Turtle Beach Corp 10-Q

Item 1. Financial Statements. Turtle Beach Corporation Condensed Consolidated Statements of Operations ( unaudited) Three Months Ended March 31, March 31, 2022 2021 (in thousands, except per-share data) Net revenue $ 46,662 $ 93,053 Cost of revenue 32,633 58,198 Gross profit 14,029 34,855 Operating expenses: Selling and marketing 10,829 11,545 Research and development 5,252 3,993 General and administrative 6,235 7,037 Total operating expenses 22,316 22,575 Operating income (loss) ( 8,287 ) 12,280 Interest expense 109 97 Other non-operating expense, net 719 579 Income (loss) before income tax ( 9,115 ) 11,604 Income tax expense (benefit) ( 2,639 ) 2,766 Net income (loss) $ ( 6,476 ) $ 8,838 Net income (loss) per share Basic $ ( 0.40 ) $ 0.57 Diluted $ ( 0.40 ) $ 0.49 Weighted average number of shares: Basic 16,194 15,551 Diluted 16,194 18,076 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 2 Turtle Beach Corporation Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months Ended March 31, 2022 March 31, 2021 (in thousands) Net income (loss) $ ( 6,476 ) $ 8,838 Other comprehensive income (loss): Foreign currency translation adjustment ( 429 ) ( 711 ) Other comprehensive income (loss) ( 429 ) ( 711 ) Comprehensive income (loss) $ ( 6,905 ) $ 8,127 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 3 Turtle Beach Corporation Condensed Consolidated Balance Sheets March 31, December 31, 2022 2021 (unaudited) ASSETS (in thousands, except par value and share amounts) Current Assets: Cash and cash equivalents $ 23,700 $ 37,720 Accounts receivable, net 11,814 35,953 Inventories 117,422 101,933 Prepaid expenses and other current assets 15,773 17,506 Total Current Assets 168,709 193,112 Property and equipment, net 6,293 6,955 Deferred income taxes 8,229 5,899 Goodwill 10,686 10,686 Intangible assets, net 5,464 5,788 Other assets 8,669 8,065 Total Assets $ 208,050 $ 230,505 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Revolving credit facility $ — $ — Accounts payable 32,899 40,475 Other current liabilities 27,385 37,693 Total Current Liabilities 60,284 78,168 Income tax payable 3,774 3,774 Other liabilities 7,630 7,194 Total Liabilities 71,688 89,136 Commitments and Contingencies Stockholders’ Equity Common stock, $ 0.001 par value - 25,000,000 shares authorized; 16,244,625 and 16,168,147 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively 16 16 Additional paid-in capital 200,176 198,278 Accumulated deficit ( 63,528 ) ( 57,052 ) Accumulated other comprehensive income (loss) ( 302 ) 127 Total Stockholders’ Equity 136,362 141,369 Total Liabilities and Stockholders’ Equity $ 208,050 $ 230,505 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 4 Turtle Beach Corporation Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 31, 2022 March 31, 2021 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ ( 6,476 ) $ 8,838 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,192 739 Amortization of intangible assets 312 303 Amortization of debt financing costs 47 47 Stock-based compensation 1,537 1,786 Deferred income taxes ( 2,329 ) ( 388 ) Change in sales returns reserve ( 3,285 ) 678 Provision for obsolete inventory ( 874 ) 57 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 27,423 10,819 Inventories ( 14,615 ) 12,108 Accounts payable ( 7,494 ) ( 15,669 ) Prepaid expenses and other assets 1,734 ( 6,568 ) Income taxes payable ( 657 ) 3,086 Other liabilities ( 9,863 ) 5,251 Net cash provided by (used for) operating activities ( 13,348 ) 21,087 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment ( 611 ) ( 2,280 ) Acquisition of a business, net of cash acquired — ( 2,500 ) Net cash used for investing activities ( 611 ) ( 4,780 ) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on revolving credit facilities — 97,032 Repayment of revolving credit facilities — ( 97,032 ) Proceeds from exercise of stock options and warrants 361 911 Repurchase of common stock to satisfy employee tax withholding obligations — ( 215 ) Net cash provided by financing activities 361 696 Effect of exchange rate changes on cash and cash equivalents ( 422 ) ( 719 ) Net increase (decrease) in cash and cash equivalents ( 14,020 ) 16,284 Cash and cash equivalents - beginning of period 37,720 46,681 Cash and cash equivalents - end of period $ 23,700 $ 62,965 SUPPLEMENTAL DISCLOSURE OF INFORMATION Cash paid for interest $ 64 $ 64 Cash paid for income taxes $ 126 $ 5 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 5 Turtle Beach Corporation Condensed Consolidated Statement of Stockholders ’ Equity (Deficit) (unaudited) Common Stock Additional Paid-In Accumulated Accumulated Other Comprehensive Shares Amount Capital Deficit Income (Loss) Total (in thousands) Balance at December 31, 2021 16,168 $ 16 $ 198,278 $ ( 57,052 ) $ 127 $ 141,369 Net loss — — — ( 6,476 ) — ( 6,476 ) Other comprehensive loss, net of tax — — — — ( 429 ) ( 429 ) Issuance of restricted stock 30 — — — — — Stock options exercised 47 — 361 — — 361 Stock-based compensation — — 1,537 — — 1,537 Balance at March 31, 2022 16,245 $ 16 $ 200,176 $ ( 63,528 ) $ ( 302 ) $ 136,362 Common Stock Additional Paid-In Accumulated Accumulated Other Comprehensive Shares Amount Capital Deficit Income (Loss) Total (in thousands) Balance at December 31, 2020 15,476 15 190,568 ( 74,773 ) 589 $ 116,399 Net income — — — 8,838 — 8,838 Other comprehensive loss, net of tax — — — — ( 711 ) ( 711 ) Issuance of restricted stock 26 — 113 — — 113 Repurchase of common stock and retirement of related treasury shares ( 6 ) — ( 215 ) — — ( 215 ) Stock options exercised 159 1 911 — — 912 Stock-based compensation — — 1,786 — — 1,786 Balance at March 31, 2021 15,655 $ 16 $ 193,163 $ ( 65,935 ) $ ( 122 ) $ 127,122 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited) 6 Turtle Beach Corporation Notes to Condensed Consolidated Financial Statements (unaudited) Note 1. Background and Basis of Presentation Organization Turtle Beach Corporation (“Turtle Beach” or the “Company”), headquartered in White Plains, New York and incorporated in the state of Nevada in 2010, is a premier audio and gaming technology company with expertise and experience in developing, commercializing and marketing innovative products across a range of large addressable markets under the Turtle Beach®, ROCCAT® and Neat Microphones® brands. Turtle Beach is a worldwide leader of feature-rich headset solutions for use across multiple platforms, including video game and entertainment consoles, handheld consoles, personal computers (“PC”), tablets and mobile devices. ROCCAT is a gaming keyboards, mice and other accessories brand focused on the PC peripherals market. Neat Microphones is a microphones brand focused on using cutting edge technology and design to create high quality USB and analog microphones for gamers, streamers, and professionals. VTB Holdings, Inc. (“VTBH”), a wholly-owned subsidiary of Turtle Beach Corporation and the owner of Voyetra Turtle Beach, Inc. (“VTB”), was incorporated in the state of Delaware in 2010. VTB, the owner of Turtle Beach Europe Limited (“TB Europe”), was incorporated in the state of Delaware in 1975 with operations principally located in White Plains, New York. Basis of Presentation The accompanying interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. All intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire fiscal year. The December 31, 2021 Condensed Consolidated Balance Sheet has been derived from the Company’s audited financial statements included in its Annual Report on Form 10-K filed with the SEC on March 2, 2022 (“Annual Report”). These financial statements should be read in conjunction with the annual financial statements and the notes thereto included in the Annual Report that contains information useful to understanding the Company’s businesses and financial statement presentations. Use of estimates : The preparation of accompanying unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These estimates may change, as new events occur and additional information is obtained, and will be recognized in the consolidated financial statements in the period in which such changes occur. Future actual results could differ materially from these estimates. The novel coronavirus (“COVID-19”) pandemic has disrupted worldwide economic markets and the extent to which COVID-19 continues to affect the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict. We continue to actively monitor and assess the impact of the pandemic on our business, operations, and financial condition. Note 2. Summary of Significant Accounting Policies The preparation of consolidated annual and quarterly financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Company’s consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. The Company can give no assurance that actual results will not differ from those estimates. There have been no material changes to the critical accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report. 7 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 March 31, 2022 and December 31, 2021, the Company had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted . The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of March 31, 2022 and December 31, 2021 . March 31, 2022 December 31, 2021 Reported Fair Value Reported Fair Value (in thousands) Financial Assets and Liabilities: Cash and cash equivalents $ 23,700 $ 23,700 $ 37,720 $ 37,720 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. Note 4. Allowance for Sales Returns The following table provides the changes in our sales return reserve, which is classified as a reduction of accounts receivable: Three Months Ended March 31, 2022 2021 (in thousands) Balance, beginning of period $ 8,998 $ 11,233 Reserve accrual 2,683 6,551 Recoveries and deductions, net ( 5,968 ) ( 5,873 ) Balance, end of period $ 5,713 $ 11,911 Note 5. Composition of Certain Financial Statement Items Inventories Inventories consist of the following: March 31, 2022 December 31, 2021 (in thousands) Finished goods $ 116,811 $ 101,446 Raw materials 611 487 Total inventories $ 117,422 $ 101,933 8 Property and Equipment, net Property and equipment, net, consists of the following: March 31, 2022 December 31, 2021 (in thousands) Machinery and equipment $ 2,317 $ 2,255 Software and software development 2,406 2,404 Furniture and fixtures 1,422 1,257 Tooling 8,036 7,855 Leasehold improvements 1,752 1,794 Demonstration units and convention booths 14,657 14,493 Total property and equipment, gross 30,590 30,058 Less: accumulated depreciation and amortization ( 24,297 ) ( 23,103 ) Total property and equipment, net $ 6,293 $ 6,955 Other Current Liabilities Other current liabilities consist of the following: March 31, 2022 December 31, 2021 (in thousands) Accrued royalty 8,261 11,582 Accrued employee expenses 4,328 4,114 Accrued freight 4,028 6,251 Accrued marketing 2,411 3,723 Accrued expenses 8,357 12,023 Total other current liabilities $ 27,385 $ 37,693 Note 6. Goodwill and Other Intangible Assets Acquired Intangible Assets Acquired identifiable intangible assets, and related accumulated amortization, as of March 31, 2022 and December 31, 2021 consist of: March 31, 2022 Gross Carrying Value Accumulated Amortization Net Book Value (in thousands) Customer relationships $ 8,355 $ 6,491 $ 1,864 Tradenames 3,066 807 2,259 Developed technology 1,884 507 1,377 Foreign currency ( 1,025 ) ( 989 ) ( 36 ) Total Intangible Assets $ 12,280 $ 6,816 $ 5,464 December 31, 2021 Gross Carrying Value Accumulated Amortization Net Book Value (in thousands) Customer relationships $ 8,355 $ 6,315 $ 2,040 Tradenames 3,066 730 2,336 Developed technology 1,884 440 1,444 Foreign currency ( 896 ) ( 865 ) ( 32 ) Total Intangible Assets $ 12,409 $ 6,620 $ 5,788 9 In connection with the October 2012 acquisition of TB Europe, the acquired intangible assets related to customer relationships is being amortized over an estimated useful life of thirteen years with the amortization being included within sales and marketing expense. In May 2019, the Company completed its acquisition of the business and assets of the ROCCAT business, and in January 2021, the Company completed its acquisition of the business and assets of the Neat Microphones business. The respective acquired intangible assets relating to developed technology, customer relationships and trade names are subject to amortization. Amortization expense related to definite lived intangible assets was $ 0.3 million for each of the three months ended March 31, 2022 and March 31, 2021. As of March 31, 2022, estimated annual amortization expense related to definite lived intangible assets in future periods is as follows: (in thousands) 2022 $ 961 2023 1,041 2024 1,008 2025 889 2026 637 Thereafter 964 Total $ 5,500 There were no changes in the carrying values of goodwill for the three months ended March 31, 2022 from the balance as of December 31, 2021. Note 7. Revolving Credit Facility and Long-Term Debt The Company had no outstanding balance related to its revolving credit facility as of March 31, 2022 and December 31, 2021. Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was $ 0.1 million for each of the three months ended March 31, 2022 and March 31, 2021. Amortization of deferred financing costs was $ 47,000 for each of the three months ended March 31, 2022 and March 31, 2021. 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 “first-in, last-out” loan (a “FILO Loan”) of up to $ 6.8 million. On May 31, 2019, the Company amended the Credit Facility to provide for, amongst other items, (i) the addition of TBC Holding Company LLC, a wholly-owned subsidiary of VTB, as an obligor and (ii) the ability to make investments in TB Germany GmbH, a wholly-owned subsidiary of TB Europe, of up to $ 4 million in connection with the acquisition of the business 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 and between 1.25 % to 2.00 % for U.S. LIBOR loans and U.K. loans, and between 2.00 % to 2.75 % for the FILO Loan. In addition, Turtle Beach is required to pay a commitment fee on the unused revolving loan commitment at a rate ranging from 0.25 % to 0.50 % and letter of credit fees and agent fees. As of March 31, 2022, interest rates for outstanding borrowings were 4.00 % for base rate loans and 3.00 % for LIBOR rate loans. As of March 31, 2022, there were no outstanding borrowings under the Credit Facility. The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met or certain other events occur (as defined in the Credit Facility). At such times, the Credit Facility requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the last day of each fiscal quarter. 10 The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions, including the Company’s ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and consolidations, engage in sale leaseback transactions and transactions with affiliates, and encumber and dispose of assets. Obligations under the Credit Facility are secured by a security interest and lien upon substantially all of the Company’s assets. As of March 31, 2022, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $ 48.7 million. Note 8. Income Taxes In order to determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions. However, to the extent that application of the estimated annual effective tax rate is not representative of the quarterly portion of actual tax expense expected to be recorded for the year, the Company determines the provision for income taxes based on actual year-to-date income (loss). Certain significant or unusual items are separately recognized as discrete items in the period during which they occur and can be a source of variability in the effective tax rates from quarter to quarter. The following table presents the Company’s income tax expense and effective income tax rate: Three Months Ended March 31, 2022 2021 (in thousands) Income tax expense (benefit) $ ( 2,639 ) $ 2,766 Effective income tax rate 29.0 % 23.8 % Income tax benefit for the three months ended March 31, 2022 was $ 2.6 million at an effective tax rate of 29.0 % and income tax expense for the three months ended March 31, 2021 was $ 2.8 million at an effective tax rate of 23.8 %. The effective tax rate for the three months ended March 31, 2022 was primarily impacted by certain non-deductible costs and state income tax expense, offset by the deduction for foreign derived intangible income and stock option exercises. The Company is subject to income taxes domestically and in various foreign jurisdictions. Significant judgment is required in evaluating uncertain tax positions and determining the provision for income taxes. The Company recognizes only those tax positions that meet the more-likely-than-not recognition threshold and establishes tax reserves for uncertain tax positions that do not meet this threshold. Interest and penalties associated with income tax matters are included in the provision for income taxes in the condensed consolidated statements of operations. As of March 31, 2022, the Company had uncertain tax positions of $ 3.8 million, inclusive of $ 1.1 million of interest and penalties. The Company files U.S., state and foreign income tax returns in jurisdictions with various statutes of limitations. The federal tax years open under the statute of limitations are 2018 through 2020, and the state tax years open under the statute of limitations are 2017 through 2020. Note 9. Stock-Based Compensation Total estimated stock-based compensation expense for employees and non-employees, related to all of the Company’s stock-based awards, was as follows: Three Months Ended March 31, 2022 2021 (in thousands) Cost of revenue $ 26 $ 397 Selling and marketing 398 331 Research and development 283 249 General and administrative 830 809 Total stock-based compensation $ 1,537 $ 1,786 11 The following table presents the stock activity and the total number of shares available for grant as of March 31, 2022: (in thousands) Balance at December 31, 2021 998 Options cancelled 5 Restricted stock granted ( 43 ) Forfeited/Expired restricted stock added back 5 Balance at March 31, 2022 965 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, 2021 1,739,240 $ 7.72 $ 7.02 $ 25,542,823 Options Granted - - Options Exercised ( 47,078 ) 7.67 Options Forfeited ( 5,198 ) 16.27 Outstanding at March 31, 2022 1,686,964 $ 7.70 6.64 $ 23,231,263 Vested and expected to vest at March 31, 2022 1,666,854 $ 7.75 6.62 $ 22,967,200 Exercisable at March 31, 2022 1,075,419 $ 7.08 6.15 $ 15,595,467 Stock options are time-based and the majority are exercisable within 10 years of the date of grant, but only to the extent they have vested. The options generally vest as specified in the option agreements subject to acceleration in certain circumstances. In the event participants in the plan cease to be employed or engaged by the Company, all vested options would be forfeited if they are not exercised within 90 days. Forfeitures on option grants are estimated at 10 % for non-executives and 0 % for executives based on evaluation of historical and expected future turnover. Stock-based compensation expense was recorded net of estimated forfeitures, such that expense was recorded only for those stock-based awards expected to vest. The Company reviews this assumption periodically and will adjust it if it is not representative of future forfeiture data and trends within employee types (executive vs. non-executive). Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. The aggregate intrinsic value of options exercised was $ 0.5 million for the three months ended March 31, 2022. The Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted as of the grant date. There were no new options granted during the three months ended March 31, 2022. The total estimated fair value of employee options vested during the three months ended March 31, 2022 was $ 3.1 million. As of March 31, 2022, total unrecognized compensation cost related to non-vested stock options granted to employees was $ 2.5 million, which is expected to be recognized over a remaining weight average vesting period of 1.8 years. Restricted Stock Activity Shares Weighted Average Grant Date Fair Value Per Share Nonvested restricted stock at December 31, 2021 788,454 $ 16.81 Granted 42,900 23.21 Vested ( 29,400 ) 20.88 Shares forfeited ( 4,587 ) 18.75 Nonvested restricted stock at March 31, 2022 797,367 $ 17.00 12 As of March 31, 2022 , total unrecognized compensation cost s related to the nonvested restricted stock awards was $ 10.2 million , which will be recognized over a remaining weighted average vesting period of 2.3 years . Performance-Based Restricted Share Units As of March 31, 2022, the Company had 134,000 performance-based restricted share units outstanding. The vesting of performance-based restricted share units is determined over a three-year period based on (i) the amount by which revenue growth exceeds a defined baseline market growth each year and (ii) the achievement of specified tiers of adjusted EBITDA as a percentage of net revenue each year, with the ability to earn and vest into such units ranging from 0 % to 200 %. Note 10. Net Income (Loss) Per Share The following table sets forth the computation of basic and diluted net income per share of common stock attributable to common stockholders: Three Months Ended March 31, 2022 2021 (in thousands, except per-share data) Net income (loss) $ ( 6,476 ) $ 8,838 Weighted average common shares outstanding — Basic 16,194 15,551 Plus incremental shares from assumed conversions: Dilutive effect of restricted stock — 517 Dilutive effect of stock options — 1,458 Dilutive effect of warrants — 550 Weighted average common shares outstanding — Diluted 16,194 18,076 Net income (loss) per share: Basic $ ( 0.40 ) $ 0.57 Diluted $ ( 0.40 ) $ 0.49 Incremental shares from stock options and restricted stock awards are computed using the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Three Months Ended March 31, 2022 2021 (in thousands) Stock options 1,725 97 Unvested restricted stock awards 793 3 Warrants 550 - Total 3,068 100 Note 11. Segment Information The following table represents total net revenues based on where customers are physically located: Three Months Ended March 31, 2022 2021 (in thousands) North America $ 31,368 $ 64,135 Europe and Middle East 12,122 26,343 Asia Pacific 3,172 2,575 Total net revenues $ 46,662 $ 93,053 13 Note 12. Commitments and Contingencies Litigation The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the amount of any liability that could arise with respect to these actions cannot be determined with certainty, in the Company’s opinion, any such liability will not have a material adverse effect on its consolidated financial position, consolidated results of operations or liquidity. Shareholders Class Action : On August 5, 2013, VTBH and the Company (f/k/a Parametric Sound Corporation) announced that they had entered into the Merger Agreement pursuant to which VTBH would acquire an approximately 80 % ownership interest and existing shareholders would maintain an approximately 20 % ownership interest in the combined company (the “Merger”). Following the announcement, several shareholders filed class action lawsuits in California and Nevada seeking to enjoin the Merger. The plaintiffs in each case alleged that members of the Company’s Board of Directors breached their fiduciary duties to the shareholders by agreeing to a merger that allegedly undervalued the Company. VTBH and the Company were named as defendants in these lawsuits under the theory that they had aided and abetted the Company’s Board of Directors in allegedly violating their fiduciary duties. The plaintiffs in both cases sought a preliminary injunction seeking to enjoin closing of the Merger, which, by agreement, was heard by the Nevada court with the California plaintiffs invited to participate. On December 26, 2013, the court in the Nevada case denied the plaintiffs’ motion for a preliminary injunction. Following the closing of the Merger, the Nevada plaintiffs filed a second amended complaint, which made essentially the same allegations and sought monetary damages as well as an order rescinding the Merger. The California plaintiffs dismissed their action without prejudice, and sought to intervene in the Nevada action, which was granted. Subsequent to the intervention, the plaintiffs filed a third amended complaint, which made essentially the same allegations as prior complaints and sought monetary damages. On June 20, 2014, VTBH and the Company moved to dismiss the action, but that motion was denied on August 28, 2014. On September 14, 2017, a unanimous en banc panel of the Nevada Supreme Court granted defendants’ petition for writ of mandamus and ordered the trial court to dismiss the complaint but provided a limited basis upon which plaintiffs could seek to amend their complaint. Plaintiffs amended their complaint on December 1, 2017 to assert the same claims in a derivative capacity on behalf of the Company, as a well as in a direct capacity, against VTBH, Stripes Group, LLC, SG VTB Holdings, LLC, and the former members of the Company’s Board of Directors. All defendants moved to dismiss this amended complaint on January 2, 2018, and those motions were denied on March 13, 2018. Defendants petitioned the Nevada Supreme Court to reverse this ruling on April 18, 2018. On June 15, 2018, the Nevada Supreme Court denied defendants’ writ petition without prejudice. The district court subsequently entered a pretrial schedule and set trial for November 2019. On January 18, 2019, the district court certified a class of shareholders of the Company as of January 15, 2014. On October 11, 2019, the parties notified the district court that they had reached a settlement that would resolve the pending action if ultimately approved by the Court. On January 13, 2020, the district court preliminarily approved the settlement between the plaintiffs and all defendants. A final hearing was held on May 18, 2020, wherein the Court approved the settlement and entered final judgment. On May 22, 2020, PAMTP LLC, which purports to hold the claims of eight shareholders who opted out of the class settlement described above, brought suit against the Company, the Company’s CEO, Juergen Stark, Stripes Group, LLC, SG VTB Holdings, LLC, Kenneth Fox, and former members of the Company’s Board of Directors in Nevada state court. This opt-out action asserts the same direct claims that were asserted by the class of shareholders described above. The defendants filed two motions to dismiss this complaint, which were heard on August 10, 2020. The Court denied those motions by order of August 20, 2020. The case was tried in August 2021 and all defendants, including the Company, prevailed on all counts with final judgment entered in their favor on September 3, 2021. Plaintiff has filed a notice of their intent to appeal the judgment. Defendants have pending motions to obtain their costs and fees in successfully defending against the claims, which were heard in December 2021. 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. The matter was tried between September 24 and October 7, 2021. On October 8, 2021 a jury rendered a unanimous verdict in favor of the Company on the employment claims. The Court granted a directed verdict to the Company on its Cross- Complaint against the former employee. Judgment was entered in favor of the Company on October 27, 2021. On December 20, 2021, the former employee filed a notice of appeal of the judgment. Intellectual Property Dispute: On November 24, 2020, ABP Technology Limited (ABP) issued a claim for trademark 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 Defense to the claim on February 2, 2021. On March 31, 2021, ABP filed an application for summary judgement. The summary judgment application was heard by the Court in November 2021 and was dismissed. The next stage in the main proceedings will be a Case Management Conference on June 13, 2022 at which the Court will give directions for each stage to trial. The trial is expected to be set for late 2022/early 2023. 14 The Company will continue to vigorously defend itself in the foregoing unresolved matters. However, litigation and investigations are inherently uncertain. Accordingly, the Company cannot predict the outcome of these matters. The Company has not recorded any accrual at March 31, 2022 for contingent losses associated with these matters based on its belief that losses, while possible, are not probable. Further, any possible range of loss cannot be reasonably estimated at this time. The unfavorable resolution of these matters could have a material adverse effect on the Company’s business, results of operations, financial condition, or cash flows. The Company is engaged in other legal actions, not described above, arising in the ordinary course of its business and, while there can be no assurance, believes that the ultimate outcome of these other legal actions will not have a material adverse effect on its business, results of operations, financial condition, or cash flows. Warranties The Company warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product. Warranties are generally fulfilled by replacing defective products with new products. The following table provides the changes in our product warranty reserve, which are included in accrued liabilities: Three Months Ended March 31, 2022 2021 (in thousands) Warranty, beginning of period $ 856 $ 1,039 Warranty costs accrued 121 334 Settlements of warranty claims ( 188 ) ( 255 ) Warranty, end of period $ 789 $ 1,118 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 March 31, 2022 (in thousands) Right-of-use assets Other assets $ 8,100 Lease liability obligations, current Other current liabilities $ 1,075 Lease liability obligations, noncurrent Other liabilities 7,430 Total lease liability obligations $ 8,505 Weighted-average remaining lease term (in years) 5.6 Weighted-average discount rate 4.00 % During the three months ended March 31, 2022, the Company recognized approximately $ 0.4 million of lease costs in operating expenses and approximately $ 0.2 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 March 31, 2022, are as follows: (in thousands) 2022 $ 986 2023 1,308 2024 1,329 2025 1,315 2026 1,217 Thereafter 3,695 Total minimum payments 9,850 Less: Imputed interest ( 1,345 ) Total $ 8,505 15