10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

or

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to  

Commission File Number: 001-35465

TURTLE BEACH CORPORATION

(Exact name of registrant as specified in its charter)

Nevada	27-2767540
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
12220 Scripps Summit Drive, Suite 100 San Diego, California	92131
(Address of principal executive offices)	(Zip Code)

(914) 345-2255

(Registrant’s telephone number, including area code)

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 ¨ (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 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 Common Stock, par value $0.001 per share, outstanding on April 30, 2017 was 49,251,336.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016	2
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2017 and 2016	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016	5
	Condensed Consolidated Statement of Stockholders' Equity for the Three Months Ended March 31, 2017	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	33
Item 5.	Other Information	34
PART II. OTHER INFORMATION		34
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 6.	Exhibits	45
SIGNATURES		46

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Turtle Beach Corporation

Condensed Consolidated Balance Sheets

(unaudited)

	March 31, 2017			December 31, 2016
ASSETS	(in thousands, except par value and share amounts)
Current Assets:
Cash and cash equivalents	$	3,613		$	6,183
Accounts receivable, net	4,516			54,633
Inventories	22,285			21,698
Prepaid expenses and other current assets	3,937			4,121
Total Current Assets	34,351			86,635
Property and equipment, net	3,919			4,311
Intangible assets, net	1,553			1,618
Deferred income taxes	688			543
Other assets	1,363			1,693
Total Assets	$	41,874		$	94,800
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Revolving credit facilities	$	—		$	35,905
Term loan	3,850			2,647
Accounts payable	8,429			11,927
Other current liabilities	11,274			16,414
Total Current Liabilities	23,553			66,893
Term loan, long-term portion	9,374			10,442
Series B redeemable preferred stock	17,827			17,480
Subordinated notes - related party	18,566			17,881
Other liabilities	2,750			2,800
Total Liabilities	72,070			115,496
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock, $0.001 par value - 100,000,000 shares authorized; 49,251,336 shares issued and outstanding as of March 31, 2017 and December 31, 2016	49			49
Additional paid-in capital	147,001			146,615
Accumulated deficit	(176,726		)	(166,800		)
Accumulated other comprehensive loss	(520		)	(560		)
Total Stockholders' Equity (Deficit)	(30,196		)	(20,696		)
Total Liabilities and Stockholders' Equity (Deficit)	$	41,874		$	94,800

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

2

Turtle Beach Corporation

Condensed Consolidated Statements of Operations

(unaudited)

	Three Months Ended
	March 31, 2017			March 31, 2016
	(in thousands, except per-share data)
Net Revenue	$	14,352		$	24,028
Cost of Revenue	12,136			20,666
Gross Profit	2,216			3,362
Operating expenses:
Selling and marketing	4,449			5,600
Research and development	1,390			2,024
General and administrative	4,171			5,283
Restructuring charges	298			225
Total operating expenses	10,308			13,132
Operating loss	(8,092		)	(9,770		)
Interest expense	1,840			1,779
Other non-operating expense (income), net	(51		)	365
Loss before income tax expense	(9,881		)	(11,914		)
Income tax expense	45			97
Net loss	$	(9,926	)	$	(12,011	)
Net loss per share:
Basic	$	(0.20	)	$	(0.26	)
Diluted	$	(0.20	)	$	(0.26	)
Weighted average number of shares:
Basic	49,251			46,624
Diluted	49,251			46,624

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

3

Turtle Beach Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

	Three Months Ended
	March 31, 2017			March 31, 2016
	(in thousands)
Net loss	$	(9,926	)	$	(12,011	)
Other comprehensive income (loss):
Foreign currency translation adjustment	40			(21		)
Other comprehensive income (loss)	40			(21		)
Comprehensive loss	$	(9,886	)	$	(12,032	)

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

4

Turtle Beach Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Three Months Ended
	March 31, 2017			March 31, 2016
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(9,926	)	$	(12,011	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	769			1,260
Amortization of intangible assets	84			1,229
Amortization of debt financing costs	388			324
Stock-based compensation	386			1,127
Accrued interest on Series B redeemable preferred stock	347			323
Paid in kind interest	582			515
Deferred income taxes	(145		)	—
Reversal of sales returns reserve	(1,558		)	(2,741		)
Provision for doubtful accounts	64			(90		)
Provision for obsolete inventory	869			699
Changes in operating assets and liabilities:
Accounts receivable	51,611			44,210
Inventories	(1,456		)	(391		)
Accounts payable	(3,728		)	(4,628		)
Prepaid expenses and other assets	365			(405		)
Income taxes payable	193			5
Other liabilities	(5,398		)	(4,429		)
Net cash provided by operating activities	33,447			24,997
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	(148		)	(1,311		)
Net cash used for investing activities	(148		)	(1,311		)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving credit facilities	30,659			49,854
Repayment of revolving credit facilities	(66,564		)	(81,774		)
Repayment of capital leases	(4		)	(3		)
Repayment of term loan	—			(1,203		)
Proceeds from sale of common stock, net of issuance costs	—			5,989
Debt financing costs	—			(574		)
Net cash used for financing activities	(35,909		)	(27,711		)
Effect of exchange rate changes on cash and cash equivalents	40			139
Net decrease in cash and cash equivalents	(2,570		)	(3,886		)
Cash and cash equivalents - beginning of period	6,183			7,114
Cash and cash equivalents - end of period	$	3,613		$	3,228
SUPPLEMENTAL DISCLOSURE OF INFORMATION
Cash paid for interest	$	513		$	568
Cash paid for income taxes	$	—		$	—

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

5

Turtle Beach Corporation

Condensed Consolidated Statement of Stockholders' Equity (Deficit)

(unaudited)

	Common Stock			Additional Paid-In 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	—	—		—		(9,926		)	—			(9,926		)
Other comprehensive loss	—	—		—		—			40			40
Stock-based compensation	—	—		386		—			—			386
Balance at March 31, 2017	49,251	$	49	$	147,001	$	(176,726	)	$	(520	)	$	(30,196	)

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

6

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1. Background and Basis of Presentation

Organization

Turtle Beach Corporation (“Turtle Beach” or the “Company”), headquartered in San Diego, California and incorporated in the state of Nevada in 2010, is a premier audio technology company with expertise and experience in developing, commercializing and marketing innovative products across a range of large addressable markets under the Turtle Beach® and HyperSound® 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 is an innovative patent-protected sound technology that delivers immersive, directional audio offering unique potential benefits in a variety of commercial settings and consumer devices.

VTB Holdings, Inc. (“VTBH”), the parent holding company of the headset business, was incorporated in the state of Delaware in 2010 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 Condensed Consolidated Balance Sheet has been derived from the Company's most recent audited financial statements included in its Annual Report on Form 10-K.

These financial statements should be read in conjunction with the annual financial statements and the notes thereto included in our 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 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

7

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. On July 9, 2015, the FASB agreed to a one-year deferral of the effective date to annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods, but will permit public business entities to adopt the standard as of the original effective date (annual reporting periods beginning after December 15, 2016). These updates permit the use of either the retrospective or cumulative effect transition method. We do not believe the standard will impact our recognition of revenue from our headset business.

In February 2016, the FASB issued ASU No. 2016-02, Leases, that introduces 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 January 1, 2017 and the standard did not have a material impact on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230),which attempts to reduce the existing diversity in practice with respect 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; 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.

Note 3. Fair Value Measurement

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

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

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

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and debt instruments. As of March 31, 2017 and December 31, 2016, there were no outstanding financial assets and liabilities recorded at fair value on a recurring basis and the Company had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted.

8

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following is a summary of the carrying amounts and estimated fair values of our financial instruments at March 31, 2017 and December 31, 2016:

	March 31, 2017				December 31, 2016
	Reported		Fair Value		Reported		Fair Value
	(in thousands)
Financial Assets and Liabilities:
Cash and cash equivalents	$	3,613	$	3,613	$	6,183	$	6,183
Credit Facility	—		—		35,905		35,905
Term Loans	14,367		14,137		14,367		14,281
Subordinated Debt	19,986		19,663		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 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 considered a Level 3 input.

Note 4. Allowance for Sales Returns

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

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Balance, beginning of period	$	4,591		$	6,268
Reserve accrual	1,131			2,133
Recoveries and deductions, net	(2,689		)	(4,874		)
Balance, end of period	$	3,033		$	3,527

Note 5. Composition of Certain Financial Statement Items

Inventories

Inventories consist of the following:

	March 31, 2017		December 31, 2016
	(in thousands)
Raw materials	$	893	$	1,680
Finished goods	21,392		20,018
Total inventories	$	22,285	$	21,698

9

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements - (Continued)

(unaudited)

Property and Equipment, net

Property and equipment, net, consists of the following:

	March 31, 2017			December 31, 2016
	(in thousands)
Machinery and equipment	$	1,321		$	1,321
Software and software development	383			383
Furniture and fixtures	301			288
Tooling	1,669			1,581
Leasehold improvements	1,247			1,247
Demonstration units and convention booths	8,448			8,172
Total property and equipment, gross	13,369			12,992
Less: accumulated depreciation and amortization	(9,450		)	(8,681		)
Total property and equipment, net	$	3,919		$	4,311

Other Current Liabilities

Other current liabilities consist of the following:

	March 31, 2017		December 31, 2016
	(in thousands)
Accrued vendor expenses	$	3,950	$	4,735
Accrued royalty	855		3,370
Accrued employee expenses	2,507		2,791
Accrued expenses	3,962		5,518
Total other current liabilities	$	11,274	$	16,414

Note 6. 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 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.

10

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

Acquired Intangible Assets

Acquired identifiable intangible assets, and related accumulated amortization, as of March 31, 2017 and December 31, 2016 consist of:

	March 31, 2017
	Gross Carrying Value			Accumulated Amortization			Asset Impairment		Net Book Value
	(in thousands)
Customer relationships	$	5,796		$	3,846		$	—	$	1,950
Foreign Currency	(1,243		)	(846		)	—		(397		)
Total Intangible Assets	$	4,553		$	3,000		$	—	$	1,553
	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 October 2012, VTB acquired Lygo, subsequently renamed TB Europe Ltd. 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, the merger between VTBH and Turtle Beach (f/k/a Parametric Sound Corporation) was completed. The acquired intangible assets relating to developed technology, customer relationships and trade name were subject to amortization over their respective useful lives. In September 2016, we recorded an impairment charge related to the total remaining acquired intangible assets value.

Amortization expense related to definite lived intangible assets of $0.1 million and $1.2 million for the three months ended March 31, 2017and 2016, respectively.

As of March 31, 2017, estimated annual amortization expense related to definite lived intangible assets in future periods is as follows:

	(in thousands)
2017	$	327
2018	366
2019	307
2020	258
2021	217
Thereafter	475
Total	$	1,950

11

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 7. Credit Facilities and Long-Term Debt

	March 31, 2017			December 31, 2016
	(in thousands)
Revolving credit facility, maturing March 2019	$	—		$	35,905
Term Loan Due 2018	3,632			3,632
Term Loan Due 2019	10,735			10,735
Less unamortized deferred financing fees	1,143			1,278
Total Term Loans	13,224			13,089
Subordinated notes - related party	19,986			19,403
Less unamortized debt discount	1,420			1,522
Total Subordinated notes	18,566			17,881
Total outstanding debt	31,790			66,875
Less: current portion of revolving line of credit	—			(35,905		)
Less: current portion of term loans	(3,850		)	(2,647		)
Total noncurrent portion of long-term debt	$	27,940		$	28,323

Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was $1.3 million and $1.3 million for the three months ended March 31, 2017 and March 31, 2016, respectively. This includes related party interest of $0.6 million and $0.5 million for the three months ended March 31, 2017 and March 31, 2016, respectively, in connection with the subordinated notes.

Amortization of deferred financing costs was $0.4 million and $0.3 million for the three months ended March 31, 2017 and March 31, 2016, respectively.

Revolving Credit Facility

On March 31, 2014, Turtle Beach and certain of its subsidiaries entered into a new asset-based revolving credit 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 loan and security agreement. The Credit Facility, whichexpires on March 31, 2019, provides for a line of credit of up to $60 million inclusive of a sub-facility limit of$10 millionforTB Europe, a wholly owned subsidiary of Turtle Beach. The Credit Facility may be used for working capital, the issuance of bank guarantees,letters of credit and other corporate purposes.

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.

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%to1.50%for U.S. base rate loansand between 2.00%to2.50%for U.S. LIBOR loans and U.K. loans. As ofMarch 31, 2017, interest rates for outstanding borrowings were 5.98% for base rate loans and 3.21% for LIBOR rate loans. 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 certain availability thresholds are not met, meaning that the Company does not have receivables and inventory which are eligible to borrow on under the Credit Facility in excess of amounts borrowed, the Credit Facility requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio. The fixed charge ratio is defined as the ratio, determinedon 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 to 1.00 on the last day of each month

12

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

while a Covenant Trigger Period (as defined in the Credit Facility) is in effect will become effective again after the Company has complied with such ratio for six consecutive months.

The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions, including our ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and consolidations, engage in sale leaseback transactions and transactions with affiliates and encumber and dispose of assets. Obligations under the Credit Facility are secured by a security interest and lien upon substantially all of the Company's assets.

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 March 31, 2017, the Company was in compliance with all financial covenants, as amended, and excess borrowing availability was approximately $4.1 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.

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 $11.0 million in the year ending December 31, 2015 and 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

13

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 March 31, 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

On 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 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 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

14

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

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.

Note 8. Income Taxes

In order to determine the quarterly provision for income taxes, we use 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 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 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
	March 31,
	2017			2016
	(in thousands)
Income tax expense	$	45		$	97
Effective income tax rate	(0.5		)%	(0.8		)%

15

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

Income tax expense for the three months ended March 31, 2017 and March 31, 2016 was $45,000 at an effective tax rate of (0.5)% and $97,000 at an effective tax rate of (0.8)%, 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.

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 limitation and the net operating 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.

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 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 of operations. As of March 31, 2017, the Company had uncertain tax positions of $2.2 million, inclusive of $0.7 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 through 2015, and the state tax years open under the statute of limitations are 2012 through 2015.

Note 9. Stock-Based Compensation

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

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Cost of revenue	$	(85	)	$	121
Selling and marketing	36			21
Research and development	57			144
General and administrative	378			841
Total stock-based compensation	$	386		$	1,127

The following table presents the stock activity and the total number of shares available for grant as of March 31, 2017:

	(in thousands)
Balance at December 31, 2016	2,261
Options granted	(197	)
Restricted Stock granted	—
Forfeited/Expired shares added back	542
Balance at March 31, 2017	2,606

16

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

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, 2016	6,381,447		1.90	7.37	20,033
Granted	196,600		1.14
Exercised	—		—
Forfeited	(497,352	)	1.94
Outstanding at March 31, 2017	6,080,695		1.87	7.01	—
Vested and expected to vest at March 31, 2017	6,070,694		1.88	7.01	—
Exercisable at March 31, 2017	3,435,334		1.89	6.98	—

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 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).

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 three months ended March 31, 2017.

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 assumptions for the three months endedMarch 31, 2017.

Expected term (in years)	6.1
Risk-free interest rate	2.0% - 2.1%
Expected volatility	41.0% - 41.1%
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 three months endedMarch 31, 2017 was $0.49. The total estimated fair value of employee options vested during the three months endedMarch 31, 2017 was $0.5 million. As of March 31, 2017, total unrecognized compensation cost related to non-vested stock options granted to employees was $2.4 million, which is expected to be recognized over a remaining weighted average vesting period of 2.7 years.

17

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

Restricted Stock Activity

	Shares		Weighted Average Grant Date Fair Value Per Share
Nonvested restricted stock at December 31, 2016	135,705		1.84
Granted	—		—
Vested	—		—
Forfeited	(43,902	)	1.16
Nonvested restricted stock at March 31, 2017	91,803		2.17

As of March 31, 2017, total unrecognized compensation cost related to the nonvested restricted stock awards granted to be recognized over a remaining weighted average vesting period of 0.1 years was minimal.

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 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 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 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.

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 $17.8 million and $17.5 million as of March 31, 2017 and December 31, 2014, respectively.

On February 18, 2015, the holder of the Series B Redeemable Preferred Stock, filed 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 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 into shares of common stock but give the holder a right to receive a cash bonus equal to the appreciation in value between the exercise price and value of common stock at the time of a change in control event as defined in the plan.

As of March 31, 2017 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 into common shares, said

18

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

amounts and exercise prices were not subject to the exchange ratio provided by the Merger agreement. As of March 31, 2017, compensation expense related to the Appreciation Plan units remained unrecognized because as of those dates a change in control, as defined 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.

Note 10. Net Loss Per Share

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

	Three Months Ended
	March 31,
	2017			2016
	(in thousands, except per-share data)
Net Loss	$	(9,926	)	$	(12,011	)
Weighted average common shares outstanding — Basic	49,251			46,624
Plus incremental shares from assumed conversions:
Dilutive effect of stock options	—			—
Weighted average common shares outstanding — Diluted	49,251			46,624
Net loss per share:
Basic	$	(0.20	)	$	(0.26	)
Diluted	$	(0.20	)	$	(0.26	)

Incremental shares from stock options and restricted stock awards are computed by the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock, reduced by the repurchase of shares with the proceeds from the assumed exercises, unrecognized compensation expense for outstanding awards and the estimated tax benefit of the assumed exercises.

	Three Months Ended
	March 31,
	2017	2016
	(in thousands)
Stock options	6,310	5,543
Warrants	3,068	3,079
Unvested restricted stock awards	108	72
Total	9,486	8,694

19

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 11. Segment and Geographic Information

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

	Three Months Ended
	March 31,
	2017			2016
Net Revenues	(in thousands)
Headset	$	14,260		$	23,747
HyperSound	92			281
Total	$	14,352		$	24,028
Operating Loss
Headset	$	(7,056	)	$	(5,280	)
HyperSound	(1,036		)	(4,490		)
Total	$	(8,092	)	$	(9,770	)
Interest Expense	$	1,840		$	1,779
Other non-operating expense (income), net	(51		)	365
Loss before income tax expense	$	(9,881	)	$	(11,914	)

	March 31, 2017			December 31, 2016
Total Assets	(in thousands)
Headset	$	41,833		$	94,081
HyperSound (1)	29,876			31,233
Eliminations	(29,835		)	(30,514		)
Total	$	41,874		$	94,800

(1) At March 31, 2017, HyperSound assets excluding eliminations, totaled less than $0.1 million.

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

	Three Months Ended
	March 31,
	2017		2016
	(in thousands)
North America	$	11,055	$	18,763
United Kingdom	1,854		2,802
Europe	1,168		1,473
International	275		990
Total net revenues	$	14,352	$	24,028

20

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 12. Commitments and Contingencies

Litigation

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

Shareholders Class Action: On August 5, 2013, VTBH and the Company (f/k/a Parametric) 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 that allegedly undervalued the Company. VTBH and the Company were named as defendants in these lawsuits under the theory that they had aided and abetted the Company's Board of Directors in allegedly violating their fiduciary duties. The plaintiffs in both cases sought a preliminary injunction seeking to enjoin closing of the Merger, which, by agreement, was heard by the Nevada court with the California plaintiffs invited to participate. On December 26, 2013, the court in the Nevada cases 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. The Company believes that the plaintiffs’ claims against it are without merit.

Dr. John Bonanno Complaint: On February 18, 2015, Dr. John Bonanno, a minority shareholder of VTBH, filed 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 and expenses. On February 8, 2016, the Delaware Chancery Court granted VTBH's motion to dismiss for improper venue, and Dr. Bonnano's complaint was dismissed without prejudice. In January 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 order of the Court, the parties will be filing cross-motions for summary judgment on March 31, 2017, on the sole question of whether the Merger was a defined event in the purported contract entitling Dr. Bonnano to redemption of his shares. Those motions have been filed and briefing is in progress with respect thereto. VTBH maintains that the Merger did not trigger any obligation to redeem Mr. Bonanno's preferred stock.

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 March 31, 2017 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.

21

Turtle Beach Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

Warranties

We warrant our products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product. Warranties are generally fulfilled by replacing defective products with new products. The following table provides the changes in our product warranties, which are included in accrued liabilities:

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Warranty, beginning of period	$	639		$	580
Warranty costs accrued	60			270
Settlements of warranty claims	(110		)	(163		)
Warranty, end of period	$	589		$	687

XO FOUR Stealth Product Recall: In August 2015, the Company received a limited number of reports 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 of the XO FOUR Stealth headsets and notified our retail customers to stop sales pending the results of the Company’s investigation. An outside laboratory engaged by the Company identified the substance 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 March 31, 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.

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. The Company will be subject to additional fees and costs related to the recall; additionally, the CPSC has the authority to seek penalties in connection with this matter. The possible range of loss cannot be reasonably estimated at this time.

22

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 Exchange Commission on March 8, 2017 (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 company with expertise and experience in developing, commercializing and marketing innovative products across a range of large addressable markets operating under two reportable segments, Turtle Beach® (“Headset“) and HyperSound®.

• 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 is an innovative patent-protected sound technology that delivers immersive, directional audio with applications in digital signage and kiosks, consumer electronics and hearing healthcare.

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

Business Trends

Gaming Headset Market

Sales 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 this is a good indication that any potential future console changes are not expected to be nearly as disruptive as this past change as the new generation of platform uses fairly standard audio connectivity, which we believe is unlikely to change 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, driven by the introductions of Xbox One S, PlayStation®VR, PlayStation®4

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Pro, and Microsoft's upcoming Project Scorpio, expected to be available in holiday of this year, which should result in stronger gaming engagement for the next several years.

The February 2017 Intelligence: Worldwide Console Forecast report by DFC Intelligence Forecasts (“DFC”) estimates that cumulative new generation consoles are expected to exceed $65 billion by 2020. While sales of the new-gen consoles have outperformed previous platforms, the overall console gaming market uncharacteristically slowed in the recent holiday season. Sales tracking data from The NPD Group, Inc. indicated that console gaming headset sales in the U.S. were nearly $400 million, up slightly from the prior year, as consumer deferred purchases ahead of mid-cycle console refreshes and a limited line up of multi-player games.

Cumulative New Generation Console Sales (in millions)

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

Seasonality

Our gaming headset business is seasonal with a significant portion of sales and profits typically occurring around the holiday period. Historically, more than 50% of headset business revenues are generated during the period from September through December as new headsets are introduced and consumers engage in holiday shopping.

HyperSound

HyperSound technology is a pioneering 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, the world’s first transparent directional speakers. and have started exploration of potential commercial licensing opportunities.

In 2017, we have 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.

Key Performance Indicators and Non-GAAP Measures

Management routinely reviews key performance indicators including revenue, operating income and margins, 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 measures used by our board of directors and management team to evaluate our operating performance; (ii) it is one of the 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 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 potential differences caused by variations in capital structures (affecting relative

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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, 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 is defined as gross margin excluding depreciation and amortization, and stock-based compensation.

Adjusted EBITDA (and a reconciliation to Net loss, the nearest GAAP financial measure) for the three months ended March 31, 2017 and 2016 are as follows:

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Net loss	$	(9,926	)	$	(12,011	)
Interest expense	1,840			1,779
Depreciation and amortization	853			2,489
Stock-based compensation	386			1,127
Income tax expense	45			97
Restructuring charges	298			225
Business model transition charge	353			—
Impairment charges	—			—
Adjusted EBITDA	$	(6,151	)	$	(6,294	)

Comparison of the Three Months Ended March 31, 2017 to the Three Months Ended March 31, 2016

Net loss for the three months endedMarch 31, 2017 was $9.9 million compared to a net loss of $12.0 million in the prior year period, including $8.9 million and $7.5 million of net loss attributable to the Headset segment, respectively.

For the three months endedMarch 31, 2017, Adjusted EBITDA on a consolidated basis was $(6.2) million, including investments of $0.6 million in the HyperSound business compared to $(6.3) million, including investments of $3.1 million in the HyperSound business during the three months endedMarch 31, 2016. Headset adjusted EBITDA totaled approximately $(5.6) million in the three months endedMarch 31, 2017 compared to $(3.2) million in the prior year period.

Adjusted EBITDA slightly improved for the three months endedMarch 31, 2017 as compared to the prior year period, despite a challenging gaming consumer market, primarily due to lower HyperSound business investment requirements as a result of the transition to a license model and the success of certain cost management initiatives.

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Results of Operations

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

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Net Revenue	$	14,352		$	24,028
Cost of Revenue	12,136			20,666
Gross Profit	2,216			3,362
Operating expenses	10,308			13,132
Operating loss	(8,092		)	(9,770		)
Interest expense	1,840			1,779
Other non-operating expense (income), net	(51		)	365
Loss before income tax expense	(9,881		)	(11,914		)
Income tax expense	45			97
Net loss	$	(9,926	)	$	(12,011	)

Net Revenue and Gross Profit

Headset Segment

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

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Net Revenue	$	14,260		$	23,747
Gross Profit	2,778			4,734
Gross Margin	19.5		%	19.9		%
Cash Margin (1)	19.7		%	21.2		%

(1) Excludes non-cash charges of $0.0 million and $0.3 million, respectively, for the three months endedMarch 31, 2017 and 2016.

Comparison of the Three Months Ended March 31, 2017 to the Three Months Ended March 31, 2016

Net revenues for the three months endedMarch 31, 2017 decreased $9.5 million or 40.0%, as compared to three months endedMarch 31, 2016, due to lower industry-wide demand as limited sales of marquee games disrupted holiday purchasing behavior and drove higher than normal channel inventory. Further, the market has continued to be negatively impacted by mid-cycle console releases and uncertainty surrounding the timing of upcoming new technology leading to higher promotional activity in response.

For the three months endedMarch 31, 2017, gross profit as a percentage of net revenue decreased to 19.5% from 19.9% in the prior year. Headset margins were positively impacted by product mix to our higher margin Universal and PlayStation®4 compatible headsets, offset by negative fixed costs leveraging on lower sales volumes.

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Operating Expenses

	Three Months Ended
	March 31,
	2017		2016
	(in thousands)
Selling and marketing	$	4,449	$	5,600
Research and development	1,390		2,024
General and administrative	4,171		5,283
Restructuring charges	298		225
Total operating expenses	$	10,308	$	13,132
By Segment:
Headset	$	9,834	$	10,014
HyperSound	$	474	$	3,118

Selling and Marketing

Selling and marketing expenses for the three months endedMarch 31, 2017 totaled $4.4 million, or 31.0% as a percentage of net revenues, compared to $5.6 million, or 23.3% as a percentage of net revenues, for the three months endedMarch 31, 2016. This decrease was attributable to sales force and marketing spend reductions related to the HyperSound business transition as well as lower depreciation, 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 months endedMarch 31, 2017 versus the comparable prior year period.

General and Administrative

General and administrative expenses for the three months endedMarch 31, 2017 totaled $4.2 million, or 29.1% as a percentage of net revenues, compared to $5.3 million, or 22.0% as a percentage of net revenues, for the three months endedMarch 31, 2016. The decrease was primarily due to lower non-cash charges, employee expenses and legal fees offset, in part, by an increase in professional service charges.

Restructuring Charges

Restructuring charges for the three months endedMarch 31, 2017 and March 31, 2016 related to our continued efforts to improve our operating efficiency in our Headset business, such as closing excess facilities and reducing redundancies, and reduce HyperSound business operating expenses.

Interest Expense

For the three months endedMarch 31, 2017, interest expense increased as compared to March 31, 2016 due to additional expense related to the Term Loan Due 2019 and the Subordinated Notes.

Income Taxes

Income tax expense for the three months ended March 31, 2017 and March 31, 2016 was $45,000 at an effective tax rate of (0.5)% and $97,000 at an effective tax rate of (0.8)%, 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.

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Liquidity and Capital Resources

Our primary sources of working capital are cash flow 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.

The following table summarizes our sources and uses of cash:

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Cash and cash equivalents at beginning of period	$	6,183		$	7,114
Net cash provided by operating activities	33,447			24,997
Net cash used for investing activities	(148		)	(1,311		)
Net cash used for financing activities	(35,909		)	(27,711		)
Effect of foreign exchange on cash	40			139
Cash and cash equivalents at end of period	$	3,613		$	3,228

Operating activities

Cash provided by operating activities for the three months endedMarch 31, 2017 was $33.4 million, an increase of $8.5 million as compared to cash used for operating activities of $25.0 million for the three months endedMarch 31, 2016. The increase is primarily the result of gross receipts, lower HyperSound business net cash burn and certain initiatives to better align cash expenditures with the seasonality of the gaming market.

Investing activities

Cash used for investing activities was $0.1 million during the three months endedMarch 31, 2017 compared to $1.3 million in the prior period on lower capital expenditures as domestic retailer customers continue to transition their advertising display models.

Financing activities

Net cash used for financing activities was $35.9 million during the three months endedMarch 31, 2017 compared to $27.7 million during the three months endedMarch 31, 2016. Financing activities during the three months endedMarch 31, 2017 included net payments on our revolving credit facility of $35.9 million. Financing activities during the three months endedMarch 31, 2016 included net payments on our revolving credit facility of $31.9 million and term loan repayments of $1.2 million with cash from operations and the issuance of common stock.

Management assessment of liquidity

Management believes that our current cash and cash equivalents, the amounts available under our revolving credit facility, the impact of the proceeds from our recent financings and cash flows derived from operations will be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements.

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 March 31, 2017 and December 31, 2016 were $2.6 million and $0.2 million, respectively.

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Revolving Credit Facility

On March 31, 2014, Turtle Beach and certain of its subsidiaries entered into a new asset-based revolving credit 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 loan and security agreement. The Credit Facility, whichexpires on March 31, 2019, provides for a line of credit of up to $60 million inclusive of a sub-facility limit of$10 millionforTB Europe, a wholly owned subsidiary of Turtle Beach. The Credit Facility may be used for working capital, the issuance of bank guarantees,letters of credit and other corporate purposes.

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.

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%to1.50%for U.S. base rate loansand between 2.00%to2.50%for U.S. LIBOR loans and U.K. loans. As ofMarch 31, 2017, interest rates for outstanding borrowings were 5.98% for base rate loans and approximately 3.21% for LIBOR rate loans. 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 certain availability thresholds are not met, meaning that the Company does not have receivables and inventory which are eligible to borrow on under the Credit Facility in excess of amounts borrowed, the Credit Facility requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio. The fixed charge ratio is defined as the ratio, determinedon 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 to 1.00 on the last day of each month while a Covenant Trigger Period (as defined in the Credit Facility) is in effect will become effective again after the Company has complied with such ratio for six consecutive months.

The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions, including our ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and consolidations, engage in sale leaseback transactions and transactions with affiliates and encumber and dispose of assets. Obligations under the Credit Facility are secured by a security interest and lien upon substantially all of the Company's assets.

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 March 31, 2017, the Company was in compliance with all financial covenants, as amended, and excess borrowing availability was approximately $4.1 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.

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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 $11.0 million in the year ending December 31, 2015 and 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 March 31, 2017, the Company was in compliance with all the amended financial covenants.

Subordinated Notes - Related Party

On 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 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

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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 $17.8 million and $17.5 million as of March 31, 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 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 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 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.

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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.

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 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.

See Note 2, “Summary of Significant Accounting Policies,” in the Notes to the condensed consolidated financial statements for a complete discussion of recent accounting pronouncements. We are currently evaluating the impact of certain recently issued guidance on our financial condition and results of operations in future periods.

Item 3 - Qualitative and Quantitative Disclosures about Market Risk

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

To date, the Company has used derivative financial instruments, specifically foreign currency forward and option contracts, to manage exposure to foreign currency risks, by hedging a portion of its forecasted expenses denominated in British Pounds expected to occur within a year. The effect of exchange rate changes on foreign currency forward and option contracts is expected to offset the effect of exchange rate changes on the underlying hedged item. The Company does not use derivative financial instruments for speculative or trading purposes. As of March 31, 2017 and December 31, 2016, we did not have any derivative financial instruments.

Interest Rate Risk

The Company's total variable rate debt is comprised of $14.4 million presented as a Term Loan and $16.9 million of Subordinated Notes. A hypothetical 10% increase in borrowing rates at March 31, 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. As of March 31, 2017 and December 31, 2016, our monetary assets and liabilities which are subject to this exposure are immaterial, therefore the potential immediate loss to us that would result from a hypothetical 10% change in foreign currency exchange rates would not be expected to have a material impact on our earnings or cash flows. This sensitivity analysis assumes an unfavorable 10% fluctuation in the exchange rates affecting the foreign currencies in which monetary assets and liabilities are denominated and does not take into account the offsetting effect of such a change on our foreign currency denominated revenues.

Inflation Risk

The Company is exposed to market risk due to the possibility of inflation, such as increases in the cost of its products. Although the Company does not believe that inflation has had a material impact on its financial position or results of operations to date, a

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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 December 31, 2016. 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 December 31, 2016, 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 March 31, 2017.

Changes in Internal Control over Financial Reporting

In our annual report on Form 10-K for the year ended December 31, 2015, management concluded that internal controls over financial reporting were not effective because of a material weakness in our internal control over financial reporting related to the review of certain assumptions as part of our annual goodwill impairment assessment. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Corporation's annual or interim financial statements will not be prevented or detected on a timely basis.

Management implemented its plan to remediate the material weakness described above, which consisted of the following elements:

• Enhanced existing control procedures related to the review of the assumptions, data inputs, and calculations,

• Implemented additional reviews by qualified personnel and improved the preparation and retention of additional supporting documentation, to enhance the design and documentation of management review controls in order to increase the precision at which management review controls operate,

• Tested and evaluated the design and operating effectiveness of the control procedures,

• Assessed the effectiveness of the remediation plan.

As of March 31, 2017, management has determined that the material weakness identified has been remediated.

Other than the material weakness remediated above, 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.

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Item  5 - Other Information

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. 

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.

The Company is currently evaluating its alternatives to resolve this listing deficiency.

PART II. OTHER INFORMATION

Item 1 - Legal Proceedings

Please refer to Note 12 - “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

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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 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 for our headsets to connect to the Xbox One advanced features and controls, a proprietary computer chip 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 of the chips. If we are unable to obtain sufficient quantities of these headset adapters or chips, sales of our Xbox One headsets and consequently our revenues would 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.

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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 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, 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, 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

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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 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 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, our three largest individual customers accounted for approximately 49% 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

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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 growth strategy.

We believe that our ability to extend the recognition and favorable perception of our Turtle Beach brand is critical to implement our headset 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,

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marketing and promotions. These expenditures, however, may not result in a sufficient increase in net sales to cover such expenses.

The on-going console platform transition has adversely affected, and future transitions in console platforms may adversely affect, our headset business.

In 2005, Microsoft released the Xbox 360; in 2006, Sony introduced the PlayStation®3; and in 2012, Nintendo introduced the Wii U. Sony launched its new generation console, PlayStation®4, on November 15, 2013, and Microsoft launched its new generation console, Xbox One, on November 22, 2013. 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 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 Scorpio, 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 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 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 $17.8 million as of March 31, 2017.

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

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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;

• 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, 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, 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, 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.

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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 and process evaluation and testing of our internal control 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. If we are not able to 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 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.

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

Our competitive position will be seriously 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

41

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 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.

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. 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 to modify the technology, or a product incorporating the technology, to comply with requirements that may be imposed by the FDA.  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.

In addition, HyperSound Clear 500P and the HyperSound Tinnitus Module feature available in the HyperSound Clear 500P are regulated by the FDA as medical devices pursuant to the Federal Food, Drug, and Cosmetic Act, or FDCA, and implementing regulations.  HyperSound Clear 500P has received 510(k) clearance permitting over - the - counter (“OTC”)

42

commercial distribution for use as a group auditory trainer or group hearing aid and in August 2016, the HyperSound Tinnitus Module feature available in the HyperSound Clear 500P received 510(k) clearance for prescription use in the temporary relief of tinnitus symptoms.  Recently, FDA exempted group hearing aids from the 510(k) requirement.  Therefore, we may modify HyperSound Clear 500P in the future without seeking additional 510(k) clearance, provided that we do not alter its intended use or incorporate a fundamentally different scientific technology, either of which would require a new 510(k) clearance or premarket approval. The Tinnitus Module remains subject to 510(k) clearance requirements.

We continue to be subject to FDA’s requirements for marketed medical devices, 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.

In the European Union we are subject to similar government regulation regarding medical device safety and effectiveness and ongoing certification and related costs. In the European Union and in other markets we may enter we will be subject to numerous and varying governmental requirements. The timing and expense to obtain or maintain any required clearances or approvals in foreign markets are difficult to estimate and may be significant. It may also be costly for us to comply with any applicable regulations and postmarket requirements in each country where we do business. If we fail to do so, we may be subject to fines, 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, including the XO FOUR Stealth headset recall in 2015, 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.

43

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 in 44 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 and the European Union Anti-Corruption Act, 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.

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 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. While we would 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.

44

Ownership of our common stock is highly concentrated, and we are a “controlled company” within 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 54% of 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 also 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 the market value of our common stock due to investors’ perception that such conflicts of interest may exist 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 of our voting stock. As a “controlled company,” we are permitted to, and have, opted out of certain NASDAQ rules that would otherwise require (i) a majority of the members of our board to be independent, (ii) that our compensation committee be comprised entirely of independent directors and (iii) that we establish a nominating and governance committee comprised entirely of independent directors, or otherwise ensure that director nominees are determined or recommended to our board by 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.

Item 6. Exhibits

10.1	Turtle Beach Corporation Retention Plan (Incorporated by reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 8, 2017).
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

45

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:	May 9, 2017	By:	/S/ JOHN T. HANSON
			John T. Hanson Chief Financial Officer, Treasurer and Secretary
			(Principal Financial Officer)

46

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Juergen Stark,certify that:

1. I have reviewed this quarterly report on Form10-Q of Turtle Beach Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	May 9, 2017	By:	/s/ JUERGEN STARK
			Juergen Stark
			Chief Executive Officer and President

EX-31.2

Exhibit 31.2

CERTIFICATION

I, John T. Hanson,certify that:

1. I have reviewed this quarterly report on Form10-Q of Turtle Beach Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	May 9, 2017	By:	/s/ JOHN T. HANSON
			John T. Hanson
			Chief Financial Officer, Treasurer and Secretary

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his or her capacity as an officer of Turtle Beach Corporation (the "Company"), that, to his or her knowledge, the Quarterly Report of the Company on Form 10-Q for the period ended March 31, 2017, fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Date:	May 9, 2017	By:	/s/ JUERGEN STARK
			Juergen Stark
			Chief Executive Officer and President
			(Principal Executive Officer)

Date:	May 9, 2017	By:	/s/ JOHN T. HANSON
			John T. Hanson
			Chief Financial Officer, Treasurer and Secretary
			(Principal Financial Officer)

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2017	Apr. 30, 2017
Document And Entity Information
Entity Registrant Name	Turtle Beach Corporation
Entity Central Index Key	0001493761
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Document Type	10-Q
Document Period End Date	Mar. 31, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1
Amendment Flag	false
Entity Common Stock, Shares Outstanding		49,251,336

XML

Condensed Consolidated Balance Sheets (unaudited) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Current Assets:
Cash and cash equivalents	$ 3,613	$ 6,183
Accounts receivable, net	4,516	54,633
Inventories	22,285	21,698
Prepaid expenses and other current assets	3,937	4,121
Total Current Assets	34,351	86,635
Property and equipment, net	3,919	4,311
Intangible assets, net	1,553	1,618
Deferred Tax Assets, Net of Valuation Allowance, Noncurrent	688	543
Other assets	1,363	1,693
Total Assets	41,874	94,800
Current Liabilities:
Revolving credit facilities	0	35,905
Term loan	3,850	2,647
Accounts payable	8,429	11,927
Other current liabilities	11,274	16,414
Total Current Liabilities	23,553	66,893
Loans Payable, Noncurrent	9,374	10,442
Series B redeemable preferred stock	17,827	17,480
Subordinated Long-term Debt, Noncurrent	18,566	17,881
Other liabilities	2,750	2,800
Total Liabilities	72,070	115,496
Stockholders' Equity (Deficit)
Common stock, $0.001 par value - 100,000,000 shares authorized; 49,251,336 shares issued and outstanding as of March 31, 2017 and December 31, 2016	49	49
Additional paid-in capital	147,001	146,615
Accumulated deficit	(176,726)	(166,800)
Accumulated other comprehensive loss	(520)	(560)
Total Stockholders' Equity (Deficit)	(30,196)	(20,696)
Total Liabilities and Stockholders' Equity (Deficit)	$ 41,874	$ 94,800

XML

Condensed Consolidated Balance Sheets (unaudited) (Parenthetical) - $ / shares	Mar. 31, 2017	Dec. 31, 2016
Stockholders' Equity (Deficit)
Preferred stock par value (in dollars per share)	$ 0	$ 0
Preferred stock shares authorized	0	0
Preferred stock shares issued	0	0
Preferred stock shares outstanding	0	0
Common stock par value (in dollars per share)	$ 0.001	$ 0.001
Common stock shares authorized	100,000,000	100,000,000
Common stock shares issued	49,251,336	49,251,336
Common stock shares outstanding	49,251,336	49,251,336

XML

Condensed Consolidated Statements of Operations (unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Income Statement [Abstract]
Net Revenue	$ 14,352	$ 24,028
Cost of Revenue	12,136	20,666
Gross Profit	2,216	3,362
Operating expenses:
Selling and marketing	4,449	5,600
Research and development	1,390	2,024
General and administrative	4,171	5,283
Restructuring Charges	298	225
Total operating expenses	10,308	13,132
Operating loss	(8,092)	(9,770)
Interest expense	1,840	1,779
Other non-operating expense (income), net	(51)	365
Loss before income tax expense	(9,881)	(11,914)
Income tax expense	45	97
Net loss	$ (9,926)	$ (12,011)
Net loss per share:
Basic (in dollars per share)	$ (0.20)	$ (0.26)
Diluted (in dollars per share)	$ (0.20)	$ (0.26)
Weighted average number of shares:
Basic (in shares)	49,251	46,624
Diluted (in shares)	49,251	46,624

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Condensed Consolidated Statements of Comprehensive Income (Loss) Statement - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Statement of Comprehensive Income [Abstract]
Net loss	$ (9,926)	$ (12,011)
Foreign currency translation adjustment	40	(21)
Other comprehensive income (loss)	40	(21)
Comprehensive loss	$ (9,886)	$ (12,032)

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Condensed Consolidated Statements of Cash Flows (unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$ (9,926)	$ (12,011)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	769	1,260
Amortization of intangible assets	84	1,229
Amortization of debt financing costs	388	324
Stock-based compensation	386	1,127
Accrued interest on Series B redeemable preferred stock	347	323
Paid in kind interest	582	515
Deferred income taxes	(145)	0
Reversal of sales returns reserve	(1,558)	(2,741)
Provision for Doubtful Accounts	64	(90)
Provision for obsolete inventory	869	699
Changes in operating assets and liabilities:
Accounts receivable	51,611	44,210
Inventories	(1,456)	(391)
Accounts payable	(3,728)	(4,628)
Prepaid expenses and other assets	365	(405)
Income taxes payable	193	5
Other liabilities	(5,398)	(4,429)
Net cash provided by operating activities	33,447	24,997
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	(148)	(1,311)
Net cash used for investing activities	(148)	(1,311)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving credit facilities	30,659	49,854
Repayment of revolving credit facilities	(66,564)	(81,774)
Repayment of capital leases	(4)	(3)
Repayment of term loan	0	(1,203)
Proceeds from Issuance of Common Stock	0	5,989
Debt financing costs	0	(574)
Net cash used for financing activities	(35,909)	(27,711)
Effect of exchange rate changes on cash and cash equivalents	40	139
Net decrease in cash and cash equivalents	(2,570)	(3,886)
Cash and cash equivalents, beginning of period	6,183	7,114
Cash and cash equivalents, end of period	3,613	3,228
SUPPLEMENTAL DISCLOSURE OF INFORMATION
Cash paid for interest	513	568
Cash paid for income taxes	$ 0	$ 0

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Condensed Consolidated Statement of Stockholders' Equity Statement - 3 months ended Mar. 31, 2017 - USD ($) $ in Thousands	Total	Common stock	Additional Paid-in Capital	Retained Earnings	Accumulated Other Comprehensive Income
Beginning balance, shares at Dec. 31, 2016		49,251,000
Beginning balance at Dec. 31, 2016	$ (20,696)	$ 49	$ 146,615	$ (166,800)	$ (560)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	(9,926)			(9,926)
Other comprehensive income	$ 40				40
Stock options exercised and related tax activity, shares	0
Share-based compensation	$ 386		386
Ending balance, shares at Mar. 31, 2017		49,251,000
Ending balance at Mar. 31, 2017	$ (30,196)	$ 49	$ 147,001	$ (176,726)	$ (520)

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Background and Basis of Presentation

3 Months Ended

Mar. 31, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Background and Basis of Presentation

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 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® 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 is an innovative patent-protected sound technology that delivers immersive, directional audio offering unique potential benefits in a variety of commercial settings and consumer devices.

VTB Holdings, Inc. (“VTBH”), the parent holding company of the headset business, was incorporated in the state of Delaware in 2010 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 Condensed Consolidated Balance Sheet has been derived from the Company's most recent audited financial statements included in its Annual Report on Form 10-K.

These financial statements should be read in conjunction with the annual financial statements and the notes thereto included in our 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.

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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2017

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

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 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 changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. On July 9, 2015, the FASB agreed to a one-year deferral of the effective date to annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods, but will permit public business entities to adopt the standard as of the original effective date (annual reporting periods beginning after December 15, 2016). These updates permit the use of either the retrospective or cumulative effect transition method. We do not believe the standard will impact our recognition of revenue from our headset business.

In February 2016, the FASB issued ASU No. 2016-02, Leases, that introduces 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 January 1, 2017 and the standard did not have a material impact on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230),which attempts to reduce the existing diversity in practice with respect 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; 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.

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Fair Value Measurement

3 Months Ended

Mar. 31, 2017

Fair Value Disclosures [Abstract]

Fair Value Measurement

Fair Value Measurement

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

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

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

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and debt instruments. As of March 31, 2017 and December 31, 2016, there were no outstanding financial assets and liabilities recorded at fair value on a recurring basis and the Company had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted.

The following is a summary of the carrying amounts and estimated fair values of our financial instruments at March 31, 2017 and December 31, 2016:

	March 31, 2017				December 31, 2016
	Reported		Fair Value		Reported		Fair Value
	(in thousands)
Financial Assets and Liabilities:
Cash and cash equivalents	$	3,613	$	3,613	$	6,183	$	6,183
Credit Facility	—		—		35,905		35,905
Term Loans	14,367		14,137		14,367		14,281
Subordinated Debt	19,986		19,663		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 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 considered a Level 3 input.

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Allowance for Sales Return

3 Months Ended

Mar. 31, 2017

Allowance for Sales Returns [Abstract]

Allowance for Sales Returns

Allowance for Sales Returns

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

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Balance, beginning of period	$	4,591		$	6,268
Reserve accrual	1,131			2,133
Recoveries and deductions, net	(2,689		)	(4,874		)
Balance, end of period	$	3,033		$	3,527

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Composition of Certain Financial Statement Items

3 Months Ended

Mar. 31, 2017

Condensed Consolidated Balance Sheet Components [Abstract]

Composition of Certain Financial Statement Items

Composition of Certain Financial Statement Items

Inventories

Inventories consist of the following:

	March 31, 2017		December 31, 2016
	(in thousands)
Raw materials	$	893	$	1,680
Finished goods	21,392		20,018
Total inventories	$	22,285	$	21,698

Property and Equipment, net

Property and equipment, net, consists of the following:

	March 31, 2017			December 31, 2016
	(in thousands)
Machinery and equipment	$	1,321		$	1,321
Software and software development	383			383
Furniture and fixtures	301			288
Tooling	1,669			1,581
Leasehold improvements	1,247			1,247
Demonstration units and convention booths	8,448			8,172
Total property and equipment, gross	13,369			12,992
Less: accumulated depreciation and amortization	(9,450		)	(8,681		)
Total property and equipment, net	$	3,919		$	4,311

Other Current Liabilities

Other current liabilities consist of the following:

	March 31, 2017		December 31, 2016
	(in thousands)
Accrued vendor expenses	$	3,950	$	4,735
Accrued royalty	855		3,370
Accrued employee expenses	2,507		2,791
Accrued expenses	3,962		5,518
Total other current liabilities	$	11,274	$	16,414

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Goodwill and Other Intangible Assets

3 Months Ended

Mar. 31, 2017

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Other Intangible Assets

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 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 March 31, 2017 and December 31, 2016 consist of:

	March 31, 2017
	Gross Carrying Value			Accumulated Amortization			Asset Impairment		Net Book Value
	(in thousands)
Customer relationships	$	5,796		$	3,846		$	—	$	1,950
Foreign Currency	(1,243		)	(846		)	—		(397		)
Total Intangible Assets	$	4,553		$	3,000		$	—	$	1,553
	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 October 2012, VTB acquired Lygo, subsequently renamed TB Europe Ltd. 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, the merger between VTBH and Turtle Beach (f/k/a Parametric Sound Corporation) was completed. The acquired intangible assets relating to developed technology, customer relationships and trade name were subject to amortization over their respective useful lives. In September 2016, we recorded an impairment charge related to the total remaining acquired intangible assets value.

Amortization expense related to definite lived intangible assets of $0.1 million and $1.2 million for the three months ended March 31, 2017and 2016, respectively.

As of March 31, 2017, estimated annual amortization expense related to definite lived intangible assets in future periods is as follows:

	(in thousands)
2017	$	327
2018	366
2019	307
2020	258
2021	217
Thereafter	475
Total	$	1,950

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Credit Facilities and Long-Term Debt

3 Months Ended

Mar. 31, 2017

Debt Disclosure [Abstract]

Credit Facilities and Long-Term Debt

Credit Facilities and Long-Term Debt

	March 31, 2017			December 31, 2016
	(in thousands)
Revolving credit facility, maturing March 2019	$	—		$	35,905
Term Loan Due 2018	3,632			3,632
Term Loan Due 2019	10,735			10,735
Less unamortized deferred financing fees	1,143			1,278
Total Term Loans	13,224			13,089
Subordinated notes - related party	19,986			19,403
Less unamortized debt discount	1,420			1,522
Total Subordinated notes	18,566			17,881
Total outstanding debt	31,790			66,875
Less: current portion of revolving line of credit	—			(35,905		)
Less: current portion of term loans	(3,850		)	(2,647		)
Total noncurrent portion of long-term debt	$	27,940		$	28,323

Total interest expense, inclusive of amortization of deferred financing costs, on long-term debt obligations was $1.3 million and $1.3 million for the three months ended March 31, 2017 and March 31, 2016, respectively. This includes related party interest of $0.6 million and $0.5 million for the three months ended March 31, 2017 and March 31, 2016, respectively, in connection with the subordinated notes.

Amortization of deferred financing costs was $0.4 million and $0.3 million for the three months ended March 31, 2017 and March 31, 2016, respectively.

Revolving Credit Facility

On March 31, 2014, Turtle Beach and certain of its subsidiaries entered into a new asset-based revolving credit 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 loan and security agreement. The Credit Facility, whichexpires on March 31, 2019, provides for a line of credit of up to $60 million inclusive of a sub-facility limit of$10 millionforTB Europe, a wholly owned subsidiary of Turtle Beach. The Credit Facility may be used for working capital, the issuance of bank guarantees,letters of credit and other corporate purposes.

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.

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%to1.50%for U.S. base rate loansand between 2.00%to2.50%for U.S. LIBOR loans and U.K. loans. As ofMarch 31, 2017, interest rates for outstanding borrowings were 5.98% for base rate loans and 3.21% for LIBOR rate loans. 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 certain availability thresholds are not met, meaning that the Company does not have receivables and inventory which are eligible to borrow on under the Credit Facility in excess of amounts borrowed, the Credit Facility requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio. The fixed charge ratio is defined as the ratio, determinedon 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 to 1.00 on the last day of each month while a Covenant Trigger Period (as defined in the Credit Facility) is in effect will become effective again after the Company has complied with such ratio for six consecutive months.

The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions, including our ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and consolidations, engage in sale leaseback transactions and transactions with affiliates and encumber and dispose of assets. Obligations under the Credit Facility are secured by a security interest and lien upon substantially all of the Company's assets.

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 March 31, 2017, the Company was in compliance with all financial covenants, as amended, and excess borrowing availability was approximately $4.1 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.

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 $11.0 million in the year ending December 31, 2015 and 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 March 31, 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

On 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 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 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.

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Income Taxes

3 Months Ended

Mar. 31, 2017

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

In order to determine the quarterly provision for income taxes, we use 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 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 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
	March 31,
	2017			2016
	(in thousands)
Income tax expense	$	45		$	97
Effective income tax rate	(0.5		)%	(0.8		)%

Income tax expense for the three months ended March 31, 2017 and March 31, 2016 was $45,000 at an effective tax rate of (0.5)% and $97,000 at an effective tax rate of (0.8)%, 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.

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 limitation and the net operating 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.

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 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 of operations. As of March 31, 2017, the Company had uncertain tax positions of $2.2 million, inclusive of $0.7 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 through 2015, and the state tax years open under the statute of limitations are 2012 through 2015.

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Stock-Based Compensation

3 Months Ended

Mar. 31, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-Based Compensation

Stock-Based Compensation

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

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Cost of revenue	$	(85	)	$	121
Selling and marketing	36			21
Research and development	57			144
General and administrative	378			841
Total stock-based compensation	$	386		$	1,127

The following table presents the stock activity and the total number of shares available for grant as of March 31, 2017:

	(in thousands)
Balance at December 31, 2016	2,261
Options granted	(197	)
Restricted Stock granted	—
Forfeited/Expired shares added back	542
Balance at March 31, 2017	2,606

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, 2016	6,381,447		1.90	7.37	20,033
Granted	196,600		1.14
Exercised	—		—
Forfeited	(497,352	)	1.94
Outstanding at March 31, 2017	6,080,695		1.87	7.01	—
Vested and expected to vest at March 31, 2017	6,070,694		1.88	7.01	—
Exercisable at March 31, 2017	3,435,334		1.89	6.98	—

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 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).

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 three months ended March 31, 2017.

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 assumptions for the three months endedMarch 31, 2017.

Expected term (in years)	6.1
Risk-free interest rate	2.0% - 2.1%
Expected volatility	41.0% - 41.1%
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 three months endedMarch 31, 2017 was $0.49. The total estimated fair value of employee options vested during the three months endedMarch 31, 2017 was $0.5 million. As of March 31, 2017, total unrecognized compensation cost related to non-vested stock options granted to employees was $2.4 million, which is expected to be recognized over a remaining weighted average vesting period of 2.7 years.

Restricted Stock Activity

	Shares		Weighted Average Grant Date Fair Value Per Share
Nonvested restricted stock at December 31, 2016	135,705		1.84
Granted	—		—
Vested	—		—
Forfeited	(43,902	)	1.16
Nonvested restricted stock at March 31, 2017	91,803		2.17

As of March 31, 2017, total unrecognized compensation cost related to the nonvested restricted stock awards granted to be recognized over a remaining weighted average vesting period of 0.1 years was minimal.

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 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 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 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.

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 $17.8 million and $17.5 million as of March 31, 2017 and December 31, 2014, respectively.

On February 18, 2015, the holder of the Series B Redeemable Preferred Stock, filed 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 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 into shares of common stock but give the holder a right to receive a cash bonus equal to the appreciation in value between the exercise price and value of common stock at the time of a change in control event as defined in the plan.

As of March 31, 2017 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 into common shares, said amounts and exercise prices were not subject to the exchange ratio provided by the Merger agreement. As of March 31, 2017, compensation expense related to the Appreciation Plan units remained unrecognized because as of those dates a change in control, as defined 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.

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Net Loss Per Share

3 Months Ended

Mar. 31, 2017

Earnings Per Share [Abstract]

Net Loss Per Share

Net Loss Per Share

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

	Three Months Ended
	March 31,
	2017			2016
	(in thousands, except per-share data)
Net Loss	$	(9,926	)	$	(12,011	)
Weighted average common shares outstanding — Basic	49,251			46,624
Plus incremental shares from assumed conversions:
Dilutive effect of stock options	—			—
Weighted average common shares outstanding — Diluted	49,251			46,624
Net loss per share:
Basic	$	(0.20	)	$	(0.26	)
Diluted	$	(0.20	)	$	(0.26	)

Incremental shares from stock options and restricted stock awards are computed by the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock, reduced by the repurchase of shares with the proceeds from the assumed exercises, unrecognized compensation expense for outstanding awards and the estimated tax benefit of the assumed exercises.

	Three Months Ended
	March 31,
	2017	2016
	(in thousands)
Stock options	6,310	5,543
Warrants	3,068	3,079
Unvested restricted stock awards	108	72
Total	9,486	8,694

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Segment and Geographical Information

3 Months Ended

Mar. 31, 2017

Segment Reporting [Abstract]

Geographical Information

Geographic Information

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

	Three Months Ended
	March 31,
	2017			2016
Net Revenues	(in thousands)
Headset	$	14,260		$	23,747
HyperSound	92			281
Total	$	14,352		$	24,028
Operating Loss
Headset	$	(7,056	)	$	(5,280	)
HyperSound	(1,036		)	(4,490		)
Total	$	(8,092	)	$	(9,770	)
Interest Expense	$	1,840		$	1,779
Other non-operating expense (income), net	(51		)	365
Loss before income tax expense	$	(9,881	)	$	(11,914	)

	March 31, 2017			December 31, 2016
Total Assets	(in thousands)
Headset	$	41,833		$	94,081
HyperSound (1)	29,876			31,233
Eliminations	(29,835		)	(30,514		)
Total	$	41,874		$	94,800

(1) At March 31, 2017, HyperSound assets excluding eliminations, totaled less than $0.1 million.

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

	Three Months Ended
	March 31,
	2017		2016
	(in thousands)
North America	$	11,055	$	18,763
United Kingdom	1,854		2,802
Europe	1,168		1,473
International	275		990
Total net revenues	$	14,352	$	24,028

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2017

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Litigation

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

Shareholders Class Action: On August 5, 2013, VTBH and the Company (f/k/a Parametric) 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 that allegedly undervalued the Company. VTBH and the Company were named as defendants in these lawsuits under the theory that they had aided and abetted the Company's Board of Directors in allegedly violating their fiduciary duties. The plaintiffs in both cases sought a preliminary injunction seeking to enjoin closing of the Merger, which, by agreement, was heard by the Nevada court with the California plaintiffs invited to participate. On December 26, 2013, the court in the Nevada cases 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. The Company believes that the plaintiffs’ claims against it are without merit.

Dr. John Bonanno Complaint: On February 18, 2015, Dr. John Bonanno, a minority shareholder of VTBH, filed 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 and expenses. On February 8, 2016, the Delaware Chancery Court granted VTBH's motion to dismiss for improper venue, and Dr. Bonnano's complaint was dismissed without prejudice. In January 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 order of the Court, the parties will be filing cross-motions for summary judgment on March 31, 2017, on the sole question of whether the Merger was a defined event in the purported contract entitling Dr. Bonnano to redemption of his shares. Those motions have been filed and briefing is in progress with respect thereto. VTBH maintains that the Merger did not trigger any obligation to redeem Mr. Bonanno's preferred stock.

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 March 31, 2017 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 products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product. Warranties are generally fulfilled by replacing defective products with new products. The following table provides the changes in our product warranties, which are included in accrued liabilities:

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Warranty, beginning of period	$	639		$	580
Warranty costs accrued	60			270
Settlements of warranty claims	(110		)	(163		)
Warranty, end of period	$	589		$	687

XO FOUR Stealth Product Recall: In August 2015, the Company received a limited number of reports 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 of the XO FOUR Stealth headsets and notified our retail customers to stop sales pending the results of the Company’s investigation. An outside laboratory engaged by the Company identified the substance 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 March 31, 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.

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. The Company will be subject to additional fees and costs related to the recall; additionally, the CPSC has the authority to seek penalties in connection with this matter. The possible range of loss cannot be reasonably estimated at this time.

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2017

Accounting Policies [Abstract]

Basis of Accounting

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

These financial statements should be read in conjunction with the annual financial statements and the notes thereto included in our 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.

Recent Accounting Pronouncements

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 changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. On July 9, 2015, the FASB agreed to a one-year deferral of the effective date to annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods, but will permit public business entities to adopt the standard as of the original effective date (annual reporting periods beginning after December 15, 2016). These updates permit the use of either the retrospective or cumulative effect transition method. We do not believe the standard will impact our recognition of revenue from our headset business.

In February 2016, the FASB issued ASU No. 2016-02, Leases, that introduces 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 January 1, 2017 and the standard did not have a material impact on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230),which attempts to reduce the existing diversity in practice with respect 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; 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.

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Fair Value Measurement Fair Value Measurement (Tables)

3 Months Ended

Mar. 31, 2017

Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]

Fair Value, by Balance Sheet Grouping [Table Text Block]

The following is a summary of the carrying amounts and estimated fair values of our financial instruments at March 31, 2017 and December 31, 2016:

	March 31, 2017				December 31, 2016
	Reported		Fair Value		Reported		Fair Value
	(in thousands)
Financial Assets and Liabilities:
Cash and cash equivalents	$	3,613	$	3,613	$	6,183	$	6,183
Credit Facility	—		—		35,905		35,905
Term Loans	14,367		14,137		14,367		14,281
Subordinated Debt	19,986		19,663		19,403		18,569

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Allowance for Sales Return (Tables)

3 Months Ended

Mar. 31, 2017

Allowance for Sales Returns [Abstract]

Schedule of allowances for sales returns

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

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Balance, beginning of period	$	4,591		$	6,268
Reserve accrual	1,131			2,133
Recoveries and deductions, net	(2,689		)	(4,874		)
Balance, end of period	$	3,033		$	3,527

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Composition of Certain Financial Statement Items (Tables)

3 Months Ended

Mar. 31, 2017

Condensed Consolidated Balance Sheet Components [Abstract]

Schedule of inventory

Inventories consist of the following:

	March 31, 2017		December 31, 2016
	(in thousands)
Raw materials	$	893	$	1,680
Finished goods	21,392		20,018
Total inventories	$	22,285	$	21,698

Schedule of property and equipment

Property and equipment, net, consists of the following:

	March 31, 2017			December 31, 2016
	(in thousands)
Machinery and equipment	$	1,321		$	1,321
Software and software development	383			383
Furniture and fixtures	301			288
Tooling	1,669			1,581
Leasehold improvements	1,247			1,247
Demonstration units and convention booths	8,448			8,172
Total property and equipment, gross	13,369			12,992
Less: accumulated depreciation and amortization	(9,450		)	(8,681		)
Total property and equipment, net	$	3,919		$	4,311

Other Current Liabilities [Table Text Block]

Other current liabilities consist of the following:

	March 31, 2017		December 31, 2016
	(in thousands)
Accrued vendor expenses	$	3,950	$	4,735
Accrued royalty	855		3,370
Accrued employee expenses	2,507		2,791
Accrued expenses	3,962		5,518
Total other current liabilities	$	11,274	$	16,414

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Goodwill and Other Intangible Assets (Tables)

3 Months Ended

Mar. 31, 2017

Finite-Lived Intangible Assets [Line Items]

Schedule of Goodwill

	(in thousands)
2017	$	327
2018	366
2019	307
2020	258
2021	217
Thereafter	475
Total	$	1,950

Schedule of Intangible Assets

Acquired identifiable intangible assets, and related accumulated amortization, as of March 31, 2017 and December 31, 2016 consist of:

	March 31, 2017
	Gross Carrying Value			Accumulated Amortization			Asset Impairment		Net Book Value
	(in thousands)
Customer relationships	$	5,796		$	3,846		$	—	$	1,950
Foreign Currency	(1,243		)	(846		)	—		(397		)
Total Intangible Assets	$	4,553		$	3,000		$	—	$	1,553
	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

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense

As of March 31, 2017, estimated annual amortization expense related to definite lived intangible assets in future periods is as follows:

	(in thousands)
2017	$	327
2018	366
2019	307
2020	258
2021	217
Thereafter	475
Total	$	1,950

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Credit Facilities and Long-Term Debt (Tables)

3 Months Ended

Mar. 31, 2017

Debt Disclosure [Abstract]

Schedule of Long-Term Debt Instruments

	March 31, 2017			December 31, 2016
	(in thousands)
Revolving credit facility, maturing March 2019	$	—		$	35,905
Term Loan Due 2018	3,632			3,632
Term Loan Due 2019	10,735			10,735
Less unamortized deferred financing fees	1,143			1,278
Total Term Loans	13,224			13,089
Subordinated notes - related party	19,986			19,403
Less unamortized debt discount	1,420			1,522
Total Subordinated notes	18,566			17,881
Total outstanding debt	31,790			66,875
Less: current portion of revolving line of credit	—			(35,905		)
Less: current portion of term loans	(3,850		)	(2,647		)
Total noncurrent portion of long-term debt	$	27,940		$	28,323

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Income Taxes (Tables)

3 Months Ended

Mar. 31, 2017

Income Tax Disclosure [Abstract]

Schedule of income tax benefit

The following table presents our income tax expense (benefit) and effective income tax rate:

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Income tax expense	$	45		$	97
Effective income tax rate	(0.5		)%	(0.8		)%

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Stock-Based Compensation (Tables)

3 Months Ended

Mar. 31, 2017

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Stock-based compensation cost

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

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Cost of revenue	$	(85	)	$	121
Selling and marketing	36			21
Research and development	57			144
General and administrative	378			841
Total stock-based compensation	$	386		$	1,127

Stock activity and total number of shares available for grant

The following table presents the stock activity and the total number of shares available for grant as of March 31, 2017:

	(in thousands)
Balance at December 31, 2016	2,261
Options granted	(197	)
Restricted Stock granted	—
Forfeited/Expired shares added back	542
Balance at March 31, 2017	2,606

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, 2016	6,381,447		1.90	7.37	20,033
Granted	196,600		1.14
Exercised	—		—
Forfeited	(497,352	)	1.94
Outstanding at March 31, 2017	6,080,695		1.87	7.01	—
Vested and expected to vest at March 31, 2017	6,070,694		1.88	7.01	—
Exercisable at March 31, 2017	3,435,334		1.89	6.98	—

Schedule of weighted-average assumptions

The following are assumptions for the three months endedMarch 31, 2017.

Expected term (in years)	6.1
Risk-free interest rate	2.0% - 2.1%
Expected volatility	41.0% - 41.1%
Dividend rate	0%

Restricted stock awards

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Stock option activity

	Shares		Weighted Average Grant Date Fair Value Per Share
Nonvested restricted stock at December 31, 2016	135,705		1.84
Granted	—		—
Vested	—		—
Forfeited	(43,902	)	1.16
Nonvested restricted stock at March 31, 2017	91,803		2.17

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Net Loss Per Share (Tables)

3 Months Ended

Mar. 31, 2017

Earnings Per Share [Abstract]

Schedule of computation of basic and diluted net (loss) income per share of common stock

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

	Three Months Ended
	March 31,
	2017			2016
	(in thousands, except per-share data)
Net Loss	$	(9,926	)	$	(12,011	)
Weighted average common shares outstanding — Basic	49,251			46,624
Plus incremental shares from assumed conversions:
Dilutive effect of stock options	—			—
Weighted average common shares outstanding — Diluted	49,251			46,624
Net loss per share:
Basic	$	(0.20	)	$	(0.26	)
Diluted	$	(0.20	)	$	(0.26	)

Schedule of antidilutive securities excluded from computation of diluted net income per share of common stock

	Three Months Ended
	March 31,
	2017	2016
	(in thousands)
Stock options	6,310	5,543
Warrants	3,068	3,079
Unvested restricted stock awards	108	72
Total	9,486	8,694

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Segment and Geographical Information (Tables) - USD ($)
$ in Thousands

3 Months Ended

Mar. 31, 2017

Mar. 31, 2016

Segment Reporting Information [Line Items]

Other Nonoperating Income (Expense)

$ 51

$ (365)

Operating Income (Loss)

(8,092)

(9,770)

Interest expense

1,840

1,779

Income (Loss) from Continuing Operations before Equity Method Investments, Income Taxes, Extraordinary Items, Noncontrolling Interest

$ (9,881)

$ (11,914)

Reconciliation of Assets from Segment to Consolidated [Table Text Block]

	March 31, 2017			December 31, 2016
Total Assets	(in thousands)
Headset	$	41,833		$	94,081
HyperSound (1)	29,876			31,233
Eliminations	(29,835		)	(30,514		)
Total	$	41,874		$	94,800

Schedule of Segment Reporting Information, by Segment [Table Text Block]

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

	Three Months Ended
	March 31,
	2017			2016
Net Revenues	(in thousands)
Headset	$	14,260		$	23,747
HyperSound	92			281
Total	$	14,352		$	24,028
Operating Loss
Headset	$	(7,056	)	$	(5,280	)
HyperSound	(1,036		)	(4,490		)
Total	$	(8,092	)	$	(9,770	)
Interest Expense	$	1,840		$	1,779
Other non-operating expense (income), net	(51		)	365
Loss before income tax expense	$	(9,881	)	$	(11,914	)

Schedule of total revenues based on where customers are physically located

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

	Three Months Ended
	March 31,
	2017		2016
	(in thousands)
North America	$	11,055	$	18,763
United Kingdom	1,854		2,802
Europe	1,168		1,473
International	275		990
Total net revenues	$	14,352	$	24,028

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Commitment and Contingencies (Tables)

3 Months Ended

Mar. 31, 2017

Commitments and Contingencies Disclosure [Abstract]

Schedule of Product Warranty Liability

The following table provides the changes in our product warranties, which are included in accrued liabilities:

	Three Months Ended
	March 31,
	2017			2016
	(in thousands)
Warranty, beginning of period	$	639		$	580
Warranty costs accrued	60			270
Settlements of warranty claims	(110		)	(163		)
Warranty, end of period	$	589		$	687

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Background and Basis of Presentation(Details) - shares	Mar. 31, 2017	Dec. 31, 2016
Business Acquisition [Line Items]
Common stock shares authorized	100,000,000	100,000,000

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Fair Value Measurement (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Reported Value Measurement [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and Cash Equivalents, Fair Value Disclosure	$ 3,613	$ 6,183
Estimate of Fair Value Measurement [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and Cash Equivalents, Fair Value Disclosure	3,613	6,183
Loans Payable [Member] | Reported Value Measurement [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	14,367	14,367
Loans Payable [Member] | Estimate of Fair Value Measurement [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	14,137	14,281
Subordinated Debt [Member] | Reported Value Measurement [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	19,986	19,403
Subordinated Debt [Member] | Estimate of Fair Value Measurement [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	19,663	18,569
Revolving credit facility, maturing March 2019 | Line of Credit [Member] | Reported Value Measurement [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	0	35,905
Revolving credit facility, maturing March 2019 | Line of Credit [Member] | Estimate of Fair Value Measurement [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt Instrument, Fair Value Disclosure	$ 0	$ 35,905

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Allowance for Sales Return (Details) - Allowance for Sales Returns - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Movement in Valuation Allowances and Reserves [Roll Forward]
Sales returns reserve, beginning balance	$ 4,591	$ 6,268
Reserve accrual	1,131	2,133
Valuation Allowances and Reserves, Deductions	(2,689)	(4,874)
Sales returns reserve, ending balance	$ 3,033	$ 3,527

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Composition of Certain Financial Statement Items Inventory (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Condensed Consolidated Balance Sheet Components [Abstract]
Raw materials	$ 893	$ 1,680
Finished goods	21,392	20,018
Total inventories	$ 22,285	$ 21,698

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Composition of Certain Financial Statement Items Property and equipment (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	$ 13,369	$ 12,992
Less: accumulated depreciation and amortization	(9,450)	(8,681)
Total property and equipment, net	3,919	4,311
Machinery and equipment
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	1,321	1,321
Software and software development
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	383	383
Furniture and fixtures
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	301	288
Tooling
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	1,669	1,581
Leasehold improvements
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	1,247	1,247
Demonstration units and convention booths
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	$ 8,448	$ 8,172

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Composition of Certain Financial Statement Items Other Liabilities (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Condensed Consolidated Balance Sheet Components [Abstract]
Accrued Vendor Expenses, Current	$ 3,950	$ 4,735
Accrued Royalties, Current	855	3,370
Employee-related Liabilities, Current	2,507	2,791
Other Accrued Liabilities, Current	3,962	5,518
Other current liabilities	$ 11,274	$ 16,414

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Goodwill and Other Intangible Assets (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Finite-lived Intangible Assets [Roll Forward]
Total intangible assets, gross carrying value	$ 4,553	$ 41,796
Finite-lived intangible assets, accumulated amortization	3,000	8,094
Intangible, Impaired, Accumulated Impairment Loss	0	32,084
Total intangible assets, net book value	1,553	1,618
Total	1,950
Foreign Currency [Member]
Finite-lived Intangible Assets [Roll Forward]
Finite-lived intangible assets, gross carrying value	(1,243)	(1,294)
Finite-lived intangible assets, accumulated amortization	(846)	(853)
Intangible, Impaired, Accumulated Impairment Loss	0	0
Total	(397)	(441)
Customer relationships
Finite-lived Intangible Assets [Roll Forward]
Finite-lived intangible assets, gross carrying value	5,796	5,796
Finite-lived intangible assets, accumulated amortization	3,846	3,737
Intangible, Impaired, Accumulated Impairment Loss	0	0
Total	$ 1,950	2,059
Non-compete agreements
Finite-lived Intangible Assets [Roll Forward]
Finite-lived intangible assets, gross carrying value		177
Finite-lived intangible assets, accumulated amortization		177
Intangible, Impaired, Accumulated Impairment Loss		0
Total		0
In-process research and development (IPR&D)
Finite-lived Intangible Assets [Roll Forward]
Finite-lived intangible assets, gross carrying value		27,100
Finite-lived intangible assets, accumulated amortization		4,074
Intangible, Impaired, Accumulated Impairment Loss		23,026
Total		0
Developed technology
Finite-lived Intangible Assets [Roll Forward]
Finite-lived intangible assets, gross carrying value		8,880
Finite-lived intangible assets, accumulated amortization		802
Intangible, Impaired, Accumulated Impairment Loss		8,078
Total		0
Trade name
Finite-lived Intangible Assets [Roll Forward]
Finite-lived intangible assets, gross carrying value		170
Finite-lived intangible assets, accumulated amortization		92
Intangible, Impaired, Accumulated Impairment Loss		78
Total		0
Patent and trademarks
Finite-lived Intangible Assets [Roll Forward]
Finite-lived intangible assets, gross carrying value		967
Finite-lived intangible assets, accumulated amortization		65
Intangible, Impaired, Accumulated Impairment Loss		902
Total		$ 0

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Goodwill and Other Intangible Assets - Estimated Future Amortization Expense (Details) $ in Thousands	Mar. 31, 2017 USD ($)
Finite-Lived Intangible Assets, Amortization Expense, Maturity Schedule [Abstract]
2014	$ 327
2015	366
2016	307
2017	258
2018	217
Thereafter	475
Total	$ 1,950

XML

Goodwill and Other Intangible Assets - Additional Disclosures (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Finite-Lived Intangible Assets [Line Items]
Amortization of intangible assets	$ 84	$ 1,229
Acquisition of Lygo International Limited | Customer relationships
Finite-Lived Intangible Assets [Line Items]
Useful life	13 years

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Credit Facilities and Long-Term Debt (Details) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016	Jul. 22, 2015
Debt Instrument [Line Items]
Total outstanding debt	$ 31,790,000		$ 66,875,000
Total noncurrent portion of long-term debt	27,940,000		28,323,000
Interest Expense, Debt	1,300,000	$ 1,300,000
Interest Expense, Related Party	600,000	500,000
Amortization of debt financing costs	388,000	$ 324,000
Revolving credit facilities | Revolving credit facility, maturing March 2019
Debt Instrument [Line Items]
Total outstanding debt	0		35,905,000
Current maturities of outstanding debt	0		(35,905,000)
Term Loan Due 2018 [Member]
Debt Instrument [Line Items]
Total outstanding debt	3,632,000		3,632,000
Loans Payable
Debt Instrument [Line Items]
Total outstanding debt	13,224,000		13,089,000
Current maturities of outstanding debt	(3,850,000)		(2,647,000)
Term Loan Due 2019
Debt Instrument [Line Items]
Total outstanding debt	10,735,000		10,735,000	$ 15,000,000
Unamortized Debt Issuance Expense	1,143,000		1,278,000
Subordinated Debt
Debt Instrument [Line Items]
Total outstanding debt	19,986,000		19,403,000
Debt Instrument, Unamortized Discount	1,420,000		1,522,000
Notes Payable, Other Payables [Member]
Debt Instrument [Line Items]
Total outstanding debt	$ 18,566,000		$ 17,881,000

XML

Credit Facilities and Long-Term Debt - Credit Facility (Details)	3 Months Ended
	Mar. 31, 2017 USD ($)	Mar. 16, 2015	Dec. 29, 2014 USD ($)
Line of Credit Facility [Line Items]
Expiration date	Mar. 31, 2019
Revolving credit facility, maturing March 2019
Line of Credit Facility [Line Items]
Maximum borrowing capacity	$ 60,000,000
Remaining borrowing capacity	$ 4,100,000
Debt Instrument, Covenant, Current Fixed Charge Ratio Required, Minimum		1.15
Revolving credit facility, maturing March 2019 | Minimum
Line of Credit Facility [Line Items]
Unused commitment fee, percent	0.25%
Revolving credit facility, maturing March 2019 | Maximum
Line of Credit Facility [Line Items]
Unused commitment fee, percent	0.50%
Revolving credit facility, maturing March 2019 | Base rate
Line of Credit Facility [Line Items]
Basis spread on variable rate	5.98%
Revolving credit facility, maturing March 2019 | Base rate | Minimum
Line of Credit Facility [Line Items]
Basis spread on variable rate	1.00%
Revolving credit facility, maturing March 2019 | Base rate | Maximum
Line of Credit Facility [Line Items]
Basis spread on variable rate	1.50%
Revolving credit facility, maturing March 2019 | London Interbank Offered Rate (LIBOR) [Member]
Line of Credit Facility [Line Items]
Basis spread on variable rate	3.21%
Revolving credit facility, maturing March 2019 | London Interbank Offered Rate (LIBOR) [Member] | Minimum
Line of Credit Facility [Line Items]
Basis spread on variable rate	2.00%
Revolving credit facility, maturing March 2019 | London Interbank Offered Rate (LIBOR) [Member] | Maximum
Line of Credit Facility [Line Items]
Basis spread on variable rate	2.50%
Revolving credit facility, maturing March 2019 | UK Borrower
Line of Credit Facility [Line Items]
Maximum borrowing capacity	$ 10,000,000
Loans Payable
Line of Credit Facility [Line Items]
Debt Instrument, Amended Credit Agreement, Principal Amount Permitted to be Repaid			$ 7,700,000
Loans Payable | London Interbank Offered Rate (LIBOR) [Member]
Line of Credit Facility [Line Items]
Basis spread on variable rate	5.00%

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Credit Facilities and Long-Term Debt - Subordinated Note (Details) - USD ($) $ / shares in Units, shares in Millions		3 Months Ended		12 Months Ended
	Jul. 22, 2015	Mar. 31, 2017	Aug. 13, 2015	Apr. 21, 2016	Dec. 31, 2016	Nov. 30, 2015	Nov. 16, 2015	Jul. 08, 2015	Apr. 23, 2015
Line of Credit Facility [Line Items]
Risk-free interest rate, minimum		2.00%
Total outstanding debt		$ 31,790,000			$ 66,875,000
Subordinated Debt
Line of Credit Facility [Line Items]
Total outstanding debt		$ 19,986,000			$ 19,403,000
Chief Executive Officer, Director, and Shareholder | VTB Holdings, Inc | Issuance Of Debt, April Notes [Member]
Line of Credit Facility [Line Items]
Related Party Transaction, Rate, Initial Period				10.00%
Related Party Transaction, Rate, Subsequent Period				20.00%
Chief Executive Officer, Director, and Shareholder | VTB Holdings, Inc | Issuance Of Debt, May Notes [Member]
Line of Credit Facility [Line Items]
Related Party Transaction, Rate, Initial Period			10.00%
Related Party Transaction, Rate, Subsequent Period				20.00%
Chief Executive Officer, Director, and Shareholder | Subordinated Debt | VTB Holdings, Inc
Line of Credit Facility [Line Items]
Debt Instrument, Maturity Date	Sep. 29, 2019
Chief Executive Officer, Director, and Shareholder | Subordinated Debt | VTB Holdings, Inc | Issuance Of Debt, April Notes [Member]
Line of Credit Facility [Line Items]
Debt Instrument, Face Amount									$ 5,000,000
Chief Executive Officer, Director, and Shareholder | Subordinated Debt | VTB Holdings, Inc | Issuance Of Debt, May Notes [Member]
Line of Credit Facility [Line Items]
Debt Instrument, Face Amount									3,800,000.0
Debt Instrument, Maturity Date		Aug. 13, 2015
Chief Executive Officer, Director, and Shareholder | Subordinated Debt | VTB Holdings, Inc | Issuance Of Debt, June Notes [Member]
Line of Credit Facility [Line Items]
Debt Instrument, Face Amount									$ 3,000,000.0
Debt Instrument, Maturity Date		Sep. 17, 2015
hear_Debt Instrument, Maximum Capacity		$ 15,000,000
Total outstanding debt	$ 9,000,000
Chief Executive Officer, Director, and Shareholder | Subordinated Debt | VTB Holdings, Inc | Issuance Of Debt, Additional June Notes [Member]
Line of Credit Facility [Line Items]
Debt Instrument, Face Amount								$ 6,000,000.0
Chief Executive Officer, Director, and Shareholder | Subordinated Debt | VTB Holdings, Inc | Issuance Of Debt, November Notes [Member]
Line of Credit Facility [Line Items]
Debt Instrument, Face Amount							$ 2,500,000.0
Debt Instrument, Interest Rate, Stated Percentage							15.00%
Chief Executive Officer, Director, and Shareholder | Promissory Note [Member] | VTB Holdings, Inc | Issuance Of Debt, November Notes [Member]
Line of Credit Facility [Line Items]
Debt Instrument, Face Amount							$ 2,000,000
Debt Instrument, Interest Rate, Stated Percentage							12.00%
London Interbank Offered Rate (LIBOR) [Member] | Chief Executive Officer, Director, and Shareholder | Subordinated Debt | VTB Holdings, Inc
Line of Credit Facility [Line Items]
Basis spread on variable rate		10.50%
London Interbank Offered Rate (LIBOR) [Member] | Chief Executive Officer, Director, and Shareholder | Promissory Note [Member] | VTB Holdings, Inc
Line of Credit Facility [Line Items]
Basis spread on variable rate		10.50%
VTB Holdings, Inc
Line of Credit Facility [Line Items]
Class of Warrant or Right, Outstanding	1.7					1.4
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 2.54					$ 2.00

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Credit Facilities and Long-Term Debt - Term Loan Due 2019 (Details)		3 Months Ended
	Jul. 22, 2015 USD ($)	Mar. 31, 2017 USD ($)	Mar. 31, 2016 USD ($)	Dec. 31, 2016 USD ($)
Line of Credit Facility [Line Items]
Total outstanding debt		$ 31,790,000		$ 66,875,000
Repayments of Notes Payable		0	$ 1,203,000
Term Loan Due 2019
Line of Credit Facility [Line Items]
Total outstanding debt	$ 15,000,000	$ 10,735,000		$ 10,735,000
Debt Instrument, Maturity Date	Jun. 28, 2019
London Interbank Offered Rate (LIBOR) [Member] | Term Loan Due 2019
Line of Credit Facility [Line Items]
Basis spread on variable rate	10.25%
Additional Default Rate [Member] | Term Loan Due 2019
Line of Credit Facility [Line Items]
Basis spread on variable rate	2.00%
Year Ended December 31, 2015 [Member] | Term Loan Due 2019
Line of Credit Facility [Line Items]
Debt Instrument, Covenant, Consolidated Leverage Ratio	5.75
hear_Capital Expenditures, Maximum	$ 11,000,000
Year Ended December 31, 2017 [Member] | Term Loan Due 2019
Line of Credit Facility [Line Items]
Debt Instrument, Covenant, Consolidated Leverage Ratio	3.00
hear_Capital Expenditures, Maximum	$ 6,000,000
Years Ended December 31, 2016, 2017, 2018, 2019 [Member] | Term Loan Due 2019
Line of Credit Facility [Line Items]
hear_Capital Expenditures, Maximum	$ 5,000,000

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Income Taxes (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Operating Loss Carryforwards [Line Items]
Income tax expense	$ 45	$ 97
Effective tax rate	(0.50%)	(0.80%)
Unrecognized Tax Benefits, Inclusive of Interest and Penalties	$ 2,200
Interest and penalties	700
2029 [Member]
Operating Loss Carryforwards [Line Items]
Operating Loss Carryforwards	49,000
State and Local Jurisdiction [Member] | 2029 [Member]
Operating Loss Carryforwards [Line Items]
Operating Loss Carryforwards	21,000
Domestic Tax Authority [Member] | 2029 [Member]
Operating Loss Carryforwards [Line Items]
Operating Loss Carryforwards	$ 12,700

XML

Stock-Based Compensation - Stock-based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	6,080,695		6,381,447
Stock-based compensation	$ 386	$ 1,127
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures in Period	497,352
Forfeited/Expired shares added back	542,000
Cost of revenue
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	$ (85)	121
Selling and marketing
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	36	21
Research and development
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	57	144
General and administrative
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	$ 378	$ 841

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Stock-Based Compensation - Shares Available for Grant (Details)	3 Months Ended
	Mar. 31, 2017 shares
Share-based Compensation Arrangement by Share-based Payment Award, Options, Shares Available for Grant [Roll Forward]
Balance, beginning of period (in shares)	2,261,000
Options granted	(196,600)
RSAs granted (in shares)	0
Forfeited/Expired shares added back	542,000
Balance, end of period (in shares)	2,606,000

XML

Stock-Based Compensation - Stock Option Activity (Details) - USD ($)	3 Months Ended	12 Months Ended
	Mar. 31, 2017	Dec. 31, 2014	Dec. 31, 2016
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Outstanding beginning of period (in shares)	6,381,447
Options granted	196,600
Exercised (in shares)	0
Forfeited (in shares)	(497,352)
Outstanding end of period (in shares)	6,080,695
Vested and expected to vest (in shares)	6,070,694
Exercisable (in shares)	3,435,334
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Abstract]
Outstanding beginning of period (in dollars per share)	$ 1.90
Granted (in dollars per share)	1.14
Exercised (in dollars per share)	0.00
Forfeited (in dollars per share)	1.94
Outstanding end of period (in dollars per share)	1.87
Vested and expected to vest (in dollars per share)	1.88
Exercisable (in dollars per share)	$ 1.89
Outstanding, weighted average remaining contractual term	7 years 5 days	7 years 4 months 15 days
Vested and expected to vest, weighted average remaining contractual term	7 years 5 days
Exercisable, weighted average remaining contractual term	6 years 11 months 22 days
Share-based Compensation Arrangement by Share-based Payment Award, Options, Additional Disclosures [Abstract]
Outstanding, intrinsic value	$ 0		$ 20,033
Vested and expected to vest, intrinsic value	0
Exercisable, intrinsic value	$ 0
Stock options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition	2 years 8 months

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Stock-Based Compensation - Weighted-Average Assumptions (Details)	3 Months Ended
	Mar. 31, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk-free interest rate, minimum	2.00%
Risk-free interest rate, maximum	2.10%
Expected volatility, minimum	41.00%
Expected volatility, maximum	41.10%
Expected dividend rate	0.00%
Minimum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term (in years)	6 years 18 days
Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term (in years)	6 years 1 month 18 days

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Stock-Based Compensation - RSA Activity (Details)	3 Months Ended
	Mar. 31, 2017 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Granted (in shares)	0
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted Average Grant Date Fair Value [Abstract]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Forfeitures, Weighted Average Grant Date Fair Value | $ / shares	$ 1.16
Restricted stock awards
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Outstanding beginning of period (in shares)	135,705
Granted (in shares)	0
Vested (in shares)	0
Outstanding end of period (in shares)	91,803
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted Average Grant Date Fair Value [Abstract]
Outstanding beginning of period (in dollars per share) | $ / shares	$ 1.84
Granted (in dollars per share) | $ / shares	0.00
Outstanding end of period (in dollars per share) | $ / shares	$ 2.17
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition	1 month
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period, Weighted Average Grant Date Fair Value | $ / shares	$ 0.00
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Forfeited in Period	(43,902)

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Stock-Based Compensation (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands	1 Months Ended	3 Months Ended
	Sep. 30, 2010	Mar. 31, 2017	Dec. 31, 2016	Nov. 30, 2015	Jul. 22, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award expiration period		10 years
Forfeiture Period after Ending Employment		90 days
Options exercised, intrinsic value		$ 0
Weighted average grant date fair value of options granted (in dollars per share)		$ 0.49
Estimated grant date fair value of options vested		$ 500
Total unrecognized compensation cost related to stock options		2,400
Series B redeemable preferred stock		$ 17,827	$ 17,480
Phantom equity | 2011 Phantom Equity Appreciation Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share authorized (in shares)			1,500,000
Shares granted and outstanding (in shares)		714,347
Weighted average exercise price of options granted and outstanding (in dollars per share)		$ 0.93
VTB Holdings, Inc
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Class of Warrant or Right, Outstanding				1,400,000	1,700,000
Class of Warrant or Right, Exercise Price of Warrants or Rights				$ 2.00	$ 2.54
Series B Redeemable Preferred Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares issued	1,000,000
Fair value of shares issued	$ 12,400
Par value (in dollars per share)		$ 12.425371
Non-Executives [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Forfeiture rate		10.00%
Executive Officer [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Forfeiture rate		0.00%

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Net Loss Per Share - Computation of Basic and Diluted Earnings per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Basic and diluted:
Net loss	$ (9,926)	$ (12,011)
Basic:
Weighted-average common shares outstanding, basic (in shares)	49,251	46,624
Dilutive effect of stock options	0	0
Diluted:
Weighted-average common shares outstanding, diluted (in shares)	49,251	46,624
Net loss per share:
Basic (in dollars per share)	$ (0.20)	$ (0.26)
Diluted (in dollars per share)	$ (0.20)	$ (0.26)

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Net Loss Per Share - Antidilutive Securities (Details) - shares shares in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share	9,486	8,694
Stock options
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share	6,310	5,543
Warrants
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share	3,068	3,079
Restricted stock awards
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share	108	72

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Segment and Geographical Information - Revenues (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Revenues from External Customers and Long-Lived Assets [Line Items]
Assets	$ 41,874		$ 94,800
Revenues	14,352	$ 24,028
Operating Income (Loss)	(8,092)	(9,770)
United States
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenues	11,055	18,763
Other
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenues	275	990
United Kingdom
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenues	1,854	2,802
Europe [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenues	1,168	1,473
Headset Business [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Assets	41,833		94,081
Revenues	14,260	23,747
Operating Income (Loss)	(7,056)	(5,280)
HyperSound Business [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Assets	29,876		31,233
Revenues	92	281
Operating Income (Loss)	(1,036)	$ (4,490)
Consolidation, Eliminations [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Assets	$ (29,835)		$ (30,514)

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Commitments and Contingencies (Details) - USD ($) $ in Thousands		3 Months Ended
	Feb. 18, 2015	Mar. 31, 2017	Mar. 31, 2016	Aug. 05, 2013
Movement in Standard Product Warranty Accrual [Roll Forward]
Warranty accrual, beginning balance		$ 639	$ 580
Warranty costs accrued		60	270
Settlements of warranty claims		(110)	(163)
Warranty accrual, ending balance		$ 589	$ 687
Merger of VTB Holdings, Inc. and Parametric Sound Corporation | VTB Holdings, Inc
Business Acquisition [Line Items]
Ownership percentage				80.00%
Merger of VTB Holdings, Inc. and Parametric Sound Corporation | Parametric Sound Corporation
Business Acquisition [Line Items]
Ownership percentage				20.00%
Pending Litigation [Member] | Bonanno vs. VTBH [Member]
Movement in Standard Product Warranty Accrual [Roll Forward]
Loss Contingency, Damages Sought, Value	$ 15,100