reimbursements were approximately $ 6.8 million, $ 5.7 million and $ 5.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. Deferred Financing Costs Deferred financing costs represent costs incurred in conjunction with our debt financing activities and are capitalized and amortized over the life of the related financing arrangements. If the debt is retired early, the related unamortized deferred financing costs are written off in the period the debt is retired as part of the net carrying value of the debt, and any gains or losses are recorded in the statement of operations under the caption “Other non-operating expense (income), net.” Stock-Based Compensation Compensation costs related to stock options and restricted stock grants are calculated based on the fair value of the stock-based awards on the date of grant, net of estimated forfeitures. The grant date fair value of awards is determined using the Black-Scholes option-pricing model and the related stock-based compensation is recognized on a straight-line basis over the period in which an employee is required to provide service in exchange for the award, which is generally four years . The Company estimates its forfeiture rate based on an analysis of actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from any forfeiture rate adjustment would be recognized in the period of adjustment and if the actual number of future forfeitures differs from estimates, the Company might be required to record adjustments to stock-based compensation expense. 40 For stock-based awards issued to non-employees, including consultants, compensation expense is based on the fair value of the awards calculated using the Black-Scholes option-pricing model over the service performance period. The fair value of options granted to non-employees for each reporting period is remeasured over the vesting period and recognized as an expense over the period the services are received. Exit and Disposal Costs Management-approved restructuring activities are periodically initiated to achieve cost savings through reduced operational redundancies and to position the Company strategically in the market in response to prevailing economic conditions and associated customer demand. Costs associated with restructuring actions can include severance, infrastructure charges to vacate facilities or consolidate operations, contract termination costs and other related charges. For involuntary separation plans, a liability is recognized when it is probable and reasonably estimable. For one-time termination benefits, such as additional severance pay or benefit payouts, and other exit costs, such as lease termination costs, the liability is measured and recognized initially at fair value in the period in which the liability is incurred, with subsequent changes to the liability recognized as adjustments in the period of change. Net Earnings (Loss) per Common Share Basic earnings (loss) per share is calculated by dividing net income (loss) associated with common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share assumes the issuance of additional shares of common stock by the Company upon exercise of all outstanding stock options, stock warrants and contingently issuable securities if the effect is dilutive, in accordance with the treasury stock method. Cash Equivalents Cash and short-term highly liquid investments with original maturity dates of three months or less at time of purchase and no redemption restrictions are considered cash and cash equivalents. Inventories Inventories consist primarily of finished goods and related component parts, and are stated at the lower of weighted average cost or market value (estimated net realizable value) using the first in, first out (“FIFO”) method. The Company maintains an inventory allowance for returned goods, slow-moving and unused inventories based on the historical trend and estimates. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory. Inventory write-downs are included as a component of cost of revenues in the accompanying consolidated statements of operations. Property and Equipment, net Property and equipment are presented at cost less accumulated depreciation and amortization. Repairs and maintenance expenditures are expensed as incurred. Depreciation and amortization are computed on a straight-line basis over the following estimated useful lives: Estimated Life Machinery and equipment 3 years Software and software development 2 - 3 years Furniture and fixtures 5 years Tooling 2 years Leasehold improvements Term of lease or economic life of asset, if shorter Demonstration units and convention booths 2 years Valuation of Long-Lived and Intangible Assets and Goodwill At acquisition, we estimate and record the fair value of purchased intangible assets, which primarily consists of in-process research and development, customer relationships, trademarks and trade names, and patents. The fair values of these intangible assets are estimated based on the Company’s assessment. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill and certain other intangible assets having indefinite lives are not amortized to earnings, but instead are subject to periodic testing for impairment. Intangible assets determined to have definite lives are amortized over their remaining useful lives. Long-lived and intangible assets are assessed for potential impairment whenever events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question. Goodwill and indefinite-lived intangible assets are assessed at least annually, but also whenever events or changes in circumstances indicate the carrying values may not be recoverable. Factors that could trigger an impairment review include (a) significant underperformance relative to historical or projected future operating results; (b) significant changes in the manner of use of the acquired assets or the strategy for the Company’s overall business; (c) significant negative industry or economic trends; (d) significant decline in the Company’s stock price for a sustained period; and (e) a decline in the Company’s market capitalization below net book value. 41 Assessment for possible impairment is based on the Company’s ability to recover the carrying value of the long-lived asset from the expected future pre-tax cash flows. The expected future pre-tax cash flows are estimated based on historical experience, internal knowledge and market data. Estimates of future cash flows require the Company to make assumptions and to apply judgment, including forecasting future sales and expenses and estimating the useful lives of assets. If the expected future cash flows related to the long-lived assets are less than the assets’ carrying value, an impairment charge is recognized for the difference between estimated fair value and carrying value. When performing the Company’s evaluation of goodwill for impairment, if it concludes qualitatively that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company performs its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount exceeds the fair value a goodwill impairment charge would be recorded for the amount by which the reporting unit’s carrying amount exceeds its fair value. In addition, identifiable intangible assets having indefinite lives are reviewed for impairment on an annual basis using a methodology consistent with that used to evaluate goodwill. There are inherent assumptions and estimates used in developing future cash flows requiring management judgment including projecting revenues, interest rates and the cost of capital. Many of the factors used in assessing fair value are outside the Company’s control and it is reasonably likely that assumptions and estimates will change in future periods. These changes can result in future impairments. In the event the Company’s planning assumptions were modified resulting in impairment to our assets, the associated expense would be included in the Consolidated Statements of Operations, which could materially impact its business, financial condition and results of operations. The Company conducted its annual impairment assessment on November 1, 2020 taking a qualitative evaluation approach to determine if there were any adverse market factors or changes in circumstances that would indicate that the carrying value of goodwill as determined in connection with the current year acquisition may not be recoverable. The Company’s qualitative assessment included an analysis of business changes, economic outlook, financial trends and forecasts, and events or circumstances that could unfavorably impact the key assumptions. Based on this review, management determined that no events or changes in circumstances indicated that the carrying value may not be recoverable and further consideration of potential goodwill impairment was not considered necessary. Income Taxes The Company accounts for income taxes in accordance with the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases based on enacted tax laws and statutory tax rates applicable to the periods in which the Company expects the temporary differences to reverse. The Company had elected to record a “deferred charge” for basis differences relating to intra-entity profits as recognition as a deferred tax asset is prohibited. A valuation allowance is established for deferred tax assets when management anticipates that it is more likely than not that all, or a portion, of these assets would not be realized. In determining whether a valuation allowance is warranted, all positive and negative evidence and all sources of taxable income such as prior earnings history, expected future earnings, carryback and carryforward periods and tax strategies are considered to estimate if sufficient future taxable income will be generated to realize the deferred tax asset. The assessment of the adequacy of a valuation allowance is based on estimates of taxable income by jurisdiction and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates, or these estimates are adjusted in future periods for current trends or expected changes in assumptions, the Company may need to modify the level of valuation allowance which could materially impact our business, financial condition and results of operations. The tax effects of uncertain tax positions taken or expected to be taken in income tax returns are recognized only if they are “more likely-than-not” to be sustained on examination by the taxing authorities based on the technical merits as of the reporting date. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company recognizes estimated accrued interest and penalties related to uncertain tax positions in income tax expense. The Company and its domestic subsidiaries file a consolidated federal income tax return, while the Company’s foreign subsidiary files in its respective local jurisdictions. Fair Value of Financial Instruments The Company determines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses a hierarchical structure to prioritize the inputs used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), then to quoted market prices for similar assets or liabilities in active or inactive markets (Level 2) and gives the lowest priority to unobservable inputs (Level 3). Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, revolving line of credit, long-term debt and warrants reported as a financial instrument obligation. Cash equivalents are stated at amortized cost, which approximated 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 revolving line of credit is stated at the carrying value as the stated interest rate approximates market rates currently available to the Company, which are considered Level 2 inputs. 42 The Company did no t have any non-financial assets or non-financial liabilities recognized at fair value on a recurring basis at December 31, 2020 and 2019. Foreign Currency Translation Balance sheet accounts of the Company’s foreign subsidiaries are translated at the exchange rate in effect at the end of each period. Statement of operations accounts are translated using the weighted average of the prevailing exchange rates during each period. Gains or losses resulting from foreign currency transactions are included in the Company’s Consolidated Statements of Operations under the caption “Other non-operating expense (income), net” whereas translation adjustments are reflected in the Consolidated Statements of Comprehensive Income (Loss) under the caption “Foreign currency translation adjustment.” Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments in cash, cash equivalents and accounts receivables. The Company is exposed to credit risk and liquidity risk in the event of default by the financial institutions or issuers of investments in excess of FDIC insured limits. The Company performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any institution. Accounts receivable are unsecured and represent amounts due based on contractual obligations of customers. The Company’s three largest individual customers accounted for approximately 47 % of its gross sales in the aggregate for the year ended December 31, 2020, or individually 11 %, 23 % and 13 %, compared to 11 %, 20 % and 9 % in 2019 and 9 %, 19 % and 11 % in 2018. In addition, these three customers accounted for 1 %, 34 % and 10 % of accounts receivable as of December 31, 2020 and 33 %, 29 % and 9 % as of December 31, 2019. Concentrations of credit risk with respect to accounts receivable are mitigated by performing ongoing credit evaluations of customers to assess the probability of collection based on a number of factors, including past transaction experience with the customer, evaluation of their credit history, limiting the credit extended, and review of the invoicing terms of the contract. In addition, the Company has credit insurance in place through a third-party insurer against defaults by certain other domestic and international customers, subject to policy limits. The Company generally does not require customers to provide collateral to support accounts receivable. The Company has recorded an allowance for doubtful accounts for those receivables that were determined not to be collectible. Foreign cash balances at December 31, 2020 and 2019 were $ 5.9 million and $ 5.9 million, respectively. Segment Information The company operates in a single reportable segment and two reporting unit structure. The entire business is managed by a single management team whose chief operating decision maker is the Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance . Recent Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02, Leases , that introduced the recognition of a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term and, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis for all leases (with the exception of short-term leases). The Company adopted this standard on its effective date of January 1, 2019 , using the optional alternative approach, which applies the provisions of the new guidance at the effective date without adjusting the comparative periods. As part of the adoption of the new standard, the Company elected the package of practical expedients that permits entities to not reassess prior conclusions regarding lease identification, lease classification, and initial direct costs under the new standard. Upon adoption of the new standard as it relates to the Company's accounting for real estate operating leases, assets and liabilities increased by approximately $ 3.3 million. In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," amending the accounting for the impairment of financial instruments, including trade receivables. Under previous guidance, credit losses were recognized when the applicable losses had a probable likelihood of occurring and this assessment was based on past events and current conditions. The amended guidance eliminates the “probable” threshold and requires an entity to use a broader range of information, including forecast information when estimating expected credit losses. Generally, this should result in a more timely recognition of credit losses. The requirements of the amended guidance should be applied using a modified retrospective approach except for debt securities, which require a prospective transition approach. We adopted this guidance as of January 1, 2020 . The adoption of this guidance did not have a material impact on our financial condition and results of operations. 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 43 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 ASU No. 2017-04 prospectively on January 1, 2020 , which did no t have a material impact on the consolidated financial statements. In June 2018, the FASB issued ASU 2018-07, Improvements to Non-employee Share-Based Payment Accounting , that expands the scope of Topic 718, Compensation—Stock Compensation , to include share-based payments issued to non-employees for goods or services and substantially aligned the accounting for share-based payments to non-employees and employees. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The adoption of ASU No. 2018-07 did not have a material impact on the 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 2. Acquisitions Neat Microphones On January 12, 2021, the Company acquired certain assets related to the Neat Microphones business of Stray Electrons LLC, a California limited liability company. The closing payment was funded from cash on the Company’s balance sheet. Neat creates, manufactures, and sells high-quality digital USB and analog microphones that embrace cutting-edge technology and design. 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 and up to $ 3.4 million in potential earn-outs based on revenues for the years ended 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 i n connection with the acquisition of $ 0.6 million and $ 3.5 million for the years ended December 31, 2020 and 2019, respectively, were recorded as a component of “General and administrative” expenses in the Condensed Consolidated Statements of Operations. The ROCCAT purchase price allocation as of May 31, 2019 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 values 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. 44 The estimate of fair value of ROCCAT’s identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method. Some of the more significant assumptions inherent in the development of intangible asset values include: the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, the assessment of the intangible asset’s life cycle, as well as other factors. The following table summarizes key information underlying intangible assets related to the ROCCAT acquisition: (In thousands) Life Amount Customer relationships 7 Years $ 2,119 Tradenames 10 Years 2,686 Developed technology 7 Years 784 Total $ 5,589 For the year ended December 31, 2019, revenue related to ROCCAT products was $ 14.4 million. Given that the ROCCAT operations have been substantially integrated into our legacy business, the Company is unable to provide the results of operations attributable to ROCCAT going forward. 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. No payment will be made under the contingent earn-out provisions of the acquisition agreement as certain revenue targets were not achieved, and as such, th e $ 1.1 million fair value recorded related to the potential $ 3.4 million earn-outs has been fully released. Note 3. 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 December 31, 2020 and 2019, the Company has not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted, and the only outstanding financial assets and liabilities recorded at fair value on a recurring basis were the wholly-funded warrants reported as a financial instrument obligation. The following is a summary of the carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2020 and 2019: December 31, 2020 December 31, 2019 Reported Fair Value Reported Fair Value (in thousands) Financial Assets and Liabilities: Cash and cash equivalents $ 46,681 $ 46,681 $ 8,249 $ 8,249 Revolving credit facility $ — $ — $ 15,655 $ 15,655 Contingent consideration liabilities $ — $ — $ 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. 45 Note 4. Allowance for Sales Returns The following table provides the changes in the Company’s sales return reserve, which is classified as a reduction of accounts receivable: Year ended December 31, 2020 2019 2018 in thousands Balance, beginning of period $ 8,815 $ 9,212 $ 5,533 Reserve accrual 21,193 16,866 21,340 Recoveries and deductions, net ( 18,775 ) ( 17,263 ) ( 17,661 ) Balance, end of period $ 11,233 $ 8,815 $ 9,212 Note 5. Composition of Certain Financial Statement Items Inventories Inventories consist of the following: December 31, 2020 December 31, 2019 (in thousands) Finished goods $ 69,939 $ 44,423 Raw materials 1,362 1,288 Total inventories $ 71,301 $ 45,711 Property and Equipment, net Property and equipment, net consists of the following: December 31, 2020 December 31, 2019 (in thousands) Machinery and equipment $ 2,223 $ 1,783 Software and software development 1,629 439 Furniture and fixtures 1,123 601 Tooling 6,548 5,340 Leasehold improvements 1,833 1,326 Demonstration units and convention booths 14,439 12,051 Total property and equipment, gross 27,795 21,540 Less: accumulated depreciation and amortization ( 21,220 ) ( 17,578 ) Total property and equipment, net $ 6,575 $ 3,962 Depreciation and amortization expense on property and equipment for the years ended December 31, 2020, 2019 and 2018 was $ 4.4 million, $ 4.6 million and $ 4.0 million, respectively. Other Current Liabilities Other current liabilities consist of the following: December 31, 2020 December 31, 2019 (in thousands) Accrued tax-related payables $ 5,670 $ 3,789 Accrued employee expenses 7,138 3,674 Accrued royalty 5,166 3,880 Accrued marketing 5,487 3,695 Accrued freight 3,401 1,977 Accrued expenses 9,260 9,407 Total other current liabilities $ 36,122 $ 26,422 46 Other non-operating expense (income), net Other non-operating expense (income), net consists of the following: Year Ended December 31, 2020 2019 2018 (in thousands) Acquisition-related settlement $ ( 1,702 ) $ — $ — Change in fair value of contingent consideration ( 1,121 ) ( 471 ) — Unrealized loss (gain) on financial instrument obligation — ( 1,601 ) 5,291 Loss on debt extinguishment — — 1,572 Other non-operating expense (income) ( 934 ) ( 137 ) 916 Total other non-operating expense (income),net $ ( 3,757 ) $ ( 2,209 ) $ 7,779 Note 6. Goodwill and Other Intangible Assets Acquired Intangible Assets Acquired identifiable intangible assets, and related accumulated amortization, as of December 31, 2020 and 2019 consist of: December 31, 2020 Gross Carrying Value Accumulated Amortization Net Book Value (in thousands) Customer relationships $ 7,915 $ 5,584 $ 2,331 Tradenames 2,686 425 2,261 Developed technology 784 177 607 Foreign currency ( 845 ) ( 784 ) ( 61 ) Total Intangible Assets $ 10,540 $ 5,402 $ 5,138 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 asset 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 2, “Acquisitions” for additional information related to ROCCAT’s identifiable intangible assets. Amortization expense related to definite lived intangible assets was $ 0.9 million, $ 0.6 million and $ 0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. 47 As of December 31, 2020, estimated annual amortization expense related to definite lived intangible assets in future periods is as follows: (in thousands) 2021 $ 901 2022 866 2023 837 2024 813 2025 694 Thereafter 1,088 Total $ 5,199 Changes in the carrying values of goodwill for twelve months ended December 31, 2020 are as follows: (in thousands) Balance as of January 1, 2020 $ 8,515 ROCCAT acquisition opening balance adjustment ( 337 ) Balance as of December 31, 2020 $ 8,178 Note 7. Credit Facilities and Long-Term Debt December 31, 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 $ 0.5 million, $ 0.9 million and $ 4.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. Amortization of deferred financing costs was $ 0.2 million, $ 0.2 million and $ 1.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. In connection with the Company’s amendment and restatement of its Credit Facility (as noted below), the Company incurred $ 0.6 million of financing costs that have been deferred, added to the then remaining unamortized financing costs and will be recognized over the term of the respective agreement. 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 ROCCAT and up to an additional $ 4 million annually. The maximum credit availability for loans and letters of credit under the Credit Facility is governed by a borrowing base determined by the application of specified percentages to certain eligible assets, primarily eligible trade accounts receivable and inventories, and is subject to discretionary reserves and revaluation adjustments. The Credit Facility may be used for working capital, the issuance of bank guarantees, letters of credit and other corporate purposes. Amounts outstanding under the Credit Facility bear interest at a rate equal to either a rate published by Bank of America or the LIBOR rate, plus in each case, an applicable margin, which is between 0.50 % to 1.25 % for base rate loans, 1.25 % to 2.00 % for U.S. LIBOR loans and U.K. loans and 2.00 % and 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 December 31, 2020, interest rates for outstanding borrowings were 3.75 % for base rate loans and 3.00 % for LIBOR rate loans. The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met or certain other events occur (as defined in the Credit Facility). 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. 48 The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit the Company's ability to take certain actions, including its 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 December 31, 2020, the Company was in compliance with all the financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $ 67.5 million. Note 8. Income Taxes The provision (benefit) for income taxes consists of the following: Year Ended December 31, 2020 2019 2018 (in thousands) Federal: Current $ 8,518 $ 230 $ 423 Deferred 714 ( 5,910 ) — Total Federal 9,232 ( 5,680 ) 423 State and Local: Current 3,476 114 300 Deferred ( 221 ) ( 1,529 ) — Total State and Local 3,255 ( 1,415 ) 300 Foreign Current 1,249 897 378 Deferred ( 25 ) ( 39 ) 636 Total Foreign 1,224 858 1,014 Total $ 13,711 $ ( 6,237 ) $ 1,737 The reconciliation between the provision (benefit) for income taxes and the expected provision (benefit) for income taxes at the U.S. federal statutory rate is as follows: Year Ended December 31, 2020 2019 2018 (in thousands) U.S. Operations $ 46,970 $ 8,030 $ 37,466 Foreign Operations 5,487 3,677 3,461 Income (loss) before income taxes 52,457 11,707 40,927 Federal statutory rate 21 % 21 % 21 % Provision for income taxes at federal statutory rate 11,016 2,458 8,595 State taxes, net of federal benefit 1,434 989 594 Foreign tax rate differential 4 ( 33 ) ( 50 ) Change in valuation allowance ( 2 ) ( 10,112 ) ( 8,497 ) Interest on Series B redeemable preferred stock — — 105 Unrealized loss (gain) on financial instrument obligation — ( 336 ) 1,111 Excess tax benefit recognized ( 413 ) ( 44 ) ( 1,175 ) Foreign tax credit ( 568 ) — ( 358 ) Global intangible low taxed income 586 637 456 Prior year adjustment 16 429 — Change in unrecognized tax benefits 969 ( 715 ) 634 Nondeductible compensation 414 402 136 Other 255 88 186 Provision (benefit) for income taxes $ 13,711 $ ( 6,237 ) $ 1,737 49 The tax effects of significant items comprising the Company’s deferred tax assets (liabilities) are as follows: December 31, 2020 December 31, 2019 (in thousands) Allowance for doubtful accounts $ 4 $ 34 Inventories 1,116 720 Employee benefits 2,506 2,048 Net operating loss 1,288 3,272 Sales reserves 2,428 1,644 Unrecognized tax benefits 621 387 Right of Use Liability 1,134 182 Right of Use Asset ( 1,071 ) ( 163 ) Depreciation and amortization ( 297 ) 182 Intangible assets ( 117 ) ( 140 ) Other 97 13 7,709 8,179 Valuation allowance ( 891 ) ( 893 ) Net deferred tax assets (liabilities) $ 6,818 $ 7,286 At December 31, 2020, the Company has no balance of federal net operating loss carryforwards and $ 18.6 million of state net operating loss carryforwards, which will begin to expire in 2029. In October 2018, as a result of certain trading activity in the Company's common stock, the change of ownership provisions of Internal Revenue Code Section 382 (“Section 382”) were triggered. Based on the Section 382 limitation, the Company was not able to utilize its net operating losses to fully offset its taxable income in 2018. Based on the Section 382 limitation, the pre-ownership change net operating losses are fully utilized through 2020 due to sufficient taxable income in 2019 and 2020. The realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. During the fourth quarter of 2019, the Company concluded that it was more likely than not that the deferred tax assets would be realized. This conclusion was based on the recent profitability in 2019 and 2018, including the previous winddown of a business that was the cause of significant losses in previous years. For the year ended December 31, 2019, the Company reported a change in the valuation allowance for deferred tax assets of $ 10.1 million. The Company continues to maintain a valuation allowance on certain state net operating losses as it is not more likely than not that the losses in those specific jurisdictions will be realized. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: December 31, 2020 December 31, 2019 (in thousands) Gross unrecognized tax benefit, beginning of period $ 2,023 $ 2,693 Additions based on tax positions related to the current year 1,249 213 Settlements related to tax positions in a prior period ( 36 ) ( 376 ) Decreases based on tax positions in a prior period ( 146 ) ( 507 ) Gross unrecognized tax benefit, end of period $ 3,090 $ 2,023 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. The Company has settled uncertain tax positions in certain jurisdictions, which resulted in a decrease in amounts based on tax positions in prior periods of approximately $ 36 thousand and $ 0.7 million for the years ended December 31, 2020 and 2019, respectively. To the extent these unrecognized tax benefits are ultimately recognized, approximately $ 2.4 million will impact the Company’s effective tax rate in future periods. The Company is currently in discussions with certain additional jurisdictions regarding uncertain tax positions and based on those discussions estimates that the amounts based on tax positions in prior periods will potentially decrease by $ 0.6 million within the next twelve months. Interest and penalties associated with income tax matters are included in the provision for income taxes. As of December 31, 2020, the Company had uncertain tax positions of $ 3.1 million, inclusive of $ 0.8 million of interest and penalties. We are currently under examination by certain state and local taxing jurisdictions. Further, at any given time, multiple tax years may be subject to examination by various taxing authorities. The recorded amounts of income tax are subject to adjustment upon examination, changes in interpretation and changes in judgment utilized in determining estimates. 50 The Company files U.S., state and foreign income tax returns in jurisdictions with various statutes of limitations. Below is a summary of the filing jurisdictions and open tax years: Open Years U.S. Federal 2017 - 2019 U.S. State and Local 2016 - 2019 Non-U.S. 2017 - 2019 Note 9. Preferred Stock Series B Redeemable Preferred Stock In September 2010, VTBH issued 1,000,000 shares of non-voting Series B Redeemable Preferred Stock (“Series B Preferred Stock”) with a fair value of $ 12.4 million. The Series B Preferred Stock was required to be redeemed on the earlier of September 28, 2030, or the occurrence of a liquidation event at its original issue price of $ 12.425371 per share plus any accrued but unpaid dividends. Dividends were cumulative and accrued at a rate of 8.0 % per annum, compounded quarterly, and payable as and when declared by the Board of Directors. The Series B Preferred Stock did not contain any conversion rights. On February 18, 2015, Dr. John Bonanno (“Dr. Bonanno”), the original holder of the Series B Preferred Stock, filed a complaint in Delaware Chancery Court alleging breach of contract. According to the complaint, the merger between VTBH and Turtle Beach purportedly triggered a contractual obligation for VTBH to redeem Dr. Bonanno’s stock. Dr. Bonanno requested a declaratory judgment stating that he was entitled to damages, including a redemption of his stock valued at $ 15.1 million (equal to the original issue price of his stock plus accrued dividends) as well as other costs and expenses. On April 23, 2018, the Company facilitated and entered into a series of transactions pursuant to which the Series B Preferred Stock was acquired from Dr. Bonanno by non-affiliate investors and subsequently retired. As part of the transactions, the Company entered into (i) an Exchange Agreement (the “Exchange Agreement”) with such non-affiliate investors pursuant to which the Company agreed to exchange the Series B Preferred Stock for an aggregate of 1,307,143 newly issued shares of the Company’s common stock and wholly-funded warrants exercisable for an aggregate of 550,000 shares of the Company’s common stock and (ii) a Settlement Agreement (the “Settlement Agreement”) with Dr. Bonanno. Pursuant to the Settlement Agreement, Dr. Bonanno agreed to discontinue certain previously disclosed claims and actions against the Company related to the Series B Preferred Stock, as well as to provide a release of the Company with respect to all such claims and any other claims related to Dr. Bonanno’s ownership or disposition of the Series B Preferred Stock. In connection with and as consideration thereof, the Company agreed to pay Dr. Bonanno a cash sum of $ 1.0 million to settle nonredemption claims in connection with the matter, and to pay an additional $ 1.25 million if a change of control transaction meeting certain specified requirements is consummated within three years of the date of the Settlement Agreement. Accordingly, on April 26, 2018, all exchanged shares of Series B Preferred Stock were retired, and no shares of Series B Preferred Stock remain outstanding. The redemption value of the Series B Preferred Stock was $ 19.4 million as of the transaction date, and $ 18.9 million as of December 31, 2017. The Company assessed the relative fair values of the Series B Preferred Stock retired pursuant to the Exchange Agreement and Settlement Agreement to determine the amount of the total transaction consideration transferred that was allocable to each component. The Company determined the fair value of the Series B Preferred Stock to be greater than the total consideration transferred. In addition, the Company was not able to reliably estimate the fair value of the litigation settlement. Based on these fair value assessments, the Company utilized the residual approach and first allocated proceeds to the Series B Preferred Stock, which resulted in no amount of the consideration being allocated to the litigation settlement. Accordingly, the entire transaction was accounted for as an equity transaction with the difference between the carrying value of the Series B Preferred Stock and the fair value of the consideration transferred included in stockholders’ equity. Under the initial terms of the warrants, the holders had the right to receive, at their option, a cash payment for the remaining unexercised portion of the warrants upon the Company consummating a Fundamental Transaction (as defined in the warrant agreement, and including any merger, consolidation, sale or other reorganization event in which its common stock is converted into or exchanged for securities, cash or other property). If so elected by the warrant holders, the cash payment would have been based on a Black-Scholes pricing model and would have been made upon the consummation of a Fundamental Transaction or during the ensuing 30-day period thereafter. As a result of these terms regarding the possible future cash payment, the Company accounted for the warrants issued in connection with the retirement of the Series B Preferred Stock as a financial instrument obligation that is marked to market each period, with subsequent changes in fair value reported in earnings. The fair value of the warrants upon issuance and at December 31, 2018, was $ 2.6 million and $ 7.8 million, respectively. On March 20, 2019, the Company amended the terms of the warrant agreement so that the value of the warrant no longer have to be adjusted to fair value. See Note 11. Stock-Based Compensation for further discussion. For the year ended December 31, 2020, the company recognized no gain or loss related to warrants. For the years ended December 31, 2019 and December 31, 2018, respectively, the company recognized an unrealized gain of $ 1.6 million and unrealized loss of $ 5.3 million on the warrants that is included in “Other non-operating expense (income), net” in the Consolidated Statement of Operations. 51 For the years ended December 31, 2020 and 2019, the Company recognized no interest expense on the Series B Preferred Stock. For the year ended December 31, 2018, the Company recognized $ 0.5 million. There were no dividends declared during the years ended December 31, 2020, 2019 and 2018. Registration Rights Agreement In connection with the Exchange Agreement, the Company entered into an agreement (the “Registration Rights Agreement”) with certain non-affiliate investors pursuant to which, among other things, the Company agreed to file a registration statement to register for resale the shares of common stock (i) issued and outstanding as a result of the consummation of the transactions contemplated by the Exchange Agreement and (ii) issuable upon the exercise of the wholly-funded warrants. The Company is required to cause the registration statement to be declared effective as soon as practicable, but in no event later than 90 days after the closing of the transactions contemplated by the Exchange Agreement, which occurred on April 26, 2018. The Company also agreed, among other things, to indemnify the investors under the registration statement from certain liabilities and to pay all fees and expenses incident to the Company’s performance of or compliance with the Registration Rights Agreement. Note 10. 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: Year Ended December 31, 2020 2019 2018 (in thousands, except per-share data) Net income $ 38,746 $ 17,944 $ 39,190 Unrealized gain on financial instrument obligation — ( 1,601 ) — Net income - diluted $ 38,746 $ 16,343 $ 39,190 Weighted average common shares outstanding — Basic 14,801 14,483 13,512 Plus incremental shares from assumed conversions: Dilutive effect of restricted stock 235 19 31 Dilutive effect of stock options 917 432 565 Dilutive effect of warrants 412 754 181 Weighted average common shares outstanding — Diluted 16,365 15,688 14,289 Net income per share: Basic $ 2.62 $ 1.24 $ 2.90 Diluted $ 2.37 $ 1.04 $ 2.74 Incremental shares from stock options and restricted stock awards are computed by 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, unrecognized compensation expense for outstanding awards and the estimated tax benefit of the assumed exercises. Year Ended December 31, 2020 2019 2018 (in thousands) Stock options 813 480 86 Warrants — — 377 Unvested restricted stock awards 136 194 107 Total 949 674 570 Note 11. Equity and Stock-Based Compensation Stock Repurchase Activity 52 On April 9, 2019, the 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. As of December 31, 2020 , the Company has repurchased 0.3 million shares of its common stock for a total cost of $ 2.5 million . Stock-Based Compensation On October 30, 2013, the Board of Directors adopted, and on December 27, 2013, the stockholders approved, the 2013 Stock-Based Incentive Compensation Plan (the “2013 Plan”), that became effective upon consummation of the Merger on January 15, 2014 and was subsequently amended at our 2019 Annual Meeting. Our stock-based compensation program is a broad-based program designed to attract and retain employees while also aligning employees’ interests with the interests of our shareholders. In addition, members of our Board of Directors participate in our stock-based compensation program in connection with their service on our board. Stock option awards outstanding under the 2013 Plan are time-based and granted at exercise prices which are equal to the market value of the Company’s common stock on the grant date and expire no later than ten years from the date of grant, but only to the extent they have vested. The options generally vest as specified in the option agreements subject, in some instances, to acceleration in certain circumstances. The restrictions on restricted stock generally lapse over a three-year period from the date of the grant. In the event a participant terminates employment with the Company, any vested stock options and any restricted stock still subject to restrictions are generally forfeited if they are not exercised within 90 days. The following table presents the stock activity and the total number of shares available for grant as of December 31, 2020: (in thousands) Balance at December 31, 2019 1,777 Options granted ( 910 ) Options cancelled 51 Restricted stock granted ( 427 ) Restricted forfeited 10 Balance at December 31, 2020 501 Total estimated stock-based compensation expense for employees and non-employees, related to all of the Company's stock-based awards, was comprised as follows: Year ended December 31, 2020 2019 2018 (in thousands) Cost of revenue $ 927 $ 150 $ 289 Selling and marketing 1,148 691 186 Research and development 664 417 136 General and administrative 2,810 2,300 1,266 Total stock-based compensation $ 5,549 $ 3,558 $ 1,877 Forfeitures on option grants are estimated at 10 % based on evaluation of historical and expected future turnover for non-executives and 0 % for executives. Stock-based compensation expense was recorded net of estimated forfeitures, such that expense was recorded only for those stock-based awards that are 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). In 2017, due to changes in the reporting of stock compensation, the Company’s previously unrecognized excess tax benefit related to the exercise of nonqualified stock options totaling $ 2.2 million was recognized as a deferred tax asset. The associated tax benefit recognized in the Consolidated Statements of Operations for the fiscal years ended December 31, 2020 and 2019 was approximately $ 0.4 million and $ 0.1 million, respectively. 53 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 910,004 7.32 Exercised ( 618,192 ) 6.79 Forfeited ( 51,310 ) 10.35 Outstanding at December 31, 2020 2,383,427 $ 7.85 7.78 $ 33,064,942 Vested and expected to vest at December 31, 2020 2,316,460 $ 7.88 7.75 $ 32,219,922 Exercisable at December 31, 2020 919,951 $ 7.40 6.23 $ 13,383,477 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 option exercises was $ 7.4 million and $ 0.6 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, total unrecognized compensation cost related to non-vested stock options granted to employees was $ 5.3 million, which is expected to be recognized over a remaining weighted average vesting period of 2.6 years. Determination of Fair Value Option valuation models require the input of highly subjective assumptions, including expected stock price volatility. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. The fair value of options granted under the 2013 Plan was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: Expected term (in years) 6.1 Risk-free interest rate 0.4%- 1.4% Expected volatility 50.1%- 60.4% Dividend rate 0 % Each of these inputs is subjective and generally requires significant judgment to determine. The risk-free rate is based on a zero-coupon U.S. Treasury rate in effect at the time of grant with maturity dates that coincide with the expected life of the options. The expected life of the options is based on a simplified weighted average taking into account the vesting conditions and contractual life of the award. Since the Company has a limited trading history for its common stock, the expected volatility was derived from the historical stock volatilities of several unrelated public companies within the Company’s industry that are considered to be comparable to the Company’s business over a period equivalent to the expected term of the stock option grants. The weighted average grant date fair value of options granted during the three years ended December 31, 2020 was $ 3.82 , $ 4.71 , and $ 3.33 , respectively. The total estimated fair value of employee options vested during the three years ended December 31, 2020 was $ 1.7 million, $ 1.0 million and $ 0.7 million, respectively. Restricted Stock Activity Shares Weighted Average Grant Date Fair Value Per Share Nonvested restricted stock at December 31, 2019 421,490 $ 15.06 Granted 427,352 7.24 Vested ( 160,861 ) 17.21 Shares forfeited ( 10,391 ) 9.61 Nonvested restricted stock at December 31, 2020 677,590 $ 9.71 54 As of December 31, 2020 total unrecognized compensation cost related to the nonvested restricted stock awards granted was $ 5.3 million, which is expected to be recognized over a remaining weighted average vesting period of 2.6 years. Stock Warrants In connection with certain subordinated notes, the Company issued warrants to purchase an aggregate 0.4 million shares and 0.3 million shares of the Company’s common stock at an exercise price of $ 10.16 and $ 8.00 per share, respectively, to SG VTB Holdings, LLC, all of which were settled through cashless exercises during the year ended December 31, 2019. In connection with the retirement of the Series B Preferred Stock in April 2018, the Company issued wholly-funded warrants exercisable for an aggregate of 0.5 million shares of its common stock. Under the terms of the warrants, the holders had the right to receive, at their option, a cash payment for the remaining unexercised portion of the warrants upon the Company consummating a Fundamental Transaction (as defined in the warrant agreement, and including any merger, consolidation, sale or other reorganization event in which its common stock is converted into or exchanged for securities, cash or other property). If so elected by the warrant holders, the cash payment will be based on a Black-Scholes pricing model and will be made upon the consummation of a Fundamental Transaction or during the ensuing 30-day period thereafter. As a result of these terms regarding the possible future cash payment, the Company accounted for the warrants issued in connection with the retirement of the Series B Preferred Stock as a financial instrument obligation that is marked to market each period, with subsequent changes in fair value reported in earnings. On March 30, 2019, the Company and the warrant holders entered into an amendment to the warrant agreement that revises the terms under which warrant holders may exercise their rights under a Fundamental Transaction. As a result of this amendment, the warrants are no longer accounted for as a financial instrument obligation and reported as a liability that is marked to market each period with changes in fair value reported in earnings. The warrants were marked to market through March 30, 2019, the execution date of the amendment, at which time the warrants are accounted for as an equity instrument. The fair value on that date of $ 6.2 million was reclassified to additional paid-in-capital. For the years ended December 31, 2020 and 2019, the Company recognized no gain or loss and an unrealized gain of $ 1.6 million , respectively, on the warrants that is included in “Other non-operating expense (income), net” in the Condensed Consolidated Statement of Operations. Phantom Equity Activity In November 2011, VTBH adopted a 2011 Phantom Equity Appreciation Plan (“the Appreciation Plan”) that covers certain employees, consultants, and directors of VTBH (“Participants”) who are entitled to phantom units, as applicable, pursuant to the provisions of their respective award agreements. The Appreciation Plan is shareholder-approved, which permits the granting of phantom units to Participants of up to 1,500,000 units. These units are not exercisable or convertible into shares of common stock, but give the holder a right to receive a cash bonus equal to the appreciation in value between the exercise price and value of common stock at the time of a change in control event as defined in the plan. As of December 31, 2020 and 2019, 178,586 phantom units at a weighted-average exercise price of $ 3.72 have been granted and are outstanding. Because these phantom units are not exercisable or convertible into common shares, the share amounts and exercise prices were not subject to the exchange ratio provided by the Merger agreement. As of December 31, 2020, compensation expense related to the Appreciation Plan units remained unrecognized because a change in control of VTB, as defined in the plan, had not occurred and is not anticipated by the Company. In July 2015, the Appreciation Plan was terminated as to new grants, but vested phantom units remain in place. Note 12. Stockholders’ 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 year ended December 31, 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. 55 Note 13. Segment Information The company operates in a single reportable segment and two reporting unit structure. The entire business is managed by a single management team whose chief operating decision maker is the Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance . The following table represents total net revenue based on where customers are physically located: Year Ended December 31, 2020 2019 2018 (in thousands) North America $ 262,170 $ 166,748 $ 215,601 United Kingdom 38,251 25,671 34,509 Europe 45,629 34,707 30,244 Other 14,043 7,537 7,083 Total net revenues $ 360,093 $ 234,663 $ 287,437 The following table represents property and equipment, net based on physical location: Year Ended December 31, 2020 2019 (in thousands) United States $ 5,645 $ 2,906 International 930 1,056 Total $ 6,575 $ 3,962 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 approximately 80 % ownership interest and existing shareholders would maintain approximately 20 % ownership interest in the combined company. 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 56 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 members of the Company’s Board of Directors prior to the merger 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 July 9, 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 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. Intellectual Property dispute : On November 24, 2020, ABP Technology Limited (ABP) issued a claim for trade mark infringement in the High Court of England and Wales against Voyetra Turtle Beach, Inc. (“VTB”) and Turtle Beach Europe Limited (“TBEU”) relating to the use by VTB and TBEU of the sign STEALTH on and in relation to gaming headsets in the UK. VTB and TBEU filed and served a Defence to the claim on February 2, 2021. The next stage in the proceedings will be a Case Management Conference (date to be set) at which the Court will give directions for each stage to trial. The trial is expected to be set for mid-2022. 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 December 31, 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 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 warranties, which are included in other current liabilities: Year ended December 31, 2020 2019 2018 (in thousands) Warranty, beginning of period $ 742 $ 668 $ 472 Warranty costs accrued 1,336 816 864 Settlements of warranty claims ( 1,039 ) ( 742 ) ( 668 ) Warranty, end of period $ 1,039 $ 742 $ 668 57 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 December 31, 2020 (in thousands) Right-of-use assets Other assets $ 5,765 Lease liability obligations, current $ 896 Lease liability obligations, noncurrent 5,128 Total lease liability obligations $ 6,024 Weighted-average remaining lease term (in years) 6.0 Weighted-average discount rate 3.75 % During the year ended December 31, 2020, the Company recognized approximately $ 1.3 million of lease costs in operating expenses and approximately $ 0.7 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 December 31, 2020: (in thousands) 2021 $ 1,127 2022 852 2023 729 2024 738 2025 709 Thereafter 2,965 Total minimum payments 7,120 Less: Imputed interest ( 1,096 ) Total $ 6,024 Note 15. Selected Quarterly Financial Data – Unaudited Fiscal 2020 Quarter First Second Third Fourth (in thousands, except per share data) Net Revenue $ 35,007 $ 79,680 $ 112,494 $ 132,912 Gross Margin 10,785 29,227 46,136 47,640 Net Income (Loss) ( 3,555 ) 8,204 17,794 16,303 Earnings (Loss) Per Share Basic $ ( 0.25 ) $ 0.56 $ 1.20 $ 1.07 Diluted $ ( 0.25 ) $ 0.51 $ 1.04 $ 0.93 Fiscal 2019 Quarter First Second Third Fourth (in thousands, except per share data) Net Revenue $ 44,846 $ 41,330 $ 46,723 $ 101,764 Gross Margin 14,787 13,171 15,043 35,712 Net Income (Loss) 3,055 ( 2,373 ) ( 3,124 ) 20,386 Earnings (Loss) Per Share Basic $ 0.21 $ ( 0.16 ) $ ( 0.22 ) $ 1.41 Diluted $ 0.19 $ ( 0.16 ) $ ( 0.22 ) $ 1.29 58 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.