What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-04 compared with 2021-11-04 · 79 added, 101 removed, 121 unchanged (60% of the section changed)

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Turtle Beach is a worldwide leader of feature-rich headset solutions for use across multiple platforms, including video game and entertainment consoles, handheld consoles, personal computers (“PC”), tablets and mobile devices.

Under the ROCCAT brand, the Company creates award-winning keyboards, mice, headsets, mousepads, and other computer accessories.

The recently acquired, Neat Microphones brand creates high-quality USB and analog microphones for gamers, streamers, and professionals that embrace cutting-edge technology and design.

ROCCAT is a gaming keyboards, mice and other accessories brand focused in the PC peripherals market.

Neat Microphones is a microphones brand focused on using cutting edge technology and design to create high quality USB and analog microphones for gamers, streamers, and professionals.

Business Trends

Gaming Headset Market

Gaming headsets are part of a $184 billion global software and accessories gaming market.

We participate in the $189 billion global software and accessories gaming market.

The global gaming audience now exceeds global cinema and music markets with over 3 billion active gamers worldwide.

Gaming peripherals, such as headsets, keyboards, mice and controllers are estimated to be a $8.3 billion business globally with 80% of that market in the Americas and Europe where the Company’s business is focused.

Gaming headsets are expected to represent about $3.3 billion global market in 2021, or around 39% of the total gaming peripherals market.

Competitive esports is a global phenomenon where professional gamers train and compete to win prize money, partner with major brands, and attract/gain dedicated fans–similar to traditional professional sports.

There were approximately 398 million esports viewers in 2019, and that was expected to surge to roughly 436 million viewers by 2020 (9.6% YOY), according to a report from Newzoo.

This is expected to go up to 465 million viewers (YoY increase of 8.7%).

Of those 465 million projected viewers, 236 million are expected to identify as “occasional viewers” and 230 million are expected to consider themselves “esports enthusiasts”.

Gaming peripherals, such as headsets, keyboards, mice, microphones, controllers, and simulation are estimated to be a $8.8 billion business globally with over 80% of that market in the Americas and Europe where the Company’s business is focused.

Competitive esports is a global phenomenon where professional gamers train and compete to win prize money, partner with major brands, and attract dedicated fans – similar to traditional professional sports.

There were approximately 490 million esports viewers in 2021, and that is expected to increase to roughly 641 million viewers by 2025, according to a report from Newzoo.

Of those 641 million projected viewers, approximately 318 million are considered “esports enthusiasts.”

Many gamers play online, where a gaming headset (which typically includes a microphone allowing players to communicate in real-time) provides a more immersive experience and a competitive advantage in the industry’s most popular games and franchises.

Through 2021 and going forward, the effects of the global pandemic and the measures being taken in response are uncertain and difficult to predict.

While there were likely certain one-time purchases caused by the stay-at-home orders, we believe millions of new gamers have joined the market which created an ongoing, larger installed base of players.

Console Headset Market

The global market for console headsets in 2021 was approximately $1.7 billion.

PlayStation® and Xbox ® consoles continue to be 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 released their next generation consoles, Xbox ® and PlayStation®5, just ahead of the 2020 holiday season.

Demand for the new consoles has been very strong and exceeded supply which is a good indicator of the enthusiasm for the latest consoles.

Further, industry guidance suggests that with the launch of the new systems, and continued sales of the current consoles, combined console hardware sales will set records in 2021 and 2022.

In 2020, the Nintendo Switch™ completed its third full year in the market with more than 70 million units sold through the end of December 2020, during which there has been an expanding library of games and an increased number of multiplayer chat-enabled games.

In addition, Nintendo launched a follow-on product, the Nintendo Switch™ Lite, which is the handheld-only version of their popular gaming console.

Consistent with a historical pattern of major new console launches every 7-8 years, Microsoft and Sony released their latest next generation consoles, Xbox ® Series and PlayStation®5 platforms just ahead of the 2020 holiday season.

Demand for the new consoles has continued to be very strong and exceeded supply which is a good indicator of the enthusiasm for the latest consoles.

The demand for gaming consoles is forecasted to continue to be strong in 2022 with the additional supply of PlayStation®5 and Xbox ® Series platforms expected to help the overall console market reach single digit percentage growth in 2022.

Nintendo has sold over 100 million units of the Nintendo Switch™ since its release in early 2017.

Nintendo continues adding and expanding their library of games with 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.

While gaming on mobile/tablet devices represents about 52% of the global gaming market and headsets can be used for mobile gaming, console and PC gaming are by-far the largest drivers of gaming headset use.

PC Accessories Market

The market for PC gaming headsets, mice and keyboards grew in 2020 to $3.6 billion.

The same gaming, work-from-home, and school/learn-from-home factors associated with COVID-19 that benefitted the accessories market also resulted in headsets, keyboards, mice and other accessories developed for PC gaming having increased consumer demand.

In 2021, the demand for such PC gaming accessories is forecasted to increase to $3.8 billion.

The market for PC gaming headsets, mice, and keyboards is estimated to have grown in 2021 to $3.8 billion.

The same gaming, work-from-home, and school-learn-from-home factors associated with the COVID-19 pandemic that benefitted the accessories market also resulted in increased consumer demand for headsets, keyboards, mice, and other accessories developed for PC gaming in recent years.

In 2022, this increased demand for such PC gaming accessories is expected to continue.

PC gaming in the U.S.

has seen a resurgence in popularity the past few years and continues to be a main gaming platform internationally, driven by big AAA game launches, PC-specific esports leagues, teams and players, content creators and influencers, cross-platform play, and more.

While most games are available on multiple platforms, gaming on PC offers advantages that include improved graphics, increased speed and precision of mouse/keyboard controls, and the ability for customization.

Gaming mice and keyboards are engineered to provide gamers with higher-end performance and a superior gaming experience through benefits including faster response times, improved materials and build quality, programmable buttons and keys, 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 options for different sensors (optical and laser) and responsiveness, and often feature integrated RGB lighting and software to unify with the lighting on other devices for a visually pleasing PC gaming appearance.

Similarly, PC gaming keyboards deliver a competitive advantage by registering keystrokes faster than others, offer options for mechanical key switches that feel and sound different, and utilize customizable lighting.

has seen a resurgence in popularity the past few years and continues to be a main gaming platform internationally, driven by big AAA game launches, PC-specific esports leagues, popular teams and players, content creators and influencers and cross-platform play.

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 faster response times, improved materials and build quality, programmable buttons and keys, and software suites to customize and control devices and settings.

Similarly, PC gaming keyboards often deliver a competitive advantage by registering keystrokes faster than others and offer options for mechanical and optical key switches that feel and sound different and offer customizable lighting.

PC and console gaming markets are also driven by major game launches and franchises that encourage players to buy equipment and accessories.

On Xbox ® , PlayStation®, 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 which encourage communication and tend to drive increased gaming headset sales.

Many of these established franchises launch new titles annually leading into the holidays and which can cause an additional boost to the normally strong holiday sales of gaming accessories.

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 tend to drive increased gaming headset demand.

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.

Microphone Market

The microphone market is estimated to be approximately $2.3 billion in size with roughly $700 million of that estimated to be for digital USB microphones.

The market for high-quality microphones, specifically digital microphones is experiencing significant growth as consumers on YouTube, Twitch and other popular platforms are gravitating toward using high-quality professional equipment for their workstations.

Additionally, with the increasing trend toward remote work furthered by stay-at-home orders, the need for a great sounding desktop microphone has become an important tool for working from home, as well as learning from home and staying connected with family and friends.

The 2021 acquisition of Neat Microphones expands Turtle Beach’s reach into the global microphone market, including, in particular, the market for digital/USB microphones which are often used by gamers, streamers, and influencers who also use other PC accessories.

COVID-19 Outlook

During 2020, as the pandemic created stay-at-home guidance, the gaming accessory market experienced a significant surge in demand as existing gamers began gaming more and new gamers entered the market.

In addition, the increase in working from home and learning from home created additional demand for accessories, particularly gaming headsets which work well for video and audio calls.

As a result, the Company’s 2020 revenues exceeded historical levels as the overall gaming and headset markets experienced an unprecedented surge in demand.

Going forward, the effects of the global pandemic and the measures being taken in response are uncertain and difficult to predict.

While there were likely certain one-time purchases caused by the stay-at-home orders, we believe millions of new gamers have joined the market which should create an ongoing, larger installed base of players.

As of 2021, the microphone market is estimated to be $2.3 billion in size of which roughly an estimated $700 million is for digital USB microphones.

The market for high-quality microphones, specifically digital microphones, has experienced significant growth as content creators on YouTube, Twitch and other popular platforms are gravitating toward using high-quality professional equipment for their workstations.

Additionally, with the sustained trend to remote work, the need for a well-performing desktop microphone has become an important tool for working and learning from home, as well as staying connected with family and friends.

Turtle Beach’s acquisition of Neat Microphones in 2021 expanded the Company’s reach into the global microphone market, including, in particular, the market for digital/USB microphones that are often used by gamers, streamers, and influencers with other PC accessories.

Other Gaming Accessories Market

During 2021, the Company expanded into the gaming simulation and gaming controller markets with the launch of the VelocityOne Flight™ simulation control system and the Xbox ® Recon Controller, respectively.

These markets will increase our total addressable market by $1 billion, with third-party game controllers at roughly $600 million and PC/console flight simulation hardware at roughly $400 million in global market.

Supply Chain and Logistic Outlook

The ongoing global economic recovery from the COVID-19 pandemic has created significant challenges for global supply chains resulting in inflationary cost pressures and component shortages.

The ongoing global economic recovery from the COVID-19 pandemic as well as a surge in imports and high demand for electronics, has created significant challenges for global supply chains resulting in inflationary cost pressures and component shortages.

We have also experienced logistical challenges related to transportation delays and have incurred incremental costs for commodities and components used in our products as well as component shortages that have negatively impacted our sales and results of operations.

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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:

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;

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These 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 consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:

We consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicator s:

Adjusted EBITDA is defined as net income (loss) before interest, taxes, depreciation and amortization, stock-based compensation (non-cash) and certain special items that we believe are not representative of core operations.

Cash Margin is defined as gross margin excluding depreciation and amortization, and stock-based compensation.

Adjusted EBITDA (and a reconciliation to Net income, the nearest GAAP financial measure) for the three and nine months ended September 30, 2021 and 2020, are as follows:

Adjusted EBITDA (and a reconciliation to Net income (loss), the nearest GAAP financial measure) for the three months ended March 31, 2022 and March 31, 2021, are as follows:

Three Months Ended

Nine Months Ended

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Net income (loss)

Interest expense

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Income tax expense (benefit)

Acquisition-related settlement

Change in fair value of contingent consideration

Business transaction expense

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Adjusted EBITDA

Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020

Net income for the three months ended September 30, 2021 was $2.6 million with Adjusted EBITDA of $6.7 million, compared to net income of $17.8 million with Adjusted EBITDA of $27.6 million for the prior year, due to lower revenue as compared to higher demand from the stay at home orders and channel replenishment, increased logistics costs caused by supply chain challenges and increased operating expenses to support PC product portfolio expansion and entry into new product categories.

Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020

Net income for the nine months ended September 30, 2021 was $13.2 million with Adjusted EBITDA of $27.0 million compared to net income of $22.4 million with adjusted EBITDA of $37.8 million for the prior period due to certain brand development and product portfolio expansion investments and increased costs as a result of supply chain and logistic challenges.

Comparison of the Three Months Ended March 31, 2022 to the Three Months Ended March 31, 2021

Net loss for the three months ended March 31, 2022 was $6.5 million with Adjusted EBITDA of ($5.7) million, compared to net income of $8.8 million with Adjusted EBITDA of $15.3 million for the prior year, due to lower revenue as compared to prior year’s stay-at-home orders and government stimulus payments as well as increased logistics costs caused by supply chain challenges.

Results of Operations

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Operating expenses

Operating income

Operating income (loss)

Interest expense

Other non-operating expense, net

Income before income tax

Income (loss) before income tax

Income tax expense (benefit)

Net income (loss)

Net Revenue and Gross Profit

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Excludes depreciation and amortization, and stock-based compensation

Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020

Net revenue for the three months ended September 30, 2021 was $85.3 million, a $27.2 million decrease from $112.5 million in the elevated comparable prior year period brought on by stay-at-home orders and channel replenishments.

For the three months ended September 30, 2021, gross profit as a percentage of net revenue decreased to 34.3% from 41.0% in the comparable prior year period.

The decrease was primarily due to unfavorable business mix and higher logistics costs.

Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020

Net revenue for the nine months ended September 30, 2021 was $256.9 million, a $29.7 million increase from $227.2 million in the comparable prior year period as consumer demand for console headsets remained at elevated levels early in the year, and retailers increased channel levels in response to on-going global supply chain concerns.

For the nine months ended September 30, 2021, gross profit as a percentage of net revenue decreased to 36.1% from 37.9% in the comparable prior year period.

The decrease was primarily due to margins that were negatively impacted by increased costs as a result of higher logistics costs, partially offset by volume-driven fixed cost leverage.

Comparison of the Three Months Ended March 31, 2022 to the Three Months Ended March 31, 2021

Net revenue for the three months ended March 31, 2022 was $46.7 million, a $46.4 million decrease from $93.1 million in the elevated comparable prior year period brought on by stay-at-home orders and government stimulus payments.

For the three months ended March 31, 2022, gross profit as a percentage of net revenue decreased to 30.1% from 37.5% in the comparable prior year period.

The decrease was primarily due to higher freight costs, a more normalized level of promotional credits and volume-driven fixed cost deleveraging, partially offset by favorable business mix.

Operating Expenses

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Selling and Marketing

Selling and marketing expenses for the three and nine months ended September 30, 2021 totaled $14.3 million and $41.5 million, respectively, compared to $11.9 million and $29.1 million for the three and nine months ended September 30, 2020, respectively.

This increase was primarily due to certain digital marketing initiatives to support PC product portfolio expansion and entry into new product categories.

Selling and marketing expenses for the three months ended March 31, 2022 totaled $10.8 million compared to $11.5 million for the three months ended March 31, 2021.

This decrease was primarily due to lower revenue-based expenses and certain marketing initiatives.

Research and Development

Research and development costs for the three and nine months ended September 30, 2021 were $4.5 million and $12.9 million compared to $3.3 million and $8.7 million for the three and nine months ended September 30, 2020.

The year-over-year increases were primarily due to additional resources and infrastructure to support product expansion.

Research and development costs for the three months ended March 31, 2022 were $5.3 million compared to $4.0 million for the three months ended March 31, 2021.

The year-over-year increases were primarily due to additional global resources and infrastructure to support product expansion.

General and Administrative

General and administrative expenses for the three months ended September 30, 2021 totaled $9.0 million compared to $6.8 million for the three months ended September 30, 2020 as a result of higher professional fees.

General and administrative expenses for the nine months ended September 30, 2021 totaled $24.2 million compared to $19.2 million for the nine months ended September 30, 2020.

The year-over-year increase was primarily due to increased professional fees and the inclusion of acquired NEAT-related headcount, partially offset by lower variable compensation costs.

Income tax benefit for the three months ended September 30, 2021 was $1.8 million at an effective tax rate of (226.2%) and income tax benefit for the nine months ended September 30, 2021 was $0.3 million at an effective tax rate of (2.6%).

Income tax expense for the three and nine months ended September 30, 2020 was $6.4 million at an effective tax rate of 26.5% and $7.9 million at an effective tax rate of 26.0%, respectively.

The effective tax rate for the three and nine months ended September 30, 2021 was primarily impacted by discrete stock-based compensation related tax benefits of $(2.3) million attributable to stock option exercises and restricted stock vestings, Research and Development (“R&D”) credits and the reduced tax rate on our Foreign Derived Intangible Income (“FDII”).

These tax benefits were partially offset by the impact of disallowed compensation and state income tax expense on the estimated annual effective tax rate.

During the third quarter of 2021, we substantially completed a federal R&D study for the 2018-2020 tax years, recognizing tax benefits of $0.5 million, net of reserves.

In addition, we completed an analysis of our foreign sales and recognized a tax benefit of $0.8 million on our FDII.

General and administrative expenses for the three months ended March 31, 2022 totaled $6.2 million compared to $7.0 million for the three months ended March 31, 2021.

The year-over-year decrease was primarily due to lower variable employee cost and professional fees.

Income tax benefit for the three months ended March 31, 2022 was $2.6 million at an effective tax rate of 29.0% and income tax expense for the three months ended March 31, 2021 was $2.8 million at an effective tax rate of 23.8%.

The effective tax rate for the three months ended March 31, 2022 was primarily impacted by certain non-deductible costs and state income tax expense, offset by the deduction for foreign derived intangible income and stock option exercises.

Liquidity and Capital Resources

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The following table summarizes our sources and uses of cash:

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Net cash used for investing activities

Net cash used for financing activities

Net cash provided by financing activities

Effect of foreign exchange on cash

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Operating activities

Cash used for operating activities for the nine months ended September 30, 2021 was $10.3 million, a decrease of $42.9 million as compared to cash provided by $32.6 million for the nine months ended September 30, 2020.

The decrease is primarily the result of lower gross receipts combined with increased raw material procurements and product purchases to maintain inventory levels consistent with expected demand, supply chain challenges and new product introductions.

Cash used for operating activities for the three months ended March 31, 2022 was $13.3 million, a decrease of $34.4 million as compared to cash provided by operating activities of $21.1 million for the three months ended March 31, 2021.

The decrease is primarily the result of lower gross receipts.

Investing activities

Cash used for investing activities was $7.0 million for the nine months ended September 30, 2021 and related to certain capital investments, including $2.5 million related to the Neat Microphones acquisition, compared to $3.9 million for the nine months ended September 30, 2020.

Cash used for investing activities was $0.6 million for the three months ended March 31, 2022, which was related to certain capital investments, compared to $4.8 million for the three months ended March 31, 2021, which included $2.5 million related to the Neat Microphones acquisition.

Financing activities

Net cash used for financing activities was $0.9 million during the nine months ended September 30, 2021 compared to $9.3 million during the nine months ended September 30, 2020.

Financing activities during the nine months ended September 30, 2021 primarily included stock option exercise proceeds of $4.4 million and repurchases of common stock of $4.9 million.

Financing activities during the nine months ended September 30, 2020 consisted of net repayments on our revolving credit facility of $15.6 million and stock option exercise proceeds of $2.2 million.

Net cash provided by financing activities was $0.4 million during the three months ended March 31, 2022 compared to $0.7 million during the three months ended March 31, 2021.

Financing activities during the three months ended March 31, 2022 and March 31, 2021 consisted of stock option exercise proceeds.

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 cash needs for working capital and capital expenditures for at least the next twelve months.

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.

In addition, the Company monitors the capital markets on an ongoing basis and may consider raising capital if favorable market conditions develop.

Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity or capital requirements.

Foreign cash balances at September 30, 2021 and December 31, 2020 were $5.0 million and $5.9 million, respectively.

At-the-Market Common Stock Issuance

Foreign cash balances at March 31, 2022 and December 31, 2021 were $5.6 million and $10.2 million, respectively.

At-the-Market Equity Offering Sales Agreement

On August 7, 2020, the Company entered into an ATM Equity Offering Sales Agreement (the “Sales Agreement”) with BofA Securities, Inc.

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The Company intends to use the net proceeds from the offering, after deducting the Sales Agent’s commissions and the Company’s offering expenses, to support its strategic growth plans, as well as for general corporate purposes.

There was no activity under this agreement during the nine months ended September 30, 2021.

There was no activity under this agreement during the three months ended March 31, 2022.

Revolving Credit Facility

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The Credit Facility, which expires on March 5, 2024, provides for a line of credit of up to $80 million inclusive of a sub-facility limit of $12 million for TB Europe, a wholly-owned subsidiary of Turtle Beach.

In addition, the Credit Facility provides for a $40 million accordion feature and the ability to increase the borrowing base with a FILO Loan of up to $6.8 million.

In addition, the Credit Facility provides for a $40 million accordion feature and the ability to increase the borrowing base with a “first-in, last-out” (a “FILO Loan”) of up to $6.8 million.

On May 31, 2019, the Company amended the Credit Facility to provide for, amongst other items, (i) the addition of TBC Holding Company LLC, a wholly-owned subsidiary of VTB, as an obligor and (ii) the ability to make investments in TB Germany GmbH, a wholly-owned subsidiary of TB Europe, of up to $4 million in connection with the acquisition of ROCCAT and up to an additional $4 million annually.

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In addition, Turtle Beach is required to pay a commitment fee on the unused revolving loan commitment at a rate ranging from 0.25% to 0.50% and letter of credit fees and agent fees.

As of September 30, 2021, interest rates for outstanding borrowings were 3.75% for base rate loans and 3.00% for LIBOR rate loans.

As of September 30, 2021, there were no outstanding borrowings under the Credit Facility.

As of March 31, 2022, interest rates for outstanding borrowings were 4.00% for base rate loans and 3.00% for LIBOR rate loans.

As of March 31, 2022, there were no outstanding borrowings under the Credit Facility.

The Company is subject to quarterly financial covenant testing if certain availability thresholds are not met or certain other events occur (as defined in the Credit Facility).

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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, 2021, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $54.6 million.

As of March 31, 2022, the Company was in compliance with all financial covenants under the Credit Facility, as amended, and excess borrowing availability was approximately $48.7 million.

Critical Accounting Estimates

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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.

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The Company does not use derivative financial instruments for speculative or trading purposes.

As of September 30, 2021 and December 31, 2020, we did not have any derivative financial instruments.

As of March 31, 2022 and December 31, 2021, 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, 2021 and December 31, 2020, 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.

As of March 31, 2022 and December 31, 2021, 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 the possibility of inflation, such as increases in the cost of its products.

Although the Company does not believe that inflation has had a material impact on its financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on the Company’s ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenue if the selling prices of products do not increase with these increased costs.

The Company is exposed to market risk due to inflationary pressures, including higher labor-related costs, increases in the costs of the goods and services we purchase as part of the manufacture and distribution of our products, increased costs from supply chain and logistic headwinds and increased costs in our operations generally.

Such inflationary pressures have been and could continue to be exacerbated by higher oil prices, geopolitical turmoil, and economic policy actions.

In 2022, we have experienced a higher rate of inflation than in recent years resulting in higher cost of goods, selling expenses, and general and administrative expenses.

Such increases will have a negative impact on the Company’s profit margins if selling prices of products do not increase with the increased costs.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis