LIFETIME BRANDS, INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q of Lifetime Brands, Inc. (the “Company” and, unless the context otherwise requires, references to the “Company” shall include its consolidated subsidiaries), contains “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. These forward-looking statements include information concerning the Company’s plans, objectives, goals, strategies, future events, future revenues, performance, capital expenditures, financing needs and other information that is not historical information. Many of these statements appear, in particular, in Management’s Discussion and Analysis of Financial Condition and Results of Operations. When used in this Quarterly Report on Form 10-Q, the words “estimates,” “expects,” “intends,” “predicts,” “plans,” “believes,” “may,” “should,” “would,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, those based on the Company’s examination of historical operating trends, are based upon the Company’s current expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and assumptions, but there can be no assurance that the Company will realize its expectations or that the Company’s assumptions will prove correct. There are a number of risks and uncertainties that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Important factors that could cause the Company’s actual results to differ materially from those expressed as forward-looking statements include, without limitation, those set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 Annual Report on Form 10-K”) in Part I, Item 1A under the heading Risk Factors, and in the Company’s subsequent filings with the U.S. Securities and Exchange Commission (the “SEC”). Such risks, uncertainties and other important factors include, among others, risks related to: • Macroeconomic conditions, including inflationary impacts and disruptions to the global supply chain; • Increase in supply chain costs, including raw materials, sourcing, transportation and energy; • The impact of the United Kingdom's exit from the European Union on the Company's U.K. operations; • The impact of tariffs and trade policies, particularly with respect to China; • Legislative or regulatory risks relating to climate change; • Indebtedness, compliance with credit agreements, and access to credit markets; • Access to the capital markets and credit markets; • The seasonality of the Company's cash flows; • The Company's ability to complete acquisitions or successfully integrate acquisitions; • Intense market competition, changing customer practices or preferences and inventory rationalization among retailers; • Dependence on third-party manufacturers; • Technology, cybersecurity and data privacy risks; • Geopolitical conditions, including war, conflict, unrest and sanctions, including those related to the conflicts in Ukraine, Israel and surrounding areas; • Product liability claims; and • Reputational risks. There may be other factors that may cause the Company’s actual results to differ materially from the forward-looking statements. Except as may be required by law, the Company undertakes no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. The Company is required to file its Annual Reports on Forms 10-K, Quarterly Reports on Forms 10-Q, Current Reports on Form 8-K, and other reports and documents as required from time to time with the SEC. The Company also maintains a website at http://www.lifetimebrands.com . Information contained on this website is not a part of or incorporated by reference into this Quarterly Report on Form 10-Q. The Company makes available on its website the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports as soon as reasonably practicable after these reports are filed with or furnished to the SEC. Users can access these reports free of charge on the - 29 - Table of Contents Company’s website. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding the Company’s electronic filings with the SEC at http://www.sec.gov. The Company intends to use its website as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD. Such disclosures will be included on the Company’s website in the ‘Investor Relations’ section. Accordingly, investors should monitor such portion of the Company’s website, in addition to following the Company's press releases, SEC filings and public conference calls and webcasts. ABOUT THE COMPANY The Company designs, sources and sells branded kitchenware, tableware and other products used in the home. The Company’s product categories include two categories of products used to prepare, serve, and consume foods: Kitchenware (kitchen tools and gadgets, cutlery, kitchen scales, thermometers, cutting boards, shears, cookware, pantryware, spice racks, and bakeware) and Tableware (dinnerware, stemware, flatware, and giftware); and one category, Home Solutions, which comprises other products used in the home (thermal beverageware, bath scales, weather and outdoor household products, food storage, neoprene travel products and home décor). The Company markets several product lines within each of its product categories and under most of the Company’s brands, primarily targeting moderate price points through virtually every major level of trade. The Company believes it possesses certain competitive advantages based on its brands, its emphasis on innovation and new product development, and its sourcing capabilities. The Company owns or licenses a number of leading brands in its industry, including Farberware ® , Mikasa ® , KitchenAid ® , Taylor ® , Rabbit ® , Pfaltzgraff ® , Built NY ® , Sabatier ® , Fred ® & Friends, Kamenstein ® , and S'well ® . Historically, the Company’s sales growth has come from expanding product offerings within its product categories, developing existing brands, acquiring new brands (including complementary brands in markets outside the United States), and establishing new product categories. Key factors in the Company’s growth strategy have been the selective use and management of the Company’s brands and the Company’s ability to provide a stream of new products and designs. A significant element of this strategy is the Company’s in-house design and development teams that create new products, packaging and merchandising concepts. RECENT DEVELOPMENTS The global economy experienced relatively high inflation throughout 2023. As global inflation levels moderate, the impact of elevated inflation and high interest rates may negatively impact consumer spending and buying patterns in 2024. Shifts in consumer spending and buying patterns may directly impact our retailer ordering patterns, which may adversely impact the Company's results. In addition, disruptions in the global supply chain due to attacks on commercial vessels in the Red Sea, may adversely impact the Company’s results due to supply delays and an increase in transportation costs. The Company expects uncertainty as result of these trends in 2024. BUSINESS SEGMENTS The Company has two reportable segments, U.S. and International. The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its operations. The U.S. segment includes the Company’s primary domestic business that designs, markets and distributes its products to retailers, distributors and directly to consumers through its own websites. The International segment consists of certain business operations conducted outside the U.S.. Management evaluates the performance of the U.S. and International segments based on net sales and income (loss) from operations. Such measures give recognition to specifically identifiable operating costs such as cost of sales, distribution expenses and selling, general and administrative expenses. Certain general and administrative expenses, such as senior executive salaries and benefits, stock compensation, director fees, and accounting, legal fees and consulting fees, are not allocated to the specific segments and are reflected as unallocated corporate expenses. EQUITY INVESTMENT As of March 31, 2024, the Company owned 24.7% of the outstanding capital stock of Grupo Vasconia S.A.B. (“Vasconia”), an integrated manufacturer of aluminum products and a housewares company in Mexico. Shares of Vasconia’s capital stock are traded on the Bolsa Mexicana de Valores, the Mexican Stock Exchange. The Quotation Key is VASCONI. The Company accounts for its investment in Vasconia using the equity method of accounting and records its proportionate share of Vasconia’s net loss in the Company’s condensed consolidated statements of operations. Accordingly, the Company has recorded its proportionate share of Vasconia’s net loss for the three months ended March 31, 2024 and 2023 in the accompanying unaudited condensed consolidated statements of operations. Pursuant to a Shares Subscription Agreement, the Company may designate - 30 - Table of Contents four persons to be nominated as members of Vasconia’s Board of Directors (the "Vasconia Board"). As of March 31, 2024, the Vasconia Board was comprised of eleven members, of whom the Company had zero designated members. SEASONALITY The Company’s business and working capital needs are seasonal, with a majority of sales occurring in the third and fourth quarters. In 2023 and 2022, net sales for the third and fourth quarters accounted for 57% and 54% of total annual net sales, respectively. In anticipation of the pre-holiday shipping season, inventory levels increase primarily in the June through October time period. Consistent with the seasonality of the Company’s net sales and inventory levels, the Company also experiences seasonality in its inventory turnover and turnover days from one quarter to the next. CRITICAL ACCOUNTING ESTIMATES There have been no material changes to the Company’s critical accounting estimates discussed in the 2023 Annual Report on Form 10-K in Item 7 under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates . RESULTS OF OPERATIONS The following table sets forth statements of operations data of the Company as a percentage of net sales for the periods indicated: Three Months Ended March 31, 2024 2023 Net sales 100.0 % 100.0 % Cost of sales 59.5 63.0 Gross margin 40.5 37.0 Distribution expenses 11.4 11.6 Selling, general and administrative expenses 27.8 26.1 Restructuring expenses — 0.5 Income (loss) from operations 1.3 (1.2) Interest expense (3.9) (3.7) Mark to market loss on interest rate derivatives (0.2) (0.2) Loss before income taxes and equity in losses (2.8) (5.1) Income tax (provision) benefit (0.1) 0.9 Equity in losses, net of taxes (1.5) (1.9) Net loss (4.4) % (6.1) % - 31 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS THREE MONTHS ENDED MARCH 31, 2024 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2023 Net Sales Consolidated net sales for the three months ended March 31, 2024 were $142.2 million, representing a decrease of $3.2 million, or 2.2%, as compared to net sales of $145.4 million for the corresponding period in 2023. In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2024 average rates to 2023 local currency amounts, consolidated net sales decreased by $3.7 million, or 2.5%, as compared to consolidated net sales in the corresponding period in 2023. Net sales for the U.S. segment for the three months ended March 31, 2024 were $130.5 million, a decrease of $3.0 million, or 2.2%, as compared to net sales of $133.5 million for the corresponding period in 2023. Net sales for the U.S. segment’s Kitchenware product category were $83.5 million for the three months ended March 31, 2024, a decrease of $2.2 million, or 2.6%, as compared to $85.7 million for the corresponding period in 2023. The decrease was driven by sales for kitchen tools and gadgets and barware products, partially offset by higher sales for cutlery and boards. Net sales for the U.S. segment’s Tableware product category were $25.8 million for the three months ended March 31, 2024, an increase of $1.8 million, or 7.5%, as compared to $24.0 million for the corresponding period in 2023. The increase was attributable to higher dinnerware sales due to a new warehouse club program in 2024. Net sales for the U.S. segment’s Home Solutions product category were $21.2 million for the three months ended March 31, 2024, a decrease of $2.6 million, or 10.9%, as compared to $23.8 million for the corresponding period in 2023. The decrease was in hydration products and Taylor branded bath measurement products, partially offset by higher sales for Home Décor products. Net sales for the International segment were $11.7 million for the three months ended March 31, 2024, a decrease of $0.2 million, or 1.7%, as compared to net sales of $11.9 million for the corresponding period in 2023. In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations, net sales decreased $0.7 million, or 5.3%, as compared to consolidated net sales in the corresponding period in 2023. The decrease was attributable to lower replenishment orders for e-commerce and brick-and-mortar customers, partially offset by higher sales in Australia for the Company's global trading business in Asia. Gross margin Gross margin for the three months ended March 31, 2024 was $57.5 million, or 40.5%, as compared to $53.8 million, or 37.0%, for the corresponding period in 2023. Gross margin for the U.S. segment was $53.3 million, or 40.8%, for the three months ended March 31, 2024, as compared to $48.9 million, or 36.6%, for the corresponding period in 2023. The increase in gross margin percentage was due to lower inbound freight costs and favorable product mix. Gross margin for the International segment was $4.2 million, or 35.9%, for the three months ended March 31, 2024, as compared to $5.0 million, or 42.0%, for the corresponding period in 2023. The decrease in the gross margin percentage was driven by higher product costs due to unfavorable fluctuations in foreign currency exchange rates. Distribution expenses Distribution expenses for the three months ended March 31, 2024 were $16.2 million, as compared to $16.9 million for the corresponding period in 2023. Distribution expenses as a percentage of net sales were 11.4% for the three months ended March 31, 2024, as compared to 11.6% for the three months ended March 31, 2023. Distribution expenses as a percentage of net sales for the U.S. segment were approximately 10.0% and 10.2% for the three months ended March 31, 2024 and 2023, respectively. As a percentage of sales shipped from the Company’s U.S. warehouses, distribution expenses were 10.5% for the three months ended March 31, 2024 and 2023, respectively. The expenses as a percentage of sales were impacted by improved labor management efficiencies resulting in a decrease of employee expenses and lower storage expenses from lower inventory levels, offset by higher freight out and facility expenses. - 32 - Table of Contents Distribution expenses as a percentage of net sales for the International segment were 27.2% for the three months ended March 31, 2024, compared to 28.0% for the corresponding period in 2023. As a percentage of sales shipped from the Company’s international warehouses distribution expenses were 23.6% and 24.0% for the three months ended March 31, 2024 and 2023, respectively. The decrease in expenses as a percentage of sales was attributable to lower freight costs. Selling, general and administrative expenses Selling, general and administrative expenses for the three months ended March 31, 2024 were $39.5 million, an increase of $1.6 million, or 4.2%, as compared to $37.9 million for the corresponding period in 2023. Selling, general and administrative expenses for the U.S. segment were $30.8 million for the three months ended March 31, 2024, as compared to $29.3 million for the corresponding period in 2023. As a percentage of net sales, selling, general and administrative expenses were 23.6% and 21.9% for the three months ended March 31, 2024 and 2023, respectively. The increase in expenses was attributable to higher employee expenses, including incentive compensation, legal expenses, expenses related to the start-up of the Company's manufacturing operations in Mexico, and inflationary increases across several expense categories. This was partially offset by a decrease in the provision for doubtful accounts in the current period. Selling, general and administrative expenses for the International segment were $4.2 million for the three months ended March 31, 2024, as compared to $3.6 million for the corresponding period in 2023. As a percentage of net sales, selling, general and administrative expenses were 35.9% and 30.0% for the three months ended March 31, 2024 and 2023, respectively. The increase in expenses was attributable to increased employee expenses and commission expense. Unallocated corporate expenses for the three months ended March 31, 2024 were $4.5 million, as compared to $5.0 million for the corresponding period in 2023. The current period decrease was driven by lower professional services and legal expenses. Restructuring expense For the three months ended March 31, 2023, the Company incurred $0.8 million of unallocated corporate expense related to the termination payment with its former Executive Chairman. Interest expense Interest expense was $5.6 million and $5.3 million for the three months ended March 31, 2024 and 2023, respectively. The increase in expense was a result of higher interest rates on outstanding borrowings, partially offset by lower average outstanding borrowings. Mark to market loss on interest rate derivatives Mark to market loss on interest rate derivatives was $0.2 million for the three months ended March 31, 2024 and 2023. The loss recognized for the three months ended March 31, 2024 and 2023 was attributable to the change in the fair value due to the change in the projected interest rate environment. The mark to market amount represents the change in fair value on the Company’s interest rate derivatives that have not been designated as hedging instruments. These derivatives were entered into for purposes of locking-in a fixed interest rate on a portion of the Company’s variable interest rate debt. As of March 31, 2024, the intent of the Company is to hold these derivative contracts until their maturity. Income taxes Income tax provision of $0.2 million and income tax benefit of $1.3 million for the three months ended March 31, 2024 and 2023, respectively, represent taxes on both U.S. and foreign earnings at a combined effective income tax provision rate of (5.3)% and benefit rate of 18.3%, respectively. The negative rate for the three months ended March 31, 2024 reflects tax expense on a pretax financial reporting loss. The effective tax rate for the three months ended March 31, 2024 differs from the federal statutory income tax rate of 21.0% primarily due to the expiration of non-qualified stock options and the vesting of equity-based awards, where the book expense exceeded the tax deduction upon vesting, and foreign losses for which no tax benefit is recognized as such amounts are fully offset with a valuation allowance. The effective tax rate for the three months ended March 31, 2023 differs from the federal statutory income tax rate of 21.0% primarily due to state and local tax expense, the impact of non-deductible expenses, and foreign losses for which no tax benefit is recognized as such amounts are fully offset with a valuation allowance. Equity in losses Equity in losses of Vasconia, net of taxes, was $2.1 million for the three months ended March 31, 2024, as compared to equity in losses of Vasconia, net of taxes, of $0.7 million for the three months ended March 31, 2023. For the three months ended - 33 - Table of Contents March 31, 2023, equity in losses included a non-cash impairment charge of $2.1 million, to reduce the carrying value of the Company’s investment in Vasconia to its fair value. Vasconia reported loss from operations of $6.9 million for the three months ended March 31, 2024, as compared to loss from operations of $1.0 million for the three months ended March 31, 2023. The increase in loss from operations was primarily attributable to decreased operating results in the current period. LIQUIDITY AND CAPITAL RESOURCES The Company’s principal sources of cash to fund liquidity needs are: (i) cash provided by operating activities and (ii) borrowings available under its revolving credit facility under the ABL Agreement, as defined below. The Company’s primary uses of funds consist of working capital requirements, capital expenditures, acquisitions and investments, payments of dividends, and payments of principal and interest on its debt. At March 31, 2024, the Company had cash and cash equivalents of $4.6 million, compared to $16.2 million at December 31, 2023. Working capital was $199.0 million at March 31, 2024, compared to $224.4 million at December 31, 2023. Liquidity as of March 31, 2024 was $125.1 million, consisting of $4.6 million of cash and cash equivalents, $96.7 million of availability under the ABL Agreement, and $23.8 million of available funding under the Receivables Purchase Agreement. Inventory, a large component of the Company’s working capital, is expected to fluctuate from period to period, with inventory levels higher primarily in the June through October time period. The Company also expects inventory turnover to fluctuate from period to period based on product and customer mix. Certain product categories have lower inventory turnover rates as a result of minimum order quantities from the Company’s vendors or customer replenishment needs. Certain other product categories experience higher inventory turns due to lower minimum order quantities or trending sale demands. For the three months ended March 31, 2024, inventory turnover was 1.8 times, or 203 days, as compared to 1.7 times, or 212 days, for the three months ended March 31, 2023. Inventory turns have remained relatively consistent. On February 7, 2024, in connection with the Wallace EPA Matter, the Company provided financial assurance of $5.6 million in the form of a letter of credit. This reduced the availability under the revolving credit facility in the period. The Company believes that availability under the revolving credit facility under its ABL Agreement, cash on hand and cash flows from operations are sufficient to fund the Company’s operations for the next twelve months. However, if circumstances were to adversely change, the Company may seek alternative sources of liquidity including debt and/or equity financing. However, there can be no assurance that any such alternative sources would be available or sufficient. The Company closely monitors the creditworthiness of its customers. Based upon its evaluation of changes in customers’ creditworthiness, the Company may modify credit limits and/or terms of sale. However, notwithstanding the Company’s efforts to monitor its customers’ financial condition, the Company could be materially adversely affected by future changes in these conditions. Indebtedness On August 26, 2022, the Company entered into Amendment No. 2 (the “Amendment”) to the Company’s credit agreement, dated as of March 2, 2018 (as amended, the “ABL Agreement”) among the Company, as a Borrower, certain subsidiaries of the Company, as Borrowers and/or Loan Parties, JPMorgan Chase Bank, N.A., as Administrative Agent and a Lender. The ABL Agreement provides for a senior secured asset-based revolving credit facility in the maximum aggregate principal amount of $200.0 million, which facility will mature on August 26, 2027. On November 14, 2023, the Company entered into Amendment No. 2 to amend the Loan Agreement, dated as of March 2, 2018, among the Company, as borrower, the other loan parties from time to time party thereto, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (as amended, the “Term Loan” and together with the ABL Agreement, the “Debt Agreements”). The Term Loan has a principal amount of $150.0 million, and matures on August 26, 2027. The Term Loan requires the Company to make quarterly payments of principal each equal to 1.25% of the aggregate principal amount of the Term Loan, commencing on March 31, 2024, with the remaining balance payable on the maturity date. The Term Loan requires the Company to make an annual prepayment of principal, beginning with those for the fiscal year ending December 31, 2024, based upon a percentage of the Company’s excess cash flow, (“Excess Cash Flow”), if any. The percentage applied to the Company’s excess cash flow is based on the Company’s Total Net Leverage Ratio (as defined in the - 34 - Table of Contents Debt Agreements). When an Excess Cash Flow payment is required, each lender has the option to decline a portion or all of the prepayment amount payable to it. Per the Term Loan, when the Company makes an Excess Cash Flow prepayment, the payment is first applied to satisfy the next eight (8) scheduled future quarterly required payments of the Term Loan in order of maturity and then to the remaining scheduled installments on a pro rata basis. The maximum borrowing amount under the ABL Agreement may be increased to up to $250.0 million if certain conditions are met. One or more tranches of additional term loans (the “Incremental Term Facilities”) may be added under the Term Loan if certain conditions are met. The Incremental Facilities may not exceed the sum of (i) $50.0 million plus (ii) an unlimited amount so long as, in the case of (ii) only, the Company’s secured net leverage ratio, as defined in and computed on a pro forma basis pursuant to the Term Loan, after giving effect to such increase, is no greater than 3.25 to 1.00, subject to certain limitations and for the period defined pursuant to the Term Loan but not to mature earlier than the maturity date of the then existing term loans. As of March 31, 2024 and December 31, 2023, the total availability under the ABL Agreement were as follows (in thousands): March 31, 2024 December 31, 2023 Maximum aggregate principal allowed $ 146,084 $ 181,919 Outstanding borrowings under the ABL Agreement (40,860) (60,395) Standby letters of credit (8,522) (2,894) Total availability under the ABL Agreement $ 96,702 $ 118,630 Availability under the ABL Agreement is limited to the lesser of the $200.0 million commitment thereunder and the borrowing base and therefore depends on the valuation of certain current assets comprising the borrowing base. The borrowing capacity under the ABL Agreement will depend, in part, on eligible levels of accounts receivable and inventory that fluctuate regularly. Due to the seasonality of the Company’s business, the Company may have greater borrowing availability during the third and fourth quarters of each year. Consequently, the $200.0 million commitment thereunder may not represent actual borrowing capacity. The Company’s borrowing capacity may be further limited by the Term Loan financial covenant of 5.00 to 1.00 maximum Total Net Leverage Ratio. The current and non-current portions of the Company’s Term Loan included in the condensed consolidated balance sheets were as follows (in thousands): March 31, 2024 December 31, 2023 Current portion of Term Loan: Term Loan payment $ 9,375 $ 7,500 Estimated Excess Cash Flow principal payment 4,000 — Estimated unamortized debt issuance costs (2,723) (2,758) Total Current portion of Term Loan $ 10,652 $ 4,742 Non-current portion of Term Loan: Term Loan, net of current portion $ 136,625 $ 142,500 Estimated unamortized debt issuance costs (5,999) (6,666) Total Non-current portion of Term Loan $ 130,626 $ 135,834 The estimated Excess Cash Flow principal payment recorded at March 31, 2024 represents the Company’s estimate for the Excess Cash Flow Payment due in 2025. There was no Excess Cash Flow payment due in 2024. The Company’s payment obligations under its Debt Agreements are unconditionally guaranteed by its existing and future U.S. subsidiaries with certain minor exceptions. Certain payment obligations under the ABL Agreement are also direct obligations of its foreign subsidiary borrowers designated as such under the ABL Agreement and, subject to limitations on such guaranty, are guaranteed by the foreign subsidiary borrowers, as well as by the Company. The obligations of the foreign subsidiary borrowers under the ABL Agreement are secured by security interests in substantially all of the assets of, and stock in, such foreign subsidiary borrowers, subject to certain limitations. The obligations of the Company under the Debt Agreements and any hedging arrangements and cash management services and the guarantees by its domestic subsidiaries in respect of those obligations are secured by security interests in substantially all of the assets and stock (but in the case of foreign subsidiaries, limited to 65% of the capital stock in first-tier foreign subsidiaries and not including the stock of subsidiaries of such first-tier foreign subsidiaries) owned by the Company and the U.S. subsidiary guarantors, subject to certain exceptions. Such security - 35 - Table of Contents interests consist of (1) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and certain of its subsidiaries (the “ABL Collateral”) pledged as collateral in favor of lenders under the ABL Agreement and a second-priority lien in the ABL Collateral in favor of the lenders under the Term Loan and (2) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and certain of its subsidiaries (the “Term Loan Collateral”) pledged as collateral in favor of lenders under the Term Loan and a second-priority lien in the Term Loan Collateral in favor of the lenders under the ABL Agreement. Borrowings under the revolving credit facility bear interest, at the Company’s option, at one of the following rates: (i) an alternate base rate, defined, for any day, as the greater of the prime rate, a federal funds and overnight bank funding based rate plus 0.5% or one-month Adjusted Term Secured Overnight Financing Rate (“SOFR”) plus 1.0% as of a specified date in advance of the determination, but in each case not less than 1.0%, plus a margin of 0.25% to 0.50%, or (ii) Adjusted Term SOFR, which is the Term SOFR Rate for the selected 1, 3 or 6 month interest period plus 0.10% (or Euro Interbank Offered Rate “EURIBOR” for borrowings denominated in Euro; or Sterling Overnight Index Average “SONIA” for borrowings denominated in Pounds Sterling), but in each case not less than zero, plus a margin of 1.25% to 1.50%. The respective margins are based upon average quarterly availability, as defined in and computed pursuant to the ABL Agreement. In addition, the Company pays a commitment fee of 0.20% to 0.25% per annum based on the average daily unused portion of the aggregate commitment under the ABL Agreement. The interest rate on outstanding borrowings under the ABL Agreement at March 31, 2024 was between 6.44% and 8.75%. The Company paid a commitment fee of 0.25% on the unused portion of the ABL Agreement during the three months ended March 31, 2024. The Term Loan bears interest, at the Company’s option, at one of the following rates: (i) alternate base rate, defined, for any day, as the greater of (x) the prime rate, (y) a federal funds and overnight bank funding based rate plus 0.5% or (z) one-month Adjusted Term SOFR, but not less than 1.0%, plus 1.0%, plus a margin of 4.5% or (ii) Adjusted Term SOFR (Term SOFR plus the Term SOFR Adjustment) for the applicable interest period, but not less than 1.0%, plus a margin of 5.5%. The interest rate on outstanding borrowings under the Term Loan at March 31, 2024 was 10.94%. The Debt Agreements provide for customary restrictions and events of default. Restrictions include limitations on additional indebtedness, liens, acquisitions, investments and payment of dividends, among other things. Under the Term Loan, the Total Net Leverage Ratio is not permitted to be greater than 5.00 to 1.00 determined as of the end of each fiscal quarters. Further, the ABL Agreement provides that during any period (a) commencing on the last day of the most recently ended four consecutive fiscal quarters on or prior to the date availability under the ABL Agreement is less than the greater of $20.0 million and 10% of the aggregate commitment under the ABL Agreement at any time and (b) ending on the day after such availability has exceeded the greater of $20.0 million and 10% of the aggregate commitment under the ABL Agreement for 45 consecutive days, the Company is required to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 as of the last day of any period of four consecutive fiscal quarters. The Company was in compliance with the covenants of the Debt Agreements at March 31, 2024. The Company expects that it will continue to borrow, subject to availability, and repay funds under the ABL Agreement based on working capital and other corporate needs. Covenant Calculations Adjusted EBITDA (a non-GAAP financial measure), which is defined in the Company’s Debt Agreements, is used in the calculation of the Fixed Charge Coverage Ratio, Secured Net Leverage Ratio, Total Leverage Ratio and Total Net Leverage Ratio, which are required to be provided to the Company’s lenders pursuant to its Debt Agreements. The Company’s adjusted EBITDA for the trailing twelve months ended March 31, 2024 was $59.5 million. Capital expenditures for the three months ended March 31, 2024 were $0.6 million. Non-GAAP financial measure Adjusted EBITDA is a non-GAAP financial measure within the meaning of Regulation G and Item 10(e) of Regulation S-K, each promulgated by the SEC. This measure is provided because management of the Company uses this financial measure in evaluating the Company’s on-going financial results and trends, and management believes that exclusion of certain items allows for more accurate period-to-period comparison of the Company’s operating performance by investors and analysts. Management also uses this non-GAAP information as an indicator of business performance. Adjusted EBITDA, as discussed above, is also one of the measures used to calculate financial covenants required to be provided to the Company’s lenders pursuant to its Debt Agreements. - 36 - Table of Contents Investors should consider this non-GAAP financial measure in addition to, and not as a substitute for, the Company’s financial performance measures prepared in accordance with U.S. GAAP. Further, the Company’s non-GAAP information may be different from the non-GAAP information provided by other companies including other companies within the home retail industry. The following is a reconciliation of the net (loss) income, as reported, to adjusted EBITDA, for each of the last four quarters and the 12 months ended March 31, 2024: Quarter Ended Twelve Months Ended March 31, 2024 June 30, 2023 September 30, 2023 December 31, 2023 March 31, 2024 (in thousands) Net (loss) income as reported $ (6,520) $ 4,206 $ 2,707 $ (6,260) $ (5,867) Undistributed equity losses, net 5,863 1,047 2,978 2,092 11,980 Income tax provision 1,242 3,015 3,313 210 7,780 Interest expense 5,528 5,246 5,618 5,614 22,006 Depreciation and amortization 4,925 4,821 4,955 4,939 19,640 Mark to market (gain) loss on interest rate derivatives (197) 98 364 174 439 Stock compensation expense 1,011 898 917 807 3,633 Contingent consideration fair value adjustments (50) — (600) — (650) (Gain) loss on extinguishments of debt, net (1,520) — 759 — (761) Acquisition related expenses 242 186 407 95 930 Warehouse redesign expenses (1) 157 176 51 18 402 Adjusted EBITDA (2) $ 10,681 $ 19,693 $ 21,469 $ 7,689 $ 59,532 (1) For the twelve months ended March 31, 2024, the warehouse redesign expenses were related to the U.S. segment. (2) Adjusted EBITDA is a non-GAAP financial measure that is defined in the Company’s debt agreements. Adjusted EBITDA is defined as net (loss) income, adjusted to exclude undistributed equity in losses, income tax provision, interest expense, depreciation and amortization, mark to market (gain) loss on interest rate derivatives, stock compensation expense, (gain) loss on extinguishments of debt, net, and other items detailed in the table above that are consistent with exclusions permitted by our debt agreements. Accounts Receivable Purchase Agreement To improve its liquidity during seasonally high working capital periods, the Company has an uncommitted Receivables Purchase Agreement with HSBC Bank USA, National Association (“HSBC”) as Purchaser (the “Receivables Purchase Agreement”). Under the Receivables Purchase Agreement, the Company may offer to sell certain eligible accounts receivable (the “Receivables”) to HSBC, which may accept such offer, and purchase the offered Receivables. Under the Receivables Purchase Agreement, following each purchase of Receivables, the outstanding aggregate purchased Receivables shall not exceed $30.0 million. HSBC will assume the credit risk of the Receivables purchased, and the Company will continue to be responsible for all non-credit risk matters. The Company will service the Receivables, and as such servicer, collect and otherwise enforce the Receivables on behalf of HSBC. The term of the agreement is for 364 days and shall automatically be extended for annual successive terms unless terminated. Either party may terminate the agreement at any time upon sixty days’ prior written notice to the other party. The Company did not sell receivables to HSBC during the three months ended March 31, 2024 and March 31, 2023. At March 31, 2024, $23.8 million of accounts receivables were available for sale to HSBC, net of applicable charges. Derivatives Interest Rate Swaps In June 2019 the Company entered into interest rate swap agreements, with an aggregate notional value of $25.0 million and expire in February 2025. In March 2024, the Company entered into a new interest rate swap agreement, with an aggregate notional value of $25.0 million and expire in August 2027. These non-designated interest rate swaps serve as cash flow hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings. The Company’s total outstanding notional value of interest rate swaps was $50.0 million at March 31, 2024. - 37 - Table of Contents The Company’s interest rate swaps that were designated as cash flow hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings expired in March 2023. The Company has no designated interest rate swaps at March 31, 2024. Foreign Exchange Contracts The Company is party from time to time to certain foreign exchange contracts, primarily to offset the earnings impact related to fluctuations in foreign currency exchange rates associated with inventory purchases denominated in foreign currencies. Fluctuations in the value of certain foreign currencies as compared to the USD may positively or negatively affect the Company’s revenues, gross margins, operating expenses, and retained earnings, all of which are expressed in USD. Where the Company deems it prudent, the Company engages in hedging programs using foreign currency forward contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. The Company purchases foreign currency forward contracts with terms less than 18 months to protect against currency exchange risks associated with the payment of merchandise purchases to foreign suppliers. The Company does not hedge the translation of foreign currency profits into USD, as the Company regards this as an accounting exposure rather than an economic exposure. The aggregate gross notional value of foreign exchange contracts at March 31, 2024 was $7.0 million. These foreign exchange contracts have been designated as hedges in order to apply hedge accounting. The Company is exposed to market risks as well as changes in foreign currency exchange rates as measured against the USD and each other, and to changes to the credit risk of derivative counterparties. The Company attempts to minimize these risks primarily by using foreign currency forward contracts and by maintaining counterparty credit limits. These hedging activities provide only limited protection against currency exchange and credit risk. Factors that could influence the effectiveness of the Company’s hedging programs include those impacting currency markets and the availability of hedging instruments and liquidity of the credit markets. All foreign currency forward contracts that the Company enters into are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure. The Company does not enter into such contracts for speculative purposes, and as of March 31, 2024, these foreign exchange contracts have been designated as hedges in to order to apply hedge accounting. Operating activities Net cash provided by operating activities was $10.5 million for the three months ended March 31, 2024, as compared to net cash provided by operating activities of $12.1 million for the three months ended March 31, 2023. The decrease from 2024 compared to 2023 was attributable to higher use of cash related to inventory purchases, partially offset by timing of collections related to the Company's accounts receivables. Investing activities Net cash used in investing activities was $0.6 million and $0.5 million for the three months ended March 31, 2024 and 2023, respectively. Financing activities Net cash used in financing activities was $21.4 million for the three months ended March 31, 2024, as compared to net cash provided by financing activities of $5.7 million for the three months ended March 31, 2023. The change was attributable to the higher repayments of revolving credit facility in the 2024 period. The cash used in financing activities was partially offset by no payments for stock repurchases in the 2024 period. Stock repurchase program On March 14, 2022, the Company announced that its Board authorized the repurchase of up to $20.0 million of the Company’s common stock, replacing the Company’s previously-authorized $10.0 million share repurchase program. The repurchase authorization permits the Company to effect the repurchases from time to time through open market purchases and privately negotiated transactions. No repurchases were effected during the three months ended March 31, 2024. As of March 31, 2024, the remaining dollar amount available for repurchases under the Board authorized plan was $11.1 million. - 38 - Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes in market risk for changes in foreign currency exchange rates and interest rates from the information provided in Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the 2023 Annual Report on Form 10-K.