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 17, 2025 (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. Overview Turtle Beach Corporation (“Turtle Beach” or the “Company”), headquartered in San Diego, California, and incorporated in the state of Nevada in 2010, is a premier audio 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 brand. 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 and it has recently expanded its brand beyond gaming headsets and launched its gaming controller product line, as well as, gaming flight simulation and racing simulation accessories. In March 2024, Turtle Beach acquired Performance Designed Products LLC (“PDP”), another leading gaming accessory brand with a robust slate of products, including gaming controllers/gamepads for all platforms and licensing deals with popular gaming and entertainment properties. The Company has transitioned all gaming accessories under its best-selling Turtle Beach brand, with products for consoles and PC, including multiplatform gaming headsets, controllers, mice, keyboards, microphones, and flight/racing simulation accessories under one of the industry’s most recognized and trusted brand names. Business Trends Turtle Beach operates in the approximately $200 billion global games and accessories market. The global gaming audience now exceeds global cinema and music markets with over 3.4 billion active gamers worldwide. Gaming peripherals, such as headsets, controllers, keyboards, mice, microphones, and flight and racing simulation controls are estimated to be an $11 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, Grand Theft Auto, Battlefield, 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 player-to-player communication and drive increased demand for gaming headsets, controllers, and more. Many of these established franchises launch new titles annually, leading into the holidays and beyond, and as a result can cause an additional boost to the normally strong holiday sales for gaming accessories. Additionally, some larger franchise games, for example Call of Duty and Fortnite, follow-up with post-launch downloadable content or new content update packs, to keep interest and fan engagement/momentum going for months following a game’s initial release. 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. 21 Results of Operations The following table sets forth the Company’s statements of operations for the periods presented (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2025 2024 2025 2024 Net revenue $ 56,777 $ 76,478 $ 120,678 $ 132,326 Cost of revenue 38,515 53,402 79,049 91,464 Gross profit 18,262 23,076 41,629 40,862 Operating expenses 18,591 27,187 40,422 50,686 Operating (loss) income (329 ) (4,111 ) 1,207 (9,824 ) Interest expense 2,049 2,220 4,055 2,370 Other expense, net 799 352 1,102 722 Loss before income tax (3,177 ) (6,683 ) (3,950 ) (12,916 ) Income tax (benefit) expense (246 ) 841 (355 ) (5,547 ) Net loss $ (2,931 ) $ (7,524 ) $ (3,595 ) $ (7,369 ) Net Revenue and Gross Profit The following table summarizes net revenue and gross profit for the periods presented (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2025 2024 2025 2024 Net Revenue $ 56,777 $ 76,478 $ 120,678 $ 132,326 Gross Profit $ 18,262 $ 23,076 $ 41,629 $ 40,862 Gross Margin 32.2 % 30.2 % 34.5 % 30.9 % Comparison of the Three Months Ended June 30, 2025 to the Three Months Ended June 30, 2024 Net revenue for the three months ended June 30, 2025 was $56.8 million, a $19.7 million decrease from $76.5 million driven by a significant reduction in market demand for computer gaming accessories. For the three months ended June 30, 2025, gross margin increased to 32.2% from 30.2% in the comparable prior year period primarily due to unfavorable impact of fair value step-up adjustment in prior period, partially offset by higher tariffs in 2025. Comparison of the Six Months Ended June 30, 2025 to the Six Months Ended June 30, 2024 Net revenue for six months ended June 30, 2025 was $120.7 million, an $11.6 million decrease from $132.3 million that included incremental revenue from the PDP acquisition, due to lower market demand and the launch of certain wireless products in the comparable period. For the six months ended June 30, 2025, gross margin increased to 34.5% from 30.9% in the comparable prior year period primarily due to unfavorable impact of fair value step-up adjustment and incremental warehouse costs in the prior period from the PDP acquisition. 22 Operating Expenses Three Months Ended Six Months Ended June 30, June 30, 2025 2024 2025 2024 (in thousands) Selling and marketing $ 12,731 $ 13,741 $ 25,184 $ 22,754 Research and development 4,471 4,589 8,464 8,491 General and administrative 7,354 7,463 15,570 13,137 Subtotal operating expenses 24,556 25,793 49,218 44,382 Insurance recovery (5,965 ) — (9,404 ) — Acquisition-related cost — 1,394 608 6,304 Total operating expenses $ 18,591 $ 27,187 $ 40,422 $ 50,686 Selling and Marketing Selling and marketing expenses decreased by approximately $1.0 million, or 7.4% for the three months ended June 30, 2025 as compared to the same period in the prior year due to lower market demand driven direct media marketing. Selling and marketing expenses increased by $2.4 million, or 10.7% for the six months ended June 30, 2025 due to certain employee-related expenses, professional fees, certain marketing initiatives and incremental intangible assets amortization expenses related to the PDP acquisition. Research and Development Research and development costs were consistent for the three and six months ended June 30, 2025 as compared to the same period in the prior year. General and Administrative General and administrative expenses were consistent for the three months ended June 30, 2025 at $7.4 million compared to the same period in the prior year. General and administrative expenses increased by approximately $2.4 million for the six months ended June 30, 2025 as compared to the same period in the prior year due to filing-related legal costs, professional service and certain system investments. Insurance recovery Insurance recovery for the three and six months ended June 30, 2025 totaled $6.0 million and $9.4 million, respectively, and relates to the receipt of certain insurance claims from the previously disclosed loss of inventory while in transit that occurred in the fourth quarter of 2024. Acquisition-related cost Acquisition-related costs include one-time costs incurred in connection with the PDP acquisition including professional fees such as legal and accounting along with other certain integration related costs. Income Taxes Income tax expense for the three months ended June 30, 2025 was $(0.2) million at an effective tax rate of 7.7% compared to income tax expense of $0.8 million for the three months ended June 30, 2024 at an effective tax rate of (12.6%). The effective tax rate for the three months ended June 30, 2025 was primarily impacted by the change in U.S. valuation allowance, foreign taxes and Federal and State current tax. Income tax expense for the six months ended June 30, 2025 was $(0.4) million at an effective tax rate of 9.0% compared to income tax benefit for the six months ended June 30, 2024 of $5.5 million at an effective tax rate of 42.9%. The effective tax rate for the six months ended June 30, 2024 was primarily impacted by the reversal of a portion of the Company’s deferred tax asset valuation allowance. Key Performance Indicators and Non-GAAP Measures 23 Management routinely reviews key performance indicators, including revenue, operating income and margins, and earnings per share, among others. In addition, we believe certain other measures provide useful information to management and investors about us and our financial condition and results of operations for the following reasons: (i) they are measures used by our Board of Directors and management team to evaluate our operating performance; (ii) they are measures used by our management team to make day-to-day operating decisions; (iii) the adjustments made are often viewed as either non-recurring or not reflective of ongoing financial performance and/or have no cash impact on operations; and (iv) the measures are used by securities analysts, investors and other interested parties as a common operating performance measure to compare results across companies in our industry by adjusting for potential differences caused by variations in capital structures (affecting relative interest expense), and the age and book value of facilities and equipment (affecting relative depreciation and amortization expense). These other metrics, however, are not measures of financial performance under accounting principles generally accepted in the United States of America (“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 loss, the nearest GAAP financial measure) for the three and six months ended June 30, 2025 and June 30, 2024, are as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2025 2024 2025 2024 Net loss $ (2,931 ) $ (7,524 ) $ (3,595 ) $ (7,369 ) Interest expense 2,049 2,220 4,055 2,370 Depreciation and amortization 3,098 3,306 6,224 4,782 Stock-based compensation 1,008 846 2,920 1,951 Income tax provision (1) (246 ) 841 (355 ) (5,547 ) Restructuring expense (2) 125 706 130 747 Acquisition-related cost (3) — 1,394 608 6,304 Fair value step-up adjustment to acquired inventory (4) — 1,251 — 1,251 Insurance recovery (5) (5,965 ) — (9,404 ) — Loss on inventory in transit and other costs (6) — — 605 — Litigation proceedings and other (7) (182 ) 4 (182 ) 4 Adjusted EBITDA $ (3,044 ) $ 3,044 $ 1,006 $ 4,493 (1) An income tax benefit of $7.0 million was recorded in the three months ended March 31, 2024 as a result of the reversal of a portion of the Company’s deferred tax asset valuation allowance. (2) Restructuring expenses are costs in connection with reorganization of operations. These costs primarily include severance and related benefits. (3) Acquisition-related cost includes one-time costs we incurred in connection with acquisitions including warehouse lease impairment, professional fees such as legal and accounting along with other integration related costs. (4) 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. (5) Insurance proceeds from claims related to a loss of inventory while in transit that occurred in the fourth quarter of 2024. (6) Certain professional fees related to recovery initiatives in connection with a loss of inventory while in transit that occurred in the fourth quarter of 2024. 24 (7) Litigation and other primarily includes one-time legal and other professional fees associated with certain proceedings and settlements. 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 (in thousands): Six Months Ended June 30, 2025 2024 Cash and cash equivalents at beginning of period $ 12,995 $ 18,726 Net cash provided by operating activities 37,303 14,613 Net cash provided by (used for) investing activities 2,019 (79,261 ) Net cash (used for) provided by financing activities (41,746 ) 58,176 Effect of foreign exchange on cash 1,134 208 Cash and cash equivalents at end of period $ 11,705 $ 12,462 Operating activities Cash provided by operating activities for the six months ended June 30, 2025 was $37.3 million, an increase of $22.7 million as compared to $14.6 million for the six months ended June 30, 2024. The increase is primarily due to higher gross receipts, insurance proceeds from claims related to a loss of inventory, lower acquisition-related costs and reduced spending levels. Investing activities Cash provided by investing activities was $2.0 million for the six months ended June 30, 2025, which was primarily related to purchase price working capital adjustments of $2.5 million, compared to $79.3 million used for the six months ended June 30, 2024 primarily related to the acquisition of the PDP business. Financing activities Net cash used for financing activities was $41.7 million during the six months ended June 30, 2025 compared to net cash provided by financing activities of $58.2 million during the six months ended June 30, 2024. Financing activities during the six months ended June 30, 2025 consisted primarily of $29.5 million revolving credit facility net repayments, $6.7 million of share repurchases and $5.6 million of term loan repayments. Financing activities during the six months ended June 30, 2024 consisted primarily of the $50 million term loan and $2.9 million of stock option exercise proceeds, partially offset by $3.2 million of debt issuance costs. 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 June 30, 2025 and December 31, 2024 were $4.7 million and $4.5 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, 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, Voyetra Turtle Beach, Inc., TBC Holding Company LLC, PDP, Turtle Beach Europe Limited, VTB Holdings, Inc., the financial institutions party thereto from time to time and Bank of America, as administrative agent, collateral agent and security trustee for the lenders. Among other things, the Fourth Amendment provided for: (i) the acquisition of PDP; (ii) the revision of 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) extension of the maturity date of the Credit Facility from April 1, 2025 to March 13, 2027; and (iv) updates to 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 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 June 30, 2025, interest rates for outstanding borrowings were 8.10% for base rate loans and 4.32% for Term SOFR loans. The Company is subject to financial covenant testing if certain availability thresholds are not met or certain other events occur (as defined in the Credit Facility). 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 June 30, 2025, the Company was in compliance with all the financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $36.2 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”), 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 amortizes in a monthly amount equal to 0.208333% during the first two years and 0.416667% during the third year. As the prepayment period concluded on March 13, 2025, the Term Loan Facility is no longer subject to the prepayment premium applied during the first year. 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 June 30, 2025, the interest rate for outstanding borrowings was 12.19%. As of June 30, 2025, the Company was in compliance with all financial covenants under the Term Loan Facility. 27 Credit Agreement On August 1, 2025, the Company entered into the Credit Agreement (the “Credit Agreement”) with Bank of America, as the administrative agent, the swingline lender and the line of credit issuer, replacing the Company’s previous debt arrangements. The Credit Agreement, matures on August 1, 2028 and includes a $60 million term loan facility and a $90 million revolving credit facility with designated sub-facility limits of (i) $15 million for the U.K. Borrower, (ii) $10 million or a swingline facility and (iii) $5 million for letters of credit. Actual credit availability under the revolving facility is subject to a borrowing base limitation that is calculated based on a percentage of eligible trade accounts receivable and inventories, the balances of which fluctuate, and is subject to discretionary reserves and revaluation adjustments. The Company may utilize the facilities for borrowings as well as for the issuance of letters of credit, repaying existing indebtedness outstanding as of the effective date of the Credit Agreement and ongoing working capital and general corporate purposes as defined by the Credit Agreement. The facilities under the Credit Agreement replaced the Company’s previous debt arrangements. Borrowings will bear interest at a rate that varies depending on the type of loan calculated using a floating rate plus a margin. Depending on the type of loan, the floating rate will either be the prime rate announced by Bank of America, Term SOFR, Daily Simple SOFR, EURIBOR or SONIA. The margin will range from 2.00% to 2.75% for base rate loans and SONIA based loans and from 3.00% to 3.75% for Term SOFR, Daily Simple SOFR and EURIBOR loans. The Credit Agreement also provides for an unused line fee, letter of credit fees, and agent fees. The Credit Agreement requires the Company and its subsidiaries to (i) maintain a fixed charge coverage ratio, defined as the ratio, determined on a consolidated basis for the Company and its subsidiaries for the applicable measurement period, of (a) EBITDA minus unfinanced capital expenditures and cash taxes paid for such period to (b) consolidated interest charges for such period plus principal payments or redemptions of outstanding debt plus certain restricted payments and (ii) maintain a consolidated leverage ratio, defined as the ratio, determined on a consolidated basis for the Company and its subsidiaries for the applicable measurement period, of (a) certain funded indebtedness minus unrestricted cash up to a maximum of $12 million to (b) EBITDA. The Credit Agreement also contains affirmative and negative covenants that, subject to certain exceptions, limit our ability to take certain actions, including our ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and consolidations, engage in sale leaseback transactions and transactions with affiliates, and encumber and dispose of assets. 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 June 30, 2025 and December 31, 2024, we did not have any derivative financial instruments. 28 Foreign Currency Exchange Risk The Company has exchange rate exposure primarily with respect to the British Pound and Euro. As of June 30, 2025 and December 31, 2024, 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. In 2025, the United States introduced trade policy actions that have increased import tariffs across a wide range of countries. The incremental tariffs have had and may continue to have an adverse impact on the Company's result of operations. 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, and may result in reduced sales. The global and regional economic and political conditions, as well as changes in trade policies, have caused and may continue to cause volatility in demand for the Company's products as well as the cost of tariffs, materials and logistics, and transportation delays, and as a result have impacted and may continue to impact the pricing of the Company's products, product availability and the Company's results of operations. 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.