Turtle Beach Corp 10-Q

Item 3 - Quantitative and Qualitative 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 June 30, 2026 and December 31, 2025, we did not have any derivative financial instruments. Interest Rate Risk As of June 30, 2026, we had cash of $19.6 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 2026 Term Loan Facility and 2026 Revolving Credit Facility, each of which bears interest at variable rates. The applicable interest rate depends on the facility and loan type and is calculated as a floating benchmark rate plus an applicable margin. Borrowings under the 2026 Term Loan Facility accrue interest at a benchmark rate such as Reference Rate Loans and SOFR, plus the margin specified for term loans. Borrowings under the 2026 Revolving Credit Facility accrue interest at a benchmark rate such as the prime rate announced by Bank of America, Term SOFR, Daily Simple SOFR, EURIBOR, or SONIA, plus the margin applicable to revolving loans. Because these benchmark rates fluctuate with market conditions, our interest expense will increase or decrease as the underlying reference rates change. As of June 30, 2026, under the 2026 Term Loan Facility, we had $83.9 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 $0.8 million based on $83.9 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 June 30, 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. 29 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.