Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. This discussion summarizes the significant factors affecting our results of operations and the financial condition of our business during each of the fiscal years in the three-year period ended December 31, 2025.

Overview

We are a premier audio and gaming technology company with expertise and experience in developing, commercializing, and marketing innovative products across a range of large addressable markets under our brand, Turtle Beach. The Turtle Beach® brand is a market share leader in console gaming headsets for over 16 years running with a vast portfolio of headsets designed to be multiplatform compatible with the latest Xbox, PlayStation, and Nintendo consoles, as well as for PCs and mobile and tablet devices. Our PC product portfolio includes PC gaming headsets, keyboards, mice, microphones and other PC gaming peripherals and in 2021 it expanded its brand beyond gaming headsets and launched its gaming controller product line, as well as, flight simulation and racing simulation accessories. In 2024, we acquired PDP, another leading gaming accessory brand with a robust slate of products, including gaming controllers for all major platforms and licensing deals with popular gaming and entertainment properties. We are headquartered in San Diego, California, and incorporated in the state of Nevada in 2010.

Business Trends

Console Headset Market

In 2025, we were the leading gaming headset manufacturer in the U.S. and other major console markets. We have achieved these global market shares by delivering high-quality products that often include first-to-market innovations, robust features, superior sound, unmatched comfort, and top customer support - all key factors that consumers seek when shopping for a gaming headset.

The global market for console and PC gaming headsets is estimated to be approximately $2.9 billion, according to external market data and internal estimates, reflecting continued growth driven by increasing online multiplayer engagement, content creation, and improvements in technology. PlayStation and Xbox consoles remain among the most significant platforms supporting gaming headset usage, as console-focused headsets continue to integrate features such as wireless connectivity and surround sound optimized for these systems. Consistent with a historical pattern of major new console cycles of roughly seven to eight years, Microsoft and Sony launched their latest consoles, Xbox Series X|S and PlayStation 5, ahead of the 2020 holiday season, and these platforms have sustained an active installed base through 2025. In late 2024, Sony introduced the PS5 Pro system. The next Microsoft and Sony consoles are anticipated to launch within the next 2-3 years.

Nintendo's platform also plays a significant role in the growth of the console headset market. The large installed base of Nintendo Switch systems, combined with the successful launch of the Nintendo Switch 2 in June 2025, increases participation in online, chat-enabled gameplay, thereby expanding the overall addressable market for console gaming headsets.

Controllers

The controllers market is estimated at approximately $3.0 billion, according to external market data and internal estimates, and shares the same retail footprint and consumer base as Turtle Beach gaming headsets, creating natural cross-sell opportunities and strong category alignment. We entered the controllers market in 2021 and have since expanded our portfolio across console and PC platforms, with key products including Stealth Ultra and Stealth Pivot premium controllers, which target the higher value controller segment. The 2024 acquisition of PDP, a leading gaming accessories company with a strong foundation in the controller category, significantly strengthened our scale and competitiveness in controllers. PDP's established expertise and product portfolio, spanning high-value and enthusiast-driven segments, expanded our offerings with products such as the Riffmaster Wireless Guitar Controller and Victrix Pro BFG, Pro FS Arcade Fight Stick, and Pro KO Leverless Fight Stick, positioning us across both premium and value tiers and across multiple controller subcategories.

Industry activity across console platforms, continues to support category growth. Ongoing hardware refresh cycles and the large global installed base, continues to drive engagement across core gaming genres such as multiplayer, esports, fighting games, and rhythm-based gaming. These trends, along with market forecasts projecting sustained controller demand tied to wireless adoption, haptic feedback innovations, and cross-platform compatibility, indicate that the controllers category remains an attractive growth opportunity.

With an expanded product portfolio and enhanced innovation pipeline following the PDP acquisition, we believe we are well positioned to capture additional share in the global controllers market as consumer interest and platform ecosystems continue to evolve.

PC Accessories Market

The market for PC gaming mice, keyboards, and microphones is estimated to be approximately $3.9 billion, according to external market data and internal estimates. PC gaming continues to be a main gaming platform in the U.S. and internationally, similarly driven by popular AAA game launches, PC-specific esports leagues, teams, and players, content creators, and influencers, and with the introduction of cross-platform play - where PC gamers can play online against other gamers playing the same game on an Xbox, PlayStation, or Nintendo Switch. While most games are available on multiple platforms, gaming on PC offers advantages including improved graphics, increased speed and precision of mouse/keyboard controls, and the ability for deeper customization. Gaming mice and keyboards are engineered to provide gamers with high-end performance and a superior gaming experience through features such as fast key and button response times, improved materials and build quality, comfortable ergonomic designs, programmable keys and buttons, and software suites to customize and control devices and settings.

PC gaming mice come in a variety of different ergonomic and symmetrical shapes and sizes, are available in both wired and wireless models, offer different optical or laser sensor options and responsiveness, and often feature integrated RGB LED lighting and software to unify the lighting with other devices for a visually consistent PC gaming appearance. Similarly, PC gaming keyboards often deliver a competitive advantage by offering options for ultra-responsive mechanical and optical key switches that feel and sound different, as well as customizable lighting.

Our PC gaming headsets, keyboards, and mice span price tiers ranging from low-to-high for entry-level to professional gamers, with each successive price tiers adding features and build quality. We seek to infuse differentiation and innovation into our PC products, including our own design for keyboard and mouse switches, innovative RGB LED lighting, and extensive ergonomic design testing and modeling.

Simulation Accessories Market

The market for simulation accessories is estimated to be approximately $1.4 billion, according to external market data and internal estimates. Flight and racing simulation are more dominant on higher-end PCs able to deliver the most realistic visuals. However, jumps in visual quality made possible in the latest consoles and games have made flight simulation on Xbox and PlayStation more accessible. For example, in 2020 Microsoft redefined the graphics flight simulation gamers can expect while playing with the launch of the latest generation of its flight simulation games and, in subsequent years, Microsoft expanded the game to Xbox Series X|S, Xbox One, and for lower-end gaming PCs, and mobile gaming via Xbox Cloud.

Long-running popular flight simulations like Flight Simulator 2024, X-Plane, and others allow pilots to learn to fly and pilot various aircraft through picture-perfect skies and scenery, with typical flight simulation accessories including yokes and pedals, combat flightsticks, and Hands-On Throttle And Stick ("H.O.T.A.S.") controllers. The flight simulation market is niche, but with a dedicated, older fanbase willing to spend more on accessories to create the ultimate flight simulation setups, with a variety of expert pilots and creators showcasing their latest content on YouTube and other mediums. We launched the original VelocityOne Flight universal control system in 2021, followed by the VelocityOne Rudder and VelocityOne Stand in 2022, the VelocityOne Flightstick in 2023, and the VelocityOne Flightdeck H.O.T.A.S controller in 2024.

Racing simulation follows a similar trajectory as flight simulation. The audience of racing simulation gamers is also dedicated, slightly older and willing to spend more on creating high-end racing simulation setups predominantly on PC, but also on consoles. There is also a variety of long-running, successful racing game franchises including Forza, Assetto Corsa, and more that allow drivers to get behind the wheel and experience the rush of racing. Typical racing simulation accessories include wheel and pedal setups, swappable steering wheels, shifters, handbrakes and more, ranging in price from lower cost entry-level gear available for a couple of hundred dollars (~$200), to ultra-premium, high-end custom-built simulation racing setups that cost thousands of dollars. Racing simulation fans also regularly create their own content to share with the racing simulation community. We introduced our first VelocityOne Race racing simulation wheel and pedals setup in 2024, as well as the follow-up add-on VelocityOne Multi-Shift shifter/handbrake in early 2025. In the latter portion of 2025, we released the VelocityOne™ KD3 wheel and pedals system, the F-RX formula wheel for hardcore simulation racers on Xbox and PC and the Racer wireless racing wheel.

Seasonality

Our gaming accessories business is seasonal with a significant portion of sales and profits typically occurring around the holiday period. Historically, more than 45% of revenues are generated during the period between September and December as new products are introduced and consumers engage in holiday shopping. In addition, launches of major new online multiplayer games, and specific retailer purchasing behavior, can drive significant revenue shifts between months and quarters in a given year. In connection with the seasonality of the business, historically the Company's borrowings on the revolving credit facility increase as a result of the holiday inventory build leading up to year-end and decline on gross receipts during the first quarter of the following year.

Supply Chain and Operations

We have a global network of suppliers that manufacture products to meet the quality standards sought by our customers and our cost objectives. We have worked closely with component, manufacturing, and global logistic partners to build a supply chain that we consider dependable, scalable, and efficient to provide high-quality, reliable products employing leading cost management practices. The use of outsourced manufacturing facilities is designed to take advantage of specific expertise and allow for flexibility and scalability to respond to both seasonality and changing demands for our products.

We believe we have strong, long-term relationships with our suppliers and that, subject to the discussion in Item 1A, "Risk Factors" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources," we expect to continue to be able to obtain a sufficient supply of quality products on satisfactory terms.

This section presents our operating results for the year ended December 31, 2025 and 2024. For a discussion of the year ended December 31, 2024 and 2023, please refer to Part II Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2024 Annual Report on Form 10-K, which was filed with the SEC on March 17, 2025.

Results of Operations

Management Overview

In 2025, we continued integrating and building upon our acquisition of PDP, a leading gaming accessory brand recognized for its diverse product lineup. The acquisition expanded our presence in the multi-platform controllers category and added a strong set of licensing partnerships, further strengthening our competitive position. The increased scale and diversification resulting from the PDP acquisition have enhanced our market position and broadened our portfolio. These strategic gains provide a stronger foundation for long-term performance as we continue to deliver industry-leading gaming accessories and an expanded suite of offerings.

Revenue for 2025 reflects the contribution from the PDP acquisition and performance in our headset and controller categories, offset by decline in demand for gaming accessories. Our portfolio continued to perform well, highlighted by ongoing demand for products such as the Stealth 700 Gen 3 wireless headset, a premium, multi-platform device featuring our proprietary cross-play technology, which proved to be a top choice among gamers. This performance underscores our commitment to delivering cutting-edge accessories and our leadership in key gaming accessory markets.

Disciplined execution of our strategic priorities, together with targeted cost-management initiatives, contributed to a more resilient operating environment during the year. Although operating expenses increased modestly, these actions helped increase gross profit and maintain operating leverage amid softer revenue. We believe our brands are well-positioned to sustain market leadership due to our expanded product portfolio, strengthened retail partnerships, and strong portfolio of innovative console gaming headsets and controllers.

The following table sets forth the Company's consolidated statements of operations for the periods presented (in thousands):

The following table sets forth the Company's consolidated statements of operations data as a percentage of revenue for the periods presented:

Net Revenue and Gross Profit

Comparison of the Year Ended December 31, 2025 to the Year Ended December 31, 2024

Net revenue for the year ended December 31, 2025 was $319.9 million, a $52.9 million, or 14.2%, decrease from $372.8 million in the prior year. The decrease was due to a decline in demand for gaming accessories in the current year.

For the year ended December 31, 2025, gross margin increased to 37.3% from 34.6%, in the comparable prior year period primarily due to the unfavorable impact of fair value step-up adjustment in the prior year period relating to the PDP acquisition, partially offset by higher tariffs in 2025.

Operating Expenses

Selling and Marketing

Selling and marketing expense remained flat for the year ended December 31, 2025 compared to the same period in the prior year.

Research and Development

Research and development expense decreased by $0.4 million or 2.4% for the year ended December 31, 2025 compared to the same period in the prior year. The decrease was primarily due to lower stock compensation expense and employee-related costs.

General and Administrative

General and administrative expenses increased by $2.0 million or 7.0% for the year ended December 31, 2025 compared to the same period in the prior year. The increase was primarily due to higher stock compensation expense, higher public company costs for professional services, consulting fees, and information technology investments.

Acquisition-related Costs

Acquisition-related costs include costs incurred in connection with the PDP acquisition, including professional fees such as legal and accounting along with other certain integration related costs.

Insurance Recovery

Insurance recovery for the year ended December 31, 2025 was $9.4 million, and relates to the receipt of insurance claims from the loss of inventory in transit that primarily occurred in the fourth quarter of 2024.

Interest Expense

Interest expense increased by $1.7 million or 21.1% for the year ended December 31, 2025 compared to the same period in the prior year. The increase was primarily due to the $1.9 million loss on debt extinguishment related to the Revolving Credit Facility and Blue Torch Term Loan. The increase was offset by more favorable effective interest rates in 2025 from the refinancing of our Credit Agreement.

Income Taxes

Income tax benefit for the year ended December 31, 2025 was $1.1 million at an effective tax rate of 6.4% compared to income tax expense of $5.5 million for the year ended December 31, 2024 at an effective tax rate of (51.6%). The effective tax rate was primarily impacted by the reversal of a portion of the Company's deferred tax asset valuation allowance associated with the deferred tax liabilities established on PDP's intangible assets.

Key Performance Indicators and Non-GAAP Measures

Management routinely reviews key performance indicators, including revenue, operating income and margins, and earnings per share, among others. In addition, we believe certain other measures provide useful information to management and investors about us and our financial condition and results of operations for the following reasons: (i) they are measures used by our Board of Directors and management team to evaluate our operating performance; (ii) they are measures used by our management team to make day-to-day operating decisions; (iii) the adjustments made are often viewed as either non-recurring or not reflective of ongoing financial performance and/or have no cash impact on operations; and (iv) the measures are used by securities analysts, investors and other interested parties as a common operating performance measure to compare results across companies in our industry by adjusting for potential differences caused by variations in capital structures (affecting relative interest expense), and the age and book value of facilities and equipment (affecting relative depreciation and amortization expense). These other metrics, however, are not measures of financial performance under accounting principles generally accepted in the United States of America ("U.S. 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 U.S. GAAP.

We believe that the presentation of Adjusted EBITDA, defined as net income (loss) before interest, taxes, depreciation and amortization, stock-based compensation (non-cash) and certain non-recurring special items that we believe are not representative of core operations, is appropriate to provide additional information to investors about our operating profitability adjusted for certain non-cash items, non-routine items that we do not expect to continue at the same level in the future, as well as other items that are not core to our operations. Further, we believe Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against that of other peer companies using similar measures. However, Adjusted EBITDA is not a measure of financial performance under U.S. 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 U.S. GAAP.

Adjusted EBITDA

Adjusted EBITDA (and a reconciliation to Net income (loss), the nearest U.S. GAAP financial measure) for the years ended December 31, 2025, 2024 and 2023 are as follows (in thousands):

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 (in thousands):

Operating Activities

Net cash provided by operating activities for the year ended December 31, 2025 was $35.5 million, an increase of $29.7 million as compared to $5.8 million for the year ended December 31, 2024. The increase is primarily due to higher gross receipts, insurance proceeds from claims related to a loss of inventory, lower acquisition-related costs and reduced spending levels. These cash inflows were partially offset by a decrease in accounts payable and other liabilities.

Net cash provided by operating activities for the year ended December 31, 2024 was $5.8 million, a decrease of $21.3 million as compared to $27.0 million for the year ended December 31, 2023. The decrease is primarily the result of certain acquisition related business costs, including integration costs and related severance, and higher inventory procurements reflective of the larger business and additional product offerings.

Investing Activities

Net cash provided by investing activities was $1.1 million for the year ended December 31, 2025, which was primarily related to purchase price working capital adjustments of $2.5 million compared to $82.2 million used for investing activities primarily for the PDP acquisition in 2024.

Net cash used for investing activities was $82.2 million for the year ended December 31, 2024, which was primarily related to the PDP acquisition, compared to $2.2 million in 2023.

Financing Activities

Net cash used for financing activities was $32.6 million during the year ended December 31, 2025 compared to net cash provided by financing activities of $71.1 million during the year ended December 31, 2024. Financing activities during the year ended December 31, 2025 consisted primarily of $20.0 million revolving credit facility net repayments, $19.0 million of share repurchases, $2.3 million of debt financing costs and $6.8 million of term loan net proceeds.

Net cash used for financing activities was $71.1 million during the year ended December 31, 2024 compared to net cash provided by financing activities of $17.8 million during the year ended December 31, 2023. Financing activities during the year ended December 31, 2024 consisted primarily of $49.4 million net borrowings, the $50 million term loan and $3.4 million of stock option exercise proceeds, partially offset by $27.8 million of share repurchases, $2.9 million of debt issuance costs and $1.0 million of term loan repayments.

Management Assessment of Liquidity

Management believes that our current cash and cash equivalents, the amounts available under our revolving credit facility and cash flows derived from operations will be sufficient to meet anticipated short-term and long-term funding for working capital and capital expenditures including amounts to develop new products, fund future stock repurchases and to pursue strategic opportunities. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements, or strategic opportunities that require additional capital.

In addition, the Company monitors the capital markets on an ongoing basis and may consider raising capital if favorable market conditions develop.

Foreign cash balances at December 31, 2025 and December 31, 2024 were $8.7 million and $4.5 million, respectively.

Revolving Credit Facility

In 2024, we maintained a Revolving Credit Facility with Bank of America that provided up to $50.0 million in borrowing capacity, including a $10.0 million sub-facility for TB Europe, and was secured by substantially all of our assets. On March 13, 2024, we executed a Fourth Amendment to the facility, extending the maturity to March 13, 2027, incorporating PDP acquisition assets into the U.S. borrowing base, and updating the interest rate and fee terms. The facility included customary covenants, included a minimum fixed-charge coverage ratio when availability thresholds were not met, and restrictions on additional indebtedness, dividends share repurchases, certain investments, mergers, and asset sales.

On August 1, 2025, we entered into a Credit Agreement (the "Credit Agreement"), discussed below, and made a payment of $16.0 million from the Bank of America term loan facility, including $15.9 million and $0.1 million of principal and accrued interest, respectively. We treated the Credit Agreement as a partial extinguishment to the Revolving Credit Facility and recognized a loss on extinguishment of debt of $0.3 million to write-off the unamortized deferred financing costs in interest expense in its condensed consolidated statements of operations.

Term Loan

In March 2024, we entered into a $50.0 million Term Loan Facility with Blue Torch Finance, LLC to support the PDP acquisition, repay certain indebtedness of the acquired business, cover transaction-related fees, and provide general corporate liquidity. The facility was amortized over its term, was secured by substantially all our assets, and carried a prepayment premium that expired in March 2025.

The Term Loan Facility was scheduled to mature on March 13, 2027 and included interest rates tied to base rate or Secured Overnight Financing Rate ("SOFR") benchmarks with leverage-based pricing tiers, as well as customary affirmative, negative, and financial covenants, including minimum liquidity and quarterly total net leverage requirements. As discussed below, the facility was refinanced in 2025 in connection with our new Credit Agreement.

On August 1, 2025, the Term Loan Facility was repaid in full from the proceeds of the Bank of America credit agreement, discussed below, for the amount of $43.2 million. The Company treated the repayment as a debt extinguishment and recognized a loss on extinguishment of debt of $1.7 million to write-off the unamortized deferred financing costs in interest expense in the condensed consolidated statements of operations.

Credit Agreement

On August 1, 2025, we and certain of our subsidiaries (the "Borrowers") entered into the Credit Agreement (the "Credit Agreement") with Bank of America, as the administrative agent, the swingline lender and the line of credit issuer. The Credit Agreement, matures on August 1, 2028 and includes a $60.0 million term loan facility and a $90.0 million revolving credit facility with designated sub-facility limits of (i) $15.0 million for the U.K. Borrower, (ii) $10 million for a swingline facility and (iii) $5.0 million for letters of credit. Actual credit availability under the revolving facility is subject to a borrowing base limitation that is calculated based on a percentage of eligible trade accounts receivable and inventories, the balances of which fluctuate, and is subject to discretionary reserves and revaluation adjustments. The Borrowers may utilize the facilities for borrowings as well as for the issuance of letters of credit, repaying existing indebtedness outstanding as of the effective date of the Credit Agreement and ongoing working capital and general corporate purposes as defined by the Credit Agreement. The facilities under the Credit Agreement replaced our previous debt arrangements.

Borrowings will bear interest at a rate that varies depending on the type of loan and the Borrower. The interest rate will be calculated using a floating rate plus a margin. Depending on the type of loan, the floating rate will either be the prime rate announced by Bank of America, Term SOFR, Daily Simple SOFR, EURIBOR or SONIA. The margin will range from 2.00% to 2.75% for base rate loans and SONIA based loans and from 3.00% to 3.75% for Term SOFR, Daily Simple SOFR and EURIBOR loans. The Credit Agreement also provides for an unused line fee, letter of credit fees, and agent fees. The Borrowers will be able to voluntarily prepay the principal of any advance, without penalty or premium, at any time in whole or in part, subject to certain breakage costs. As of December 31, 2025, interest rates for the term loan and revolving credit facilities were 7.27% and 7.11%, respectively.

The Credit Agreement requires us and our subsidiaries to (i) maintain a fixed charge coverage ratio, defined as the ratio, determined on a consolidated basis for us and our subsidiaries for the applicable measurement period, of (a) EBITDA minus unfinanced capital expenditures and cash taxes paid for such period to (b) consolidated interest charges for such period plus principal payments or redemptions of outstanding debt plus certain restricted payments and (ii) maintain a consolidated leverage ratio, defined as the ratio, determined on a consolidated basis for us and our subsidiaries for the applicable measurement period, of (a) certain funded indebtedness minus unrestricted cash up to a maximum of $12.0 million to (b) EBITDA.

The Credit Agreement 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. The Credit Agreement contains customary 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 the lenders' security interest in the collateral, and events related to bankruptcy and insolvency of us and our subsidiaries. If an event of default occurs and is continuing, the lenders may terminate and/or suspend their obligations to make loans and issue letters of credit and/or accelerate amounts due under the Credit Agreement and exercise other rights and remedies. To secure their obligations under the Credit Agreement, the Company and each of the other loan parties granted an all-assets lien with a first priority security interest in substantially all of their assets to the administrative agent.

As of December 31, 2025, we were in compliance with all the financial covenants under the Credit Agreement and excess borrowing availability was approximately $41.1 million.

As part of the Credit Agreement, we recorded deferred debt financing costs of $2.3 million.

On December 29, 2025, we entered into a First Amendment to our Credit Agreement (the "First Amendment"). The First Amendment revised clause (b)(iii) of the definition of "Consolidated Fixed Charge Coverage Ratio" to permit the Company to exclude from the denominator of such ratio up to $10.0 million of restricted payments for the trailing twelve-month period ended March 31, 2026, and an additional $10.0 million of restricted payments for the trailing twelve-month period ended June 30, 2026. Aside from this modification, all other material terms, covenants, and conditions of the Credit Agreement remained unchanged.

Critical Accounting Estimates

Our discussion and analysis of our results of operations and capital resources are based on our consolidated financial statements, which have been prepared in conformity with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. Management bases its estimates, assumptions, and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances.

Different assumptions and judgments would change the estimates used in the preparation of the consolidated financial statements, which, in turn, could change the results from those reported. Management evaluates its estimates, assumptions, and judgments on an ongoing basis.

Based on the above, we have determined that our most critical accounting policies are those related to revenue recognition and variable consideration, inventory valuation, use of estimates, income taxes and business combination.

Revenue Recognition and Variable Consideration

Net revenue consists primarily of revenue from the sale of gaming headsets and accessories to wholesalers, retailers and to a lesser extent, on-line customers. These products function on a standalone basis (in connection with a readily available gaming console, personal computer, or stereo) and are not sold with additional services or rights to future goods or services. Revenue is recorded for a contract through the following steps: (i) identifying the contract with the customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations; and (v) recognizing revenue when or as each performance obligation is satisfied.

Each contract at inception is evaluated to determine whether the contract should be accounted for as having one or more performance obligations. The Company's business activities were determined to be a single performance obligation with revenue recognized when obligations under the terms of a contract with its customer are satisfied; generally, this occurs at a point in time when the risk and title to the product transfers to the customer which can be at the time of shipment or the product reaches its customer at the point of destination. The Company's standard terms of delivery are included in its contracts of sale, order confirmation documents, and invoices. The Company excludes sales taxes collected from customers from "Net revenue" on the consolidated statements of operations.

Certain customers may receive cash-based incentives (including cash discounts, quantity rebates, and price concessions), which are accounted for as variable consideration. Cash-based incentive allowances are based on historical and expected performance of the customers, types and levels of promotions including any contractual commitments, claims received and forecasted economic trends in comparison to historical trends. The Company also has provisions for sales returns that are recognized in the period of the sale and are recorded based upon the Company's prior experience and current trends and forecasted economic trends in comparison to historical trends. As of December 31, 2025 and 2024, the Company had an allowance for cash-based incentives of $29.6 million and $32.6 million, respectively, and an allowance for sales returns of $8.4 million and $7.7 million, respectively. These amounts are recorded as a reduction of accounts receivable on the consolidated balance sheets.

Inventory Valuation

Inventories consist primarily of finished goods and related component parts and are stated at the lower of cost or net realizable value using the first in, first out ("FIFO") method. The Company maintains an inventory allowance for returned goods, slow-moving and unused inventories based on the historical trend and estimates. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory. Inventory write-downs are included as a component of "cost of revenue" on the consolidated statements of operations.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to use estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The significant estimates and assumptions used by management affect: sales return reserve, allowances for cash-based incentive programs, warranty reserve, valuation of inventory, valuation of long-lived assets, goodwill and other intangible assets, depreciation and amortization of long-lived assets, valuation of deferred tax assets, probability of performance shares vesting and forfeiture rates utilized in issuing stock-based compensation awards. The Company evaluates estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates, and those differences could be material to the consolidated financial statements.

Income Taxes

We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates and laws expected to be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Inherent in the measurement of these deferred balances are certain judgments and interpretations of existing tax law and other published guidance as applied to our operations. Our effective tax rate considers our judgment of expected tax liabilities in the various jurisdictions within which we are subject to tax.

The determination of the need for a valuation allowance on deferred tax assets requires management to make assumptions and to apply judgment, including forecasting future earnings, and the reversal pattern of deferred tax assets and liabilities.

The tax effects of uncertain tax positions taken or expected to be taken in income tax returns are recognized only if they are "more likely-than-not" to be sustained on examination by the taxing authorities based on the technical merits as of the reporting date. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. We recognize estimated accrued interest and penalties related to uncertain tax positions in income tax expense.

Business Combinations

During the year ended December 31, 2024, the Company completed the acquisition of PDP for total consideration of $114.4 million. The transaction was accounted for under the acquisition method of accounting whereby the total purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities.

Accounting for the acquisition of PDP required estimation in determining the fair value of identified intangible assets for tradenames, customer relationships and developed technology. The Company used estimation as it relates to inputs to the valuation techniques used to measure the fair value of these intangible assets as well as the sensitivity of the respective fair values to the underlying assumptions. The significant assumptions used to estimate the fair value of the acquired intangible assets included revenue assumptions, earnings assumptions, royalty rates and discount rates. These assumptions are forward-looking and could be affected by future economic and market conditions.

There have been no material changes to the critical accounting policies and estimates. See Note 2, "Summary of Significant Accounting Policies," in the notes to the consolidated financial statements included herein for a complete discussion of recent accounting pronouncements. We are currently evaluating the impact of certain recently issued guidance on our financial condition and results of operations in future periods.