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, 2024 (the “2024 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 labor disputes, depreciation of the U.S. dollar, volatility in the capital markets, inflationary impacts and disruptions to the global supply chain; • Increase in supply chain costs, including raw materials, sourcing, transportation and energy; • The impact of tariffs and trade policies, particularly with respect to China; • 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 political instability in the U.S. and abroad, unrest and sanctions, war, conflict, including the ongoing conflicts between Russia and the Ukraine, conflicts in the Middle East, and increasing tensions between China and Taiwan; • 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 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. - 28 - Table of Contents 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, 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 ® , KitchenAid ® Mikasa ® , Taylor ® , Pfaltzgraff ® , Built NY ® , S’well ® , Fred ® & Friends, KitchenCraft ® , Rabbit ® , Kamenstein ® , and Dolly ® . Historically, the Company’s sales growth has come from expanding product offerings within its product categories, by 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 Company purchases almost all of its product from third-party manufacturers outside the U.S., primarily in China. This concentration in suppliers exposes the Company to risks associated with doing business globally, including risks relating to the tariffs recently implemented and that may be implemented in the future. As of April 9, 2025, the U.S. has imposed an aggregate 145% tariff on imports from China. Other recent tariff policy updates that went into effect in April 2025 include a 10% universal tariff for all countries and reciprocal tariffs for specific countries, which have been paused for 90 days. As the Company sources almost all of its products from suppliers located outside the United States, primarily in China, any new or increased tariffs, quotas, embargoes, or other trade barriers could impact our supply chain and cost structure. Additionally, retaliatory measures by affected countries, could further disrupt operations or reduce our competitiveness in international markets. The Company continues to monitor these changing tariffs and trade restrictions. The Company is developing a plan to mitigate the impact of the increase price of goods imported by the Company into the U.S. The Company may seek to increase prices to its customers, negotiate product costs with its suppliers and further diversify its imports to countries that are expected to be subject to lower tariffs. To the extent the tariffs remain in place and the Company cannot mitigate the impact of the increase on the price of goods imported by the Company into the U.S., it may result in lower gross margin that the Company realizes from the sale of its products which could materially adversely affect the Company’s results of operations and financial condition and result in an impairment of our long-lived assets, including goodwill within the U.S. segment reporting unit. In January 2025, the Company announced the relocation of the Company’s east coast distribution facility currently located in Robbinsville, NJ (the “Robbinsville Facility”) to a warehouse and distribution space in Hagerstown, Maryland (the “Hagerstown Facility”). In connection with the relocation, the Company will exit the Robbinsville Facility. The Company expects to incur one-time exit costs up to $7.0 million for employee severance, certain employee relocation costs, and remaining lease costs for the Robbinsville Facility, which costs are expected to be incurred in 2025 and 2026. The Hagerstown Facility will require capital expenditures for equipment and certain leasehold improvements of approximately $10.0 million. One-time relocation costs are estimated to be up to $7.0 million, which includes recruitment, relocation of inventory, set up costs and lease expenses prior to the Hagerstown Facility being fully operational. These one-time costs are expected to be incurred in 2026. The Company expects that the Hagerstown Facility will be operational by the second quarter of 2026. Additionally, in connection with the relocation to the Hagerstown Facility, the Company will receive tax abatement and incentives over the term of the Lease from the State of Maryland and Washington County, Maryland totaling approximately - 29 - Table of Contents $13.1 million. These incentives include real property tax abatement, employee state withholding tax credit, conditional grants and income tax credits. In January 2025, the Company launched Project Concord, management's comprehensive plan to propel growth and streamline the cost structure of the International segment. The Company expects this plan to improve future results in its International segment through sales growth and the identification costs efficiencies. BUSINESS SEGMENTS The Company operates in two reportable segments: U.S. and International. The U.S. segment is the Company’s domestic business that designs, markets and distributes its products to retailers and distributors, as well as directly to consumers through third parties and its own internet websites primarily in the U.S.. The International segment is the Company’s international business that sells and distributes products to consumers primarily in the U.K., the European Union and the Asia Pacific region. Additional information regarding the Company’s reportable segments is included in NOTE 11 – BUSINESS SEGMENTS of the Notes to the condensed consolidated financial statements included in Item 1. SEASONALITY The Company’s business and working capital needs are seasonal, with a majority of sales occurring in the third and fourth quarters. In 2024 and 2023, net sales for the third and fourth quarters accounted for 58% and 57% 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. The increase in inventory levels at March 31, 2025 compared to December 31, 2024 was due to preemptive measures taken in anticipation of, and designed to mitigate, the impact of the tariffs that went into effective in April 2025. 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 2024 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, 2025 2024 Net sales 100.0 % 100.0 % Cost of sales 63.9 59.5 Gross margin 36.1 40.5 Distribution expenses 12.9 11.4 Selling, general and administrative expenses 22.4 27.8 Income from operations 0.8 1.3 Interest expense (3.5) (3.9) Mark to market loss on interest rate derivatives (0.4) (0.2) Loss before income taxes and equity in losses (3.1) (2.8) Income tax benefit (provision) 0.1 (0.1) Equity in losses, net of taxes — (1.5) Net loss (3.0) % (4.4) % - 30 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS THREE MONTHS ENDED MARCH 31, 2025 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2024 Net Sales Consolidated net sales for the three months ended March 31, 2025 were $140.1 million, representing a decrease of $2.1 million, or 1.5%, as compared to net sales of $142.2 million for the corresponding period in 2024. In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2025 average rates to 2024 local currency amounts, consolidated net sales decreased by $2.0 million, or 1.4%, as compared to consolidated net sales in the corresponding period in 2024. Net sales for the U.S. segment for the three months ended March 31, 2025 were $128.5 million, a decrease of $2.0 million, or 1.5%, as compared to net sales of $130.5 million for the corresponding period in 2024. Net sales for the U.S. segment’s Kitchenware product category were $79.5 million for the three months ended March 31, 2025, a decrease of $4.0 million, or 4.8%, as compared to $83.5 million for the corresponding period in 2024. The decrease was driven by a reduction in sales for kitchen tools and cutlery and boards, partially offset by higher sales for bakeware. Net sales for the U.S. segment’s Tableware product category were $27.6 million for the three months ended March 31, 2025, an increase of $1.8 million, or 7.0%, as compared to $25.8 million for the corresponding period in 2024. The increase was attributable to dinnerware sales in the dollar channel, partially offset by a flatware warehouse club program not repeated in Q1 2025. Net sales for the U.S. segment’s Home Solutions product category were $21.4 million for the three months ended March 31, 2025, an increase of $0.2 million, or 0.9%, as compared to $21.2 million for the corresponding period in 2024. The increase was attributable to higher sales for Home Décor products driven in the dollar channel and a new warehouse program. The increase was partially offset by lower sales of bath measurement products. Net sales for the International segment were $11.6 million for the three months ended March 31, 2025, a decrease of $0.1 million, or 0.9%, as compared to net sales of $11.7 million for the corresponding period in 2024. In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations, net sales decreased by 0.2%, as compared to consolidated net sales in the corresponding period in 2024. The decrease was driven by lower sales in the U.K. and continental Europe. Gross margin Gross margin for the three months ended March 31, 2025 was $50.6 million, or 36.1%, as compared to $57.5 million, or 40.5%, for the corresponding period in 2024. Gross margin for the U.S. segment was $46.5 million, or 36.2%, for the three months ended March 31, 2025, as compared to $53.3 million, or 40.8%, for the corresponding period in 2024. The decrease in the gross margin percentage was driven by customer and product mix. Gross margin for the International segment was $4.1 million, or 35.3%, for the three months ended March 31, 2025, as compared to $4.2 million, or 35.9%, for the corresponding period in 2024. The gross margin percentage remained consistent period over period. Distribution expenses Distribution expenses for the three months ended March 31, 2025 were $18.1 million, as compared to $16.2 million for the corresponding period in 2024. Distribution expenses as a percentage of net sales were 12.9% for the three months ended March 31, 2025, as compared to 11.4% for the three months ended March 31, 2024. Distribution expenses as a percentage of net sales for the U.S. segment were 11.5% and 10.0% for the three months ended March 31, 2025 and 2024, respectively. As a percentage of sales shipped from the Company’s U.S. warehouses, distribution expenses were 11.9% and 10.5% for the three months ended March 31, 2025 and 2024, respectively. The increase in expenses as a percentage of sales was attributable to an increase in employee expenses as a result of less labor management efficiencies due to higher inventory levels, higher software expenses due to the launch of a new warehouse management system at the - 31 - Table of Contents Company's west coast distribution center in September 2024. These increases were partially offset by lower freight-out expenses. Distribution expenses as a percentage of net sales for the International segment were 28.3% for the three months ended March 31, 2025, compared to 27.2% for the corresponding period in 2024. As a percentage of sales shipped from the Company’s international warehouses distribution expenses were 25.0% and 23.6% for the three months ended March 31, 2025 and 2024, respectively. The increase in expenses as a percentage of net sales was primarily attributed to an increase in warehouse rent expense, partially offset by lower freight out-expenses. Selling, general and administrative expenses Selling, general and administrative expenses for the three months ended March 31, 2025 were $31.5 million, a decrease of $8.0 million, or 20.3%, as compared to $39.5 million for the corresponding period in 2024. Selling, general and administrative expenses for the U.S. segment were $30.0 million for the three months ended March 31, 2025, as compared to $30.8 million for the corresponding period in 2024. As a percentage of net sales, selling, general and administrative expenses were 23.3% and 23.6% for the three months ended March 31, 2025 and 2024, respectively. The decrease in expenses was attributable to lower employee expenses, including incentive compensation, and legal expenses. This was partially offset by an increase in the provision for doubtful accounts in the current period and an increase in amortization expense related to an indefinite-lived trade name, which was reclassified to a finite-lived trade name in the fourth quarter 2024. Selling, general and administrative expenses for the International segment were $3.7 million for the three months ended March 31, 2025, as compared to $4.2 million for the corresponding period in 2024. As a percentage of net sales, selling, general and administrative expenses were 31.9% and 35.9% for the three months ended March 31, 2025 and 2024, respectively. The decrease in expenses was attributable to lower commission expenses, and foreign currency exchange gains. Unallocated corporate income for the three months ended March 31, 2025 was $2.2 million, as compared to expenses of $4.5 million for the corresponding period in 2024. The current period income was driven by the recognition of a net legal settlement gain of $6.4 million. The remaining decrease compared to the prior period was due to lower incentive compensation and legal expenses, partially offset by an increase in stock compensation expense. Interest expense Interest expense was $4.9 million and $5.6 million for the three months ended March 31, 2025 and 2024, respectively. The decrease in expense was a result of lower average outstanding borrowings in the current period, and lower interest rates on outstanding borrowings. Mark to market loss on interest rate derivatives Mark to market loss on interest rate derivatives was $0.5 million for the three months ended March 31, 2025, as compared to a mark to market loss on interest rate derivatives of $0.2 million for the three months ended March 31, 2024. The loss recognized for the three months ended March 31, 2025 and 2024, respectively, 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, 2025, the intent of the Company is to hold these derivative contracts until their maturity. Income taxes Income tax benefit of $0.1 million and provision of $0.2 million for the three months ended March 31, 2025 and 2024, respectively, represent taxes on both U.S. and foreign earnings at a combined effective income tax benefit rate of 3.3% and provision rate of (5.3)%, 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, 2025 differs from the federal statutory income tax rate of 21.0% primarily due to 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, 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. - 32 - Table of Contents Equity in losses, net of taxes Equity in losses of Vasconia, net of taxes, was $2.1 million for the three months ended March 31, 2024. 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, 2025, the Company had cash and cash equivalents of $10.4 million, compared to $2.9 million at December 31, 2024. Working capital was $216.4 million at March 31, 2025, compared to $221.8 million at December 31, 2024. Liquidity as of March 31, 2025 was $89.6 million, consisting of $10.4 million of cash and cash equivalents, $63.2 million of availability under the ABL Agreement, limited by the Term Loan financial covenant, and $16.0 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, 2025, inventory turnover was 1.8 times, or 208 days, as compared to 1.8 times, or 203 days, for the three months ended March 31, 2024. Inventory turns have remained relatively consistent. 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, which commenced 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 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. - 33 - Table of Contents 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, 2025 and December 31, 2024, the total availability under the ABL Agreement were as follows (in thousands): March 31, 2025 December 31, 2024 Maximum aggregate principal allowed $ 150,571 $ 176,329 Outstanding borrowings under the ABL Agreement (39,328) (42,693) Standby letters of credit (11,564) (8,828) Total availability under the ABL Agreement $ 99,679 $ 124,808 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. As of March 31, 2025, the availability under the ABL Agreement, limited by the Term Loan financial covenant, was $63.2 million. 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, 2025 December 31, 2024 Current portion of Term Loan: Term Loan payment $ 7,500 $ 7,500 Estimated unamortized debt issuance costs (2,574) (2,609) Total Current portion of Term Loan $ 4,926 $ 4,891 Non-current portion of Term Loan: Term Loan, net of current portion $ 133,125 $ 135,000 Estimated unamortized debt issuance costs (3,418) (4,051) Total Non-current portion of Term Loan $ 129,707 $ 130,949 The 2024 excess cash flow payment of $1.2 million was paid on April 4, 2025 and reduces the scheduled quarterly payment due on June 30, 2025. As of March 31, 2025, the Company estimates no excess cash flow payment will be due for 2025. 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 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 - 34 - Table of Contents 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, 2025 was between 3.79% and 5.86%. The Company paid a commitment fee of 0.25% on the unused portion of the ABL Agreement during the three months ended March 31, 2025. 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, 2025 was 9.94%. 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, 2025. 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, 2025 was $51.0 million. Capital expenditures for the three months ended March 31, 2025 were $1.6 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. 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 - 35 - Table of Contents 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, 2025: Quarter Ended Twelve Months Ended March 31, 2025 June 30, 2024 September 30, 2024 December 31, 2024 March 31, 2025 (in thousands) Net (loss) income as reported $ (18,167) $ 344 $ 8,918 $ (4,201) $ (13,106) Loss on equity securities 14,152 — — — 14,152 Income tax (benefit) provision (57) 1,507 1,671 (142) 2,979 Interest expense 5,157 5,834 5,603 4,915 21,509 Depreciation and amortization 4,894 6,408 6,073 5,698 23,073 Mark to market loss (gain) on interest rate derivatives 82 928 (718) 527 819 Stock compensation expense 1,037 1,042 1,034 1,062 4,175 Legal settlement gain, net (1) — — — (4,578) (4,578) Acquisition related expenses 641 210 143 — 994 Warehouse redesign expenses (2) 35 662 249 — 946 Adjusted EBITDA (3) $ 7,774 $ 16,935 $ 22,973 $ 3,281 $ 50,963 (1) For the twelve months ended March 31, 2025, legal settlement gain, net included a net settlement of $6.4 million discussed in NOTE 12 — CONTINGENCIES, and adjusted for legal fees incurred from March 2, 2018 through March 31, 2025 of $1.8 million. (2) For the twelve months ended March 31, 2025, the warehouse redesign expenses were related to the U.S. segment. (3) 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 loss on equity securities, income tax (benefit) provision, interest expense, depreciation and amortization, mark to market loss (gain) on interest rate derivatives, stock compensation expense, legal settlement gain, 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, 2025 and March 31, 2024. At March 31, 2025, $16.0 million of accounts receivables were available for sale to HSBC, net of applicable charges. Derivatives The Company’s risk management strategy includes the use derivative financial instruments to manage its exposure to interest rate movements and to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates primarily to offset the earnings impact related to inventory purchases. The Company does not enter into derivative transactions for trading purposes. The Company classifies cash flows from its derivative transactions as cash flows from operating activities in the consolidated statements of cash flows. The Company’s derivatives expose it to credit risks from possible non-performance by counterparties. The Company has limited its credit risk by entering into derivative transactions exclusively with investment-grade rated financial institutions and monitors the creditworthiness of these financial institutions on an ongoing basis. The Company utilizes standard counterparty master netting agreements that net certain foreign currency and interest rate swap transactions in the event of the insolvency of - 36 - Table of Contents one of the parties to the transaction. These master netting arrangements permit the Company to net amounts due from the Company to counterparty with amounts due to the Company from the same counterparty. Although all of the Company’s recognized derivative assets and liabilities are subject to enforceable master netting arrangements, the Company has elected to present these assets and liabilities on a gross basis. The Company does not anticipate non-performance by any of its counterparties. Interest Rate Swaps To manage its exposures to interest rate movements, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In March 2024 and October 2024, the Company entered into interest rate swap agreements, each 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, 2025. Foreign Exchange Contracts To reduce the impact of changes in foreign currency exchange rates on its results, from time to time the Company is a party to certain foreign exchange contracts, primarily to offset the earnings impact related to fluctuations in foreign currency exchange rates associated with inventory purchases. The Company designates these contracts for accounting purposes as cash flow hedges. The Company purchases foreign currency forward contracts with terms less than 18 months. The aggregate gross notional value of foreign exchange contracts at March 31, 2025 was $9.3 million. Operating activities Net cash provided by operating activities was $16.7 million for the three months ended March 31, 2025, as compared to net cash provided by operating activities of $10.5 million for the three months ended March 31, 2024. The increase from 2025 compared to 2024 was attributable to a net legal settlement gain received in the current period, timing of collections related to the Company's accounts receivables and timing of payments for accounts payable and accrued expenses, partially offset by increased use of cash related to inventory purchases. Investing activities Net cash used in investing activities was $1.6 million and $0.6 million for the three months ended March 31, 2025 and 2024, respectively. The increase in investment activities was driven by purchases of equipment for the Hagerstown Facility. Financing activities Net cash used in financing activities was $7.8 million for the three months ended March 31, 2025, as compared to net cash used in financing activities of $21.4 million for the three months ended March 31, 2024. The change was attributable to lower net repayments of revolving credit facility in the 2025 period, partially offset by the principal repayment of term loan due to timing. Stock repurchase program On March 14, 2022, the Company announced that its Board of Directors of the Company 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 repurchases from time to time through open market purchases and privately negotiated transactions. No shares were repurchased during the three months ended March 31, 2025. As of March 31, 2025, the remaining dollar amount available for repurchases under the Board of Directors’ authorized plan was $11.1 million. - 37 - 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 2024 Annual Report on Form 10-K.