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 and financial condition of Turtle Beach Corporation ("we," "us," "our," the "Company," "Turtle Beach") 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 12, 2026 (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 We are a premier audio and gaming technology company with expertise and experience in developing, commercializing, and marketing innovative products across a range of large addressable markets under our brand, Turtle Beach. The Turtle Beach® brand is a market share leader in console gaming headsets for over 16 years running with a vast portfolio of headsets designed to be multiplatform compatible with the latest Xbox, PlayStation, and Nintendo consoles, as well as for PCs and mobile and tablet devices. Our PC product portfolio includes PC gaming headsets, keyboards, mice, microphones and other PC gaming peripherals and in 2021 we expanded our brand beyond gaming headsets and launched our gaming controller product line, as well as, flight simulation and racing simulation accessories. In 2024, we acquired PDP, another leading gaming accessory brand with a robust slate of products, including gaming controllers for all major platforms and licensing deals with popular gaming and entertainment properties. We are headquartered in San Diego, California, and were incorporated in the State of Nevada in 2010. Business Trends We operate in a nearly $200.0 billion global games and accessories market, according to Newzoo Peripheral Market Forecast. The global gaming audience now exceeds global cinema and music markets with over 3.5 billion active gamers worldwide. Gaming peripherals, such as headsets, controllers, keyboards, mice, microphones, and flight and racing simulation controls are estimated to be an $11.2 billion business globally. The console and PC gaming accessory markets are also 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 promote 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 multiple 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. Further, June 2025 saw the launch of the highly anticipated Nintendo Switch 2 game system in the U.S., which debuted as the fastest-selling video game console launch of all time, with the largest launch month sales for any new gaming platform. Tariffs Update  Beginning in 2025, the U.S. implemented a broad-based tariff framework applicable to most imports, with higher country- and product-specific rates imposed on certain trading partners, including Mexico, Germany, and China among others. Certain foreign jurisdictions also announced reciprocal measures. In February 2026, the U.S. Supreme Court ruled that tariffs imposed under the International Emergency Economic Powers 20 Act (“IEEPA”) were unconstitutional. Following this decision, the U.S. Court of International Trade ordered U.S. Customs and Border Protection (“CBP”) to establish a process for issuing refunds related to these tariffs. On April 20, 2026, CBP launched an online portal for the submission of IEEPA-related tariff refund requests. Submitted claims will be reviewed by CBP to determine eligibility prior to the issuance of any refunds. In response to the Supreme Court’s ruling, the U.S. implemented a new 10% tariff on all imports under Section 122 of the Trade Act of 1974. These tariffs became effective on February 24, 2026, and are scheduled to remain in effect for up to 150 days, which is the maximum duration permitted under Section 122 without congressional authorization. Existing exclusions, including those related to the United States-Mexico-Canada Agreement (“USMCA”), remain in effect. As of March 31, 2026, our condensed consolidated financial statements do not reflect any impacts attributable to such refunds. Results of Operations The following table sets forth the Company’s statements of operations for the periods presented (in thousands): Three Months Ended March 31, 2026 2025 Net revenue $ 42,172 $ 63,901 Cost of revenue 30,878 40,534 Gross profit 11,294 23,367 Operating expenses 25,355 21,831 Operating (loss) income (14,061 ) 1,536 Interest expense, net 1,369 2,006 Other (income) expense, net (101 ) 303 Loss before income tax (15,329 ) (773 ) Income tax benefit (123 ) (109 ) Net loss $ (15,206 ) $ (664 ) Net Revenue and Gross Profit The following table summarizes net revenue and gross profit for the periods presented (in thousands): Three Months Ended March 31, 2026 2025 Net Revenue $ 42,172 $ 63,901 Gross Profit $ 11,294 $ 23,367 Gross Margin 26.8 % 36.6 % Comparison of the Three Months Ended March 31, 2026 to the Three Months Ended March 31, 2025 Net revenue for the three months ended March 31, 2026 was $42.2 million, a $21.7 million decrease from $63.9 million for the three months ended March 31, 2025, reflecting softer market demand for gaming accessories driven primarily by macroeconomic challenges affecting consumer spending. For the three months ended March 31, 2026, gross margin decreased to 26.8% from 36.6% in the comparable prior year period primarily due to decline in net revenues relative to cost of goods sold. During the three months ended March 31, 2026, gross margin was adversely affected compared with the prior year quarter, driven in part by transition-related costs associated with the relocation of the Company's principal third-party logistics provider. 21 Operating Expenses Three Months Ended March 31, 2026 2025 (in thousands) Selling and marketing $ 12,260 $ 12,453 Research and development 4,574 3,993 General and administrative 8,521 8,216 Subtotal operating expenses 25,355 24,662 Insurance recovery — (3,439 ) Acquisition-related cost — 608 Total operating expenses $ 25,355 $ 21,831 Selling and Marketing Selling and marketing expenses decreased by $0.2 million, or 1.5% for the three months ended March 31, 2026 as compared to the same period in the prior year primarily due to lower employee compensation cost. Research and Development Research and development costs increased by $0.6 million or 14.6% for the three months ended March 31, 2026 as compared to the same period in the prior year due to engineering costs related to new products. General and Administrative General and administrative expenses increased by $0.3 million or 3.7% for the three months ended March 31, 2026 as compared to the same period in the prior year primarily due to professional services and fees. Insurance recovery Insurance recovery relates to the recognition of certain initial insurance claim receivables 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. Interest expense Interest expense decreased by $0.6 million or 31.8% for the three months ended March 31, 2026, as compared to the same period in the prior year primarily due to lower interest costs associated with our refinancing in August 2025. Income Taxes Income tax benefit for the three months ended March 31, 2026 was $0.1 million at an effective tax rate of 0.8% compared to income tax benefit of $0.1 million for the three months ended March 31, 2025 at an effective tax rate of 14.1%. The effective tax rate for the three months ended March 31, 2026 was primarily impacted by the change in U.S. valuation allowance, foreign taxes and Federal and State current tax. The effective tax rate for the three months ended March 31, 2025 was primarily impacted by the change in U.S. valuation allowance and foreign taxes. 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 and management team to evaluate our 22 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 or 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 margin, 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 months ended March 31, 2026 and March 31, 2025, are as follows (in thousands): Three Months Ended March 31, 2026 2025 Net loss $ (15,206 ) $ (664 ) Interest expense, net 1,369 2,006 Depreciation and amortization 2,893 3,126 Stock-based compensation 1,365 1,912 Income tax benefit (123 ) (109 ) Restructuring expense (1) 224 5 Acquisition-related costs (2) — 608 Loss on inventory in transit and other costs (3) — 605 Professional fees, litigation and other (4) 2,978 — Insurance recovery (5) — (3,439 ) Adjusted EBITDA $ (6,500 ) $ 4,050 (1) Restructuring expenses are costs in connection with reorganization of operations. These costs primarily include severance and related benefits. (2) Costs in connection with reorganization of operations which primarily include severance, related benefits and post-acquisition costs related to PDP acquisition. (3) Loss of inventory while in transit. (4) Professional fees related to potential acquisition opportunities, warehouse relocation and certain litigation proceedings fees. (5) Insurance proceeds from claims related to a loss of inventory while in transit that occurred primarily in the fourth quarter of 2024. 23 Liquidity and Capital Resources Our primary sources of working capital are cash flow from operations and availability of capital under our Credit Agreement. 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): Three Months Ended March 31, 2026 2025 Cash and cash equivalents at beginning of period $ 16,963 $ 12,995 Net cash provided by operating activities 29,377 40,452 Net cash (used for) provided by investing activities (276 ) 2,349 Net cash used for financing activities (33,682 ) (44,877 ) Effect of exchange rate changes on cash and cash equivalents (62 ) 765 Cash and cash equivalents at end of period $ 12,320 $ 11,684 Cash Flows from Operating activities Cash provided by operating activities for the three months ended March 31, 2026 was $29.4 million, decrease of $11.1 million as compared to $40.5 million used for the three months ended March 31, 2025. The decrease is primarily due to higher net loss of $14.5 million, paydown of accounts payable of $8.9 million and lower accounts receivable of $5.6 million. This was partially offset by $7.4 million of inventory sold, lower paydown of $5.4 million in other liabilities and lower prepaid expenses and other assets of $4.0 million. Cash provided by operating activities for the three months ended March 31, 2025 was $40.5 million, an increase of $13.2 million as compared to $27.3 million for the three months ended March 31, 2024. The increase is primarily due to higher gross receipts as a result of incremental PDP revenue. Cash Flows from Investing activities Cash used for investing activities was $0.3 million for the three months ended March 31, 2026, which was primarily related to purchase of property and equipment of $0.3 million, compared to $2.3 million used for the three months ended March 31, 2025 primarily related to the acquisition of the PDP business. Cash provided by investing activities was $2.3 million for the three months ended March 31, 2025, which was primarily related to a $2.5 million working capital adjustment payment, compared to $76.2 million used for the three months ended March 31, 2024 primarily related to the acquisition of the PDP business. Cash Flows from Financing activities Net cash used for financing activities was $33.7 million during the three months ended March 31, 2026 compared to net cash provided by financing activities of $44.9 million during the three months ended March 31, 2025. Financing activities during the three months ended March 31, 2026 consisted primarily of $29.4 million repayment of revolving credit facility, $2.1 million term loan principal payment and $2.2 million repurchase of our common stock. Net cash used for financing activities was $44.9 million during the three months ended March 31, 2025 compared to net cash provided by financing activities of $48.0 million during the three months ended March 31, 2024. Financing activities during the three months ended March 31, 2025 consisted primarily of $42.8 million revolving credit facility net repayments, $1.8 million of share repurchases, and $0.3 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. 24 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 March 31, 2026 and December 31, 2025 were $6.6 million and $8.7 million, respectively. 2025 Credit Facility On August 1, 2025, we and certain of our subsidiaries entered into the 2025 Credit Facility. The 2025 Credit Facility was to mature on August 1, 2028 and included 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 for a swingline facility and (iii) $5 million for letters of credit. Actual credit availability under the revolving facility was subject to a borrowing base limitation that was calculated based on a percentage of eligible trade accounts receivable and inventories, the balances of which fluctuate, and was subject to discretionary reserves and revaluation adjustments. The 2025 Credit Facility may have been used for borrowings as well as for the issuance of letters of credit, repaying existing indebtedness outstanding as of the effective date of the 2025 Credit Facility and ongoing working capital and general corporate purposes as defined by the Credit Agreement governing the 2025 Credit Facility. The 2025 Credit Facility replaced our previous debt arrangements at that time. Borrowings under the 2025 Credit Facility bore interest at a rate that varied depending on the type of loan and the borrower. The interest rate was calculated using a floating rate plus a margin. Depending on the type of loan, the floating rate was either 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 2025 Credit Facility also provided for an unused line fee, letter of credit fees, and agent fees. The borrowers were able to voluntarily prepay the principal of any advance, without penalty or premium, at any time in whole or in part, subject to certain breakage costs. As of March 31, 2026, there were no outstanding borrowings under the revolving credit facility provided by the 2025 Credit Facility. As of March 31, 2026, interest rates for the term loan and revolving credit facilities under the 2025 Credit Facility were 7.02% and 0.00%, respectively. The 2025 Credit Facility required us and our subsidiaries to (i) maintain a fixed charge coverage ratio, defined as the ratio, determined on a consolidated basis for us and our subsidiaries for the applicable measurement period, of (a) EBITDA minus unfinanced capital expenditures and cash taxes paid for such period to (b) consolidated interest charges for such period plus principal payments or redemptions of outstanding debt plus certain restricted payments and (ii) maintain a consolidated leverage ratio, defined as the ratio, determined on a consolidated basis for us and our subsidiaries for the applicable measurement period, of (a) certain funded indebtedness minus unrestricted cash up to a maximum of $12.0 million to (b) EBITDA. The 2025 Credit Facility also contained affirmative and negative covenants that, subject to certain exceptions, limited our ability to take certain actions, including our ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and consolidations, engage in sale leaseback transactions and transactions with affiliates, and encumber and dispose of assets. The 2025 Credit Facility contained customary events of default, including defaults triggered by the failure to make payments when due, breaches of covenants and representations, material impairment in the perfection of the lenders’ security interest in the collateral, and events related to bankruptcy and insolvency of us and our subsidiaries. To secure their obligations under the 2025 Credit Facility, the Company and each of the other loan parties granted an all-assets lien with a first priority security interest in substantially all of their assets to the administrative agent. As part of the Credit Agreement, we recorded deferred debt financing costs of $2.3 million. On April 30, 2026, the Company repaid in full the amount then-outstanding under the 2025 Credit Facility in connection with the 2026 Credit Facility. 2026 Term Loan Facility On April 30, 2026, we entered into the 2026 Term Loan Facility governed by the 2026 Term Loan Financing Agreement by and among us, VTB, as borrower, each of our subsidiaries listed as a guarantor on the signature pages thereto, the lenders from time to time party thereto, and Blue Torch, as administrative agent and collateral agent, pursuant to which Blue Torch made a loan to VTB in the aggregate amount of $85.0 million, the proceeds of which were used to or will be used to (a) refinance existing indebtedness of ours and our subsidiaries; (b) for general corporate purposes; and (c) to pay fees and expenses related to the loan transactions. The 2026 Term Loan Facility will amortize in a quarterly amount equal to 1.25% of the aggregate original principal amount of the 2026 Term Loan Facility 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 2026 Term Loan Facility is secured by substantially all of our assets and those of our subsidiaries which are party to the 2026 Term Loan Facility. The 2026 Term Loan Facility (a) will mature on April 30, 2029; (b) will bear interest at a rate equal to (i) a base rate plus 6.50% per annum for Reference Rate Loans and SOFR plus 7.50% per annum for SOFR Loans if the total leverage ratio is greater than or equal to 3.00x, (ii) a base rate plus 6.25% per annum for Reference Rate Loans and SOFR plus 7.25% per annum for SOFR Loans if the total leverage ratio is greater than 25 or equal to 2.25x but less than 3.00x, and (iii) a base rate plus 5.75% per annum for Reference Rate Loans and SOFR plus 6.75% per annum for SOFR Loans if the total 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. 2026 Revolving Credit Facility On April 30, 2026, we entered into the 2026 Revolving Credit Facility governed by the 2026 Revolving Credit Agreement, by and among us, Voyetra Turtle Beach, Inc., TBC Holding Company LLC, Performance Designed Products LLC, Turtle Beach Europe Limited, VTB Holdings, Inc., Tide Acquisition Sub II, LLC, the financial institutions party thereto and Bank of America, as agent, collateral agent and security trustee for the lenders to the credit facility. The 2025 Revolving Credit Agreement provides for, among other things: (a) subject in each case to the applicable borrowing base, a US commitment in an amount equal to $50.0 million or $65.0million based on the season and a UK commitment equal to $10.0 million or $15.0 million based on the season; (b) a maturity date of April 30, 2029; (c) interest rate and margin terms such that the loans will bear interest at a rate equal to (1) SOFR, (2) the US Base Rate, (3) SONIA for loans denominated in Sterling, and (4) EURIBOR for loans denominated in Euros, plus in each case, an applicable margin, which is between 0.50% and 1.00% for US Base Rate Loans and 1.50% and 2.00% for US Term SOFR Loans, UK SONIA Rate Loans and UK EURIBOR Loans; and (d) certain affirmative and negative covenants and a springing (subject to certain triggers) fixed charge coverage ratio. The obligations under the 2026 Revolving Credit Agreement are secured by substantially all of our assets and those of our subsidiaries which are party to the 2026 Revolving Credit Agreement. The respective priorities of the security interests securing the 2026 Term Loan Financing Agreement and the 2026 Revolving Credit Agreement are governed by an intercreditor agreement, dated as of April 30, 2026, between Blue Torch and Bank of America. 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. Our market risk exposure is primarily a result of fluctuations in interest rates, foreign currency exchange rates and inflation. We have 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. We do not use derivative financial instruments for speculative or trading purposes. As of March 31, 2026 and December 31, 2025, we did not have any derivative financial instruments. Interest Rate Risk As of March 31, 2026, we had cash of $12.3 million, which consisted primarily of bank deposits. Our cash is held for working capital purposes. We are exposed to interest rate risk primarily through borrowings under our amended Credit Agreement, which bears interest at variable rates. The applicable interest rate varies based on the type of loan and the borrower and is calculated using a floating benchmark rate plus an applicable margin. Depending on the loan type and currency, the floating benchmark may be the prime rate announced by Bank of America, Term SOFR, Daily Simple SOFR, EURIBOR, or SONIA. Because these benchmark rates fluctuate with market conditions, our interest expense will increase or decrease as the underlying reference rates change. As of December 31, 2025, under the amended Credit Agreement, 26 we had $85.1 million of outstanding balance at face value. A 100 basis-point change in applicable benchmark interest rates would increase or decrease our annual interest expense by approximately $0.5 million based on $53.6 million of variable-rate borrowings outstanding. Foreign Currency Exchange Risk We have exchange rate exposure primarily with respect to the British Pound and Euro. As of March 31, 2026 and December 31, 2025, 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 We remain exposed to market risk driven by inflationary pressures affecting our costs and demand for the products we sell. Such inflationary pressures have been and could continue to be exacerbated by continued high tariffs, higher oil prices, geopolitical turmoil, and economic policy actions and could lead to a recessionary environment. In recent years, our business has been affected by volatile global supply chain constraints and unfavorable changes in economic or political conditions in the countries and markets where we operate. Our financial performance continues to be influenced by shifting economic and political landscapes, most notably regarding evolving U.S. trade policies. The incremental tariffs have had and may continue to have an adverse impact on our 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 our 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 our products, product availability and our results of operations. We continue to experience the on-going impacts of a higher interest rate environment, 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 our profit margins if selling prices of products do not increase with the increased costs. 27