Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ý Yes ☐¨ No

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). ☒ý Yes ☐¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☐

~~Large accelerated filer~~ ¨ ~~Accelerated filer~~ ¨

~~Non-accelerated filer~~ ¨ ~~(Do not check if a smaller reporting company) Smaller reporting company~~ ý

~~Emerging growth company~~ ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to ~~SEction~~Section 13(a) of the Exchange Act. ☐¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐¨ Yes ☒ý No

The number of shares of the ~~registrant's~~registrant’s Common Stock, par value $0.001 per share, outstanding on ~~October~~July 31, ~~2017~~2019 was ~~49,386,006.~~

14,497,016.

INDEX

		Page

~~INDEX~~



		~~Page~~
PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements (unaudited)	3

	Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018	2 3

	Condensed Consolidated Statements of Operations for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	3 4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	4 5

	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	5 6

	Condensed Consolidated Statement of Stockholders' Equity (Deficit) for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2019 and 2018	6 7

	Notes to Condensed Consolidated Financial Statements	7 8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23 20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33 26

Item 4.	Controls and Procedures	34 26

~~Item 5.~~		~~Other Information~~	34

PART II. OTHER INFORMATION		34 28

Item 1.	Legal Proceedings	34 28

Item 1A.	Risk Factors	35 28

Item 6.2.	~~Exhibits~~Unregistered Sales of Equity Securities and Use of Proceeds	46 38

~~SIGNATURES~~ Item 5.	47Other Information	38

Item 6.	Exhibits	39

SIGNATURES		40

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Turtle Beach Corporation

Condensed Consolidated Balance Sheets

	June 30,			December 31,
	2019			2018
	(unaudited)
ASSETS	(in thousands, except par value and share amounts)
Current Assets:
Cash and cash equivalents	$	3,446		$	7,078
Accounts receivable, net		18,402			52,797
Inventories		50,420			49,472
Prepaid expenses and other current assets		5,418			4,469
Total Current Assets		77,686			113,816
Property and equipment, net		5,717			5,856
Goodwill		5,940			—
Intangible assets, net		8,324			1,036
Other assets		4,158			1,212
Total Assets	$	101,825		$	121,920
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Revolving credit facility	$	10,802		$	37,385
Accounts payable		22,116			17,724
Other current liabilities		19,649			18,488
Total Current Liabilities		52,567			73,597
Deferred income taxes		187			187
Financial instrument obligation		—			7,848
Other liabilities		4,663			2,792
Total Liabilities		57,417			84,424
Commitments and Contingencies
Stockholders’ Equity
Common stock, $0.001 par value - 100,000,000 shares authorized; 14,493,544 and 14,268,184 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively		14			14
Additional paid-in capital		175,644			169,421
Accumulated deficit		(130,781	)		(131,463	)
Accumulated other comprehensive loss		(469	)		(476	)
Total Stockholders’ Equity		44,408			37,496
Total Liabilities and Stockholders’ Equity	$	101,825		$	121,920

~~(unaudited)~~

September 30,
2017
December 31, 2016
ASSETS (in thousands, except par value and share amounts)
Current Assets:

Cash and cash equivalents $ 473
$ 6,183
Accounts receivable, net 24,588
54,633
Inventories 45,869
21,698
Prepaid expenses and other current assets 4,956
4,121
Total Current Assets 75,886
86,635
Property and equipment, net 4,427
4,311
Intangible assets, net 1,484
1,618
Deferred income taxes 126
543
Other assets 1,146
1,693
Total Assets $ 83,069
$ 94,800
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Revolving credit facilities $ 24,793
$ 35,905
Term loan 4,814
2,647
Accounts payable 29,996
11,927
Other current liabilities 12,110
16,414
Total Current Liabilities 71,713
66,893
Term loan, long-term portion 7,238
10,442
Series B redeemable preferred stock 18,547
17,480
Subordinated notes - related party 20,051
17,881
Other liabilities 2,239
2,800
Total Liabilities 119,788
115,496
Commitments and Contingencies
Stockholders' Equity (Deficit)

Common stock, $0.001 par value - 100,000,000 shares authorized; 49,386,006 and 49,251,336 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively 49
49
Additional paid-in capital 147,802
146,615
Accumulated deficit (184,279 ) (166,800 )
Accumulated other comprehensive loss (291 ) (560 )
Total Stockholders' Equity (Deficit) (36,719 ) (20,696 )
Total Liabilities and Stockholders' Equity (Deficit) $ 83,069
$ 94,800

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

Turtle Beach Corporation

Condensed Consolidated Statements of Operations

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2019			2018			2019			2018
	(in thousands, except per-share data)
Net revenue	$	41,330		$	60,805		$	86,176		$	101,691
Cost of revenue		28,159			40,528			58,218			66,385
Gross profit		13,171			20,277			27,958			35,306
Operating expenses:
Selling and marketing		7,550			6,818			14,431			12,747
Research and development		1,734			1,327			3,190			2,656
General and administrative		6,194			3,863			10,843			7,848
Total operating expenses		15,478			12,008			28,464			23,251
Operating income (loss)		(2,307	)		8,269			(506	)		12,055
Interest expense		111			1,258			355			3,263
Other non-operating expense (income), net		(70	)		9,029			(1,732	)		8,784
Income (loss) before income tax		(2,348	)		(2,018	)		871			8
Income tax expense		25			300			189			364
Net income (loss)	$	(2,373	)	$	(2,318	)	$	682		$	(356	)

Net income (loss) per share
Basic	$	(0.16	)	$	(0.17	)	$	0.05		$	(0.03	)
Diluted	$	(0.16	)	$	(0.17	)	$	(0.06	)	$	(0.03	)
Weighted average number of shares:
Basic		14,586			13,401			14,462			12,877
Diluted		14,586			13,401			15,699			12,877

~~(unaudited)~~

Three Months Ended Nine Months Ended
September 30,
2017 September 30,
2016 September 30,
2017
September 30,
2016
(in thousands, except per-share data)
Net Revenue $ 35,975
$ 38,384
$ 69,439
$ 91,774
Cost of Revenue 23,437
34,457
48,384
79,372
Gross Profit 12,538
3,927
21,055
12,402
Operating expenses:
Selling and marketing 5,586

7,016

15,564

19,737
Research and development 1,336

2,637

4,423

6,701
General and administrative 3,499

4,591

11,740

15,161
Goodwill and intangible asset impairment —

32,084

—

63,236
Restructuring charges 241
339
509
564
Total operating expenses 10,662

46,667

32,236

105,399
Operating income (loss) 1,876
(42,740 ) (11,181 ) (92,997 )
Interest expense 2,042
1,866
5,717

5,331
Other non-operating expense (income), net (252 ) 326
(517 )
1,395
Earnings (loss) before income tax 86
(44,932 ) (16,381 ) (99,723 )
Income tax expense (benefit) 578
(133 ) 1,098
(340 )
Net loss $ (492 )
$ (44,799 )
$ (17,479 )
$ (99,383 )

Net loss per share:
Basic $ (0.01 ) $ (0.91 ) $ (0.35 ) $ (2.05 )
Diluted $ (0.01 ) $ (0.91 ) $ (0.35 ) $ (2.05 )
Weighted average number of shares:
Basic 49,386
49,230
49,328
48,371
Diluted 49,386
49,230
49,328
48,371

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

Turtle Beach Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2019			June 30, 2018			June 30, 2019		June 30, 2018
	(in thousands)
Net income (loss)	$	(2,373	)	$	(2,318	)	$	682	$	(356	)
Other comprehensive income (loss):
Foreign currency translation adjustment		(158	)		(270	)		7		(115	)
Other comprehensive income (loss)		(158	)		(270	)		7		(115	)
Comprehensive income (loss)	$	(2,531	)	$	(2,588	)	$	689	$	(471	)

~~(unaudited)~~

Three Months Ended Nine Months Ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
(in thousands)
Net loss $ (492 ) $ (44,799 ) $ (17,479 ) $ (99,383 )

Other comprehensive income (loss):

Foreign currency translation adjustment 111
1
269
(69 )
Other comprehensive income (loss)

111
1
269
(69 )
Comprehensive loss $ (381 ) $ (44,798 ) $ (17,210 ) $ (99,452 )

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

Turtle Beach Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Six Months Ended
	June 30, 2019			June 30, 2018
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	682		$	(356	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		2,180			2,204
Amortization of intangible assets		221			156
Amortization of debt financing costs		94			642
Stock-based compensation		1,525			822
Accrued interest on Series B redeemable preferred stock		—			501
Paid-in-kind interest		—			1,256
Deferred income taxes		—			235
Reversal of sales returns reserve		(5,166	)		(489	)
Provision for doubtful accounts		—			144
Provision for obsolete inventory		1,602			1,766
Loss on disposal of property and equipment		—			93
Unrealized loss (gain) on financial instrument obligation		(1,601	)		8,619
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		40,979			15,692
Inventories		4,461			(2,291	)
Accounts payable		(1,066	)		16,461
Prepaid expenses and other assets		(950	)		(1,723	)
Income taxes payable		(405	)		293
Other liabilities		(4,384	)		2,316
Net cash provided by operating activities		38,172			46,341
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(1,007	)		(402	)
Acquisition of a business, net of cash acquired		(12,667	)		—
Net cash used for investing activities		(13,674	)		(402	)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving credit facilities		99,453			81,991
Repayment of revolving credit facilities		(126,036	)		(120,458	)
Proceeds of term loan		—			3,265
Repayment of term loan		—			(2,485	)
Repayment of subordinated notes - related party		—			(3,265	)
Settlement of Series B Preferred Stock		—			(1,390	)
Proceeds from exercise of stock options and warrants		94			734
Repurchase of common stock		(1,499	)		—
Repurchase of common stock to satisfy employee tax withholding obligations		(145	)		—
Debt financing costs		—			(405	)
Net cash used for financing activities		(28,133	)		(42,013	)
Effect of exchange rate changes on cash and cash equivalents		3			(65	)
Net increase (decrease) in cash and cash equivalents		(3,632	)		3,861
Cash and cash equivalents - beginning of period		7,078			5,247
Cash and cash equivalents - end of period	$	3,446		$	9,108
SUPPLEMENTAL DISCLOSURE OF INFORMATION
Cash paid for interest	$	308		$	763
Cash paid for income taxes	$	447		$	—
Reclassification of financial instrument obligation	$	6,248		$	—
Exchange of Series B Preferred Stock	$	—		$	18,032

~~(unaudited)~~

Nine Months Ended
September 30, 2017 September 30, 2016
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES

Net loss $ (17,479 ) $ (99,383 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 3,000
4,185
Amortization of intangible assets 259
4,028
Amortization of debt financing costs 1,181
957
Stock-based compensation 1,187
3,222
Accrued interest on Series B redeemable preferred stock 1,067
989
Paid in kind interest 1,844
1,585
Deferred income taxes 417
(485 )
Reversal of sales returns reserve (2,209 ) (4,931 )
Provision for doubtful accounts 49
105
Provision for obsolete inventory 1,914
9,628
Loss on impairment of assets —
63,236
Changes in operating assets and liabilities:
Accounts receivable 32,205
33,564
Inventories (26,085 ) (28,975 )
Accounts payable 17,537
20,796
Prepaid expenses and other assets (733 ) (1,465 )
Income taxes payable 669
81
Other liabilities (5,532 ) (4,020 )
Net cash provided by operating activities 9,291
3,117
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,584 ) (2,260 )
Net cash used for investing activities (2,584 ) (2,260 )
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving credit facilities 98,165
131,810
Repayment of revolving credit facilities (109,277 ) (137,964 )
Repayment of capital leases (4 ) (31 )
Repayment of term loan (1,443 ) (3,610 )
Proceeds from sale of common stock, net of issuance costs —
5,968
Debt financing costs —
(805 )
Net cash used for financing activities (12,559 ) (4,632 )
Effect of exchange rate changes on cash and cash equivalents 142
(62 )
Net decrease in cash and cash equivalents (5,710 ) (3,837 )
Cash and cash equivalents - beginning of period 6,183
7,114
Cash and cash equivalents - end of period $ 473
$ 3,277

SUPPLEMENTAL DISCLOSURE OF INFORMATION
Cash paid for interest $ 1,364
$ 1,474
Cash paid for income taxes $ —
$ —

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

Turtle Beach Corporation

Condensed Consolidated Statement of ~~Stockholders'~~ Stockholders’ Equity (Deficit)

(unaudited)

	Common Stock					Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total
	Shares			Amount
	(in thousands)
Balance at December 31, 2018		14,268		$	14	$	169,421		$	(131,463	)	$	(476	)	$	37,496
Net income		—			—		—			3,055			—			3,055
Other comprehensive income, net of tax		—			—		—			—			165			165
Reclassification of financial instrument obligation		—			—		6,248			—			—			6,248
Issuance of restricted stock		12			—		—			—			—			—
Repurchase of common stock and retirement of related treasury shares		(6	)		—		(101	)		—			—			(101	)
Issuance of common stock upon exercise of warrants		295			—		—			—			—			—
Stock options exercised		6			—		23			—			—			23
Stock-based compensation		—			—		522			—			—			522
Balance at March 31, 2019		14,575			14		176,113			(128,408	)		(311	)		47,408
Net loss		—			—		—			(2,373	)		—			(2,373	)
Other comprehensive income, net of tax		—			—		—			—			(158	)		(158	)
Issuance of restricted stock		56			—		—			—			—			—
Repurchase of common stock and retirement of related treasury shares		(4	)		—		(44	)		—			—			(44	)
Common stock buyback		(156	)		—		(1,499	)		—			—			(1,499	)
Stock options exercised		22			—		71			—			—			71
Stock-based compensation		—			—		1,003			—			—			1,003
Balance at June 30, 2019		14,493		$	14	$	175,644		$	(130,781	)	$	(469	)	$	44,408


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		—			—		—			1,962			—			1,962
Other comprehensive income, net of tax		—			—		—			—			155			155
Stock-based compensation		—			—		223			—			—			223
Balance at March 31, 2018		12,349			12		148,305			(168,691	)		(48	)		(20,422	)
Net loss		—			—		—			(2,318	)		—			(2,318	)
Other comprehensive income, net of tax		—			—		—			—			(270	)		(270	)
Issuance of common stock in exchange for Series B preferred stock, net of issuance costs		1,307			1		15,474			—			—			15,475
Issuance of restricted stock		28			—		—			—			—			—
Stock options exercised		110			1		733			—			—			734
Stock-based compensation		—			—		599			—			—			599
Balance at June 30, 2018		13,794		$	14	$	165,111		$	(171,009	)	$	(318	)	$	(6,202	)

~~(unaudited)~~

Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total
Shares Amount

(in thousands)

Balance at December 31, 2016 49,251
$ 49
$ 146,615
$ (166,800 ) $ (560 ) $ (20,696 )
Net loss —
—
—
(17,479 ) —
(17,479 )
Other comprehensive loss —
—
—
—
269
269
Stock-based compensation 135
—
1,187
—
—
1,187
Balance at September 30, 2017 49,386
$ 49
$ 147,802
$ (184,279 ) $ (291 ) $ (36,719 )

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

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 San Diego, California and incorporated in the state of Nevada in 2010, is a premier ~~audio technology~~gaming accessory company with expertise and experience in developing, commercializing and marketing innovative products across a range of large addressable markets under the Turtle Beach® and ~~HyperSound®~~ROCCAT® brands. Turtle Beach is a worldwide leading provider of feature-rich headset solutions for use across multiple platforms, including video game and entertainment consoles, handheld consoles, personal computers, tablets and mobile devices. ~~HyperSound technology~~ROCCAT is ~~an innovative patent-protected sound technology that delivers immersive, directional audio offering unique potential benefits~~a leading provider of gaming keyboards, mice and other accessories focused in ~~a variety of commercial settings and consumer devices.~~

the personal computer peripherals market.

VTB Holdings, Inc. (“VTBH”), a wholly-owned subsidiary of Turtle Beach and the ~~parent holding company~~owner of ~~the headset business,~~Voyetra Turtle Beach, Inc. (“VTB”) and Turtle Beach Europe Limited (“TB Europe”), was incorporated in the state of Delaware in ~~2010~~2010. VTB was incorporated in the state of Delaware in 1975 with operations principally located in Valhalla, New York. ~~Voyetra Turtle Beach, Inc. (“VTB”) was incorporated in the state of Delaware in 1975.~~

In October 2012, VTB acquired Lygo International Limited (“Lygo”), a private limited company organized under the laws of England and Wales, which was subsequently renamed Turtle Beach Europe Limited (“TB Europe”).

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, ~~2016~~2018 Condensed Consolidated Balance Sheet has been derived from the ~~Company's most recent~~Company’s audited financial statements included in its Annual Report on Form ~~10-K.~~

10-K filed with the SEC on March 18, 2019 (“Annual Report”).

These financial statements should be read in conjunction with the annual financial statements and the notes thereto included in ~~our~~the Annual Report ~~on Form 10-K filed with the SEC on March 8, 2017 (“Annual Report”)~~ that contains information useful to understanding the Company's businesses and financial statement presentations.

Note 2. Summary of Significant Accounting Policies

The preparation of consolidated annual and quarterly financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of ~~our~~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.

Recent Accounting Pronouncements

~~In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,~~ ~~Revenue from Contracts with Customers~~, which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements - (Continued)~~

~~(unaudited)~~

changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB deferred the effective date of the standard by one year to annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. Based on our initial assessment, we do not believe the standard will materially impact our recognition of revenue from our headset business. The new standard will require certain price concessions and right of return arrangements to be recorded as part of the transaction price determination. The Company has identified, and is in the process of implementing, appropriate changes to its business processes, systems and controls to support recognition and disclosure under the new standard. The Company will adopt the new standard on January 1, 2018 under the the modified retrospective method of adoption, reflecting the cumulative effect of initially applying the new standard to revenue recognition in the first quarter of 2018.

In February 2016, the FASB issued ASU No. 2016-02, Leases, that ~~introduces~~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 guidance will be effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted. The Company has not yet selected a transition method or determined the effect on its consolidated financial statements.

~~In March 2016, the FASB issued ASU No. 2016-09,~~ ~~Compensation—Stock Compensation~~, which requires excess tax benefits and tax deficiencies, which arise due to differences between the measure of compensation expense and the amount deductible for tax purposes, to be recorded directly through earnings as a component of income tax expense. Previously, these differences were generally recorded in additional paid-in capital and thus had no impact on net income. Additionally, this guidance permits entities to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as allowed under previous standards, or recognized when they occur. The standard was effective for interim and annual reporting periods beginning after December 15, 2016. The Company adopted this standard on its effective date of January 1, ~~2017~~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 ~~did not have a material impact on its consolidated financial statements.~~

as it relates to the Company's accounting for real estate operating leases, assets and liabilities increased by approximately $3.3 million. Refer to Note 13, “Commitments and Contingencies” for further details.

In ~~August 2016,~~June 2018, the FASB issued ASU ~~2016-15,~~2018-07, ~~Statement~~Improvements to Non-employee Share-Based Payment Accounting, that expands the scope of ~~Cash Flows (Topic 230)~~Topic 718, Compensation—Stock Compensation,~~which attempts~~ to ~~reduce~~include share-based payments issued to non-employees for goods or services and substantially aligned the ~~existing diversity in practice with respect~~accounting for share-based payments to reporting the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions;non-employees and separately identifiable cash flows and application of the predominance principle. This guidance will be effective for the Company on January 1, 2018. The Company does not believe the guidance will have a material impact on its consolidated financial statements.

~~In May 2017, the FASB issued ASU 2017-09,~~ ~~Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting~~ ~~to provide clarity and reduce diversity in practice and cost and complexity when applying the guidance to a change to the terms or conditions of a share-based payment award.~~employees. The amendments state that an entity will not have to account for the effects of a modification if: (i) the fair value of the modified award is the same immediately before and after the modification; (ii) the vesting conditions of the modified award are the same immediately before and after the modification; and (iii) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. The amendments in this update are effective for ~~fiscal years, and interim periods within those~~ fiscal years beginning after December 15, ~~2017. Early adoption~~2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is ~~permitted, including adoption~~evaluating the effect that this guidance will have on its financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement, that removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in ~~any interim period.~~unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ~~adoption~~provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. Certain disclosures in the new guidance will need to be applied on a retrospective basis and others on a prospective basis.

Note 3. Acquisitions

ROCCAT

On May 31, 2019, the Company completed its acquisition of the business and assets of ROCCAT, a provider of gaming keyboards, mice and other accessories for a purchase price of approximately $12.7 million 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 in connection with the acquisition of $1.5 million and $2.3 million for the three and six months ended June 30, 2019, respectively, were recorded as a component of “General and administrative” expenses in the Condensed Consolidated Statements of Operations.

The preliminary ROCCAT purchase price allocation as of May 31, 2019, is ~~not~~shown in the following table:

(In thousands)	Amount
Receivables	$	1,418
Inventories		7,012
Property and equipment		1,110
Intangible assets		7,511
Other long-term assets		461
Accounts payable		(5,535	)
Accrued and other current liabilities		(3,211	)
Contingent consideration		(1,711	)
Other non-current liabilities		(328	)
Total identifiable net assets		6,727
Goodwill		5,940
Total consideration	$	12,667

The fair values of ROCCAT’s assets and liabilities are provisional and were determined based on preliminary estimates and assumptions that management believes are reasonable. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. These adjustments will primarily relate to certain short-term assets, intangible assets, and certain liabilities including contingent consideration. The final determination of the fair value of certain assets and liabilities will be completed as soon as the necessary information is available, including the completion of a valuation of the tangible and intangible assets and the contingent consideration, but no later than one year from the acquisition date.

The goodwill from the acquisition of ROCCAT, which is fully deductible for tax purposes, consists largely of synergies and economies of scale expected ~~to have a material impact upon our financial condition or results~~from combing the operations of ~~operations.~~

ROCCAT and the Company’s existing business.

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	$	5,028
Tradenames	5 Years		1,602
Developed technology	7 Years		833
Non-compete agreements	3 Years		48
Total		$	7,511

For the three and six months ended June 30, 2019, ROCCAT had revenue and an operating loss of $1.3 million and $0.4 million, respectively.

Note 3.4. Fair Value Measurement

The Company follows a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

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 ~~debt instruments.~~certain warrants. As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016, there were no outstanding financial assets and liabilities recorded at fair value on a recurring basis and~~2018, the Company had not elected the fair value option for any financial assets and liabilities for which such an election would have been ~~permitted.~~

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 as of December 31, 2018. The following is a summary of the carrying amounts and estimated fair values of our financial instruments at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

	June 30, 2019				December 31, 2018
	Reported		Fair Value		Reported		Fair Value
	(in thousands)
Financial Assets and Liabilities:
Cash and cash equivalents	$	3,446	$	3,446	$	7,078	$	7,078
Revolving credit facility	$	10,802	$	10,802	$	37,385	$	37,385
Financial instrument obligation	$	—	$	—	$	7,848	$	7,848

September 30, 2017 December 31, 2016
Reported Fair Value Reported Fair Value
(in thousands)
Financial Assets and Liabilities:
Cash and cash equivalents $ 473
$ 473
$ 6,183
$ 6,183
Credit Facility 24,793
24,793
35,905
35,905
Term Loans 12,924
12,575
14,367
14,281
Subordinated Debt 21,247
21,403
19,403
18,569

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 and Term Loan Due 2018~~revolving credit facility equals fair value as the stated interest rate approximates market rates currently available to the Company, which are considered Level 2 inputs. The fair values of our Term Loan Due 2019 and Subordinated Debt are based upon an estimated market value calculation that factors principal, time to maturity, interest rate and current cost of debt, which is consideredliability-classified warrants reported as a financial instrument obligation were classified within Level 3 ~~input.~~

because the Company uses a Black-Scholes pricing model to estimate the fair value based on inputs that are not observable in any market.

Note 4.5. Allowance for Sales Returns

The following table provides the changes in our sales return reserve, which is classified as a reduction of accounts receivable:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
	(in thousands)
Balance, beginning of period	$	6,680		$	4,260		$	9,212		$	5,533
Reserve accrual		2,659			5,184			5,280			8,441
Recoveries and deductions, net		(5,293	)		(4,400	)		(10,446	)		(8,930	)
Balance, end of period	$	4,046		$	5,044		$	4,046		$	5,044

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(in thousands)
Balance, beginning of period $ 2,153
$ 579
$ 4,591
$ 6,268
Reserve accrual 2,146
2,807
4,228
7,341
Recoveries and deductions, net (1,917 ) (2,049 ) (6,437 ) (12,272 )
Balance, end of period

$ 2,382
$ 1,337
$ 2,382
$ 1,337

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements - (Continued)~~

~~(unaudited)~~

Note 5.6. Composition of Certain Financial Statement Items

Inventories

Inventories consist of the following:

	June 30, 2019		December 31, 2018
	(in thousands)
Raw materials	$	3,039	$	1,410
Finished goods		47,381		48,062
Total inventories	$	50,420	$	49,472

September 30, 2017
December 31, 2016
(in thousands)
Raw materials $ 1,842
$ 1,680
Finished goods 44,027
20,018
Total inventories $ 45,869
$ 21,698

Property and Equipment, net

Property and equipment, net, consists of the following:

	June 30, 2019			December 31, 2018
	(in thousands)
Machinery and equipment	$	1,687		$	1,616
Software and software development		537	��		306
Furniture and fixtures		564			535
Tooling		5,313			3,925
Leasehold improvements		1,325			1,325
Demonstration units and convention booths		11,981			11,659
Total property and equipment, gross		21,407			19,366
Less: accumulated depreciation and amortization		(15,690	)		(13,510	)
Total property and equipment, net	$	5,717		$	5,856

September 30, 2017
December 31, 2016
(in thousands)
Machinery and equipment $ 1,359
$ 1,321
Software and software development 383
383
Furniture and fixtures 400
288
Tooling 2,043
1,581
Leasehold improvements 1,271
1,247
Demonstration units and convention booths 10,652
8,172
Total property and equipment, gross 16,108
12,992
Less: accumulated depreciation and amortization (11,681 ) (8,681 )
Total property and equipment, net $ 4,427
$ 4,311

Other Current Liabilities

Other current liabilities consist of the following:

	June 30, 2019		December 31, 2018
	(in thousands)
Accrued customer fees	$	3,699	$	570
Accrued royalty		2,506		4,069
Accrued employee expenses		2,423		4,570
Contingent consideration		1,711		—
Accrued freight		1,497		1,044
Accrued expenses		7,813		8,235
Total other current liabilities	$	19,649	$	18,488

Other non-operating expense (income), net

Other non-operating expense (income), net consists of the following:

	June 30, 2019			June 30, 2018
	(in thousands)
Unrealized loss (gain) on financial instrument obligation	$	(1,601	)	$	8,619
Other non-operating expense (income)		(131	)		165
Total other non-operating expense (income),net	$	(1,732	)	$	8,784

September 30, 2017 December 31, 2016
(in thousands)
Accrued vendor expenses $ 1,839
$ 4,735
Accrued royalty 2,485
3,370
Accrued employee expenses 1,580
2,791
Accrued expenses 6,206
5,518
Total other current liabilities $ 12,110
$ 16,414

Note 6.7. Goodwill and Other Intangible Assets

At acquisition, the Company estimates and records the fair value of purchased intangible assets. The fair values of these intangible assets are estimated based on our 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.

We assess the impairment of long-lived assets, intangibles assets and goodwill 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

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

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 our overall business; (c) significant negative industry or economic trends; (d) significant decline in our stock price for a sustained period; and (e) a decline in our market capitalization below net book value.

Acquired Intangible Assets

Acquired identifiable intangible assets, and related accumulated amortization, as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 consist of:

	June 30, 2019
	Gross Carrying Value			Accumulated Amortization			Net Book Value
	(in thousands)
Customer relationships	$	10,824		$	4,753		$	6,071
Tradenames		1,602			27			1,575
Developed technology		833			10			823
Non-compete agreement		48			1			47
Foreign currency		(1,173	)		(982	)		(192	)
Total Intangible Assets	$	12,134		$	3,809		$	8,324

	December 31, 2018
	Gross Carrying Value			Accumulated Amortization			Net Book Value
	(in thousands)
Customer relationships	$	5,796		$	4,539		$	1,257
Foreign currency		(1,158	)		(937	)		(221	)
Total Intangible Assets	$	4,638		$	3,602		$	1,036

September 30, 2017
Gross Carrying Value Accumulated Amortization Asset Impairment Net Book Value
(in thousands)
Customer relationships $ 5,796
$ 4,064
$ —
$ 1,732
Foreign Currency (933 ) (685 ) —
(248 )
Total Intangible Assets $ 4,863
$ 3,379
$ —
$ 1,484

December 31, 2016
Gross Carrying Value Accumulated Amortization Asset Impairment Net Book Value
(in thousands)
Customer relationships $ 5,796
$ 3,737
$ —
$ 2,059
Non-compete agreements 177
177
—
—
In-process Research and Development 27,100
4,074
23,026
—
Developed technology 8,880
802
8,078
—
Trade names 170
92
78
—
Patent and trademarks 967
65
902
—
Foreign Currency (1,294 ) (853 ) —
(441 )
Total Intangible Assets $ 41,796
$ 8,094
$ 32,084
$ 1,618

In connection with the October 2012 ~~VTB acquired Lygo, subsequently renamed~~acquisition of TB Europe, ~~Ltd. The~~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 ~~January 2014,~~May 2019, the ~~merger between VTBH and Turtle Beach (f/k/a Parametric Sound Corporation) was completed.~~Company completed its acquisition of ROCCAT. The acquired intangible assets relating to developed technology, customer relationships, ~~and~~ trade name ~~were~~and non-compete agreement are subject to ~~amortization over their respective useful lives. In September 2016, we recorded an impairment charge~~amortization. Refer to Note 3, “Acquisitions” for additional information related to ~~the total remaining acquired~~ROCCAT’s identifiable intangible ~~assets value.~~

assets.

Amortization expense related to definite lived intangible assets of ~~$0.1~~$0.2 million and ~~$0.3~~$0.2 million was recognized for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, and ~~$1.4~~$0.1 million and ~~$4.0~~$0.2 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, respectively.

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

As of ~~September~~June 30, ~~2017,~~2019, estimated annual amortization expense related to definite lived intangible assets in future periods is as follows:

	(in thousands)
2019	$	643
2020		1,431
2021		1,390
2022		1,347
2023		1,310
Thereafter		2,395
Total	$	8,516

Changes in the carrying values of goodwill for six months ended June 30, 2019 are:

	(in thousands)
Balance as of January 1, 2019	$	—
ROCCAT Acquisition		5,940
Balance as of June 30, 2019	$	5,940

(in thousands)
2017 $ 109
2018 366
2019 307
2020 258
2021 217
Thereafter 475
Total $ 1,732

Note 7.8. Revolving Credit ~~Facilities~~Facility and Long-Term Debt

June 30,

2019

December 31,

2018

(in thousands)

Revolving credit facility, maturing March 2024

$

10,802

$

37,385

September 30, 2017 December 31, 2016
(in thousands)
Revolving credit facility, maturing March 2019 $ 24,793
$ 35,905

Term Loan Due 2018 2,564
3,632
Term Loan Due 2019 10,360
10,735
Less unamortized deferred financing fees 872
1,278
Total Term Loans 12,052
13,089

Subordinated notes - related party 21,247
19,403
Less unamortized debt discount 1,196
1,522
Total Subordinated notes 20,051
17,881
Total outstanding debt 56,896
66,875
Less: current portion of revolving line of credit (24,793 ) (35,905 )
Less: current portion of term loans (4,814 ) (2,647 )
Total noncurrent portion of long-term debt $ 27,289
$ 28,323

Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was ~~$1.5~~$0.1 million and $4.2 million, respectively, for the three and nine months ended September 30, 2017 and, $1.3 million and $3.9 million, respectively, for the three and nine months ended September 30, 2016. This includes related party interest of $0.6 million and $1.8$0.4 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, and ~~$0.5~~$1.0 million and ~~$1.6~~$2.5 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, respectively. This includes no related party interest for the three and six months ended June 30, 2019, and $0.7 million and $1.3 million of related party interest for the three and six months ended June 30, 2018, respectively, in connection with the subordinated notes.

Amortization of deferred financing costs was ~~$0.4~~$47,000 and $0.1 million ~~and $1.2 million or~~for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, ~~$0.3~~and $0.2 million and ~~$1.0~~$0.6 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, respectively.

Revolving Credit Facility

On ~~March 31, 2014,~~December 17, 2018, Turtle Beach and certain of its subsidiaries entered into ~~a new asset-based revolving credit~~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 ~~and security~~ agreement. The Credit Facility, which expires on March ~~31, 2019~~,5, 2024, provides for a line of credit of up to ~~$60~~$80 million inclusive of a sub-facility limit of ~~$10~~$12 million for TB Europe, a ~~wholly owned~~wholly-owned subsidiary of Turtle Beach. ~~The~~In addition, the Credit Facility ~~may be used~~provides for ~~working capital,~~ a $40 million accordion feature and the ~~issuance~~ability to increase the borrowing base with a FILO Loan of ~~bank guarantees,~~ ~~letters~~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 ~~credit~~TBC Holding Company LLC, a wholly-owned subsidiary of VTB, as an obligor and ~~other corporate purposes.~~

(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.

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

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 ~~1.00%~~0.50% to~~1.50%~~ 1.25% for ~~U.S.~~ base rate loans and between 1.25% to 2.00%to~~2.50%~~ for U.S. LIBOR loans and U.K. ~~loans. As ofSeptember 30, 2017, interest rates for outstanding borrowings were 6.24% for base rate~~ loans, and ~~3.21%~~between 2.00% to 2.75% for ~~LIBOR rate loans.~~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 June 30, 2019, interest rates for outstanding borrowings were 6.00% for base rate loans and 3.75% for LIBOR rate loans.

If

The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met ~~meaning that the Company does not have receivables and inventory which are eligible to borrow on under~~or certain other events occur (as defined in the Credit ~~Facility in excess of amounts borrowed, the~~Facility). The Credit Facility ~~requires~~requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ~~ratio. The fixed charge ratio is defined as the ratio, determined~~ on a consolidated basis for the most recent four fiscal quarters, of (a) EBITDA minus capital expenditures, excluding those financed through other instruments, and cash taxes paid, and (b) Fixed Charges defined as the sum of cash interest expense plus scheduled principal payments. ~~The current fixed charge coverage~~ ratio of at least ~~1.15~~1.00 to 1.00 onas of the last day of each ~~month will become effective again after the Company has complied with such ratio for six consecutive months.~~

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~~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~~Company’s assets.

On October 31, 2016, in connection with the HyperSound business restructuring, the Company amended certain provisions to provide, among other things, that (i) the existing loan availability blocks be permanently reduced during certain specified periods, (ii) replaced certain financial covenants determined on a segment-by-segment basis by amended EBITDA levels for the Headset business beginning with the month ended October 31, 2016, (iii) the Company maintain revised cash flow levels, in the aggregate and with respect to its HyperSound segment, during each rolling four week period beginning with the period ended October 31, 2016 through December 31, 2018 and September 30, 2017, respectively, and (iv) in the event the Company’s availability is less than certain specified amounts, obtain additional funding from the issuance of a subordinated promissory note provided by SG VTB (the “Promissory Note”).

As of ~~September~~June 30, ~~2017,~~2019, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately ~~$12.5 million, net of the outstanding Term Loan Due 2018 (as defined below) that is considered to be an additional outstanding amount under the Credit Facility.~~

~~Term Loans~~

~~Term Loan Due 2018~~

On December 29, 2014, the Company amended the Credit Facility with Bank of America to enter in to an additional loan (the “Term Loan Due 2018”) for the repayment of $7.7 million of then existing subordinated debt and accrued interest. The Term Loan Due 2018 resulted in modified financial covenants while it is outstanding, will bear interest at a rate of LIBOR for the applicable interest period plus 5% and will be repaid in equal monthly installments beginning on April 1, 2015 and ending on October 1, 2018, reflecting a six month waiver. Amounts so repaid are recognized by lowering the balance of the term loan tranche and increasing the lower interest rate base revolver amount, with no net impact on borrowing availability.

~~Term Loan Due 2019~~

On July 22, 2015, the Company and its subsidiaries, entered into a term loan, guaranty and security agreement (the “Term Loan Due 2019”) with Crystal Financial LLC, as agent, sole lead arranger and sole bookrunner, Crystal Financial SPV LLC and the other persons party thereto (“Crystal”), which provides for an aggregate term loan commitment of $15 million that bears interest at a rate per annum equal to the 90-day LIBOR rate plus 10.25%. Under the terms of the Term Loan Due 2019, the Company is required to make payments of interest in arrears on the first day of each month beginning August 1, 2015 and will repay the principal in monthly payments beginning January 1, 2016, inclusive of a nine month waiver, with a final payment on June 28, 2019, the maturity date.

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

The Term Loan Due 2019 is secured by a security interest in substantially all of the Company and each of its subsidiaries' working capital assets and is subject to the first-priority lien of Bank of America, as agent, under the Credit Facility, other than with respect to equipment, fixtures, real property interests, intellectual property, intercompany property, intercompany indebtedness, equity interest in their subsidiaries, and certain other assets specified in an inter-creditor agreement between Bank of America and Crystal.

The Company and its subsidiaries are required to comply with various customary covenants including, (i) maintaining minimum EBITDA (as defined in the Term Loan Due 2019) in each trailing twelve month period beginning August 31, 2015, (ii) maintaining a Consolidated Leverage Ratio (as defined in the Term Loan Due 2019) to be measured on the last day of each month while the term loans are outstanding of no more than 5.75:1 beginning December 31, 2015 with periodic step-downs to 3.00:1 on January 31, 2018, (iii) not making capital expenditures in excess of $5 million in each of the years ending December 31, 2016, 2018 and 2019 and in excess of $5.5 million in the year ending December 31, 2017, (iv) restrictions on the Company’s and its subsidiaries ability to prepay its subordinated notes, pay dividends, incur debt, create or suffer liens and engage in certain fundamental transactions and (v) an obligation to provide certain financial and other information. The agreement permits certain equity holders of the Company to contribute funds to the Company to cure certain financial covenant defaults.

The Term Loan Due 2019 contains customary representations, mandatory prepayment events and events of default, including defaults triggered by the failure to make payments when due, breaches of covenants and representations, material impairment in the perfection of Crystal’s security interest in the collateral and events related to bankruptcy and insolvency of the Company and its subsidiaries. Upon an event of default, Crystal may declare all outstanding obligations immediately due and payable (along with a prepayment fee), a default rate of an additional 2.0% may be applied to amounts outstanding and may take other actions including collecting or taking such other action with respect to the collateral pledged in connection with the term loan.

On October 31, 2016, in connection with the recently announced HyperSound business restructuring, the Company amended certain provisions to provide, among other things, that (i) the existing loan availability blocks be permanently reduced during certain specified periods, (ii) replaced certain financial covenants determined on a segment-by-segment basis by amended EBITDA levels for the Headset business beginning with the month ended October 31, 2016, (iii) the Company maintain revised cash flow levels, in the aggregate and with respect to its HyperSound segment, during each rolling four week period beginning with the period ended October 31, 2016 through December 31, 2018 and September 30, 2017, respectively, and (iv) in the event the Company’s availability is less than certain specified amounts, obtain additional funding from the issuance of a subordinated promissory note provided by SG VTB (the “Promissory Note”).

~~As of September 30, 2017, the Company was in compliance with all the amended financial covenants.~~

~~Subordination Agreement~~

On November 16, 2015, as a condition precedent to the Company's lenders permitting the Company to enter into certain subordinated notes, the Company entered into a subordination agreement with and between Bank of America and Crystal, pursuant to which the parties agreed that the Company's obligations under any such notes would be subordinate in right of payment to the payment in full of all the Company’s obligations under the Credit Facility and Term Loan Due 2019.

~~Subordinated Notes - Related Party~~

O~~n April 23, 2015, the Company issued a $5.0 million subordinated note (the “April Note”) to SG VTB Holdings, LLC, the Company’s largest stockholder (“SG VTB”). The April~~ $20.0 million.

Note was issued with an interest rate of (i) 10% per annum for the first year and (ii) 20% per annum for all periods thereafter, with interest accruing and being added to the principal amount of the note quarterly.

On May 13, 2015, the Company issued subordinated notes (the “May Notes”) with an aggregate principal amount of $3.8 million to SG VTB, and a trust affiliated with Ronald Doornink, the Chairman of the Company's board of directors (the “Board”). The May Notes were issued with an interest rate of 10% per annum until the maturity date of the May Notes (which was August 13, 2015 but could be extended up to two additional 90 day periods upon the written agreement of the Company and the noteholder), with interest accruing and being added to the principal amount of the May Notes quarterly. Following the maturity date, the interest rate would have increased to 20% per annum.

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

On June 17, 2015, the Company issued a subordinated note (the “June Note”) with an aggregate principal amount of $3.0 million to SG VTB. The June Note was issued at an interest rate of 10% per annum until the maturity date of the June Note (which was September 17, 2015 but could be extended up to two additional 90 day periods upon the written agreement of the Company and the noteholder), with interest accruing and being added to the principal amount of the June Note quarterly. Following the maturity date, the interest rate would have increased to 20% per annum. In addition, the Company had the option to request that SG VTB make, in SG VTB’s sole discretion, additional advances from time to time up to an aggregate principal amount of $15.0 million. Prior to the amendment (see below), following an additional advance of $6.0 million on July 8, 2015, $9.0 million was outstanding under the June Note.

Concurrently with the completion of the Term Loan Due 2019, the Company amended and restated each of its outstanding subordinated notes (the “Amended Notes”). The obligations of the Company under the Amended Notes are subordinate and junior to the prior payment of amounts due under the Credit Facility and Term Loan Due 2019. In addition, the stated maturity date of the Amended Notes was extended to September 29, 2019, subject to acceleration in certain circumstances, such as a change of control in the Company. The Amended Notes bear interest at a rate per annum equal to LIBOR plus 10.5% and shall be paid-in-kind by adding the amount to the principal amount due. Further, as consideration for the concessions in the Amended Notes, the Company issued warrants to purchase 1.7 million of the Company’s common stock at an exercise price of $2.54 per share.

On November 16, 2015, the Company issued a $2.5 million subordinated note (the “November Note”) to SG VTB, the proceeds of which, as set forth in the amendment to the Term Loan Due 2019, were applied against the outstanding balance of the Term Loan Due 2019. The November Note will bear interest at a rate of 15% per annum until its maturity date, which is September 29, 2019, and is subordinated to all senior debt of the Company.

In consideration of the credit extended under the November Note, VTB and VTBH entered into a Third Lien Continuing Guaranty, (as amended, the “Third Lien Guaranty”), under which they guarantee and promise to pay to Stripes, any and all obligations of the Company under the November Note. To secure our obligations under the November Note and the Third Lien Guaranty, the Company entered into a Third Lien Security Agreement, dated as of November 16, 2015, pursuant to which Stripes was granted a security interest upon all property of the VTB and VTBH until the payment in full of the Subordinated Note or the release of the guarantee or collateral, as applicable. Concurrent with entering into the November Note and Third Lien Guaranty, the Company also issued to SG VTB a warrant to purchase 1.4 million shares of the Company’s common stock at an exercise price of $2.00 per share.

On October 31, 2016, in connection with certain amendments to the Credit Facility and Term Loan Due 2019, the Company and SG VTB entered into the Promissory Note, which states that in the event the Company’s availability under the Credit Facility is less than certain specified amounts, the Company may, upon request, at any time until September 29, 2019 require that SG VTB provide a $2 million subordinated loan. Upon issuance, the loan would bear interest at a rate of either (i) LIBOR plus 10.5% per annum or (ii) 12.0%, dependent upon the Company’s compliance with certain financial covenants and would be subordinated to all senior debt of the Company.

In addition, under the terms of the Promissory Note, if and when the funding occurs, as additional consideration the Company would issue to SG VTB a warrant, exercisable for a period of ten years beginning on the date of issuance, to purchase an amount of shares of the Company’s common stock equal to 2.4% of the Company’s then fully diluted shares outstanding at an exercise price equal to the closing price on that date. The warrant would not entitle the holder to any voting rights or other rights as a stockholder of the Company prior to exercise.

SG VTB is an affiliate of Stripes Group LLC (“Stripes”), a private equity firm focused on internet, software, healthcare IT and branded consumer products businesses. Kenneth A. Fox, one of our directors, is the managing general partner of Stripes and the sole manager of SG VTB and Ronald Doornink, our Chairman of the Board, is an operating partner of Stripes.

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~Note 8.~~9. Income Taxes

In order to determine the quarterly provision for income taxes, ~~we use~~the Company uses an estimated annual effective tax rate (“ETR”), which is based on expected annual income and statutory tax rates in the various jurisdictions. However, to the extent that application of the estimated annual effective tax rate is not representative of the quarterly portion of actual tax expense expected to be recorded for the year, ~~we determine~~ the ~~quarterly~~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 ~~quarter~~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 our income tax expense ~~(benefit)~~ and effective income tax rate:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
	(in thousands)
Income tax expense	$	25		$	300		$	189		$	364
Effective income tax rate		(1.1	%)		(14.9	%)		21.7	%		4,550.0	%

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(in thousands)
Income tax expense (benefit) $ 578
$ (133 ) $ 1,098
$ (340 )
Effective income tax rate 672.1 % 0.3 % (6.7 )% 0.3 %

Income tax expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~$0.6~~$25,000 at an effective tax rate of (1.1%) and $0.2 million at an effective tax rate of ~~672.1%~~21.7%, respectively. Income tax expense for the three and ~~$1.1~~six months ended June 30, 2018 was $0.3 million at an effective tax rate of ~~(6.7)%, respectively. Income tax benefit for the three~~(14.9%) and ~~nine months ended September 30, 2016 was $(0.1)~~$0.4 million at an effective tax rate of ~~0.3% and $(0.3) million at an effective tax rate of 0.3%, respectively.~~

4,550.0%. The effective tax rate was primarily impacted by the full valuation allowance on domestic earnings, foreign entity tax benefits, ~~and~~ certain state tax ~~expense.~~

At December 31, 2016, the Company had $49.0 million of net operating loss carryforwards and $21.0 million of state net operating loss carryforwards, which will begin to expire in 2029. An ownership change occurred on January 15, 2014 as a result of the Merger, and $12.7 million of federal net operating losses included in the above are pre-change losses subject to Section 382 of the Internal Revenue Code of 1986, as amended. The Company believes, based on the estimated Section 382 limitationexpense, and the ~~net operating~~unrealized loss ~~carryforward period, that the pre ownership change net operating losses can be fully utilized in future years if there is sufficient taxable income in such carryforward period.~~

(gain) on a financial instrument obligation.

The Company is subject to income taxes domestically and in various foreign jurisdictions. Significant judgment is required in evaluating uncertain tax positions and determining ~~its~~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 ~~statement~~statements of operations. As of ~~September~~June 30, ~~2017,~~2019, the Company had uncertain tax positions of ~~$2.2~~$3.0 million, inclusive of ~~$0.7~~$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 ~~2013~~2016 through ~~2015,~~2017, and the state tax years open under the statute of limitations are ~~2012~~2014 through ~~2015. The Company was notified by the IRS of an examination covering our fiscal year end 2015 federal income tax return, which is currently in the discovery phase.~~

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

2017.

Note 9.10. Stock-Based Compensation

Total estimated stock-based compensation expense for employees and non-employees, related to all of the ~~Company's~~Company’s stock-based awards, was comprised as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019			2018
	(in thousands)
Cost of revenue	$	93	$	313	$	(32	)	$	331
Selling and marketing		174		30		290			55
Research and development		114		33		188			63
General and administrative		622		223		1,079			373
Total stock-based compensation	$	1,003	$	599	$	1,525		$	822

Three Months Ended
Nine Months Ended

September 30,
September 30,

2017
2016
2017
2016

(in thousands)
Cost of revenue $ 20
$ 152
$ (66 ) $ 398
Selling and marketing 18
40
74
50
Research and development 68
138
188
424
General and administrative 264
687
991
2,350
Total stock-based compensation $ 370
$ 1,017
$ 1,187
$ 3,222

The following table presents the stock activity and the total number of shares available for grant as of ~~September~~June 30, ~~2017:~~

2019:

		(in thousands)

	~~(in thousands)~~
Balance at December 31, ~~2016~~2018	~~2,261~~		1,202
~~Options granted~~ Plan amendment	~~(705~~	)	1,440
~~Restricted Stock~~ Options granted	~~(167~~		(492	)
Restricted stock granted			(230	)
Forfeited/Expired shares added back	~~1,098~~		19
Balance at ~~September~~June 30, ~~2017~~2019	~~2,487~~		1,939

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, 2018		1,654,729		$	6.41		7.36	$	14,374,572
Granted		491,540			11.99
Exercised		(27,225	)		3.45
Forfeited		(18,748	)		12.19
Outstanding at June 30, 2019		2,100,296		$	7.71		7.51	$	10,033,921
Vested and expected to vest at June 30, 2019		2,041,848		$	7.66		7.46	$	9,827,413
Exercisable at June 30, 2019		966,075		$	6.14		5.74	$	5,488,709

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, 2016 6,381,447
1.90 7.37 20,033
Granted 704,865
0.93
Exercised —
—
Forfeited (1,053,683 ) 2.22
Outstanding at September 30, 2017 6,032,629
1.73 6.75 2,543
Vested and expected to vest at September 30, 2017 6,022,628
1.74 6.75 2,543
Exercisable at September 30, 2017 3,886,414
1.76 6.68 2,100

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 ~~2013 Plan~~plan cease to be employed or engaged by the Company, then all of the options would be forfeited if they are not exercised within 90 days. Forfeitures on option grants are estimated at 10% for non-executives and 0% for executives based on evaluation of historical and expected future turnover. Stock-based compensation expense was recorded net of estimated forfeitures, such that expense was recorded only for those stock-based awards 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).

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

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. ~~There were no option exercises during~~The aggregate intrinsic value of options exercised was $0.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~

2019.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted as of the grant date. The following are the assumptions for options granted during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~

2019.



Expected term (in years)			6.1
Risk-free interest rate	~~1.9%~~	1.8% - ~~2.1%~~2.8%
Expected volatility	~~40.1%~~	37.8% - ~~41.1%~~38.6%
Dividend rate		0%

Each of these inputs is subjective and generally requires significant judgment to determine.

The weighted average grant date fair value of options granted during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~$0.39.~~$4.94. The total estimated fair value of employee options vested during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~$1.2~~$0.4 million. As of ~~September~~June 30, ~~2017,~~2019, total unrecognized compensation cost related to non-vested stock options granted to employees was ~~$1.3~~$4.0 million, which is expected to be recognized over a remaining weighted average vesting period of ~~2.6~~2.97 years.

Restricted Stock Activity

	Shares			Weighted Average Grant Date Fair Value Per Share
Nonvested restricted stock at December 31, 2018		265,636		$	19.29
Granted		230,478			12.10
Vested		(68,932	)		8.90
Nonvested restricted stock at June 30, 2019		427,182		$	17.08

Shares Weighted Average Grant Date Fair Value Per Share
Nonvested restricted stock at December 31, 2016 135,705
1.84
Granted 166,665
0.90
Vested (91,002 ) 2.06
Forfeited (43,903 ) 1.16
Nonvested restricted stock at September 30, 2017 167,465
0.96

As of ~~September~~June 30, ~~2017,~~2019, total unrecognized compensation cost related to the nonvested restricted stock awards ~~granted to~~was $6.5 million, which will be recognized over a remaining weighted average vesting period of ~~0.5 years was minimal.~~

2.84 years.

Stock Warrants

In connection with ~~and as consideration for the concessions in the Amended Notes,~~certain subordinated notes, the Company issued ~~to SG VTB and a trust affiliated with Ronald Doornink~~ warrants to purchase ~~1.7~~an aggregate 0.4 million shares and 0.3 million shares of the Company’s common stock at an exercise price of ~~$2.54~~$10.16 and $8.00 per ~~share. The warrants are exercisable for a period~~share, respectively, to SG VTB Holdings, LLC, all of ~~five years beginning on~~which were settled through cashless exercises during the date of issuance, July 22, 2015. The exercise price and the number of shares of Common Stock purchasable are subject to adjustment and do not carry any voting rights or other rights as a stockholder of the Company prior to exercise. The shares issuable upon exercise are also subject to the “demand” and “piggyback” registration rights set forth in the in the Company’s Stockholder Agreement, dated August 5, 2013, as amended July 10, 2014.

six months ended June 30, 2019.

In connection with the November Note, the Company issued a warrant to purchase 1.4 million shares of the Company’s common stock at an exercise price of $2.00 per share to SG VTB. The exercise price and the number of shares are subject to standard anti-dilution adjustments and do not carry any voting rights as a stockholder of the Company prior to exercise. The warrant is exercisable for a period of ten years beginning on the date of issuance and does not entitle the holder to any voting rights or other rights as a stockholder of the Company prior to exercise.

The warrants entitle the holder to purchase a stated amount of shares of common stock at a fixed exercise price that are not puttable (either the warrant or the shares) to the Company or redeemable for cash, and as such are classified within equity.

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~Series B Redeemable Preferred Stock~~

In September 2010, VTBH issued 1,000,000 shares of its Series B Redeemable Preferred Stock with a fair value of $12.4 million. The Series B Redeemable Preferred Stock is 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. The redemption value was $18.5 million and $17.5 million as of September 30, 2017 and December 31, 2014, respectively.

~~On February 18, 2015, the holder~~retirement of the Series B ~~Redeemable~~ Preferred Stock ~~filed a complaint~~ in ~~Delaware Chancery Court alleging breach~~April 2018, the Company issued fully-funded warrants exercisable for an aggregate of contract against VTBH. According to the complaint, the Merger purportedly triggered a contractual obligation for VTBH to redeem the stock. Refer to Note 12, “Commitments and Contingencies” for further information.

~~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 VTBH’s Participants of up to 1,500,000 units. These units are not exercisable or convertible into0.5 million shares of its common ~~stock but give~~stock. Under the ~~holder a~~terms of the warrants, the holders had the right to receive, at their option, a cash ~~bonus equal to~~payment for the ~~appreciation in value between~~remaining unexercised portion of the ~~exercise price and value of common stock at~~warrants upon the ~~time of~~Company consummating a ~~change in control event as~~Fundamental Transaction (as defined in the ~~plan.~~

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 ~~September~~these terms regarding the possible future cash payment, the Company has 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, ~~2017~~2019, the Company and ~~December 31, 2016, 714,347 phantom units at a weighted-average exercise price of $0.93 had been granted and were outstanding. Because these phantom units are not exercisable or convertible~~the warrant holders entered into ~~common shares, said amounts and exercise prices were not subject~~an amendment to the ~~exchange ratio provided by~~warrant agreement that revises the ~~Merger agreement.~~terms under which warrant holders may exercise their rights under a Fundamental Transaction. As a result of ~~September~~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, ~~2017, compensation~~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 six months ended June 30, 2019, the Company recognized an unrealized gain on the warrants of $1.6 million that is included in “Other non-operating expense ~~related to the Appreciation Plan units remained unrecognized because as of those dates a change in control, as defined~~(income), net” in the ~~plan, had not occurred and is not probable to occur. In July 2015, the Appreciation Plan was terminated as to new grants, but vested and unvested phantom units will continue.~~

Condensed Consolidated Statement of Operations.

Note ~~10.~~11. Net ~~Loss~~Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net ~~loss~~income (loss) per share of common stock attributable to common stockholders:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
	(in thousands, except per-share data)
Net income (loss)	$	(2,373	)	$	(2,318	)	$	682		$	(356	)
Unrealized gain on financial instrument obligation		—			—			(1,601	)		—
Net income (loss) - diluted	$	(2,373	)	$	(2,318	)	$	(919	)	$	(356	)

Weighted average common shares outstanding — Basic		14,586			13,401			14,462			12,877
Plus incremental shares from assumed conversions:
Dilutive effect of restricted stock		—			—			27			—
Dilutive effect of stock options		—			—			527			—
Dilutive effect of warrants		—			—			683			—
Weighted average common shares outstanding — Diluted		14,586			13,401			15,699			12,877
Net income (loss) per share:
Basic	$	(0.16	)	$	(0.17	)	$	0.05		$	(0.03	)
Diluted	$	(0.16	)	$	(0.17	)	$	(0.06	)	$	(0.03	)

Three Months Ended
Nine Months Ended
September 30,
September 30,
2017
2016
2017
2016
(in thousands, except per-share data)
Net Loss $ (492 ) $ (44,799 ) $ (17,479 ) $ (99,383 )

Weighted average common shares outstanding — Basic 49,386
49,230
49,328
48,371
Plus incremental shares from assumed conversions:
Dilutive effect of stock options —
—
—
—
Weighted average common shares outstanding — Diluted 49,386
49,230
49,328
48,371
Net loss per share:
Basic $ (0.01 ) $ (0.91 ) $ (0.35 ) $ (2.05 )
Diluted $ (0.01 ) $ (0.91 ) $ (0.35 ) $ (2.05 )

Incremental shares from stock options and restricted stock awards are computed byusing 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 and the estimated tax benefit of the assumed exercises.~~awards.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(in thousands)
Stock options		2,086		1,945		457		1,833
Warrants		550		1,314		—		965
Unvested restricted stock awards		435		62		192		52
Total		3,071		3,321		649		2,850

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(in thousands)
Stock options 6,133
6,758
6,287
6,321
Warrants 3,059
3,068
3,061
3,072
Unvested restricted stock awards 167
136
137
115
Total 9,359
9,962
9,485
9,508

Note ~~11. Segment and~~12. Geographic Information

~~The following tables show our net revenues, operating income and total assets by our reporting segments:~~

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017
2016
Net Revenues (in thousands)
Headset $ 35,947
$ 38,283
$ 69,291
$ 91,172
HyperSound 28
101
148
602
Total $ 35,975
$ 38,384
$ 69,439
$ 91,774

Operating Income (Loss)
Headset $ 1,819
$ 1,710
$ (9,779 ) $ (7,971 )
HyperSound 57
(44,450 ) (1,402 ) (85,026 )
Total $ 1,876
$ (42,740 ) $ (11,181 ) $ (92,997 )
Interest Expense $ 2,042
$ 1,866
$ 5,717
$ 5,331
Other non-operating expense (income), net $ (252 ) $ 326
(517 ) 1,395
Earnings (loss) before income tax $ 86
$ (44,932 ) $ (16,381 ) $ (99,723 )

September 30,
2017 December 31,
2016
Total Assets (in thousands)
Headset $ 83,029
$ 94,081
HyperSound⁽¹⁾
27,918
31,233
Eliminations (27,878 ) (30,514 )
Total $ 83,069
$ 94,800

~~(1) At September 30, 2017, HyperSound assets excluding eliminations, totaled less than $0.1 million.~~

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

The following table represents total net revenues based on where customers are physically located:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
	(in thousands)								(in thousands)
North America	$	23,320	$	28,063	$	47,371	$	69,679	$	28,617	$	45,967	$	63,724	$	78,951
United Kingdom	5,204		3,142		9,182		9,073			3,834		7,628		8,146		11,657
Europe	5,947		5,477		9,884		9,326			7,384		5,858		11,576		9,105
International	1,504		1,702		3,002		3,696
Other										1,495		1,352		2,730		1,978
Total net revenues	$	35,975	$	38,384	$	69,439	$	91,774	$	41,330	$	60,805	$	86,176	$	101,691

Note ~~12.~~13. Commitments and Contingencies

Litigation

The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the amount of any liability that could arise with respect to these actions cannot be determined with certainty, in the Company’s opinion, any such liability will not have a material adverse effect on its consolidated financial position, consolidated results of operations or liquidity.

Shareholders Class ~~Action:~~Action: On August 5, 2013, VTBH and the Company (f/k/a ~~Parametric)~~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. 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~~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~~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 ~~cases~~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. That denial is currently under review by the Nevada Supreme Court, which held a hearing on the Company's petition for review on September 1, 2015. After the hearing, the Nevada Supreme Court requested supplemental briefing, which the parties completed on October 13, 2015. The Nevada Supreme Court also invited the Business Law Section of the Nevada State Bar to submit an amicus brief by December 3, 2015 and briefing was completed on that date. 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 ~~did provide~~provided a limited basis upon which plaintiffs could seek to amend their complaint. ~~The schedule for such amendment, if any, has not been set.~~

~~Dr. John Bonanno Complaint:~~ ~~On February 18, 2015, Dr. John Bonanno,~~Plaintiffs amended their complaint on December 1, 2017 to assert the same claims in a ~~minority shareholder~~derivative capacity on behalf of ~~VTBH, filed~~the Company, as a complaint in Delaware Chancery Court alleging breach of contract against VTBH. According to the complaint, the Merger purportedly triggered a contractual obligation for VTBH to redeem Dr. Bonanno's stock. Dr. Bonanno requests a declaratory judgment stating that he is entitled to damages including a redemption of his stock for the redemption value of $15.1 million (equal to the original issue price of his stock plus accrued dividends) as well as ~~other costs~~in a direct capacity, against VTBH, Stripes Group, LLC, SG VTB Holdings, LLC, and ~~expenses. On February 8, 2016,~~ the ~~Delaware Chancery Court granted VTBH's motion~~former members of the Company’s Board of Directors. All defendants moved to dismiss ~~for improper venue,~~this amended complaint on January 2, 2018, and ~~Dr. Bonnano's complaint was dismissed~~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. InThe district court subsequently entered a pretrial schedule and set trial for November 2019. On January 18, 2019, the district court certified a class of 2017, Dr. Bonanno filed a complaint in New York state court alleging breach of contract against VTBH and seeking a declaratory judgment that he is entitled to damages and specific performance, including redemption of his stock. The Company answered the complaint on March 7, 2017. At the ordershareholders of the ~~Court, the parties filed cross-motions for summary judgment on March 31, 2017, on the sole question~~Company as of ~~whether the Merger was a defined event in the~~January 15, 2014.

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

purported contract entitling Dr. Bonnano to redemption of his shares. The cross-motions for summary judgment were fully briefed and heard on July 6, 2017. On September 1, 2017, the Court denied Defendant’s motion for summary judgment and granted Plaintiff’s motion for partial summary judgment. On October 5, 2017, a status conference was held that set a pre-trial schedule such that all merits and expert discovery will conclude on May 3, 2018 and a trial readiness conference will be held on May 4, 2018. On October 11, 2017, Defendant filed a motion to reargue plaintiff’s motion for summary judgment in the trial court, specifically seeking clarification that Defendant’s affirmative defenses to liability remain available. On the same day, Defendant filed a notice of appeal of the Court’s decision on summary judgment in its entirety. The plaintiff’s ability to recover any damages is subject to certain limitations, including, but not limited to, legally available funds. VTBH maintains that the Merger did not trigger any obligation to redeem Mr. Bonanno's preferred stock.

Commercial Dispute: On July 20, 2016, Bigben Interactive S.A. (“BigBen”) filed a statement of claim before the Regional Court of Berlin, Germany against VTB, which statement of claim was formally serviced upon VTB on June 28, 2017. The statement of claim alleges that VTB’s termination of a distribution agreement by and between BigBen and VTB breached the terms thereof and was invalid, and that BigBen is entitled to damages amounting to ~~damages amounting to~~ €5.0 million plus accrued ~~interests~~interest thereon plus certain additional damages as a result of such invalid termination. VTB filed its statement of defense with the court on September 21, 2017. ~~VTB maintains that~~On January 7, 2019, the Regional Court of Berlin issued its ~~termination~~judgment on this dispute, dismissing BigBen’s claim in its entirety. On February 7, 2019, BigBen Interactive S.A. has filed an appeal against the judgment of the ~~agreement was valid and that BigBen’s claims~~Regional Court of Berlin on January 7, 2019 (the "Judgment"). On April 15, 2019, Big Ben provided the reasoning for its appeal against ~~it are without merit. VTB's statement of defense was submitted~~the Judgment. On June 21, VTB replied to the ~~plaintiff~~reasoning for the appeal. Upon Big Ben’s application, the Higher Regional Court of Berlin has reviewed the provisions of the Judgment specifically relating to preliminary enforceability of the Judgment in separate proceedings and before the ~~court has granted~~appellate proceedings regarding the ~~option to submit a further written statement in reply~~main part of the Judgment. On July 9, 2019, the Higher Regional Court of Berlin completely rejected Big Ben’s applications with regard to the ~~statement~~suspension of ~~defense.~~the preliminary enforceability of the Judgment. The Higher Regional Court of Berlin has scheduled an oral hearing on the main part of Big Ben’s appeal of the Judgment for November 19, 2019.

The Company will continue to vigorously defend itself in the foregoing matters. However, litigation and investigations are inherently uncertain. Accordingly, the Company cannot predict the outcome of these matters. The Company has not recorded any accrual at ~~September~~June 30, ~~2017~~2019 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

~~We warrant our~~

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 ~~warranties,~~warranty reserve, which are included in accrued liabilities:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
	(in thousands)
Warranty, beginning of period	$	704		$	534		$	668		$	472
Warranty costs accrued		258			210			501			444
Settlements of warranty claims		(210	)		(162	)		(417	)		(334	)
Warranty, end of period	$	752		$	582		$	752		$	582

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 years, and do not contain any material residual value guarantees or material restrictive covenants.

The components of the right-of-use assets and lease liabilities were as follows:

	Balance Sheet Classification	June 30, 2019
		(in thousands)
Right-of-use assets	Other assets	$	3,034

Lease liability obligations, current	Other current liabilities	$	1,439
Lease liability obligations, noncurrent	Other liabilities		1,871
Total lease liability obligations		$	3,310
Weighted-average remaining lease term (in years)			2.2
Weighted-average discount rate			3.75	%

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(in thousands)
Warranty, beginning of period $ 529
$ 717
$ 639
$ 580
Warranty costs accrued 59
195
173
672
Settlements of warranty claims (109 ) (162 ) (333 ) (502 )
Warranty, end of period

$ 479
$ 750
$ 479
$ 750

~~XO FOUR Stealth Product Recall:~~ I~~n August 2015,~~

During the six months ended June 30, 2019, the Company ~~received a limited number~~recognized approximately $0.4 million of ~~reports~~lease costs in operating expenses and operating cash flows from ~~consumers and retailers that certain EAR FORCE~~® ~~XO FOUR Stealth headsets appeared to have a white substance or spots on the ear pads. Upon receiving the reports, the Company promptly stopped shipping any units~~operating leases of ~~the XO FOUR Stealth headsets and notified our retail customers to stop sales pending the results of~~approximately $0.8 million.

Approximate future minimum lease payments for the Company’s ~~investigation. An outside laboratory engaged by~~right of use assets over the ~~Company identified the substance~~remaining lease periods as ~~mold. In cooperation with the U.S. Consumer Product Safety Commission (“CPSC”), the Company is voluntarily recalling certain units~~ of ~~the headsets. As of September~~June 30, 2017 and the date of this report, the Company has not received notice of any law suits against the Company in connection with the recall and is working with the contract manufacturer to collect reimbursement for certain related costs.2019, are:

	(in thousands)
2019	$	848
2020		1,365
2021		566
2022		216
2023		103
Thereafter		397
Total minimum payments		3,495
Less: Imputed interest		(185	)
Total	$	3,310

On February 3, 2016, the Company notified CPSC promptly upon discovery that a vendor had mistakenly shipped certain recalled headsets to fill online orders. The Company has attempted to notify directly each of the affected purchasers to instruct them to participate in the recall. By letter dated August 23, 2017, CPSC staff notified the Company that the staff does not

~~Turtle Beach Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~intend to seek penalties against the Company at this time for the post-recall sale, offer for sale or distribution in commerce of recalled headsets.~~

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our operations should be read together with our unaudited condensed consolidated financial statements and the related notes included in Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March ~~8, 2017~~18, 2019 (the "Annual Report.")

This Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this Report are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects,” “strategies” and similar expressions. Caution should be taken not to place undue reliance on any such forward-looking statements because they involve risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements. Forward-looking statements are based on the beliefs, as well as assumptions made by, and information currently available to, the Company's management and are made only as of the date hereof. The Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties, including those described elsewhere in this Quarterly Report on Form 10-Q that could cause actual results to differ materially from the Company's historical experience and its present expectations or projections.

Business Overview

Turtle Beach Corporation (herein referred to as the “Company,” “we,” “us,” or “our”), headquartered in San Diego, California, and incorporated in the state of Nevada in 2010, is a premier ~~audio technology~~gaming accessory company with expertise and experience in developing, commercializing and marketing innovative products across a range of large addressable markets ~~operating~~ under ~~two reportable segments,~~the Turtle Beach® ~~(“Headset“)~~ and ~~HyperSound®.~~

ROCCAT® brands. Turtle Beach is a worldwide leading provider of feature-rich headset solutions for use across multiple platforms, including video game and entertainment consoles, handheld consoles, personal computers, tablets and mobile devices.

~~HyperSound technology~~ The recently acquired ROCCAT is ~~an innovative patent-protected sound technology that delivers immersive, directional audio with applications~~a leading provider of gaming keyboards, mice and other accessories focused in ~~digital signage and kiosks, consumer electronics and hearing healthcare.~~

~~The Company's stock is traded on NASDAQ Global Market under~~ the ~~symbol HEAR.~~

personal computer peripherals market.

Business Trends

Gaming Headset Market

~~Sales~~

Gaming headsets are part of a growing global gaming market sized at approximately $150 billion. The global gaming audience now exceeds global cinema and music markets with over 2.4 billion active gamers worldwide. Gaming peripherals, such as headsets, are a $4.7 billion business globally with over 75% of that market in the Americas and Europe where the Company’s business is focused. Gaming headsets represent more than a $3.4 billion global market, or more than 70% of the total peripherals market.

Competitive esports is a global phenomenon where professional gamers train, compete, win prize money, partner with major brands, and attract/gain fans - similar to traditional professional sports. There are over 195 million esports enthusiasts globally and the market is growing quickly. We believe a quality gaming headset is a must-have piece of equipment for esports participants.

Many gamers play online where a gaming headset (which typically includes a microphone and allows players to communicate in real-time) provides a more immersive experience in the industry’s most popular games and franchises.

Xbox and PlayStation® consoles are still the dominant gaming platforms in North America and Europe, however, Nintendo’s Switch console continues to perform well two years into its lifecycle. In addition to consoles, personal computers are a popular gaming platform where players utilize a similar style headset. Gaming on mobile/tablet devices represents about a third of the global gaming market, and while headsets can be used for mobile gaming, console and PC gaming are by far the largest drivers of gaming headset use.

Historically, Microsoft and Sony have gone through cycles where their respective console platform is changed significantly or updated to a new version. Microsoft and Sony launched Pro versions of their existing console platforms in 2016 and 2017, respectively, that did not result in the same levels of disruption as previous cycles in the gaming accessories market, which includes headsets and other peripherals such as gamepads, specialty controllers, adapters, batteries, memory and interactive gaming toys are heavily dependent on the global video game industry. In 2013, the gaming industry experienced a cyclical event as Microsoft and Sony each announced new consoles for the first time in eight years, and the consumer response to the Xbox One and PlayStation®4 (the “new generation” or “new-gen” consoles) has been overwhelmingly positive, creating a new installed base of gamers and a market for new-gen headsets.

~~When new console platforms are introduced into the market, changes to their platforms impact how~~ headset connect with or work with the new consoles and, such as with the most recent consoles, required a transition of console gaming headsets and consumers reduced their purchases of game console peripherals and accessories, including headsets, for old generation console platforms in anticipation of the new platforms becoming available.

In September 2016, Sony discontinued the original PlayStation®4 console and released a new, slimmer, and lower-priced PlayStation®4 Slim, which no longer includes an optical audio connector. Despite dropping the optical connector, we were largely able to accommodate this audio connectivity change via software updates to a small selection of our products affected by Sony's hardware change.

~~We believe~~business. Turtle Beach believes this is a good indication that any potential future console changes ~~are~~will not ~~expected to~~ be ~~nearly~~ as ~~disruptive as this past change as~~disruptive. In 2019, Microsoft announced that “Project Scarlett,” the ~~new~~next generation of ~~platform uses fairly standard audio connectivity,~~Xbox, will be released in late 2020, and PlayStation®5 is anticipated to arrive that year as well. The Nintendo Switch™ is completing its second year in the market with more than 25 million units sold through the end of December 2018, during which there has been an expanding library of games and an increased number of multiplayer chat-enabled games.

In addition to console sales, we believe ~~is unlikely to change~~

Xbox, PlayStation®, Nintendo, and ~~many headsets now have the capability to be updated via software upgrades. Over the long term, we expect to benefit from the extension of the new-gen cycle,~~PC gaming markets are driven by ~~the recent introductions of~~major game launches and franchises that encourage players to buy equipment and accessories. On Xbox ~~One S,~~ and PlayStation®~~VR,~~, flagship games like Call of Duty®, Destiny, Star Wars: Battlefront, Battlefield, Grand Theft Auto, and the ~~anticipated releases~~recently popular battle royale games like Fortnite, Apex Legends and PlayerUnknown’s Battlegrounds, are examples of ~~PlayStation®4 Pro and Xbox One X,~~major franchises that prominently feature online multiplayer modes that encourage communication, which ~~is believed~~tend to ~~result in stronger~~drive increased gaming ~~engagement for the next several years.~~

~~While sales~~headset sales. Many of ~~the new-gen consoles have outperformed previous platforms, the overall console gaming market uncharacteristically slowed in the 2016 holiday season,~~these established franchises launch new titles annually leading to higher-than-normal channel inventory entering 2017, as consumer deferred purchases ahead of mid-cycle console refreshes and a limited line up of multi-player games. By mid-year channel inventory normalized, however, retailer business model initiatives to reduce channels inventory levels have shifted the anticipated timing of revenue. We believe these actions are not an indication of an overall industry decline, but will require the Company to maintain higher inventory levels to meet customer demands with shorter lead times.

The upcoming 2017 holiday outlook, according to recent data, is forecasted to outperform the previous year with multiple game releases expected to exceed $100 million in packaged consumer sales. Additionally, both the PlayStation®4 Pro and Xbox One X have backwards compatibility marking the first time that the console video game business has seen the introduction of two new console systems with complete backward and forward compatibility. And it is the first time that both Sony and Microsoft will have a two-tier product offering which may allow them to offer more competitive pricing on their lower tier models and attract new gamers into the ~~market. We believe~~holidays, and as a result, the ~~anticipated increased consumer purchase activity, as compared to the prior year, will benefit the gaming console headset market recovery.~~

~~Cumulative New Generation Console Sales (in millions)~~

~~Source: DFC Intelligence Forecasts: Worldwide Console Forecast, February 2017.~~

~~Seasonality~~

~~Our~~ gaming headset business istends to be highly seasonal, often with ~~a significant portion~~45%-55% of sales occurring in the fourth quarter.

In 2017, PlayerUnknown’s Battlegrounds popularized a style of multiplayer game known as battle royale, in which players compete on large but shrinking maps until there is a single winner left. Players are able to play in teams and ~~profits typically occurring around~~audio cues and communication can be very helpful, making headsets a key accessory for this type of game.

Toward the ~~holiday period. Historically, more than 50%~~end of ~~headset business revenues are generated during the period from September~~2017, Epic Games introduced Fortnite, which includes a similar format and soared in popularity resulting in large and growing audiences of both players and spectators through ~~December as new~~content sharing platforms like Twitch, YouTube, Xbox's Mixer and PlayStation® Now.

Gaming headsets are ~~introduced~~sold at major retailers such as Amazon, Best Buy, GameStop, Target and ~~consumers engage in holiday shopping.~~

~~HyperSound~~

~~HyperSound technology is a pioneering~~Walmart. Brick and mortar retailers often have kiosks that allow shoppers to try the headsets and experience each headset’s specific fit, feel, and overall audio solution that provides an effective means of projecting sound in a highly directional manner, without use of large speaker arrays, to a specific location creating a precise audio zone. HyperSound directs a beam of audio to targeted listeners in a specific spot, delivering an immersive, 3D-like audio experience. Further, in June 2016, we unveiled HyperSound Glass, transparent directional speakers, and have started exploration of potential commercial licensing opportunities.

In the first half of 2017, we substantially completed the process of restructuring the HyperSound business in an effort to reduce costs and align spending with revenues, while continuing to pursue certain licensing opportunities for this technology. In October, the Company agreed to its initial license deal within the commercial audio field of use.

quality.

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) ~~it is one of the~~they are measures used by our board of directors and management team to evaluate our operating performance; (ii) ~~it is one of the~~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 or have no cash impact on operations; and (iv) ~~it is~~they 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 ~~backing out~~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 ~~measure,~~measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:

Adjusted EBITDAis defined as net income (loss) before interest, taxes, depreciation and amortization, stock-based compensation (non-cash) and certain special items that we believe are not representative of core operations.

Cash ~~Margins~~Margin is defined as gross margin excluding depreciation and amortization, and stock-based compensation.

Adjusted EBITDA (and a reconciliation to Net ~~loss,~~income, the nearest GAAP financial measure) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018, are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
	(in thousands)						(in thousands)
Net income (loss)	$	(2,373	)	$	(2,318	)	$	682		$	(356	)
Interest expense		111			1,258			355			3,263
Depreciation and amortization		1,299			1,333			2,401			2,360
Stock-based compensation		1,003			599			1,525			822
Income tax expense		25			300			189			364
Unrealized loss (gain) on financial instrument obligation		—			8,619			(1,601	)		8,619
Business transaction expense		1,563			—			2,343			—
Adjusted EBITDA	$	1,628		$	9,791		$	5,894		$	15,072

Three Months Ended Nine Months Ended
September 30,
September 30,
2017
2016
2017
2016
(in thousands)
Net loss $ (492 ) $ (44,799 ) $ (17,479 ) $ (99,383 )
Interest expense 2,042
1,866
5,717
5,331
Depreciation and amortization 876
3,047
3,259
8,213
Stock-based compensation 370
1,017
1,187
3,222
Income tax expense (benefit) 578
(133 ) 1,098
(340 )
Restructuring charges 241
339
509
564
Business model transition charge (312 ) 7,079
41
7,079
Impairment charges —
32,084
—
63,236
Adjusted EBITDA $ 3,303
$ 500
$ (5,668 ) $ (12,078 )

Comparison of the Three Months Ended ~~September~~June 30, ~~2017~~2019 to the Three Months Ended ~~September~~June 30, ~~2016~~

2018

Net loss for the three months ended ~~September~~June 30, ~~2017~~2019 was ~~$0.5~~$2.4 million compared to $2.3 million, including a ~~net~~$8.6 million loss related to the change in fair value of ~~$44.8 million~~a financial instrument, in the comparable prior year ~~period, including $0.5 million and $0.3 million of net loss attributable to the Headset segment, respectively.~~

period.

For the three months ended ~~September~~June 30, ~~2017,~~2019, Adjusted EBITDA ~~on a consolidated basis~~ was ~~$3.3~~$1.6 million ~~including investments of $0.2~~compared to $9.8 million in ~~the HyperSound business compared to $0.5 million, including investments of $2.9 million in the HyperSound business during the three months ended September 30, 2016.~~

~~Adjusted EBITDA improved for the three months ended September 30, 2017 as compared to~~ the prior year period primarily due to lower ~~HyperSound business investment. Headset adjusted EBITDA totaled approximately $3.5 million in the three months ended September 30, 2017~~sales as compared to ~~$3.4 million~~the record sales volumes in the prior year period which excluded $1.0 million of allocated costs. The increase was primarily due to improved margins driven by product and logistical costs savings, certain initiatives to reduce overhead costs and a foreign exchange benefit.

when the battle royale impact accelerated.

Comparison of the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 to the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~

2018

Net ~~loss~~income for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~$17.5~~$0.7 million, inclusive of a $1.6 million unrealized financial instrument obligation gain, compared to a net loss of ~~$99.4~~$0.4 million in the prior ~~year~~ period, ~~including $16.1~~inclusive of an $8.6 million ~~and $14.4 million of net loss attributable to the Headset segment, respectively.~~

unrealized financial instrument obligation loss.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, Adjusted EBITDA ~~on a consolidated basis~~ was ~~$(5.7)~~$5.9 million ~~including investments of $1.1 million in the HyperSound business~~ compared to ~~$(12.1)~~$15.1 million ~~including investments of $9.3 million in~~for the ~~HyperSound business during the nine~~six months ended ~~September~~June 30, ~~2016. Headset adjusted EBITDA totaled approximately $(4.6) million in the nine months ended September 30, 2017 compared~~2018, primarily due to ~~$(2.8) million in the prior year period that excluded $2.9 million of allocated costs.~~

~~Adjusted EBITDA improved for the nine months ended September 30, 2017~~lower sales as compared to the record volumes in the comparable prior year period ~~despite a challenging gaming consumer market, primarily due to lower HyperSound business investment requirements~~when the battle royale impact accelerated, as ~~a result of~~well as increased promotional activity and marketing spend in conjunction with the ~~transition to a license model, certain initiatives to reduce overhead costs~~Recon 70 Series release and ~~improved margins due to product~~incremental acquisition and ~~logistical costs savings.~~

sales support headcount.

Results of Operations

The following table sets forth the Company’s ~~statement~~statements of operations for the periods presented:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
	(in thousands)
Net revenue	$	41,330		$	60,805		$	86,176		$	101,691
Cost of revenue		28,159			40,528			58,218			66,385
Gross profit		13,171			20,277			27,958			35,306
Operating expenses		15,478			12,008			28,464			23,251
Operating income (loss)		(2,307	)		8,269			(506	)		12,055
Interest expense		111			1,258			355			3,263
Other non-operating expense (income), net		(70	)		9,029			(1,732	)		8,784
Income (loss) before income tax		(2,348	)		(2,018	)		871			8
Income tax expense		25			300			189			364
Net income (loss)	$	(2,373	)	$	(2,318	)	$	682		$	(356	)

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(in thousands)
Net Revenue $ 35,975
$ 38,384
$ 69,439
$ 91,774
Cost of Revenue 23,437
34,457
48,384
79,372
Gross Profit 12,538
3,927
21,055
12,402
Operating expenses 10,662
46,667
32,236
105,399
Operating loss 1,876
(42,740 ) (11,181 ) (92,997 )
Interest expense 2,042
1,866
5,717
5,331
Other non-operating expense (income), net (252 ) 326
(517 ) 1,395
Earnings (loss) before income tax 86
(44,932 ) (16,381 ) (99,723 )
Income tax expense (benefit) 578
(133 ) 1,098
(340 )
Net loss $ (492 ) $ (44,799 ) $ (17,479 ) $ (99,383 )

Net Revenue and Gross Profit

~~Headset Segment~~

The following table summarizes net revenue and gross profit for the periods presented:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
	(in thousands)
Net Revenue	$	41,330		$	60,805		$	86,176		$	101,691
Gross Profit	$	13,171		$	20,277		$	27,958		$	35,306
Gross Margin		31.9	%		33.3	%		32.4	%		34.7	%
Cash Margin (1)		33.1	%		34.0	%		33.3	%		35.3	%

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017
2016
(in thousands)
Net Revenue $ 35,947
$ 38,283
$ 69,291
$ 91,172
Gross Profit 12,328
12,766
21,465
24,643
Gross Margin 34.3 % 33.3 % 31.0 % 27.0 %
Cash Margin (1)
34.8 % 34.0 % 31.6 % 27.9 %

(1) Excludes non-cash charges of $0.2 million and $0.2 million, respectively, for the three months ended September 30, 2017 and 2016, and $0.4 million and $0.8 million, respectively, for the nine months ended September 30, 2017 and 2016.

Comparison of the Three Months Ended ~~September~~June 30, ~~2017~~2019 to the Three Months Ended ~~September~~June 30, ~~2016~~

2018

Net revenues for the three months ended ~~September~~June 30, ~~2017~~2019 were ~~$35.9~~$41.3 million, a ~~$2.3~~$19.5 million decrease from net revenues of $60.8 million in the prior year period when the sudden battle royale impact accelerated consumer demand such that retailers increased channel inventory to meet demand and avoid stock outs. As anticipated, those record levels were not sustainable; however, current year market sell-through continues to reflect a larger installed base of headset users as compared to three months ended September 30, 2016. The slight decrease, due to a holiday order timing shift from certain North American retailers that pushed revenue to October, reflects recent industry data that we believe indicates a start of the gaming console headset market recovery ahead of a solid lineup of expected new game launches and the holiday season that will include the release of the Xbox One X console. Additionally, our international business increased 22.6% driven by market share growth in the United Kingdom and Europe.

historic levels.

For the three months ended ~~September~~June 30, ~~2017,~~2019, gross profit as a percentage of net revenue ~~increased~~decreased to ~~34.3%~~31.9% from 33.3% in the comparable prior ~~year. Headset margins~~year period. Margins were ~~positively~~negatively impacted by product mix, volume-based fixed cost ~~savings driven by~~leveraging, increased refurbishment costs ahead of anticipated revenue and higher warehouse costs incurred during our ~~supply chain and logistics teams and product mix,~~partner transition, partially offset by ~~the loss of fixed cost leverage.~~

lower freight costs.

Comparison of the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 to the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~

2018

Net revenues for ~~the nine~~six months ended ~~September~~June 30, ~~2017 decreased $21.9~~2019 were $86.2 million, ~~or 24.0%, as compared~~a $15.5 million decrease from $101.7 million in the prior year period when battle royale driven consumer demand reached record levels. While the overall gaming accessory market declined across all channels, the Company held 41.9% of the North American console market revenue share and Turtle Beach’s Stealth 600 Series continued to ~~nine~~be the top selling console model.

For the six months ended ~~September~~June 30, 2016, due to the negative impact of 2016 holiday channel overhang, a result of lower industry-wide demand as limited sales of marquee games disrupted holiday purchasing behavior, and retailer business model initiatives to reduce on-hand inventory levels.

~~For the nine months ended September 30, 2017,~~2019, gross profit as a percentage of net revenue ~~increased~~decreased to ~~31.0%~~32.4% from ~~27.0%~~34.7% in the comparable prior ~~year. Headset margins~~year period. Margins were ~~positively~~ impacted by ~~favorable~~ product mix, increased refurbishment and ~~lower obsolescence reserves as we reserved much of the remaining old-gen inventory,~~warehouse costs, and a more promotional environment, which was partially offset by ~~negative fixed costs leveraging on~~reduced royalties and lower ~~sales volumes.~~

freight costs.

Operating Expenses

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(in thousands)
Selling and marketing	$	7,550	$	6,818	$	14,431	$	12,747
Research and development		1,734		1,327		3,190		2,656
General and administrative		6,194		3,863		10,843		7,848
Total operating expenses	$	15,478	$	12,008	$	28,464	$	23,251

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(in thousands)
Selling and marketing $ 5,586
$ 7,016
$ 15,564
$ 19,737
Research and development 1,336
2,637
4,423
6,701
General and administrative 3,499
4,591
11,740
15,161
Asset impairment —
32,084
—
63,236
Restructuring charges 241
339
509
564
Total operating expenses $ 10,662
$ 46,667
$ 32,236
$ 105,399

By Segment:
Headset $ 10,509
$ 11,056
$ 31,244
$ 32,613
HyperSound $ 153
$ 35,611
$ 992
$ 72,786

Selling and Marketing

Selling and marketing expenses for the three and six months ended ~~September~~June 30, ~~2017~~2019, totaled ~~$5.6~~$7.6 million ~~or 15.5% as a percentage of net revenues,~~and $14.4 million, respectively, compared to ~~$7.0~~$6.8 million ~~or 18.3% as a percentage of net revenues, for the three months ended September 30, 2016. The decrease was attributable to the reduction of HyperSound business related sales force~~ and ~~marketing campaigns and, certain promotional activity that has been deferred to align with upcoming game releases.~~

~~Selling and marketing expenses for the nine months ended September 30, 2017 totaled $15.6~~$12.7 million or 22.4% as a percentage of net revenues, compared to $19.7 million, or 21.5% as a percentage of net revenues, for the nine months ended September 30, 2016. This decrease was attributable to sales force and marketing spend reductions related to the HyperSound business transition and higher media spend in the prior year period related to certain product launch campaigns. Further, depreciation

~~expense has decreased year-over-year as certain of our major retail customers have shifted away from independent in-store displays.~~

~~Research and Development~~

~~As a result of our product development realignment in connection with the HyperSound business transition, research and development expenses decreased~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 versus~~2018, respectively. This increase was primarily due to marketing spend in conjunction with the ~~comparable prior year period.~~

Recon 70 Series launch, continued investment in our esports presence, certain digital and social media initiatives and additional headcount to support sales activity.

Research and Development

Research and development costs for the three and six months ended June 30, 2019 were $1.7 million and $3.2 million, respectively, compared to $1.3 million and $2.6 million for the three and six months ended June 30, 2018, respectively, primarily due to increased costs for legal research and patent related expenses associated with the development of new products, as well as increases in employee expenses and consultant costs.

General and Administrative

General and administrative expenses for the three months ended ~~September~~June 30, ~~2017~~2019 totaled ~~$3.5~~$6.2 million, ~~or 9.7% as a percentage~~inclusive of ~~net revenues,~~$1.6 million of acquisition integration costs, compared to ~~$4.6~~$3.9 million ~~or 12.0% as a percentage of net revenues,~~ for the three months ended ~~September~~June 30, ~~2016. The decrease~~2018. Excluding these costs, the year-over-year increase was primarily due to ~~lower~~certain warehouse transition costs, incremental ROCCAT-related headcount and higher non-cash ~~charges, legal and professional service fees and headcount reductions.~~

stock compensation expense.

General and administrative expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 totaled ~~$11.7~~$10.8 million, ~~or 16.9% as a percentage~~inclusive of ~~net revenues,~~$2.3 million of acquisition integration costs, compared to ~~$15.2~~$7.8 million ~~or 16.5% as a percentage of net revenues,~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2016. The decrease~~2018. Excluding these costs, the year-over-year increase was primarily due to higher non-cash stock compensation expense and certain warehouse transition costs, partially offset by lower ~~non-cash charges~~variable compensation costs and ~~employee~~legal expenses.

~~Restructuring Charges~~

Restructuring charges for the three and nine months ended September 30, 2017 and September 30, 2016 related to our continued efforts to improve our operating efficiency in our Headset business, such as closing excess facilities and reducing redundancies, and reducing HyperSound business operating expenses.

Interest Expense

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, interest expense ~~increased~~decreased $1.1 million and $2.9 million, respectively, as compared to ~~September 30, 2016~~the comparable prior periods, due to ~~higher borrowing costs, primarily~~the full repayment of the subordinated notes and term loans, and the exchange of the Series B redeemable preferred stock.

Other Non-Operating Expense (Income)

Other non-operating income totaled $0.1 million for three months ended June 30, 2019 related to currency fluctuations on our foreign operations compared to other non-operating loss of $9.0 for the three months ended June 30, 2018, which included an $8.6 million unrealized loss related to the ~~subordinated notes, additional amortization~~change in fair value of a financial instrument obligation.

Other non-operating income totaled $1.7 million for the six months ended June 30, 2019 primarily due to a $1.6 million unrealized gain related to ~~certain amendments~~the change in fair value of a financial instrument obligation compared to ~~our Credit Facility and~~other non-operating loss of $8.8 million for the ~~Term Loan Due 2019.~~

six months ended June 30, 2018, which included a $8.6 million unrealized loss related to the change in fair value of a financial instrument obligation.

Income Taxes

Income tax expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~$0.6~~$25,000 at an effective tax rate of (1.1%), and $0.2 million at an effective tax rate of ~~672.1%~~21.7%, respectively. Income tax expense for the three and ~~$1.1~~six months ended June 30, 2018 was $0.3 million at an effective tax rate of ~~(6.7)%~~(14.9%), ~~respectively. Income tax benefit for the three~~ and ~~nine months ended September 30, 2016 was $(0.1)~~$0.4 million at an effective tax rate of ~~0.3% and $(0.3) million at an effective tax rate of 0.3%~~4,550.0%, respectively. The effective tax rate was primarily impacted by the full valuation allowance on domestic earnings, foreign entity tax benefits, ~~and~~ certain state tax ~~expense.~~

expense and the unrealized loss (gain) on a financial instrument obligation.

Liquidity and Capital Resources

Our primary sources of working capital are cash ~~flow~~flows from operations and availability ~~of capital~~ under our revolving credit facility. We have funded operations and acquisitions in recent periods with operating cash ~~flows, and proceeds from debt and equity financings.~~

flows.

The following table summarizes our sources and uses of cash:

	Six Months Ended
	June 30,
	2019			2018
	(in thousands)
Cash and cash equivalents at beginning of period	$	7,078		$	5,247
Net cash provided by operating activities		38,172			46,341
Net cash used for investing activities		(13,674	)		(402	)
Net cash used for financing activities		(28,133	)		(42,013	)
Effect of foreign exchange on cash		3			(65	)
Cash and cash equivalents at end of period	$	3,446		$	9,108

Nine Months Ended
September 30,
2017 2016
(in thousands)
Cash and cash equivalents at beginning of period $ 6,183
$ 7,114
Net cash provided by operating activities 9,291
3,117
Net cash used for investing activities (2,584 ) (2,260 )
Net cash used for financing activities (12,559 ) (4,632 )
Effect of foreign exchange on cash 142
(62 )
Cash and cash equivalents at end of period $ 473
$ 3,277

Operating activities

Cash provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~$9.3~~$38.2 million, ~~an increase~~a decrease of ~~$6.2~~$8.2 million as compared to ~~$3.1~~$46.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. The ~~increase~~decrease is primarily the result of ~~lower HyperSound business net cash burn~~incremental ROCCAT costs, a reduction in inventory turnover and ~~certain initiatives to better align cash expenditures with the seasonality of the gaming market, partially offset by lower gross receipts due to reduced~~increased sales ~~volumes.~~

and marketing-related expenditures.

Investing activities

Cash used for investing activities was ~~$2.6~~$13.7 million ~~during~~for the ~~nine~~six months ended~~September~~ June 30, ~~2017~~2019, as a result of $12.7 million related to the ROCCAT acquisition, compared to ~~$2.3~~$0.4 million of capital expenditures in the prior ~~period due to an investment to refresh advertising displays at certain major customers and equipment purchases related to our recent headset launches.~~period.

Financing activities

Net cash used for financing activities was ~~$12.6~~$28.1 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to ~~$4.6~~$42.0 million during the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. Financing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 included net ~~payments~~repayments on our revolving credit facility of ~~$11.1~~$26.6 million and ~~term loan repayments~~$1.5 million of ~~$1.4 million.~~common stock repurchases. Financing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 included net ~~payments~~repayments on our revolving credit facility of ~~$6.2~~$38.5 million and term loan ~~repayments~~payments of ~~$3.6 million with cash from operations and the issuance of common stock.~~

$2.5 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 12twelve 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.

We believe the combination of our revolving credit facility, long-term debt and cash flow generated by our gaming headset business and reduced costs related to the HyperSound business will provide the necessary liquidity to fund our annual working capital needs.

Foreign cash balances at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 were ~~$0.1~~$1.1 million and ~~$0.2~~$5.2 million, respectively.

Revolving Credit Facility

On ~~March 31, 2014,~~December 17, 2018, Turtle Beach and certain of its subsidiaries entered into ~~a new asset-based revolving credit~~an amended and restated loan, guaranty and security agreement (“Credit Facility”) with Bank of America, N.A. (“(“Bank of ~~America~~”America”), as Agent, Sole Lead Arranger and Sole Bookrunner, which replaced the then existing asset-based revolving loan ~~and security~~ agreement. The Credit Facility, which expires on March ~~31, 2019,~~5, 2024, provides for a line of credit of up to ~~$60~~$80 million inclusive of a sub-facility limit of ~~$10~~$12 million for TB Europe, a ~~wholly owned~~wholly-owned subsidiary of Turtle Beach. ~~The~~In addition, the Credit Facility ~~may be used~~provides for ~~working capital,~~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 ~~issuance~~Credit Facility to provide for, amongst other items, (i) the addition of ~~bank guarantees,~~ ~~letters~~TBC Holding Company LLC, a wholly-owned subsidiary of ~~credit~~VTB, as an obligor and ~~other corporate purposes.~~

(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 ~~1.00%~~0.50% to~~1.50% for U.S. base rate loans~~ ~~and between~~ ~~2.00%~~to~~2.50% for U.S. LIBOR loans and U.K. loans. As ofSeptember 30, 2017, interest rates for outstanding borrowings were 6.24%~~ 1.25% for base rate loans and ~~approximately 3.21%~~between 1.25% to 2.00% for ~~LIBOR rate loans.~~U.S. LIB OR 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.

If As of June 30, 2019, interest rates for outstanding borrowings were 6.00% for base rate loans and 3.75% for LIBOR rate loans.

The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met ~~meaning that the Company does not have receivables and inventory which are eligible to borrow on under~~or certain other events occur (as defined in the Credit ~~Facility in excess of amounts borrowed, the~~Facility). The Credit Facility ~~requires~~requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ~~ratio. The fixed charge ratio is defined as the ratio, determined~~ on a consolidated basis for the most recent four fiscal quarters, of (a) EBITDA minus capital expenditures, excluding those financed through other instruments, and cash taxes paid, and (b) Fixed Charges defined as the sum of cash interest expense plus scheduled principal payments. ~~The current fixed charge coverage~~ ratio of at least ~~1.15~~1.00 to 1.00 onas of the last day of each ~~month will become effective again after the Company has complied with such ratio for six consecutive months.~~

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~~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~~Company’s assets.

On October 31, 2016, the Company amended certain provisions to provide, among other things, that (i) the existing loan availability blocks be temporarily reduced during certain specified periods, (ii) replaced certain financial covenants determined on a segment-by-segment basis by amended EBITDA levels for the Headset business beginning with the month ended October 31, 2016, (iii) the Company maintain revised cash flow levels, in the aggregate and with respect to its HyperSound division, during each rolling four week period beginning with the period ended October 31, 2016 through December 31, 2018 and September 30, 2017, respectively, and (iv) in the event the Company’s availability is less than certain specified amounts, obtain additional funding from the issuance of a subordinated promissory note provided by SG VTB (the “Promissory Note”).

As of ~~September~~June 30, ~~2017,~~2019, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately ~~$12.5 million, net of the outstanding Term Loan Due 2018 (as defined below) that is considered to be an additional outstanding amount under the Credit Facility.~~

~~Term Loan Due 2018~~

On December 29, 2014, the Company amended the Credit Facility (the “December Amendment”) to permit the repayment of $7.7 million of then existing subordinated debt and accrued interest with the proceeds of an additional loan (the “Term Loan Due 2018”). The Term Loan Due 2018 resulted in modified financial covenants while it is outstanding, will bear interest at a rate of LIBOR for the applicable interest period plus 5% will be repaid in equal monthly installments beginning on April 1, 2015 and ending on October 1, 2018, reflecting a six month waiver. Amounts so repaid are recognized by lowering the balance of the term loan tranche and increasing the lower interest rate base revolver amount, with no net impact on borrowing availability.

~~Term Loan Due 2019~~

On July 22, 2015, the Company and its subsidiaries, entered into a term loan, guaranty and security agreement (the “Term Loan Due 2019”) with Crystal Financial LLC, as agent, sole lead arranger and sole bookrunner, Crystal Financial SPV LLC and the other persons party thereto (“Crystal”), which provides for an aggregate term loan commitment of $15 million that bears interest at a rate per annum equal to the 90-day LIBOR rate plus 10.25%. Under the terms of the Term Loan Due 2019, the Company is required to make payments of interest in arrears on the first day of each month beginning August 1, 2015 and will repay the principal in monthly payments beginning January 1, 2016, inclusive of a nine month waiver, with a final payment on June 28, 2019, the maturity date.

The Term Loan Due 2019 is secured by a security interest in substantially all of the Company and each of its subsidiaries' working capital assets and is subject to the first-priority lien of Bank of America, as agent, under the Credit Facility, other than with respect to equipment, fixtures, real property interests, intellectual property, intercompany property, intercompany indebtedness, equity interest in their subsidiaries, and certain other assets specified in an inter-creditor agreement between Bank of America and Crystal.

The Company and its subsidiaries are required to comply with various customary covenants including, (i) maintaining minimum EBITDA (as defined in the Term Loan Due 2019) in each trailing twelve month period beginning August 31, 2015, (ii) maintaining a Consolidated Leverage Ratio (as defined in the Term Loan Due 2019) to be measured on the last day of each month while the term loans are outstanding of no more than 5.75:1 beginning December 31, 2015 with periodic step-downs to 3.00:1 on January 31, 2018, (iii) not making capital expenditures in excess of $5 million in each of the years ending December 31, 2016, 2018 and 2019 and in excess of $5.5 million in the year ending December 31, 2017, (iv) restrictions on the Company’s and its subsidiaries ability to prepay its subordinated notes, pay dividends, incur debt, create or suffer liens and engage in certain fundamental transactions and (v) an obligation to provide certain financial and other information. The agreement permits certain equity holders of the Company to contribute funds to the Company to cure certain financial covenant defaults.

The Term Loan Due 2019 contains customary representations, mandatory prepayment events and events of default, including defaults triggered by the failure to make payments when due, breaches of covenants and representations, material impairment in the perfection of Crystal’s security interest in the collateral and events related to bankruptcy and insolvency of the Company and its subsidiaries. Upon an event of default, Crystal may declare all outstanding obligations immediately due and payable (along with a prepayment fee), a default rate of an additional 2.0% may be applied to amounts outstanding and may take other actions including collecting or taking such other action with respect to the collateral pledged in$20.0 million.

Stock Warrants

In connection with ~~the term loan.~~

~~On October 31, 2016, in connection with the recently announced HyperSound business restructuring, the Company amended~~ certain provisions to provide, among other things, that (i) the existing loan availability blocks be permanently reduced during certain specified periods, (ii) replaced certain financial covenants determined on a segment-by-segment basis by amended EBITDA levels for the Headset business beginning with the month ended October 31, 2016, (iii) the Company maintain revised cash flow levels, in the aggregate and with respect to its HyperSound segment, during each rolling four week period beginning with the period ended October 31, 2016 through December 31, 2018 and September 30, 2017, respectively, and (iv) in the event the Company’s availability is less than certain specified amounts, obtain additional funding from the issuance of a subordinated ~~promissory note provided by SG VTB (the “Promissory Note”).~~

~~As of September 30, 2017, the Company was in compliance with all the amended financial covenants.~~

~~Subordinated Notes - Related Party~~

O~~n April 23, 2015,~~notes, the Company issued a $5.0 million subordinated note (the “April Note”) to SG VTB Holdings, LLC, the Company’s largest stockholder (“SG VTB”). The April Note was issued with an interest rate of (i) 10% per annum for the first year and (ii) 20% per annum for all periods thereafter, with interest accruing and being added to the principal amount of the note quarterly.

On May 13, 2015, the Company issued subordinated notes (the “May Notes”) with an aggregate principal amount of $3.8 million to SG VTB, and a trust affiliated with Ronald Doornink, the Chairman of the Company's board of directors (the “Board”). The May Notes were issued with an interest rate of 10% per annum until the maturity date of the May Notes (which was August 13, 2015 but could be extended up to two additional 90 day periods upon the written agreement of the Company and the noteholder), with interest accruing and being added to the principal amount of the May Notes quarterly. Following the maturity date, the interest rate would have increased to 20% per annum.

On June 17, 2015, the Company issued a subordinated note (the “June Note”) with an aggregate principal amount of $3.0 million to SG VTB. The June Note was issued at an interest rate of 10% per annum until the maturity date of the June Note (which was September 17, 2015 but could be extended up to two additional 90 day periods upon the written agreement of the Company and the noteholder), with interest accruing and being added to the principal amount of the June Note quarterly. Following the maturity date, the interest rate would have increased to 20% per annum. In addition, the Company had the option to request that SG VTB make, in SG VTB’s sole discretion, additional advances from time to time up to an aggregate principal amount of $15.0 million. Prior to the amendment (see below), following an additional advance of $6.0 million on July 8, 2015, $9.0 million was outstanding under the June Note.

Concurrently with the completion of the Term Loan Due 2019, the Company amended and restated each of its outstanding subordinated notes (the “Amended Notes”). The obligations of the Company under the Amended Notes are subordinate and junior to the prior payment of amounts due under the Credit Facility and Term Loan Due 2019. In addition, the stated maturity date of the Amended Notes was extended to September 29, 2019, subject to acceleration in certain circumstances, such as a change of control of the Company. The Amended Notes bear interest at a rate per annum equal to LIBOR plus 10.5% and shall be paid-in-kind by adding the amount to the principal amount due.

On November 16, 2015, the Company issued a $2.5 million subordinated note (the “November Note”) to SG VTB, the proceeds of which, as set forth in the amendment to the Term Loan Due 2019, were applied against the outstanding balance of the Term Loan Due 2019. The November Note will bear interest at a rate of 15% per annum until its maturity date, which is September 29, 2019, and is subordinated to all senior debt of the Company.

On October 31, 2016, in connection with certain amendments to the Credit Facility and Term Loan Due 2019, the Company and SG VTB entered into the Promissory Note, which states that in the event the Company’s availability under the Credit Facility is less than certain specified amounts, the Company may, upon request, at any time until September 29, 2019 require that SG VTB provide a $2 million subordinated loan. Upon issuance, the loan would bear interest at a rate of either (i) LIBOR plus 10.5% per annum or (ii) 12.0%, dependent upon the Company’s compliance with certain financial covenants and would be subordinated to all senior debt of the Company.

SG VTB is an affiliate of Stripes Group LLC (“Stripes”), a private equity firm focused on internet, software, healthcare IT and branded consumer products businesses. Kenneth A. Fox, one of our directors, is the managing general partner of Stripes and the sole manager of SG VTB and Ronald Doornink, our Chairman of the Board, is an operating partner of Stripes.

~~Series B Redeemable Preferred Stock~~

In September 2010, VTBH issued 1,000,000 shares of its Series B Redeemable Preferred Stock with a fair value of $12.4 million. We are required to redeem the Series B Redeemable Preferred Stock on the earlier to occur 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. The redemption value was $18.5 million and $17.5 million as of September 30, 2017 and December 31, 2016, respectively.

~~Stock Warrants~~

~~In connection with and as consideration for the concessions in the Amended Notes, the Company issued to SG VTB and a trust affiliated with Ronald Doornink~~ warrants to purchase ~~1.7~~an aggregate 0.4 million shares and 0.3 million shares of the Company’s common stock at an exercise price of ~~$2.54 per share. The warrants are exercisable for a period of five years beginning on the date of issuance, July 22, 2015. The exercise price~~$10.16 and the number of shares of Common Stock purchasable are subject to adjustment and do not carry any voting rights or other rights as a stockholder of the Company prior to exercise. The shares issuable upon exercise are also subject to the “demand” and “piggyback” registration rights set forth in the in the Company’s Stockholder Agreement, dated August 5, 2013, as amended July 10, 2014.

~~In connection with the November Note, the Company issued a warrant to purchase 1.4 million shares of the Company’s common stock at an exercise price of $2.00~~$8.00 per share, to SG VTB. The exercise price and the number of shares are subject to standard anti-dilution adjustments and do not carry any voting rights as a stockholder of the Company prior to exercise. The warrant is exercisable for a period of ten years beginning on the date of issuance and does not entitle the holder to any voting rights or other rights as a stockholder of the Company prior to exercise.

~~In addition, under the terms of the Promissory Note, if and when the funding occurs, as additional consideration the Company would issue~~respectively, to SG VTB ~~a warrant, exercisable for a period~~Holdings, LLC, all of ten years beginning on the date of issuance, to purchase an amount of shares of the Company’s common stock equal to 2.4% of the Company’s then fully diluted shares outstanding at an exercise price equal to the closing price on that date. The warrant would not entitle the holder to any voting rights or other rights as a stockholder of the Company prior to exercise.

which were settled through cashless exercises in March 2019.

Critical Accounting Estimates

Our discussion and analysis of our results of operations and capital resources are based on our ~~condensed~~ consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of these ~~condensed~~ 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.

~~There have been no material changes~~

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. Upon adoption of the new standard as it relates to the ~~critical~~Company's accounting ~~policies~~for real estate operating leases, assets and ~~estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report.~~

liabilities increased by approximately $3.3 million.

See Note 2, “Summary of Significant Accounting Policies,” into the ~~Notes to the~~unaudited condensed consolidated financial statements contained herein 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.

Item 3 - Qualitative and Quantitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact ~~a company's~~our financial position due to adverse changes in financial market prices and rates. The ~~Company's~~Company’s market risk exposure is primarily a result of fluctuations in interest rates, ~~and~~ foreign currency exchange rates and inflation.

~~To date, the~~

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~~When such derivative financial instruments are used, 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 ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, we did not have any derivative financial instruments.

~~Interest Rate Risk~~

The Company's total variable rate debt is comprised of $12.9 million presented as a Term Loan and $17.9 million of Subordinated Notes. A hypothetical 10% increase in borrowing rates at September 30, 2017 would not result in a material increase in interest expense on the existing principal balances.

Foreign Currency Exchange Risk

The Company has exchange rate exposure primarily with respect to the British ~~Pound and Euro.~~Pound. As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, our monetary assets and liabilities ~~which~~that 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.

Item 4 - Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are designed to ensure that (1) information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (2) that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures.

We assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2017. In making this assessment, we used the framework and criteria established in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment using those criteria, we concluded that, as of September 30, 2017, our internal control over financial reporting was effective.

At the conclusion of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision of our Chief Executive Officer (our principal executive officer, or PEO) and our Chief Financial Officer (our principal financial officer, or PFO), of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our PEO and PFO concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, were effective as of ~~September~~June 30, ~~2017.~~

2019.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the period covered that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II. OTHER INFORMATION

~~Item 5 - Other Information~~

~~None.~~

~~PART II. OTHER INFORMATION~~

Item 1 - Legal Proceedings

Please refer to Note ~~12 -~~13, “Commitments and Contingencies” in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report on Form 10-Q, which is incorporated into this item by reference.

Item 1A - Risk Factors

The following discussion of risk factors contains forward-looking statements. These risk factors may be important to

understanding any statement in this Form 10-Q or elsewhere. The following information should be read in conjunction with our

financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion

and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

Because of the following factors, as well as other factors affecting the Company’s financial condition and operating

results, past financial performance should not be considered to be a reliable indicator of future performance, and investors

should not use historical trends to anticipate results or trends in future periods.

~~Risks Related to Liquidity~~

We depend upon the availability of capital under our revolving credit facility and term loan to finance our operations. Any additional financing that we may need may not be available on favorable terms or at all.

In addition to cash flow generated from sales, we finance our operations with a revolving credit facility (the “Credit Facility”) provided by Bank of America, as Agent, Sole Lead Arranger and Sole Bookrunner and our term loan (the “Term Loan Due 2019”) provided by Crystal Financial LLC (“Crystal”), as Agent, Sole Lead Arranger and Sole Bookrunner. If we are unable to comply with the financial and other covenants contained in the Credit Facility or the Term Loan Due 2019 (collectively, the “Loan Documents”) and are unable to obtain a waiver under the applicable Loan Documents, Bank of America or Crystal, as applicable, may declare the outstanding borrowings under the applicable Loan Documents immediately due and payable. Such an event would have an immediate and material adverse impact on our business, results of operations and financial condition. We would be required to obtain additional financing from other sources, and we cannot predict whether or on what terms, if any, additional financing might be available. If we are required to seek additional financing and are unable to obtain it, we may have to change our business and capital expenditure plans, which may have a materially adverse effect on our business, financial condition and results of operations. In addition, the debt under the Loan Documents could make it more difficult to obtain other debt financing in the future, which could put us at a competitive disadvantage to competitors with less debt.

The Loan Documents contain financial and other covenants that we are obligated to maintain. If we violate any of these covenants, we will be in default under the applicable Loan Documents. These covenants include restrictions that prohibit or otherwise limit our ability to pay dividends, incur additional indebtedness, acquire assets or engage in certain other types of transactions, and also require that we maintain certain financial ratios and EBITDA levels during specified periods. If a default occurs and is not timely cured or waived, Bank of America or Crystal, as applicable, could seek remedies against us, including termination or suspension of obligations to make loans and issue letters of credit and acceleration of amounts due under the applicable Loan Documents. No assurance can be given that we will be able to maintain compliance with these covenants in the future. The Credit Facility is asset based and can only be drawn down in an amount to which eligible collateral exists and can be negatively impacted by extended collection of accounts receivable, unexpectedly high product returns and slow moving inventory, among other factors. As of the date of this report, we were in compliance with our covenants under the Loan Documents.

The Credit Facility and Term Loans provide our lenders with a first-priority lien against substantially all of our working capital assets, including trade accounts receivable, inventories, and intellectual property and contains certain restrictions on our ability to take certain actions.

The Credit Facility and Term Loan Due 2019 contain certain financial covenants and other restrictions that limit our ability, among other things, to incur certain additional indebtedness; pay dividends and repurchase stock; make certain investments and other payments; enter into certain mergers or consolidations; engage in sale and leaseback transactions and transactions with affiliates; and encumber and dispose of assets.

In addition, we have granted the lenders a first-priority lien against substantially all of our assets, including trade accounts receivable, inventories and our intellectual property. Failure to comply with the operating restrictions or financial covenants could result in a default which could cause the lenders to accelerate the timing of payments and exercise their lien on substantially all of our assets.

If suppliers, customers, landlords, employees or other stakeholders lose confidence in our business, it may be more difficult for us to operate and may materially adversely affect our business, results of operations and financial condition.

If suppliers, customers, landlords, employees or other stakeholders have doubts regarding our ability to continue as a going concern, this could result in further loss of confidence, which, in turn, could materially adversely affect our ability to

operate. Concerns about our financial condition may cause our suppliers and other counterparties to tighten credit terms or cease doing business with us altogether, which would have a material adverse effect on our business and results of operations.

Risks Related to Our Operations

We depend upon the success and availability of third-party gaming platforms and ~~software~~release of certain game titles to drive sales of our headset products.

The performance of our headset business is affected by the continued success of third-party gaming platforms, such as Microsoft's Xbox consoles and Sony's PlayStation® consoles, as well as video games developed by such manufacturers and other third-party publishers. Our business could suffer if any of these parties fail to continue to drive the success of these platforms, develop new or enhanced videogame platforms, develop popular game and entertainment titles for current or future generation platforms or produce and timely release sufficient quantities of such consoles. For example, DFC Intelligence forecasts' estimates of future cumulative new generation console has declined since the debut of the new-gen consoles in 2013, which, if such estimates are accurate, may negatively impact our future headset sales or otherwise negatively impact our business. Further, if a platform is withdrawn from the market or fails to sell, we may be forced to liquidate inventories relating to that platform or accept returns resulting in significant losses.

~~In order~~

The battle royale genre, such as Fortnite, Apex Legends and PlayerUnknown's Battlegrounds, has increased demand for ~~certain~~our headset products and driven significant revenue growth over prior year results. If console and personal computer game titles that are enhanced by the use of gaming headsets decline in number, popularity, or are delayed, our ~~headsets to connect to the Xbox One advanced features~~revenue and ~~controls, a proprietary computer chip is required. As a result, with respect to~~profits may decrease substantially and our products designed for the Xbox One, we are currently reliant on Microsoft or their designated supplier to provide us with sufficient quantities of the chips. If we are unable to obtain sufficient quantities of these headset adapters or chips, sales of such Xbox One headsets and consequently our revenues wouldbusiness may be adversely affected.

In addition, we are licensed and approved by Microsoft to develop and sell Xbox One compatible audio products pursuant to a license agreement under which we have the right to manufacture (including through third party manufacturers), market and sell audio products for the Xbox One video game console (the “Xbox One Agreement”). Our Xbox One headsets are dependent on this license. Microsoft has the right to terminate the Xbox One Agreement under certain circumstances set forth in the agreement. Should the Xbox One Agreement be terminated, our headset offerings may be limited, thereby significantly reducing our revenues.

Accordingly, Microsoft, Sony and other third-party gaming platform manufacturers may control our ability to manufacture headsets compatible with their platforms, and could cause unanticipated delays in the release of our products as well as increases to projected development, manufacturing, licensing, marketing or distribution costs, any of which could negatively impact our business.

Our HyperSound business has not generated significant revenues and we may not be successful in implementing our strategic priorities for our HyperSound business, which may have a material adverse impact on our business and financial results.

Our HyperSound business has incurred operating losses since the spin-off of Parametric Sound Corporation from LRAD Corporation in 2010, and could incur additional losses in the near-term if we are unable to successfully complete our previously announced strategic alternative process to continue the development and commercialization of the HyperSound technology.

Substantially all of our HyperSound revenues to date have been derived from sales of a limited number of products to a limited number of customers. We cannot guarantee that we will have sufficient capital to continue development of our HyperSound products and technology, or that we will be able to develop a larger customer base and introduce new products to generate additional revenues. Further, we cannot guarantee that we will be able to generate any future license revenues.

Our ability to achieve future profitability is dependent on a variety of factors, many of which are outside our control, including, but not limited to, the outcome of our strategic review. Failure to achieve profitability or sustain profitability, if achieved, may require us to continue to make additional capital investments in, or to dispose of, our HyperSound business, either of which could materially impact our results of operations.

Our Turtle Beach brand faces significant competition from other consumer electronics companies and this competition could have a material adverse effect on our financial condition and results of operations.

We compete with other producers of personal computers and video game console headsets, including the video game console manufacturers. Our competitors may spend more money and time on developing and testing products, undertake more extensive marketing campaigns, adopt more aggressive pricing policies, pay higher fees to licensors for motion picture, television, sports, music and character properties, or develop more commercially successful products for the personal computer or video game platforms than we do. In addition, competitors with large product lines and popular products, in particular the video game console manufacturers, typically have greater leverage with retailers, distributors and other customers, who may be willing to promote products with less consumer appeal in return for access to those competitors’ more popular products.

In the event that a competitor reduces prices, we could be forced to respond by lowering our prices to remain competitive. If we are forced to lower prices, we may be required to “price protect” products that remain unsold in our customers’ inventories at the time of the price reduction. Price protection results in our issuing a credit to our customers in the amount of the price reduction for each unsold unit in that customer’s inventory. Our price protection policies, which are customary in the industry, can have a major impact on our sales and profitability.

In addition, if console manufacturers implement new technologies, through hardware or software, which would cause our headsets to become incompatible with that hardware manufacturer’s console, there could be unanticipated delays in the release of our products as well as increases to projected development, manufacturing, marketing or distribution costs, any of which could harm our business and financial results.

Further, new and emerging technologies and alternate platforms for gaming, such as mobile devices and virtual reality devices, could make the consoles for which our headsets are designed less attractive or, in time, obsolete, which could require us to transition our business model such as develop products for other gaming platforms.

The industries in which we operate are subject to competition in an environment of rapid technological change, and if we do not adapt to, and appropriately allocate our resources among, emerging technologies, our revenues could be negatively affected.

We must make substantial product development and other investments to align our product portfolio and development efforts in response to market changes in the gaming industry. We must anticipate and adapt our products to emerging technologies in order to keep those products competitive. When we choose to incorporate a new technology into our products or to develop a product for a new platform or operating system, we are often required to make a substantial investment prior to the introduction of the product. If we invest in the development of a new technology or for a new platform that does not achieve significant commercial success, our revenues from those products likely will be lower than anticipated and may not cover our costs.

Further, our competitors may adapt to an emerging technology more quickly or effectively than we do, creating products that are technologically superior to ours, more appealing to consumers, or both. If, on the other hand, we elect not to pursue the development of products incorporating a new technology or for new platforms that achieve significant commercial success, our revenues could also be adversely affected. It may take significant time and resources to shift product development resources to that technology or platform and it may be more difficult to compete against existing products incorporating that technology or for that platform. Any failure to successfully adapt to, and appropriately allocate resources among, emerging technologies could harm our competitive position, reduce our share and significantly increase the time it takes us to bring popular products to market.

There are numerous steps required to develop a product from conception to commercial introduction and to ensure timely shipment to retail customers, including designing, sourcing and testing the electronic components,receiving approval of hardware and other third-party licensors, factory availability and manufacturing and designing the graphics and packaging. Any difficulties or delays in the product development process will likely result in delays in the contemplated product introduction schedule. It is common in new product introductions or product updates to encounter technical and other difficulties affecting manufacturing efficiency and, at times, the ability to manufacture the product at all. Although these difficulties can be corrected or improved over time with continued manufacturing experience and engineering efforts, if one or more aspects necessary for the introduction of products are not completed as scheduled, or if technical difficulties take longer than anticipated to overcome, the product introductions will be delayed, or in some cases may be terminated. No assurances can be given that our products will be introduced in a timely fashion, and if new products are delayed, our sales and revenue growth may be limited or impaired.

Our business could be adversely affected by actions on trade by domestic and foreign governments.

The U.S. government has altered its approach to international trade policy and in some cases renegotiated, or terminated, certain existing bilateral or multi-lateral trade agreements and treaties with foreign countries, including the North American Free Trade Agreement (“NAFTA”). In addition, the U.S. government has initiated or is considering imposing tariffs on certain foreign goods, including consumer goods. Related to this action, certain foreign governments, including China, have instituted or are considering imposing tariffs on certain U.S. goods. It remains unclear what the U.S. Administration or foreign governments will or will not do with respect to tariffs, NAFTA or other international trade agreements and policies. A trade war or other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impact demand for our products, our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof and, thus, to adversely impact our businesses. The majority of our production occurs in foreign jurisdictions, including China, and while the majority of our products are currently not subject to tariffs, the U.S. government announced a plan for new tariffs which will cover our products and may have an adverse effect on our results.

The decision by British voters to exit the European Union may negatively impact our operations.

In 2017, the U.K. submitted the formal notification of its intention to withdraw from the European Union pursuant to Article 50 of the Treaty on the European Union, as amended (“Brexit”). If no formal withdrawal agreement is reached between the U.K. and the European Union, then it is currently expected the U.K.’s membership of the European Union will automatically terminate on October 31, 2019 unless a further extension is agreed between the U.K. and European Union. The U.K.’s decision to leave the European Union will have political, legal and economic ramifications for both the U.K. and the European Union, although these are expected to be more pronounced for the U.K. The outcome of the negotiations on the U.K.’s withdrawal and any subsequent negotiations on trade and access to the country’s major trading markets, including the single European Union market, is currently unknown. As a result, there is ongoing uncertainty over the terms under which the U.K. will leave the European Union, in particular after any agreed transitional period, and the potential for an exit by the U.K. without a negotiated agreement (“hard Brexit”).

If there is a hard Brexit, it will likely have an adverse impact on labor and trade in addition to creating further short-term uncertainty and currency volatility. In the absence of a future trade deal, the U.K.’s trade with the European Union and the rest of the world would be subject to tariffs and duties set by the World Trade Organization. Additionally, the movement of goods between the U.K. and the remaining member states of the European Union will be subject to additional inspections and documentation checks, leading to possible delays at ports of entry and departure.

These changes to the trading relationship between the U.K and European Union would likely result in increased cost of goods imported into and exported from the U.K. and may decrease the profitability of our U.K. and other European operations. Additional currency volatility could drive a weaker British pound, which increases the cost of goods imported into our U.K. operations and may decrease the profitability of our U.K. operations. A weaker British pound versus the Euro and U.S. dollar also causes local currency results of our U.K. operations to be translated into fewer U.S. dollars during a reporting period. With a range of outcomes still possible, the impact from Brexit remains uncertain and will depend, in part, on the final outcome of tariff, trade, regulatory and other negotiations.

Our business could be adversely affected by significant movements in foreign currency exchange rates.

We are exposed to fluctuations in foreign currency transaction exchange rates, particularly with respect to the Euro and British Pound. Any significant change in the value of currencies of the countries in which we do business relative to the value of the U.S. ~~Dollar~~dollar could affect our ability to sell products competitively and control our cost structure. Additionally, we are subject to foreign exchange translation risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. The translation risk is primarily concentrated in the exchange rate between the U.S. dollar and the British Pound. As the U.S. dollar fluctuates against other currencies in which we transact business, revenue and income can be impacted.

~~The affirmative vote in the United Kingdom to withdraw from the European Union may adversely affect our business.~~

On June 23, 2016, the United Kingdom ("UK") held a referendum in which voters approved a potential exit from the European Union ("EU"), commonly referred to as "Brexit." As a result of the referendum, it is expected that the British

government will begin negotiating the terms of the UK’s future relationship with the EU. The Brexit vote may result in regulatory uncertainty throughout the region and could adversely affect business activity, political stability and economic conditions in the UK, the Eurozone, the EU and elsewhere. Any of these developments could have a material adverse effect on business activity in the UK, the Eurozone, or the EU.

The uncertainty concerning the timing and terms of the exit could also have a negative impact on the growth of the UK and/or EU economies and cause greater volatility in the pound sterling, euro and/or other currencies.

A significant portion of our revenue is derived from a few large customers, and the loss of any such customer, or a significant reduction in purchases by such customer, could have a material adverse effect on our business, financial condition and results of operations.

During ~~2016,~~2018, our three largest individual customers accounted for approximately ~~49%~~44% of our gross sales in the aggregate. The loss of, or financial difficulties experienced by, any of these or any of our other significant customers, including as a result of the bankruptcy of a customer, could have a material adverse effect on our business, results of operations, financial condition and liquidity. We do not have long-term agreements with these or other significant customers and our agreements with these customers do not require them to purchase any specific amount of products. All of our customers generally purchase from us on a purchase order basis. As a result, agreements with respect to pricing, returns, cooperative advertising or special promotions, among other things, are subject to periodic negotiation with each customer. No assurance can be given that these or other customers will continue to do business with us or that they will maintain their historical levels of business. In addition, the uncertainty of product orders can make it difficult to forecast our sales and allocate our resources in a manner consistent with actual sales, and our expense levels are based in part on our expectations of future sales. If our expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls. In addition, financial difficulties experienced by a significant customer could increase our exposure to uncollectible receivables and the risk that losses from uncollected receivables exceed the reserves we have set aside in anticipation of this risk.

The manufacture, supply and shipment of our products are dependent upon a limited number of third parties, and our success is dependent upon the ability of these parties to manufacture, supply and ship sufficient quantities of their product components to us in a timely fashion, as well as the continued viability and financial stability of these third-parties.

Because we rely on a limited number of manufacturers and suppliers for our products, we may be materially and adversely affected by the failure of any of those manufacturers and suppliers to perform as expected or supply us with sufficient quantities of their product components to ensure consumer availability of our own products. Our suppliers’ ability to supply products to us is also subject to a number of risks, including the availability of raw materials, their financial instability, the destruction of their facilities, or work stoppages. Any shortage of raw materials or components or an inability to control costs associated with manufacturing could increase our costs or impair our ability to ship orders in a timely and cost-efficient manner. As a result, we could experience cancellations of orders, refusal to accept deliveries or a reduction in our prices and margins, any of which could harm our financial performance and results of operations.

Moreover, there can be no assurance that such manufacturers and suppliers will not refuse to supply us at prices we deem acceptable, independently market their own competing products in the future, or otherwise discontinue their relationships with ~~or support of~~ us. Our failure to maintain these existing manufacturing and supplier relationships, or to establish new relationships on similar terms in the future, could have a material adverse effect on our business, results of operations, financial condition and liquidity.

In particular, certain of our products have a number of components and subassemblies produced by outside suppliers. In addition, for certain of these items, we qualify only a single source of supply with long lead times, which can magnify the risk of shortages or result in excess supply and also decreases our ability to negotiate price with our suppliers. Also, if we experience quality problems with suppliers, then our production schedules could be significantly delayed or costs significantly increased, which could have an adverse effect on our business, liquidity, results of operation and financial position.

In addition, the ongoing effectiveness of our supply chain is dependent on the timely performance of services by third parties shipping products and materials to and from our warehouse facilities and other locations. If we encounter problems with these shipments, our ability to meet retailer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies could be materially adversely affected. We have experienced some of these problems in the past and we cannot assure you that we will not experience similar problems in the future.

Our net sales and operating income fluctuate on a seasonal basis and decreases in sales or margins during peak seasons could have a disproportionate effect on our overall financial condition and results of operations.

Historically, a majority of our annual revenues have been generated during the holiday season of September to December. If we do not accurately forecast demand for particular products, we could incur additional costs or experience manufacturing

delays. Any shortfall in net sales during this period would cause our annual results of operations to suffer significantly.

Demand for our products depends on many factors such as consumer preferences and the introduction or adoption of game platforms and related content, and can be difficult to forecast. If we misjudge the demand for our products, we could face the following problems in our operations, each of which could harm our operating results:

If our forecasts of demand for products are too high, we may accumulate excess inventories of products, which could lead to markdown allowances or write-offs affecting some or all of such excess inventories. We may also have to adjust the prices of our existing products to reduce such excess inventories;

If demand for specific products increases beyond what we forecast, our suppliers and third-party manufacturers may not be able to increase production quickly enough to meet the demand. Our failure to meet market demand may lead to missed opportunities to increase our base of gamers, damage our relationships with retailers or harm our business;

The on-going console transition increases the likelihood that we could fail to accurately forecast demand for our new generation console headsets and our existing headsets; and

Rapid increases in production levels to meet unanticipated demand could result in increased manufacturing errors, as well as higher component, manufacturing and shipping costs, all of which could reduce our profit margins and harm our relationships with retailers and consumers.

~~Loss of our key management and other personnel could impact our business.~~

Our future success depends largely upon the continued service of our executive officers and other key management and technical personnel and on our ability to continue to attract, retain and motivate qualified personnel. In addition, competition for skilled and non-skilled employees among companies like ours is intense, and the loss of skilled or non-skilled employees or an inability to attract, retain and motivate additional skilled and non-skilled employees required for the operation and expansion of our business could hinder our ability to conduct research activities successfully, develop new products, attract customers and meet customer shipments.

If we are unable to continue to develop innovative and popular headset products, or if our design and marketing efforts do not effectively raise the recognition and reputation of our Turtle Beach brand, we may not be able to successfully implement our ~~headset~~gaming accessory growth strategy.

We believe that our ability to extend the recognition and favorable perception of our Turtle Beach brand, and the recently acquired ROCCAT brand, is critical to implement our ~~headset~~gaming accessory growth strategy, which includes further establishing our position in existing gaming headsets, developing a strong position in new console headsets, expanding beyond existing console, PC and mobile applications to new technology applications, accelerating our international growth and expanding complementary product categories. To extend the reach of our Turtle Beach brand, we believe we must devote significant time and resources to headset product design, marketing and promotions. These expenditures, however, may not result in a sufficient increase in net sales to cover such ~~expenses.~~

~~Future transitions~~costs.

Transitions in console platforms may adversely affect our headset business.

When new console platforms are announced or introduced into the market, consumers have historically reduced their purchases of game console peripherals and accessories, including headsets, for old generation console platforms in anticipation of new platforms becoming available. During these console transition periods, sales of gaming console headsets ~~such as those sold by us,~~ related to old generation consoles slow or decline until new platforms are introduced and achieve wide consumer acceptance, which we cannot guarantee. This decrease or decline may not be offset by increased sales of products for the new console platforms. Over time as the old generation platform user base declines, products for the old platforms are typically discontinued which can result in lower margins, excess inventory, excess parts, or similar costs related to end of life of a product model. In addition, as a third party gaming headset company, we are reliant on working with the console manufacturers for our headsets to be compatible with any new console platforms, which if not done on a timely basis may adversely affect sales. Sony and Microsoft may make changes to their platforms that impact how ~~headset~~headsets connect with or work with the new consoles which could create a disruption to consumer buying behavior and/or product life-cycles.

As console hardware moves through its life cycle, hardware manufacturers typically enact price reductions, and decreasing prices may put downward pressure on prices for products for such platforms. During platform transitions, we may simultaneously incur costs both in continuing to develop and market new products for prior-generation video game platforms, which may not sell at premium prices, and also in developing products for current-generation platforms, which will not generate immediate or near-term revenue. As a result, our operating results during platform transitions are more volatile and ~~more~~ difficult to predict than during other times.

Further, technological and other developments may in the future accelerate the frequency of such console transitions resulting in such disruption occurring more frequently. ~~For example, Sony and Microsoft have announced hardware upgrades to the current console generations with the PS®4 Pro and Xbox One X, respectively.~~ In addition, competing technologies such as tablet-based gaming and virtual reality may result in further disruption to the overall console gaming market.

~~We are party~~

Any acquisitions we pursue could disrupt our business and harm our financial condition and results of operations.

As part of our business strategy, we review and intend to ~~ongoing stockholder litigation,~~continue to review acquisition opportunities that we believe would be advantageous or complementary to the development of our business. During the second quarter of 2019, we acquired certain assets of ROCCAT GmbH and its subsidiaries, and we may acquire additional businesses, assets, or technologies in the ~~future~~future. If we make any acquisitions, we could take any or all of the following actions, any one of which could adversely affect our business, financial condition, results of operations or share price:

use a significant portion of our available cash;

require a significant devotion of management’s time and resources in the pursuit or consummation of any acquisition;

incur debt, which may not be ~~party~~available to ~~additional stockholder litigation,~~us on favorable terms and may adversely affect our liquidity;

issue equity or equity-based securities that would dilute existing stockholders’ ownership percentage;

assume contingent and other liabilities; and

take charges in connection with such acquisitions.

Acquisitions also entail numerous other risks, including, without limitation: difficulties in assimilating acquired operations, products, technologies and personnel; unanticipated costs; diversion of management’s attention from existing operations; risks of entering markets in which we have limited or no prior experience; regulatory approvals; unanticipated costs or liabilities; and potential loss of key employees from either our existing business or the acquired organization. Acquisitions may result in accounting charges for restructuring and other expenses, amortization of purchased technology and intangible assets and stock-based compensation expense, any of which could materially and adversely affect our operating results. We may not be able to realize the anticipated synergies, innovation, operational efficiencies, benefits of or successfully integrate with our existing business the businesses, products, technologies or personnel that we acquire, and our failure to do so could harm our business ~~financial condition~~ and operating results.

~~We have had, and may continue to have, actions brought against us by stockholders in connection with the merger, past transactions, changes in~~

Loss of our ~~stock price or other matters. Any such claims, whether or not resolved in our favor, could divert our~~key management and other ~~resources from~~personnel could impact our business.

Our future success depends largely upon the continued service of our executive officers and other key management and technical personnel and on our ability to continue to attract, retain and motivate qualified personnel. In addition, competition for skilled and non-skilled employees among companies like ours is intense, and the loss of skilled or non-skilled employees or an inability to attract, retain and motivate additional skilled and non-skilled employees required for the operation and expansion of our business could hinder our ability to conduct research activities successfully, develop new products, attract customers and otherwise result in unexpected and substantial expenses that would adversely and materially impact our business, financial condition and operating results. For example, and as further described in Item 3, “Legal Proceedings,” and Note 12, “Commitments and Contingencies,” we are involved in legal proceedings related to the merger of VTBH and Paris Acquisition Corp. involving certain of our stockholders, including the holder of VTBH’s Series B Redeemable Preferred Stock, (the “Series B Holder”), filing a complaint in New York state court alleging breach of contract against VTBH and seeking a declaratory judgment that he is entitled to damages and specific performance, including the redemption of his stock. The redemption value of VTBH’s Series B Redeemable Preferred Stock was $18.5 million as of September 30, 2017.

meet customer shipments.

If we are unable to protect our information systems against service interruption, misappropriation of data or breaches of security, our operations could be disrupted, our reputation may be damaged, and we may be financially liable for damages.

We rely heavily on information systems to manage our operations, including a full range of retail, financial, sourcing and merchandising systems. We regularly make investments to upgrade, enhance or replace these systems, as well as leverage new technologies to support our growth strategies. In addition, we have implemented enterprise-wide initiatives that are intended to standardize business processes and optimize performance. Any delays or difficulties in transitioning to new systems or integrating them with current systems or the failure to implement our initiatives in an orderly and timely fashion could result in additional investment of time and resources, which could impair our ability to improve existing operations and support future growth, and ultimately have a material adverse effect on our business.

The reliability and capacity of our information systems are critical. Despite preventative efforts, our systems are vulnerable ~~from time-to-time~~ to damage or interruption from, among other things, natural disasters, technical malfunctions, inadequate systems capacity, human error, power outages, computer viruses and security breaches. Any disruptions affecting our information systems could have a material adverse impact on our business. In addition, any failure to maintain adequate system security controls to protect our computer assets and sensitive data, including associate and client data, from unauthorized access, disclosure or use could damage our reputation with our associates and our clients, exposing us to financial liability, legal proceedings (such as class action lawsuits), and regulatory action. While we have implemented measures to prevent security breaches and cyber incidents, our preventative measures and incident response efforts may not be entirely effective. As a result, we may not be able to immediately detect any security breaches, which may increase the losses that we would suffer. Finally, our ability to continue to operate our business without significant interruption in the event of a disaster or other disruption depends, in part, on the ability of our information systems to operate in accordance with our disaster recovery and business continuity plans.

Our reliance on information systems and other technology also gives rise to cybersecurity risks, including security breach, espionage, system disruption, theft and inadvertent release of information. The occurrence of any of these events could compromise our networks, and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations, and damage our reputation, which could adversely affect our business. In addition, as security threats continue to evolve we may need to invest additional resources to protect the security of our systems.

Our results of operations and financial condition may be adversely affected by global business, political, operational, financial and economic conditions.

We face business, political, operational, financial and economic risks inherent in international business, many of which are beyond our control, including:

trade restrictions, higher tariffs, currency fluctuations or the imposition of additional regulations relating to import or export of our products, especially in China, where all of our Turtle Beach products are manufactured, which could force us to seek alternate manufacturing sources or increase our ~~expenses;~~costs;

difficulties obtaining domestic and foreign export, import and other governmental approvals, permits and licenses, and compliance with foreign laws, which could halt, interrupt or delay our operations if we cannot obtain such approvals, permits and licenses;

difficulties encountered by our international distributors or us in staffing and managing foreign operations or international sales, including higher labor costs;

transportation delays and difficulties of managing international distribution channels;

longer payment cycles for, and greater difficulty collecting, accounts receivable;

political and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions, any of which could materially and adversely affect our net sales and results of operations; and

natural disasters.

Any of these factors could reduce our net sales, decrease our gross margins, increase our expenses or reduce our profitability. Should we establish our own operations in international territories where we currently utilize a distributor, we will become subject to greater risks associated with operating outside of the United States.

The electronics industry in general has historically been characterized by a high degree of volatility and is subject to substantial and unpredictable variations resulting from changing business cycles. Our operating results will be subject to fluctuations based on general economic conditions, and in particular conditions that impact discretionary consumer spending. The audio products sector of the electronics industry has and may continue to experience a slowdown in sales, which adversely impacts our ability to generate revenues and impacts the results of our future operations. A lack of available credit in financial markets may adversely affect the ability of our commercial customers to finance purchases and operations and could result in an absence of orders or spending for our products as well as create supplier disruptions. We are unable to predict the likely duration and severity of any adverse economic conditions and disruptions in financial markets and the effects they will have on our business and its financial condition.

Further, certain Turtle Beach products are manufactured in China for export to the United States and worldwide. As a result of opposition to policies of the Chinese government and China’s growing trade surpluses with the United States, there has been, and in the future may be, opposition to the extension of normal trade relations (“NTR”) status for China. The loss of NTR status for China, further changes in ~~current~~ tariff structures or adoption in the United States of other trade policies adverse to China could increase our manufacturing expenses and make it more difficult for us to manufacture our products in China.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report financial results or prevent fraud, which could have an adverse effect on our business and financial condition.

Effective internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud. Any inability to provide reliable financial reports or prevent fraud could harm our business. The Sarbanes-Oxley Act requires, among other things, that we ~~perform system~~evaluate our systems and ~~process evaluation~~processes and ~~testing of~~test our internal ~~control~~controls over financial reporting to allow management and our independent registered public accounting firm, as applicable, to report on the effectiveness of our internal control over financial reporting. IfWe have reported the remediation of a material weakness related to the review of material non-routine transactions or events disclosed in our 2018 Annual Report on Form 10-K. In the future, if we are not able to remediate any identified material weakness or otherwise comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, investors could lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline and we could be subject to sanctions, investigations by ~~NASDAQ,~~the Nasdaq Stock Market, LLC, the SEC or other regulatory authorities, or shareholder litigation.

In addition, failure to maintain effective internal controls could result in financial statements that do not accurately reflect our financial condition or results of operations. There can be no assurance that we will be able to maintain a system of internal controls that fully complies with the requirements of the Sarbanes-Oxley Act of 2002 or that our management and independent registered public accounting firm will continue to conclude that our internal controls are effective.

We carried out an evaluation, under the supervision of our Chief Executive Officer (our principal executive officer, or PEO) and our Chief Financial Officer (our principal financial officer, or PFO), of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our PEO and PFO concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, were effective as of September 30, 2017. However, because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Risks Related to our Intellectual Property and other Legal and Regulatory Matters

Our competitive position will be ~~seriously~~adversely damaged if our products are found to infringe on the intellectual property rights of others.

Other companies and our competitors may currently own or obtain patents or other proprietary rights that might prevent, limit or interfere with our ability to make, use or sell our products. Although we do not believe that our products infringe the proprietary rights of any third parties, there can be no assurance that infringement or other legal claims will not be asserted against us or that we will not be found to infringe the intellectual property rights of others. The electronics industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, resulting in significant and often protracted and expensive litigation. In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results could be adversely affected. Any litigation or claims, whether or not valid, could result in substantial costs or a diversion of our resources. An adverse result from intellectual property litigation could force us to do one or more of the following:

cease selling, incorporating or using products or services that incorporate the challenged intellectual property;

obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; and/or

redesign products or services that incorporate the disputed technology.

If we are forced to take any of the foregoing actions, we could face substantial costs and shipment delays and our business could be seriously harmed. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may be inadequate to insure us for all liability that may be imposed.

In addition, it is possible that our customers or end users may seek indemnity from us in the event that our products are found or alleged to infringe the intellectual property rights of others. Any such claim for indemnity could result in substantial expenses to us that could harm our operating results.

If we are unable to obtain and maintain intellectual property rights and/or enforce those rights against third parties who are violating those rights, our business could suffer.

We rely on various intellectual property rights, including patents, trademarks, trade secrets and trade dress to protect our Turtle Beach brand name, reputation, product appearance, ~~and~~ technology and our proprietary rights in our HyperSound technology. Although we have entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with selected parties with whom we conduct business to limit access to and disclosure of our proprietary information, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent misappropriation of that intellectual property or deter independent third-party development of similar technologies. Monitoring the unauthorized use of proprietary technology and trademarks is costly, and any dispute or other litigation, regardless of outcome, may be costly and time consuming and may divert the attention of management and key personnel from our business operations. The steps taken by us may not prevent unauthorized use of proprietary technology or trademarks. Many features of our products are not protected by patents; ~~and as a consequence,~~ we may not have the legal right to prevent others from reverse engineering or otherwise copying and using these features in competitive products. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could adversely affect our financial results.

We are susceptible to counterfeiting of our products, which may harm our reputation for producing high-quality products and force us to incur expenses in enforcing our intellectual property rights. Such claims and lawsuits can be expensive to resolve, require substantial management time and resources, and may not provide a satisfactory or timely result, any of which may harm our results of operations. As some of our products are sold internationally, we are also dependent on the laws of a range of countries to protect and enforce our intellectual property rights. These laws may not protect intellectual property rights to the same extent or in the same manner as the laws of the United States.

Further, we are party to licenses that grant us rights to intellectual property, including trademarks, which are necessary or useful to our Turtle Beach business. One or more of our licensors may allege that we have breached our license agreement with them, and seek to terminate our license. If successful, this could result in our loss of the right to use the licensed intellectual property, which could adversely affect our ability to commercialize our technologies or products, as well as harm our competitive business position and our business prospects.

Our success also depends in part on our ability to obtain and enforce intellectual property protection of our technology, particularly our patents. There is no guarantee any patent ~~will issue~~be granted on any patent application that we have filed or may file. Claims allowed from existing or pending patents may not be of sufficient scope or strength to protect the economic value of our technologies. Further, any patent that we may obtain will expire, and it is possible that it may be challenged, invalidated or

circumvented. If we do not secure and maintain patent protection for our HyperSound technology and products, our competitive position could be significantly harmed. A competitor may independently develop or patent technologies that are substantially similar or superior to our HyperSound technology.

As we expand our HyperSound product line or develop new uses for our HyperSound technology, these products or uses may be outside the protection provided by our current patent applications and other intellectual property rights. In addition, if we develop new HyperSound products or enhancements to existing products we cannot assure you that we will be able to obtain patents to protect them. Even if we do receive patents for our existing or new HyperSound products, these patents may not provide meaningful protection, or may be too costly to enforce protection. In some countries outside of the United States where our HyperSound products may be sold or our HyperSound technology may be licensed, patent protection is not available. Moreover, some countries that do allow for the registration of patents do not provide meaningful redress for violations of patents. As a result, protecting intellectual property in these countries is difficult and our competitors may successfully sell products in these countries that have functions and features that infringe on our intellectual property.

We may initiate claims or litigation against third parties in the future for infringement of our proprietary rights or to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors. These claims could result in costly litigation and divert the efforts of our technical and management personnel. As a result, our operating results could suffer and our financial condition could be harmed.

We are dependent upon third-party intellectual property to manufacture some of our products.

The performance of certain technology used in new generation consoles, such as integrated voice and chat audio from the Xbox One, is improved by a licensed component to ensure compatibility with our products.

While we currently believe that we have the necessary licenses, or can obtain the necessary licenses, in order to produce compatible products, there is no guarantee that our licenses will be renewed or granted in the first instance. Moreover, if these first parties enter into license agreements with companies other than us for their “closed systems” or if we are unable to obtain sufficient quantities of these headset adapters or chips, we would be placed at a competitive disadvantage.

In order for certain of our headsets to connect to the Xbox One's advanced features and controls, a proprietary computer chip or wireless module is required. As a result, with respect to our products designed for the Xbox One, we are currently reliant on Microsoft or their designated supplier to provide us with sufficient quantities. If we are unable to obtain sufficient quantities of these headset adapters or chips, sales of such Xbox One headsets and consequently our revenues would be adversely affected.

We are licensed and approved by Microsoft to develop and sell Xbox One compatible audio products pursuant to a license agreement under which we have the right to manufacture (including through third party manufacturers), market and sell audio products for the Xbox One video game console (the “Xbox One Agreement”). Our Xbox One headsets are dependent on this license. Microsoft has the right to terminate the Xbox One Agreement under certain circumstances set forth in the agreement. Should the Xbox One Agreement be terminated, our headset offerings may be limited, thereby significantly reducing our revenues.

Accordingly, Microsoft, Sony and other third-party gaming platform manufacturers may control our ability to manufacture headsets compatible with their platforms, and could cause unanticipated delays in the release of our products as well as increases to projected development, manufacturing, licensing, marketing or distribution costs, any of which could negatively impact our business.

Our products may be subject to warranty claims, product liability and product recalls.

We may be subject to product liability or warranty claims that could result in significant direct or indirect costs, or we could experience greater returns from retailers than expected, which could harm our net sales. The occurrence of any quality problems due to defects in our products could make us liable for damages and warranty claims in excess of any existing reserves. In addition to the risk of direct costs to correct any defects, warranty claims, product recalls or other problems, any negative publicity related to the perceived quality of our products could also affect our brand image, decrease retailer and distributor demand and our operating results and financial condition could be adversely affected.

We could incur unanticipated expenses in connection with warranty or product liability claims relating to a recall of one or more of our products, which could require significant expenditures to defend. Additionally, we may be required to comply with governmental requirements to remedy the defect and/or notify consumers of the problem that could lead to unanticipated expense, and possible product liability litigation against a customer or us.

Changes in laws or regulations or the manner of their interpretation or enforcement could adversely impact our financial performance and restrict our ability to operate our business or execute our strategies.

New laws or regulations, or changes in existing laws or regulations or the manner of their interpretation or enforcement, may create uncertainty for public companies, increase our cost of doing business and restrict our ability to operate our business or execute our strategies. This could include, among other things, compliance costs and enforcement under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

We continually evaluate and monitor developments with respect to new and proposed laws, regulations, standards and rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. Any such new or changed laws, regulations, standards and rules may be subject to varying interpretations and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we may be harmed.

Our HyperSound technology is subject to government regulation, which could lead to unanticipated expenses and/or enforcement action against us.

Under the Radiation Control for Health and Safety Act of 1968, and the associated regulations promulgated by the Food and Drug Administration (“FDA”), HyperSound products are regulated as electrical emitters of ultrasonic vibrations. Under the terms of such regulations, in August 2012 we provided, and in January 2016 further supplemented, an abbreviated report to the FDA describing the HyperSound commercial product. In September 2015 we provided an initial product report describing the HyperSound Clear® 500P product. The FDA may respond to these reports and request changes or safeguards to our HyperSound ~~products, but it has not done so to date.~~products. We also are required to notify the FDA ~~in writing~~ should a product be found to have a defect relating to safety of use due to the emission of electronic product radiation. We do not believe our technology poses any human health risks. However, ~~it is possible that we, or one of our customers, could be required~~modifications to ~~modify~~ the technology ~~or a product incorporating the technology, to comply with requirements that~~ may be ~~imposed by the FDA.~~required. Our HyperSound product advertising is regulated by the Federal Trade Commission (the “FTC”), which requires all advertising be truthful, not deceptive or unfair, and evidence based.

~~Our~~

The HyperSound Clear 500P and the HyperSound Tinnitus Module ~~are~~were regulated by the FDA as medical devices pursuant to the Federal Food, Drug, and Cosmetic Act, or FDCA, and implementing regulations. HyperSound Clear 500P received 510(k) clearance permitting ~~over - the - counter~~over-the-counter (“OTC”) commercial distribution for use as a group auditory trainer or group hearing aid and the HyperSound Tinnitus Module feature received 510(k) clearance for prescription use in the temporary relief of tinnitus symptoms. ~~In connection with the recent restructuring~~

Although we have discontinued sales of ~~the HyperSound business, we terminated sales of~~our HyperSound Clear 500P ~~products~~ and ~~in March 2017~~the HyperSound Tinnitus Module, we deactivated our FDA listing of these devices. We also did not renew our 2017 European Union certifications for HyperSound Clear 500P devices. Any future sales of regulated products would require new registrations and certifications.

We continue to be subject to FDA’s requirements for marketed medical devices with respect to those HyperSound Clear 500P products that have already been sold, such as the Quality System Regulation, or QSR (which imposes procedural, documentation and record keeping requirements regarding the manufacture of medical devices); the Medical Device Reporting regulation (which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur); and the Reports of Corrections and Removals regulation (which requires manufacturers to report recalls and field actions to the FDA if initiated to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may pose a risk to health). FDA enforces these requirements by inspection and market surveillance. If the FDA finds a violation, it can institute a wide range of enforcement actions, ranging from a public warning letter to more severe sanctions such as fines, penalties,

suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions, or total shutdown of production, and criminal prosecution.

~~Our products may be subject to warranty claims, product liability and product recalls.~~

We may be subject to product liability or warranty claims that could result in significant direct or indirect costs, or we could experience greater returns from retailers than expected, which could harm our net sales. The occurrence of any quality problems due to defects in our products could make us liable for damages and warranty claims in excess of any existing reserves. In addition to the risk of direct costs to correct any defects, warranty claims, product recalls or other problems, any negative publicity related to the perceived quality of our products could also affect our brand image, decrease retailer and distributor demand and our operating results and financial condition could be adversely affected.

We could incur unanticipated expenses in connection with warranty or product liability claims relating to a recall of one or more of our products, which could require significant expenditures to defend. Additionally, we may be required to comply with governmental requirements to remedy the defect and/or notify consumers of the problem that could lead to unanticipated expense, and possible product liability litigation against a customer or us. As of December 31, 2016 and the date of this report, the Company has not received notice of any lawsuits against the Company in connection with any recall actions.

Changes in laws or regulations or the manner of their interpretation or enforcement could adversely impact our financial performance and restrict our ability to operate our business or execute our strategies.

New laws or regulations, or changes in existing laws or regulations or the manner of their interpretation or enforcement, may create uncertainty for public companies, increase our cost of doing business and restrict our ability to operate our business or execute our strategies. This could include, among other things, compliance costs and enforcement under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). For example, under Section 1502 of the Dodd-Frank Act, the SEC has adopted additional disclosure requirements related to the source of certain “conflict minerals” for issuers for which such “conflict minerals” are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that issuer. The metals covered by the rules include tin, tantalum, tungsten and gold. Our suppliers may use some or all of these materials in their production processes. The rules require us to conduct a reasonable country of origin inquiry to determine if we know or have reason to believe any of the minerals used in the production process may have originated from the Democratic Republic of the Congo or an adjoining country. If we are not able to determine the minerals did not originate from a covered country or conclude that there is no reason to believe that the minerals used in the production process may have originated in a covered country, we would be required to perform supply chain due diligence on members of our supply chain. Global supply chains can have multiple layers, thus the costs of complying with these new requirements could be substantial. These new requirements may also reduce the number of suppliers who provide conflict free metals, and may affect our ability to obtain products in sufficient quantities or at competitive prices. Compliance costs such as these could have a material adverse effect on our results of operations.

We continually evaluate and monitor developments with respect to new and proposed laws, regulations, standards and rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. Any such new or changed laws, regulations, standards and rules may be subject to varying interpretations and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we may be harmed.

The current administration has called for substantial change to fiscal and tax policies, which may include comprehensive tax reform and changes to the implementation of the Dodd-Frank Act and related or similar regulations. We cannot predict the impact, if any, of these changes to our business. However, it is possible that these changes could adversely affect our business. Until we know what changes are enacted, we will not know whether in total we benefit from, or are negatively affected by, the changes.

We are subject to various environmental laws and regulations that could impose substantial costs on us and may adversely affect our business, operating results and financial condition.

Our operations and some of our products are regulated under various federal, state, local and international environmental laws. In addition, regulatory bodies in many of the jurisdictions in which we operate propose, enact and amend environmental laws and regulations on a regular basis. The environmental laws and regulations applying to our business include those governing the discharge of pollutants into the air and water, the management, disposal and labeling of, and exposure to, hazardous substances and wastes and the cleanup of contaminated sites. If we were to violate or become liable under these

environmental laws, we could be required to incur additional costs to comply with such regulations and may incur fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs. Liability under environmental laws may be joint and several and without regard to comparative fault. The ultimate costs under environmental laws and the timing of these costs are difficult to predict. Although we cannot predict the ultimate impact of any new environmental laws and regulations, such laws may result in additional costs or decreased revenue, and could require that we redesign or change how we manufacture our products, any of which could have a material adverse effect on our business. Additionally, to the extent that our competitors choose not to abide by these environmental laws and regulations, we may be at a cost disadvantage, thereby hindering our ability to effectively compete in the marketplace.

Failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation could result in fines, criminal penalties and an adverse effect on our business.

~~We operate~~

Our products are sold in 44over 40 countries, including countries known to have a reputation for corruption. We are committed to doing business in accordance with applicable anti-corruption laws. We are subject, however, to the risk that our officers, directors, employees, agents and collaborators may take action determined to be in violation of such anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, the U.K. Bribery Act 2010, the European Union Anti-Corruption Act and other similar laws, or that subjects us to trade sanctions administered by the Office of Foreign Assets Control and the U.S. Department of Commerce. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties or curtailment of operations in certain jurisdictions, and might adversely affect our results of operations. In addition, actual or alleged violations could damage our reputation and ability to do business.

We are party to ongoing stockholder litigation, and in the future could be party to additional stockholder litigation, any of which could harm our business, financial condition and operating results.

We have had, and may continue to have, actions brought against us by stockholders in connection with the merger, past transactions, changes in our stock price or other matters. Any such claims, whether or not resolved in our favor, could divert our management and other resources from the operation of our business and otherwise result in unexpected and substantial expenses that would adversely and materially impact our business, financial condition and operating results. For example, and as further described in Note 13, “Commitments and Contingencies,” we are involved in legal proceedings related to the merger of VTBH and Paris Acquisition Corp. involving certain of our stockholders.

Risks Related to Liquidity

We depend upon the availability of capital under our revolving credit facility to finance our operations. Any additional financing that we may need may not be available on favorable terms, or at all.

In addition to cash flow generated from operations, we finance our operations with a credit facility (the “Credit Facility”) provided by Bank of America, as Agent, Sole Lead Arranger and Sole Bookrunner. If we are unable to comply with the financial and other covenants contained in the Credit Facility, and are unable to obtain a waiver under the Credit Facility, Bank of America may declare the outstanding borrowings under the Credit Facility immediately due and payable. Such an event would have an immediate and material adverse impact on our business, results of operations, and financial condition. We would be required to obtain additional financing from other sources, and we cannot predict whether or on what terms, if any, additional financing might be available. If we are required to seek additional financing and are unable to obtain it, we may have to change our business and capital expenditure plans, which may have a materially adverse effect on our business, financial condition and results of operations. In addition, the debt under the Credit Facility could make it more difficult to obtain other debt financing in the future, which could put us at a competitive disadvantage to competitors with less debt. The Credit Facility contains financial and other covenants that we are obligated to maintain. The Credit Facility contain certain financial covenants and other restrictions that limit our ability, among other things, to incur certain additional indebtedness; pay dividends and repurchase stock; make certain investments and other payments; enter into certain mergers or consolidations; engage in sale and leaseback transactions and transactions with affiliates; and encumber and dispose of assets.

If we violate any of these covenants, we will be in default under the Credit Facility. If a default occurs and is not timely cured or waived, Bank of America could seek remedies against us, including termination or suspension of obligations to make loans and issue letters of credit, and acceleration of amounts due under the applicable Credit Facility. No assurance can be given that we will be able to maintain compliance with these covenants in the future. The Credit Facility is asset based and can only be drawn down in an amount to which eligible collateral exists, and can be negatively impacted by extended collection of accounts receivable, unexpectedly high product returns and slow moving inventory, among other factors. In addition, we have granted the lender a first-priority lien against substantially all of our assets, including trade accounts receivable and inventories. Failure to comply with the operating restrictions or financial covenants could result in a default which could cause the lender to accelerate the timing of payments and exercise their lien on substantially all of our assets.

If suppliers, customers, landlords, employees or other stakeholders lose confidence in our business, it may be more difficult for us to operate and may materially adversely affect our business, results of operations and financial condition.

If suppliers, customers, landlords, employees or other stakeholders have doubts regarding our ability to continue as a going concern, this could materially adversely affect our ability to operate. Concerns about our financial condition may cause our suppliers and other counterparties to tighten credit terms or cease doing business with us altogether, which would have a material adverse effect on our business and results of operations.

Risks Related to Ownership of our Common Stock

~~If we cannot meet Nasdaq’s continuing listing requirements and Nasdaq rules, Nasdaq may delist our securities, which could negatively affect us, the~~

The market price ~~of our securities and your ability to sell our securities.~~

Although our shares are currently listed on Nasdaq, we may not be able to meet the continued listing requirements of Nasdaq, which require, among other things, a minimum bid price of $1.00 per share for common shares listed on the exchange. On May 9, 2017, Turtle Beach Corporation (the “Company”) received a written notice from the Listing Qualifications Department of The Nasdaq Stock Market, LLC (“Nasdaq”) indicating that the Company is not in compliance with Nasdaq Listing Rule 5550(a)(2) because the bid price for the Company’s common stock had closed below $1.00 per share for the previous 30 consecutive business days.

While we may consider implementation of customary options, including a reverse stock split, if our common stock does not trade at the required level that regains compliance, if our efforts are unsuccessful or we are otherwise unable to satisfy the Nasdaq criteria for maintaining our listing, our securities could be subject to delisting. As a consequence of any such delisting, our shareholders would likely find it more difficult to dispose of, or to obtain accurate quotations as to the prices of our securities. In the event of a delisting, we could face significant material adverse consequences including a limited availability of market quotations for our securities; a limited amount of news and analyst coverage for our company; and a decreased ability to issue additional securities or obtain additional financing in the future.

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has 180 calendar days, or until November 6, 2017, to regain compliance with the minimum bid price requirement. To regain compliance, the bid price of the Company’s common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days. Nasdaq’s written notice has no effect on the listing or trading of the Company’s common stock at this time.

~~Ownership~~ of our common stock ~~is highly concentrated, and we are a “controlled company” within~~may fluctuate significantly.

We cannot predict the ~~meaning of the corporate governance standards of NASDAQ and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements.~~

~~Certain Turtle Beach stockholders acting as a group beneficially own or control approximately 51% of~~prices at which our common stock. Accordingly, these stockholders, acting as a group pursuant to a stockholder agreement, have substantial influence over the outcome of our corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These stockholders alsostock may exert influence in delaying or preventing a change in control of the Company, even if such change in control would benefit our other stockholders. In addition, the significant concentration of stock ownership may affect adversely thetrade. The market ~~value~~price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including but not limited to:

actual or anticipated fluctuations in our operating results due to ~~investors’ perception that such conflicts of interest may exist~~factors related to our business;

success or ~~arise.~~

Additionally, we have elected to be treated as a “controlled company” under NASDAQ rules. A “controlled company” under NASDAQ rules is a listed company more than 50% of the voting power of which is held by an individual, a group or another company (and which elects to be treated as a “controlled company”). Certain stockholders of Turtle Beach constitute a

~~group controlling more than 50% of the voting power~~failure of our ~~voting stock. As~~business strategy;

the success of third-party gaming platforms and certain game titles to drive sales;

our quarterly or annual earnings, or those of other companies in our industry;

changes in earnings estimates by securities analysts or our ability to meet those estimates;

our ability to execute transformation, restructuring and realignment actions;

the operating and stock price performance of other comparable companies;

overall market fluctuations and,

general economic conditions and other external factors.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a ~~“controlled company,” we are permitted to, and have, opted out of certain NASDAQ rules that would otherwise require (i) a majority of~~particular company. These broad market fluctuations could adversely affect the ~~members~~trading price of our ~~board to be independent, (ii) that our compensation committee be comprised entirely~~common stock.

Item 2- Unregistered Sale of ~~independent directors~~Equity Securities and ~~(iii) that we establish a nominating and governance committee comprised entirely~~Use of ~~independent directors, or otherwise ensure that director nominees are determined or recommended to our board by~~Proceeds

On April 9, 2019, the independent members of our board. Accordingly, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of NASDAQ.

If the stockholder group ceases to own at least 50% of our outstanding common stock, we will no longer be eligible to be treated as a controlled company. Pursuant to NASDAQ’s listing rules, upon ceasing to be a controlled company, we would be required to regain compliance with NASDAQ’s listing standards applicable to non-controlled companies, including (i) within 90 days, reconfiguring the Nominating and Governance Committee of ourCompany’s board of directors ~~such that~~authorized a ~~majority~~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. The following table summarizes, by month, the repurchases made during the three months ended June 30, 2019, under the repurchase program and in connection with shares repurchased from employees to satisfy tax withholding obligations in connection with the vesting of restricted stock awards.

	Issuer Purchases of Equity Securities
	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Period
April 1- 30, 2019		2,067	$	12.00		—		—
May 1- 31, 2019		2,067	$	9.32		—		—
June 1- 30, 2019		155,800	$	9.62		155,800	$	13,501,438
Total		159,934	$	9.65		155,800

For the second quarter of 2019, we repurchased approximately $0.1 million of common shares related to employee transactions. These amounts represent common shares repurchased from employees in an amount equal to the statutory tax liability associated with the vesting of their equity awards, which is then remitted on behalf of the members of the committee would be independent and (ii) within 12 months, (x) reconfiguring our board of directors such that a majority of the directors would be independent and (y) reconfiguring the Compensation and Nominating and Governance Committees of the board of directors such that all members of such committees would be independent.

employee.

Item 5 - Other Information

None.

Item 6. Exhibits



~~31.1~~ 3.1	Articles of Incorporation of Turtle Beach Corporation, as amended (Incorporated by reference to Exhibit 3.1 to Company's 10-Q filed August 6, 2018).

3.2	Bylaw, as amended, of Turtle Beach Corporation (Incorporated by reference to Exhibit 3.1 to Company's 8-K filed June 20, 2019).

10.1	Second Amendment and Joinder to Amended and Restated Loan, Guaranty and Security Agreement (Incorporated by reference to Exhibit 10.1 to Company's 8-K filed June 6, 2019).
10.2 **	Turtle Beach Corporation 2013 Stock-Based Incentive Compensation Plan (as amended and restated effective June 14, 2019)

31.1 **	Certification of Juergen Stark, Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2 **	Certification of John T. Hanson, Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1 **	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Juergen Stark, Principal Executive Officer and John Hanson, Principal Financial Officer (filed herewith).

	Extensible Business Reporting Language (XBRL) Exhibits
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

** Filed herewith.

~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



			TURTLE BEACH CORPORATION

Date:	~~November 2, 2017~~ August 9, 2019	~~By:~~	By:	/S/ JOHN T. HANSON
				John T. Hanson Chief Financial Officer, Treasurer and Secretary
				(Principal Financial and Accounting Officer)

47

40

Nevada	27-2767540

~~Nevada~~	~~27-2767540~~
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

11011 Via Frontera, Suite A/B San Diego, California	92127
(Address of principal executive offices)	(Zip Code)

Title of each class	Trading Symbols	Name of each exchange on which registered
Common Stock, par value $0.001	HEAR	Nasdaq



	September 30, 2017			December 31, 2016
ASSETS	(in thousands, except par value and share amounts)
Current Assets:
Cash and cash equivalents	$	473		$	6,183
Accounts receivable, net	24,588			54,633
Inventories	45,869			21,698
Prepaid expenses and other current assets	4,956			4,121
Total Current Assets	75,886			86,635
Property and equipment, net	4,427			4,311
Intangible assets, net	1,484			1,618
Deferred income taxes	126			543
Other assets	1,146			1,693
Total Assets	$	83,069		$	94,800
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Revolving credit facilities	$	24,793		$	35,905
Term loan	4,814			2,647
Accounts payable	29,996			11,927
Other current liabilities	12,110			16,414
Total Current Liabilities	71,713			66,893
Term loan, long-term portion	7,238			10,442
Series B redeemable preferred stock	18,547			17,480
Subordinated notes - related party	20,051			17,881
Other liabilities	2,239			2,800
Total Liabilities	119,788			115,496
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock, $0.001 par value - 100,000,000 shares authorized; 49,386,006 and 49,251,336 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively	49			49
Additional paid-in capital	147,802			146,615
Accumulated deficit	(184,279		)	(166,800		)
Accumulated other comprehensive loss	(291		)	(560		)
Total Stockholders' Equity (Deficit)	(36,719		)	(20,696		)
Total Liabilities and Stockholders' Equity (Deficit)	$	83,069		$	94,800



	Three Months Ended						Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	(in thousands)
Net loss	$	(492	)	$	(44,799	)	$	(17,479	)	$	(99,383	)

Other comprehensive income (loss):
Foreign currency translation adjustment	111			1			269			(69		)
Other comprehensive income (loss)	111			1			269			(69		)
Comprehensive loss	$	(381	)	$	(44,798	)	$	(17,210	)	$	(99,452	)



	September 30, 2017
	Gross Carrying Value			Accumulated Amortization			Asset Impairment		Net Book Value
	(in thousands)
Customer relationships	$	5,796		$	4,064		$	—	$	1,732
Foreign Currency	(933		)	(685		)	—		(248		)
Total Intangible Assets	$	4,863		$	3,379		$	—	$	1,484


	December 31, 2016
	Gross Carrying Value			Accumulated Amortization			Asset Impairment		Net Book Value
	(in thousands)
Customer relationships	$	5,796		$	3,737		$	—	$	2,059
Non-compete agreements	177			177			—		—
In-process Research and Development	27,100			4,074			23,026		—
Developed technology	8,880			802			8,078		—
Trade names	170			92			78		—
Patent and trademarks	967			65			902		—
Foreign Currency	(1,294		)	(853		)	—		(441		)
Total Intangible Assets	$	41,796		$	8,094		$	32,084	$	1,618



	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, 2016	6,381,447		1.90	7.37	20,033
Granted	704,865		0.93
Exercised	—		—
Forfeited	(1,053,683	)	2.22
Outstanding at September 30, 2017	6,032,629		1.73	6.75	2,543
Vested and expected to vest at September 30, 2017	6,022,628		1.74	6.75	2,543
Exercisable at September 30, 2017	3,886,414		1.76	6.68	2,100



	Shares		Weighted Average Grant Date Fair Value Per Share
Nonvested restricted stock at December 31, 2016	135,705		1.84
Granted	166,665		0.90
Vested	(91,002	)	2.06
Forfeited	(43,903	)	1.16
Nonvested restricted stock at September 30, 2017	167,465		0.96



	September 30, 2017			December 31, 2016
Total Assets	(in thousands)
Headset	$	83,029		$	94,081
HyperSound⁽¹⁾	27,918			31,233
Eliminations	(27,878		)	(30,514		)
Total	$	83,069		$	94,800