Turtle Beach Corp 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our operations should be read together with our unaudited condensed consolidated financial statements and the related notes included in Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2024 (the “ Annual Report. ” ) This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this report are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects,” “strategies” and similar expressions or negatives thereof. Caution should be taken not to place undue reliance on any such forward-looking statements because they involve risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements. Forward-looking statements are based on the beliefs, as well as assumptions made by, and information currently available to, the Company's management and are made only as of the date hereof. The Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the federal securities laws. In addition, forward-looking statements are subject to certain risks and uncertainties, including those described elsewhere in this Quarterly Report on Form 10-Q that could cause actual results to differ materially from the Company's historical experience and its present expectations or projections. Business Overview Turtle Beach Corporation (“Turtle Beach” or the “Company”), headquartered in White Plains, New York, and incorporated in the state of Nevada in 2010, is 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 the Turtle Beach®, PDP® and ROCCAT® brands. The Turtle Beach® brand is a market share leader in console gaming headsets with a vast portfolio of headsets designed to be compatible with the latest Xbox, PlayStation, and Nintendo consoles, as well as for personal computers (“PCs”) and mobile/tablet devices. Turtle Beach Corporation’s PC product portfolio includes headsets, gaming keyboards, mice and other gaming accessories focused on the PC gaming platform. Recently, Turtle Beach expanded its brand beyond gaming headsets and began making game controllers, gaming flight simulation and racing simulation accessories. Acquired in March 2024, PDP is a gaming accessories leader that designs and distributes video game accessories, including controllers, headsets, power supplies, cases, and other accessories. Business Trends Turtle Beach operates in an overall $200 billion global games and accessories market. The global gaming audience now exceeds global cinema and music markets with over three billion active gamers worldwide. Gaming peripherals, such as headsets, keyboards, mice, microphones, controllers, and simulation controls are estimated to be an $11.0 billion business globally. The console and PC gaming accessory markets are driven by major game launches and long-running franchises that encourage players to continually buy equipment and accessories. On Xbox, PlayStation, Nintendo Switch and PC, flagship games like Call of Duty, Destiny, Star Wars: Battlefront, Battlefield, Grand Theft Auto, and battle royale games like Fortnite, Call of Duty Warzone, Apex Legends, and PlayerUnknown’s Battlegrounds, are examples of major franchises that prominently feature online multiplayer modes that encourage communication and drive increased demand for gaming headsets. Many of these established franchises launch new titles annually, leading into the holidays and as a result can cause an additional boost to the normally strong holiday sales for gaming accessories. Many gamers play online where a gaming headset, which includes a microphone, is required because it allows players to communicate with each other in real-time, provides a more immersive experience, and delivers a competitive advantage. Console Headset Market Turtle Beach is the leading console gaming headset manufacturer in the U.S. and other major console markets. Turtle Beach has 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 gaming headsets, in which Turtle Beach has been the market leader for the past 14 years, is estimated to be approximately $1.5 billion. PlayStation and Xbox consoles continue to be the dominant gaming platforms in North America and Europe for games that drive headset usage. Consistent with a historical pattern of major new console launches every 7-8 years, Microsoft and Sony launched their latest consoles, Xbox Series X|S and PlayStation 5, ahead of the 2020 holiday season. 21 Nintendo has sold over 140 million units of its highly popular Nintendo Switch since the platform's release in early 2017. Nintendo continues adding and expanding its library of games, including an increased number of multiplayer chat-enabled games. Nintendo also sells the Nintendo Switch Lite, a follow-on product that offers gamers the hand-held only version of their popular gaming console. PC Accessories Market The market for PC gaming headsets, mice, and keyboards is estimated to be approximately $3.3 billion. PC gaming continues to be a main gaming platform in the U.S. and internationally, similarly driven by popular AAA game launches, by popular 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 shapes and sizes, are available in both wired and wireless models, offer different sensor options (optical or laser) 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 offer customizable lighting. Gamepad/Controllers Market The market for gamepad controllers is estimated to be approximately $0.7 billion, and shares the same retail footprint and consumer base that Turtle Beach gaming headsets compete in. Controllers now come in various ergonomic shapes, sizes, and colors. Gamers can even further customize their controllers with unique thumbsticks and better grips/textures, weights, and more. Game controllers also range in price from ~$40 to more than $300 for ultra premium options, with premium controllers featuring improved materials, cooling, swappable parts and more. Turtle Beach entered the controllers market in 2021 with the introduction of its wired Recon™ Controller for Xbox and PC. Turtle Beach then launched the lower-cost wired REACT-R™ Controller in 2022, as well as introduced the mobile focused Recon™ Cloud and Atom™ controllers. In 2023, Turtle Beach launched its first wireless controller for Xbox and PC, the premium Stealth™ Ultra controller. Turtle Beach’s controllers not only provide the same responsive, quality controls as first party controllers, but also offer Turtle Beach’s signature gaming audio experience when gamers connect a wired headset to the controller. Gaming Simulation Accessories Market The market for gaming simulation accessories is estimated to be approximately $1.2 billion. Flight and racing simulation gaming are more popular on higher-end PCs able to deliver the most realistic visuals. However, jumps in visual quality made possible in the latest consoles/games have made flight simulation gaming on Xbox more accessible. In 2020, Microsoft redefined the graphics flight sim gamers can expect while playing with the launch of the latest generation of its Flight Sim games and, in subsequent years, Microsoft expanded the game to Xbox Series X|S1, Xbox One, lower-end gaming PCs, and mobile via Xbox Cloud. Long-running popular flight sim games 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 sim accessories including yokes and pedals, combat flightsticks, and HOTAS (Hands-On Throttle And Stick) controllers. The flight sim market is niche, but is supported by 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. Turtle Beach 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 HOTAS controller in 2024. Racing simulation gaming follows a similar trajectory as flight simulation gaming. The audience of racing sim gamers is also niche, dedicated, slightly older and willing to spend more on creating high-end racing simulation setups predominantly on PC, but also on gaming consoles. There are 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 a few hundred dollars to thousands of dollars for the most involved simulators. Racing simulation fans also regularly create content and share with the community. Turtle Beach introduced its first VelocityOne™ Race racing simulation wheel and pedals setup in 2024, with additional racing sim accessory launches planned for the future. 22 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. While semiconductor availability and freight costs have significantly improved compared to 2022, we continue to closely monitor component availability and freight cost including global supply chain threats within the post-pandemic business environment. Results of Operations The following table sets forth the Company’s statements of operations for the periods presented: Three Months Ended Nine Months Ended September 30, September 30, 2024 2023 2024 2023 (in thousands) Net revenue $ 94,363 $ 59,158 $ 226,689 $ 158,584 Cost of revenue 60,232 41,469 151,696 114,884 Gross profit 34,131 17,689 74,993 43,700 Operating expenses 27,708 20,206 78,394 68,502 Operating income (loss) 6,423 (2,517 ) (3,401 ) (24,802 ) Interest expense 2,712 107 5,082 253 Other non-operating expense, net 252 481 974 799 Income (loss) before income tax 3,459 (3,105 ) (9,457 ) (25,854 ) Income tax expense (benefit) 46 501 (5,501 ) 377 Net income (loss) $ 3,413 $ (3,606 ) $ (3,956 ) $ (26,231 ) Net Revenue and Gross Profit The following table summarizes net revenue and gross profit for the periods presented: Three Months Ended Nine Months Ended September 30, September 30, 2024 2023 2024 2023 (in thousands) Net Revenue $ 94,363 $ 59,158 $ 226,689 $ 158,584 Gross Profit $ 34,131 $ 17,689 $ 74,993 $ 43,700 Gross Margin 36.2 % 29.9 % 33.1 % 27.6 % Comparison of the Three Months Ended September 30, 2024 to the Three Months Ended September 30, 2023 Net revenue for the three months ended September 30, 2024 was $94.4 million, a $35.2 million increase from $59.2 million driven by incremental revenue from the PDP acquisition and growth in our product markets. For the three months ended September 30, 2024, gross margin increased to 36.2%, inclusive of a $0.8 million purchase accounting driven charge to step-up the value of PDP inventory at the time of acquisition and a $1.2 million reserve for ROCCAT inventory on-hand as part of the PC product brand transition to Turtle Beach, from 29.9% in the comparable prior year period. Excluding these two charges, gross margins improved to 38.3% as a result of lower promotional spend and freight costs. Comparison of the Nine Months Ended September 30, 2024 to the Nine Months Ended September 30, 2023 Net revenue for the nine months ended September 30, 2024 was $226.7 million, a $68.1 million increase from $158.6 million driven by incremental revenue from the PDP acquisition and growth in our product markets. For the nine months ended September 30, 2024, gross margin increased to 33.1%, inclusive of a $2.1 million purchase accounting driven charge to step-up the value of PDP inventory at the time of acquisition and a $2.8 million reserve for ROCCAT inventory on-hand as part of 23 the PC product brand transition to Turtle Beach, from 27.6% in the comparable prior year period. Excluding these two charges, gross margins improved to 35.2% as a result of lower promotional spend and freight costs Operating Expenses Three Months Ended Nine Months Ended September 30, September 30, 2024 2023 2024 2023 (in thousands) Selling and marketing $ 13,535 $ 10,583 $ 36,289 $ 30,457 Research and development 4,311 4,380 12,802 12,670 General and administrative 6,352 5,243 19,489 25,375 Subtotal operating expenses 24,198 20,206 68,580 68,502 Acquisition-related cost 3,510 — 9,814 — Total operating expenses $ 27,708 $ 20,206 $ 78,394 $ 68,502 Selling and Marketing Selling and marketing expenses for the three and nine months ended September 30, 2024 totaled $13.5 million and $36.3 million, respectively, compared to $10.6 million and $30.5 million for the three and nine months ended September 30, 2023, respectively, due to incremental intangible assets amortization and operating expenses related to the PDP acquisition, and integration related severance costs. Research and Development Research and development costs for the three and nine months ended September 30, 2024 was $4.3 million and $12.8 million, respectively, compared to $4.4 million and $12.7 million for the three and nine months ended September 30, 2023, respectively, which reflects incremental expense related to the PDP acquisition and certain integration related severance partially offset by lower headcount and costs associated with our product portfolio rationalization initiatives. General and Administrative General and administrative expenses for the three months ended September 30, 2024 totaled $6.4 million compared to $5.2 million for the three months ended September 30, 2023 reflective of incremental costs from PDP operations and certain professional service costs. General and administrative expenses for the nine months ended September 30, 2024 totaled $19.5 million compared to $25.4 million for the nine months ended September 30, 2023. Excluding $2.5 million of activism related costs, but inclusive of incremental costs from PDP operations, expenses decreased $3.4 million primarily due to lower severance and non-cash stock-based compensation. Acquisition-related cost Acquisition-related costs included costs incurred in connection with acquisitions including professional fees such as legal and accounting along with other certain integration related costs of the acquisition. Income Taxes Income tax benefit for the nine months ended September 30, 2024 was ($5.5) million at an effective tax rate of 58.2% compared to income tax benefit for the nine months ended September 30, 2023 of $0.4 million at an effective tax rate of (1.5%). The effective tax rate for the nine months ended September 30, 2024 was primarily impacted the by the reversal of a portion of the Company’s deferred tax asset valuation allowance. 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 24 (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 (“GAAP”) and given the limitations of these metrics as analytical tools, should not be considered a substitute for gross profit, gross margins, net income (loss) or other consolidated income statement data as determined in accordance with GAAP. We 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 GAAP and, given the limitations of these metrics as analytical tools, should not be considered a substitute for gross profit, gross margins, net income (loss) or other consolidated income statement data as determined in accordance with GAAP. Adjusted EBITDA (and a reconciliation to Net income (loss), the nearest GAAP financial measure) for the three and nine months ended September 30, 2024 and September 30, 2023, are as follows: Three Months Ended Nine Months Ended September 30, September 30, 2024 2023 2024 2023 (in thousands) Net income (loss) $ 3,413 $ (3,606 ) $ (3,956 ) $ (26,231 ) Interest expense (income) 2,712 107 5,082 253 Depreciation and amortization 3,322 1,212 8,104 3,673 Stock-based compensation 1,496 1,625 3,447 8,554 Income tax benefit (1) 46 501 (5,501 ) 377 Restructuring expense (2) 910 1,104 1,657 1,104 CEO transition related costs (3) — — — 2,874 Acquisition-related cost (4) 3,510 — 9,814 — Incremental costs on acquired inventory (5) 833 — 2,084 — Proxy contest and other (6) 26 94 30 1,936 Adjusted EBITDA $ 16,268 $ 1,037 $ 20,761 $ (7,460 ) (1) An income tax benefit of $6.9 million was recorded as a result of the reversal of a portion of the Company’s deferred tax asset valuation allowance. (2) Restructuring charges are expenses that are paid in connection with reorganization of our operations. These costs primarily include severance and related benefits. (3) CEO transition related expense includes one-time costs associated with the separation of its former CEO. Such costs included severance, bonus, medical benefits and the tax impact of accelerated vesting of stock-based compensation. (4) Business transaction expense includes one-time costs we incurred in connection with acquisitions including warehouse lease impairment, professional fees such as legal and accounting along with other certain integration related costs. (5) Costs relate to the step up of acquired finished goods inventory to fair market value as required under purchase accounting. This step up in value over original cost is recorded as a charge to cost of revenue as such inventory is sold. (6) Proxy contest and other primarily includes one-time legal and other professional fees associated with proxy challenges presented by certain shareholder activists in 2023. 25 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: Nine Months Ended September 30, 2024 2023 (in thousands) Cash and cash equivalents at beginning of period $ 18,726 $ 11,396 Net cash provided (used for) by operating activities (8,553 ) 7,944 Net cash used for investing activities (80,686 ) (1,924 ) Net cash provided by (used for) financing activities 82,665 (5,128 ) Effect of foreign exchange on cash 1,651 52 Cash and cash equivalents at end of period $ 13,803 $ 12,340 Operating activities Cash used for operating activities for the nine months ended September 30, 2024 was $8.6 million, a decrease of $16.5 million as compared to $7.9 million for the nine months ended September 30, 2023. The decrease is primarily the result of certain acquisition-related business costs. Investing activities Cash used for investing activities was $80.7 million for the nine months ended September 30, 2024, which was primarily related to the acquisition of the Performance Designed Products business, compared to $1.9 million for the nine months ended September 30, 2023 related to certain capital investments. Financing activities Net cash provided by financing activities was $82.7 million during the nine months ended September 30, 2024 compared to net cash used for financing activities of $5.1 million during the nine months ended September 30, 2023. Financing activities during the nine months ended September 30, 2024 consisted primarily of $58.6 million net borrowings, the $50 million term loan and $3.0 million of stock option exercise proceeds, partially offset by $25.3 million of share repurchases, $2.9 million of debt issuance costs and $0.7 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 September 30, 2024 and December 31, 2023 were $3.8 million and $8.0 million, respectively. Revolving Credit Facility On March 5, 2018, Turtle Beach and certain of its subsidiaries entered into an amended and restated loan, guaranty and security agreement (the “Credit Facility”) with Bank of America, N.A. (“Bank of America”), as administrative agent, collateral agent and security trustee for Lenders (as defined therein), which replaced the then existing asset-based revolving loan agreement. The Credit Facility was amended on each of December 17, 2018, May 31, 2019, and March 10, 2023. The Credit Facility, as amended, expires on March 13, 2027 and provides for a line of credit of up to $50 million inclusive of a sub-facility limit of $10 million for TB Europe, a wholly-owned subsidiary of Turtle Beach. 26 On March 13, 2024, the Company entered into a Fourth Amendment, dated as of March 13, 2024 (the “Fourth Amendment”), by and among the Company, VTB, TBC Holding Company LLC, TB Europe, VTBH, the financial institutions party thereto from time to time and Bank of America, as administrative agent, collateral agent and security trustee for the lenders. The Fourth Amendment provided for, among other things: (i) the acquisition of PDP; (ii) revised the calculation of the U.S. Borrowing Base to include certain acquired assets of PDP equal to the lesser of (a) the sum of the accounts formula amount and the inventory formula amount (each as defined in the Fourth Amendment), (b) $15,000,000, and (c) 30% of the aggregate Revolver Commitments; (iii) extending the maturity date of the Credit Facility from April 1, 2025 to March 13, 2027; and (iv) updated the interest rate and margin terms such that the loans will bear interest at a rate equal to (1) SOFR, (2) the U.S. Base Rate, (3) the Sterling Overnight Index Average Reference Rate (“SONIA”) for loans denominated in Sterling, and (4) the Euro Interbank Offered Rate (“EUIBOR”) for loans denominated in Euros, plus in each case, an applicable margin, which is between 0.50% and 2.50% for Base Rate Loans and 1.75% and 3.50% for Term SOFR Loans, SONIA Rate Loans and EUIBOR Loans. The maximum credit availability for loans and letters of credit under the Credit Facility is governed by a borrowing base determined by the application of specified percentages to certain eligible assets, primarily eligible trade accounts receivable and inventories, and is subject to discretionary reserves and revaluation adjustments. The Credit Facility may be used for working capital, the issuance of bank guarantees, letters of credit and other corporate purposes. Amounts outstanding under the Credit Facility bear interest at a rate equal to (i) a rate published by Bank of America or the U.S. Bloomberg Short-Term Bank Yield Index (“BSBY”) rate for loans denominated in U.S. Dollars, (ii) the Sterling Overnight Index Average Reference Rate (“SONIA”) for loans denominated in Sterling, (iii) and the Euro Interbank Offered Rate (“EUIBOR”) for loans denominated in Euros, plus in each case, an applicable margin, which is between 0.50% to 2.50% for base rate loans and UK base rate loans, and 1.75% to 3.50% for U.S. BSBY rate loans, U.S. BSBY daily floating rate loans and UK alternative currency loans. In addition, Turtle Beach is required to pay a commitment fee on the unused revolving loan commitment at a rate ranging from 0.375% to 0.50% and letter of credit fees and agent fees. As of September 30, 2024, interest rates for outstanding borrowings were 8.60% for base rate loans and 6.70% for Term SOFR loans. The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met or certain other events occur (as set forth in the Credit Facility). At such times, the Credit Facility requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the last day of each fiscal quarter. The Credit Facility also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions, including the Company’s ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and consolidations, engage in sale leaseback transactions and transactions with affiliates, and encumber and dispose of assets. Obligations under the Credit Facility are secured by a security interest and lien upon substantially all of the Company’s assets. As of September 30, 2024, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $21.1 million. Term Loan On March 13, 2024, Turtle Beach and certain of its subsidiaries entered into a new financing agreement with Blue Torch Finance, LLC, (“Blue Torch”), pursuant to which Blue Torch for an aggregate amount of $50 million (the “Term Loan Facility”), the proceeds of which were used to (i) fund a portion of the PDP acquisition purchase price; (ii) repay certain existing indebtedness of the acquired business; (iii) to pay fees and expenses related to such transactions and (iv) for general corporate purposes. The Term Loan Facility will amortize in a monthly amount equal to 0.208333% during the first two years and 0.416667% during the third year and may be prepaid at any time subject to a prepayment premium during the first year of the interest payments payable during the first year plus 3.00%. The Term Loan Facility is secured by substantially all of the assets of the Company and its subsidiaries which are party to the Term Loan Facility. The Term Loan Facility (a) matures on March 13, 2027; (b) bears interest at a rate equal to (i) a base rate plus 7.25% per annum for Reference Rate Loans and Secured Overnight Financing Rate (“SOFR”) plus 8.25% per annum for SOFR Loans if the total net leverage ratio is greater than or equal to 2.25x and (ii) a base rate plus 6.75% per annum for Reference Rate Loans and SOFR plus 7.75% per annum for SOFR Loans if the total net leverage ratio is less than 2.25x; and (c) is subject to certain affirmative, negative and financial covenants, including a minimum liquidity covenant and a quarterly total net leverage ratio covenant. As of September 30, 2024, interest rates for outstanding borrowings was 13.11%. On August 7, 2024, the Company and Blue Torch amended the Term Loan Facility to, among other things, permit the Company to repurchase Company common stock in an aggregate amount not to exceed $30 million prior to March 31, 2025, subject to the satisfaction of certain conditions. The other material terms of the Term Loan Facility were unchanged. As of September 30, 2024, the Company was in compliance with all financial covenants under the Term Loan Facility. 27 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 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 condensed consolidated financial statements, which, in turn, could change the results from those reported. Management evaluates its estimates, assumptions and judgments on an ongoing basis. For a discussion of the critical estimates that affect the condensed consolidated financial statements, see “Critical Accounting Estimates” included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. See Note 2, “Summary of Significant Accounting Policies,” to the unaudited condensed consolidated financial statements contained herein for a complete discussion of recent accounting pronouncements. We are currently evaluating the impact of certain recently issued guidance on our financial condition and results of operations in future periods. Item 3 - Qualitative and Quantitative Disclosures About Market Risk Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. The Company’s market risk exposure is primarily a result of fluctuations in interest rates, foreign currency exchange rates and inflation. The Company has used derivative financial instruments, specifically foreign currency forward and option contracts, to manage exposure to foreign currency risks, by hedging a portion of its forecasted expenses denominated in British Pounds expected to occur within a year. The effect of exchange rate changes on foreign currency forward and option contracts is expected to offset the effect of exchange rate changes on the underlying hedged item. The Company does not use derivative financial instruments for speculative or trading purposes. As of September 30, 2024 and December 31, 2023, we did not have any derivative financial instruments. Foreign Currency Exchange Risk The Company has exchange rate exposure primarily with respect to the British Pound and Euro. As of September 30, 2024 and December 31, 2023, our monetary assets and liabilities that are subject to this exposure are immaterial, therefore the potential immediate loss to us that would result from a hypothetical 10% change in foreign currency exchange rates would not be expected to have a material impact on our earnings or cash flows. This sensitivity analysis assumes an unfavorable 10% fluctuation in the exchange rates affecting the foreign currencies in which monetary assets and liabilities are denominated and does not take into account the offsetting effect of such a change on our foreign currency denominated revenues. Inflation Risk The Company is exposed to market risk due to inflationary pressures affecting our costs and demand for the products we sell. In recent years, our business has been affected by global supply chain constraints and unfavorable changes in economic or political conditions in the countries and markets where we operate. Such inflationary pressures have been and could continue to be exacerbated by higher oil prices, geopolitical turmoil, and economic policy actions and could lead to a recessionary environment. Inflationary pressures can also have a negative impact on demand for the products we sell. Reduced or delayed discretionary spending by consumers in response to inflationary pressures has reduced consumer demand for our products, resulting in reduced sales. We continue to experience the on-going impacts of a higher interest rate environment, as compared to prior years, which resulted in higher cost of goods, selling expenses, and general and administrative expenses. Such increases have had and may continue to have a negative impact on the Company’s profit margins if selling prices of products do not increase with the increased costs. 28