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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-Q
__________________________
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-41027
_______________________________
PERIMETER SOLUTIONS, SA
(Exact name of Registrant as specified in its Charter)
_______________________________
Grand Duchy of Luxembourg98-1632942
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
12E rue Guillaume Kroll, L-1882 Luxembourg
Grand Duchy of Luxembourg
352 2668 62-1
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (314) 396-7343
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Ordinary Shares, nominal value $1.00 per sharePRMNew York Stock Exchange
Warrants for Ordinary Shares
PRMFFOTC Markets Group Inc.
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
x
Smaller reporting company
o
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 1, 2022, there were 162,637,029 ordinary shares, nominal value $1.00 per share, outstanding.


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Page
    9. Equity
Item 1A.
Risk Factors
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the period ended June 30, 2022 (this “Quarterly Report”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements involve risks and uncertainties and reflect our current views with respect to, among other things, future events and our financial performance. When used in this Quarterly Report, the words “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “indicate,” “seek,” “should,” “would,” and similar expressions are intended to identify forward-looking statements, though not all forward-looking statements contain these identifying words. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. These forward-looking statements include, without limitation, statements about the following matters:
our expectations regarding the impact of the COVID-19 (as defined below) pandemic on our business;
our expectations regarding the impact of the conflict in Ukraine on our business;
our ability to realize the benefits from the Business Combination (as defined below);
future financial performance, including any growth or expansion plans and opportunities;
our ability to grow long-term value through, among other things, the continuing performance improvement of our existing operations, execution of a disciplined capital allocation and management of our capital structure;
our expectations regarding future capital expenditures;
cash flow projections;
our ability to maintain a leadership position in any market;
expectations concerning sources of revenue;
expectations about demand for fire retardant products, equipment and services;
the size of the markets we compete in and potential opportunities in such markets or new markets;
expectations concerning certain of our products’ ability to protect life and property as population settlement locations change;
expectations concerning the markets in which we will operate in the coming years and overall economic conditions;
expectations concerning repurchases of our ordinary shares under the Share Repurchase Plan (as defined below);
our beliefs regarding the sufficiency of our current sources of liquidity to fund our future liquidity requirements, our expectations regarding the types of future liquidity requirements and our expectations regarding the availability of future sources of liquidity;
our expectations and beliefs regarding accounting and tax matters; and
the expected outcome of litigation matters and the effect of such claims on business, financial condition, results of operations or cash flows.
Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date of this Quarterly Report, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to those summarized below:
the direct and indirect adverse impact of the novel strain of coronavirus, SARS-CoV-2, which causes COVID-19 (“COVID-19”) on the global economy and the related governmental regulations and restrictions;
the impact of the conflict in Ukraine on the global economy and our business;
negative or uncertain worldwide economic conditions;
volatility, seasonality and cyclicality in the industries in which we operate;
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our ability to realize the strategic and financial benefits of the Business Combination;
our substantial dependence on sales to the U.S. Department of Agriculture (“USDA”) Forest Service and the state of California and the risk of decreased sales to these customers;
changes in the regulation of the petrochemical industry, a downturn in the lubricant additives and/or fire retardant end markets or our failure to accurately predict the frequency, duration, timing, and severity of changes in demand in such markets;
changes in customer relations or service levels;
a small number of our customers represent a significant portion of our revenue;
failure to continuously innovate and to provide products that gain market acceptance, which may cause us to be unable to attract new customers or retain existing customers;
improper conduct of, or use of our products, by employees, agents, government contractors or collaborators;
changes in the availability of products from our suppliers on a long-term basis;
production interruptions or shutdowns, which could increase our operating or capital expenditures or negatively impact the supply of our products resulting in reduced sales;
changes in the availability of third-party logistics suppliers for distribution, storage and transportation;
increases in supply and raw material costs, supply shortages, long lead times for components or supply changes;
adverse effects on the demand for our products or services due to the seasonal or cyclical nature of our business or severe weather events;
introduction of new products, which are considered preferable, which could cause demand for some of our products to be reduced or eliminated;
current ongoing and future litigation, including multi-district litigation and other legal proceedings;
heightened liability and reputational risks due to certain of our products being provided to emergency services personnel and their use to protect lives and property;
future products liabilities claims where indemnity and insurance coverage could be inadequate or unavailable to cover these claims due to the fact that some of the products we produce may cause adverse health consequences;
compliance with export control or economic sanctions laws and regulations;
environmental impacts and side effects of our products, which could have adverse consequences for our business;
compliance with environmental laws and regulations;
our ability to protect our intellectual property rights and know-how;
our ability to generate the funds required to service our debt and finance our operations;
fluctuations in foreign currency exchange;
potential impairments or write-offs of certain assets;
the adequacy of our insurance coverage; and
challenges to our decisions and assumptions in assessing and complying with our tax obligations.
For additional information regarding known material factors that could cause our actual results to differ from our projected results, please read (1) Part I, Item 1A. “Risk Factors” in the annual report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Annual Report”); (2) Part II, “Item 1A. Risk Factors” in this Quarterly Report; (3) our reports and registration statements filed from time to time with the Securities and Exchange Commission (the “SEC”), and (4) other public announcements we make from time to time. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PERIMETER SOLUTIONS, SA AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
June 30,
2022
December 31,
2021
ASSETS(Unaudited)
Current assets:
 Cash and cash equivalents$125,502 $225,554 
Accounts receivable, net68,458 24,319 
Inventories123,065 110,087 
Income tax receivable25,608 816 
Prepaid expenses and other current assets6,763 14,161 
Total current assets349,396 374,937 
Property, plant and equipment, net59,155 62,247 
Goodwill1,031,219 1,041,325 
Customer lists, net730,339 753,459 
Technology and patents, net239,043 247,368 
Tradenames, net96,960 100,005 
Other assets, net1,992 2,219 
Total assets$2,508,104 $2,581,560 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable$42,967 $27,469 
Accrued expenses and other current liabilities22,876 19,025 
Founders advisory fees payable - related party27,116 53,547 
Deferred revenue5,387 445 
Total current liabilities98,346 100,486 
Long-term debt664,696 664,128 
Deferred income taxes304,993 298,633 
Founders advisory fees payable - related party191,031 312,242 
Redeemable preferred shares99,312 96,867 
Redeemable preferred shares - related party3,215 3,699 
Other non-current liabilities12,643 22,195 
Total liabilities1,374,236 1,498,250 
Commitments and contingencies (Note 8)
Shareholders’ equity:
Ordinary shares, $1 nominal value per share, 4,000,000,000 shares authorized; 163,234,542 and 157,237,435 shares issued; 162,637,029 and 157,237,435 shares outstanding at June 30, 2022 and December 31, 2021, respectively
163,235 157,237 
Treasury shares, at cost; 597,513 shares at June 30, 2022 and no shares at December 31, 2021
(5,008) 
Additional paid-in capital1,690,812 1,670,033 
Accumulated other comprehensive loss(23,380)(7,135)
Accumulated deficit(691,791)(736,825)
Total shareholders’ equity1,133,868 1,083,310 
Total liabilities and shareholders’ equity$2,508,104 $2,581,560 
See accompanying notes to condensed consolidated financial statements.
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PERIMETER SOLUTIONS, SA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share data)
(Unaudited)
SuccessorPredecessorSuccessorPredecessor
Three Months Ended
June 30, 2022
Three Months Ended
June 30, 2021
Six Months Ended
June 30, 2022
Six Months Ended
June 30, 2021
Net sales$100,965 $87,121 $158,723 $121,046 
Cost of goods sold72,423 48,840 117,050 73,814 
Gross profit28,542 38,281 41,673 47,232 
Operating expenses:
Selling, general and administrative expense22,614 18,284 42,422 27,211 
Amortization expense13,802 13,293 27,657 26,542 
Founders advisory fees - related party(20,465) (80,313) 
Other operating expense260 441 456 753 
Total operating expenses16,211 32,018 (9,778)54,506 
Operating income (loss)12,331 6,263 51,451 (7,274)
Other expense (income):
Interest expense, net12,142 8,035 22,638 15,886 
(Gain) loss on contingent earn-out(9,398)2,763 (9,398)2,763 
Unrealized foreign currency loss (gain)3,156 (540)4,036 2,258 
Other (income) expense, net(200)(44)(35)(318)
Total other expense, net5,700 10,214 17,241 20,589 
Income (loss) before income taxes6,631 (3,951)34,210 (27,863)
Income tax benefit592 103 10,824 5,486 
Net income (loss)7,223 (3,848)45,034 (22,377)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments(16,371)562 (16,245)(404)
Total comprehensive (loss) income$(9,148)$(3,286)$28,789 $(22,781)
Earnings (loss) per share:
Basic$0.04 $(0.07)$0.28 $(0.42)
Diluted$0.04 $(0.07)$0.26 $(0.42)
Weighted average number of ordinary shares outstanding:
Basic162,917,478 53,045,510 161,591,704 53,045,510 
Diluted177,059,844 53,045,510 175,734,070 53,045,510 
See accompanying notes to condensed consolidated financial statements.
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PERIMETER SOLUTIONS, SA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
(Unaudited)
Common StockTreasury SharesAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Shareholders'
Equity
SharesAmountSharesAmount
Predecessor
Balance, December 31, 2020
53,045,510 $53,046  $ $289,344 $(3,174)$(47,794)$291,422 
Net loss— — — — — — (18,529)(18,529)
Other comprehensive loss— — — — — (966)— (966)
Balance, March 31, 202153,045,510 53,046   289,344 (4,140)(66,323)271,927 
Net loss— — — — — — (3,848)(3,848)
Other comprehensive income— — — — — 562 — 562 
Balance, June 30, 2021
53,045,510 $53,046  $ $289,344 $(3,578)$(70,171)$268,641 
Ordinary SharesTreasury SharesAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Shareholders'
Equity
SharesAmountSharesAmount
Successor
Balance, December 31, 2021
157,237,435 $157,237  $ $1,670,033 $(7,135)$(736,825)$1,083,310 
Share-based compensation— — — — 5,724 — — 5,724 
Ordinary shares issued related to founders advisory fees - related party5,952,992 5,954 — — 7,829 — — 13,783 
Ordinary shares issued related to warrants exercised44,115 44 — — 485 — — 529 
Net income— — — — — — 37,811 37,811 
Other comprehensive income— — — — — 126 — 126 
Balance, March 31, 2022163,234,542 163,235   1,684,071 (7,009)(699,014)1,141,283 
Share-based compensation— — — — 6,741 — — 6,741 
Ordinary shares repurchased— — 597,513 (5,008)— — — (5,008)
Net income— — — — — — 7,223 7,223 
Other comprehensive loss— — — — — (16,371)— (16,371)
Balance, June 30, 2022
163,234,542 $163,235 597,513 $(5,008)$1,690,812 $(23,380)$(691,791)$1,133,868 
See accompanying notes to condensed consolidated financial statements.
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PERIMETER SOLUTIONS, SA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
SuccessorPredecessor
Six Months Ended
June 30, 2022
Six Months Ended
June 30, 2021
Cash flows from operating activities:
Net income (loss)$45,034 $(22,377)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Founders advisory fees - related party (change in accounting fair value)(80,313) 
Depreciation and amortization expense33,086 30,381 
Interest and payment-in-kind on preferred shares3,268  
Share-based compensation12,465  
Deferred income taxes7,648 2,242 
Amortization of deferred financing costs793 1,621 
Amortization of acquisition related inventory step-up27,315  
(Gain) loss on contingent earn-out(9,398)2,763 
Unrealized loss on foreign currency4,036 2,258 
Loss on disposal of assets9  
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable(44,477)(37,994)
Inventories(41,431)(19,472)
Income tax receivable(24,778)(5,848)
Prepaid expenses and current other assets7,301 4,761 
Other assets 229 
Accounts payable15,834 26,263 
Deferred revenue4,991 6,415 
Accrued expenses and other current liabilities2,789 (1,559)
Founders advisory fees - related party (cash settled)(53,547) 
Other liabilities24 (199)
Net cash used in operating activities(89,351)(10,516)
Cash flows from investing activities:
Purchase of property and equipment(4,006)(3,507)
Purchase price adjustment under Business Combination Agreement(1,638) 
Purchase of businesses, net of cash acquired (6,264)
Net cash used in investing activities(5,644)(9,771)
Cash flows from financing activities:
Ordinary shares repurchased(5,008) 
Proceeds from exercise of warrants529  
Proceeds from revolving credit facility 7,500 
Repayments of revolving credit facility (3,000)
Repayments of long-term debt (2,808)
Net cash (used in) provided by financing activities(4,479)1,692 
Effect of foreign currency on cash and cash equivalents(578)158 
Net change in cash and cash equivalents(100,052)(18,437)
Cash and cash equivalents, beginning of period225,554 22,478 
Cash and cash equivalents, end of period$125,502 $4,041 
Supplemental disclosures of cash flow information:
Cash paid for interest$17,919 $14,266 
Cash paid for income taxes$6,572 $946 
Non-cash investing and financing activities:
Liability portion of founders advisory fees - related party reclassified to additional paid in capital$13,783 $ 
See accompanying notes to condensed consolidated financial statements
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PERIMETER SOLUTIONS, SA AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Organization and General
Perimeter Solutions, SA, (“PSSA”), a public company limited by shares (société anonyme) was incorporated on June 21, 2021 under the laws of the Grand Duchy of Luxembourg for the purpose of effecting a business combination. PSSA is headquartered in the Grand Duchy of Luxembourg with global operations in North America, Europe, and Asia Pacific. PSSA's ordinary shares, nominal value, $1.00 per share (the “Ordinary Shares”), are listed on the New York Stock Exchange (“NYSE”) and trade under the symbol “PRM.”
Business Combination
On November 9, 2021 (the “Closing Date”), PSSA consummated the transactions contemplated by the business combination (the “Business Combination”) with EverArc Holdings Limited, the former parent company of PSSA (“EverArc”), SK Invictus Holdings, S.à r.l., (“SK Holdings”), SK Invictus Intermediate S.à r.l., (“SK Intermediate”), doing business under the name Perimeter Solutions (“Perimeter” or “Perimeter Solutions”) and EverArc (BVI) Merger Sub Limited, incorporated in the British Virgin Islands and a wholly-owned subsidiary of PSSA (the “Merger Sub”) pursuant to a business combination agreement (the “Business Combination Agreement”) dated June 15, 2021. The term the “Company” refers to PSSA and its consolidated subsidiaries, including SK Intermediate after the closing of the Business Combination (the “Closing”). Upon the acquisition of SK Intermediate, PSSA was determined to be the legal and accounting acquirer (the “Successor”) and SK Intermediate was deemed to be the accounting predecessor (the “Predecessor”).
Business Operations
The Company’s business is organized and managed in two reporting segments: Fire Safety and Specialty Products, formerly Oil Additives. Approximately 73% of the Company's 2021 annual revenues were derived in the United States, approximately 13% in Europe, approximately 7% in Canada and approximately 2% in Mexico, with the remaining approximately 5% spread across various other countries.
The Fire Safety segment is a formulator and manufacturer of fire management products that help the Company’s customers combat various types of fires, including wildland, structural, flammable liquids and other types of fires. The Company’s Fire Safety segment also offers specialized equipment and services, typically in conjunction with its fire management products, to support its customers’ firefighting operations. The Company’s specialized equipment includes air base retardant storage, mixing, and delivery equipment; mobile retardant bases; retardant ground application units; mobile foam equipment; and equipment that it custom designs and manufactures to meet specific customer needs. The Company’s specialized service network is designed to meet the emergency resupply needs of air tanker bases and other customer locations in North America and globally. Significant end markets primarily include government-related entities and are dependent on concessions, licenses, and permits granted by the respective governments and commercial customers around the world.
In June 2022, the Oil Additives segment, which produces and sells Phosphorus Pentasulfide (“P2S5”), was renamed the Specialty Products segment to better reflect the current and expanding applications for P2S5 in several end markets and applications, including lubricant additives, various agricultural applications, various mining applications, and emerging electric battery technologies. Within the lubricant additive end market, currently the Company’s largest end market application, P2S5 is primarily used in the production of a family of compounds called Zinc Dialkyldithiophosphates (“ZDDP”), which is considered an essential component in the formulation of engine oils with its main function to provide anti-wear protection to engine components.
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Global Economic Environment
Russia’s Invasion of Ukraine
In February 2022, Russia invaded Ukraine. While Perimeter has limited exposure in Russia and Ukraine, the Company continues to monitor any broader impact to the global economy, including with respect to inflation, supply chains and fuel prices. The full impact of the conflict on the Company’s business and financial results remains uncertain and will depend on the severity and duration of the conflict and its impact on regional and global economic conditions.
Inflationary Cost Environment
During fiscal 2021 and continuing into the current fiscal year, global commodity and labor markets experienced significant inflationary pressures attributable to economic recovery and supply chain issues associated with the ongoing COVID-19 pandemic. Perimeter is subject to inflationary pressures with respect to raw materials, labor and transportation. Accordingly, the Company continues to take actions with its customers and suppliers to mitigate the impact of these inflationary pressures in the future. Actions to mitigate inflationary pressures with suppliers include aggregation of purchase requirements to achieve optimal volume benefits, negotiation of cost-reductions and identification of more cost competitive suppliers. While these actions are designed to offset the impact of inflationary pressures, the Company cannot provide assurance that it will be successful in fully offsetting increased costs resulting from inflationary pressure.
Ongoing COVID-19 Pandemic
The pandemic, caused by an outbreak of a novel strain of coronavirus, SARS-CoV-2, which causes COVID-19 that began around December 2019, introduced significant volatility to the global health and economic environment, including millions of confirmed COVID-19 cases, business slowdowns or shutdowns, government challenges and market volatility throughout 2020 into 2022.
While the ongoing impact from the COVID-19 pandemic is beginning to moderate and business conditions ease, disruptions to supply chains, transportation efficiency, and availability of raw materials and labor continue to persist. The exact pace and timing of the economic recovery remains uncertain and is expected to continue to be uneven depending on factors such as trends in the number of COVID-19 infections (e.g., impact of new variants of COVID-19 resurfacing), the continued efficacy of vaccines, particularly against any newly emerging variants of COVID-19 and easing of quarantines among other factors. As the consequences of the pandemic and adverse impact to the global economy continue to evolve, the future adverse impact on the Company's business and financial statements remains subject to significant uncertainty as of the date of this filing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. The results of operations for the interim period are not necessarily indicative of the results that will be realized for the entire fiscal year. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and accompanying notes thereto included in the Company’s 2021 Annual Report. The condensed consolidated financial statements for the prior periods include certain reclassifications that were made to conform to the current period presentation. Such reclassifications have no impact on previously reported condensed consolidated financial position, results of operations or cash flows.
Perimeter Solutions is an emerging growth company (“EGC”) as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public
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companies that are not EGC. As an EGC, the Company has elected, under Section 107(b) of the JOBS Act, to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. As of June 30, 2022, the Company’s public float was greater than $700.0 million. As a result, for the fiscal year ending December 31, 2022, the Company will not qualify as an EGC.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany transactions and balances.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates made by management in connection with the preparation of the accompanying unaudited condensed consolidated financial statements include the useful lives of long-lived and intangible assets, the allowance for doubtful accounts, the fair value of financial assets and liabilities, stock options, founder advisory fees, contingent earn-out liability and realizability of deferred tax assets. Actual results could differ from those estimates.
As of June 30, 2022, the Company’s significant accounting policies are consistent with those discussed in Note 2 - “Summary of Significant Accounting Policies and Recent Accounting Pronouncements” in its consolidated financial statements included in the Company’s 2021 Annual Report.
Recently Issued and Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which will require lessees to recognize a right of use asset and a lease liability on their balance sheet for all leases, including operating leases, with a term of greater than 12 months. In July 2018, the FASB issued ASU 2018-11, which adds a transition option permitting entities to apply the provisions of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements. Under this transition option, comparative reporting would not be required, and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption.
The Company has determined its portfolio of leased assets and is completing its review of all related contracts to determine the impact the adoption will have on its consolidated financial statements and related disclosures. Upon adoption, the Company will recognize right of use assets and lease liabilities for certain commitments related to real estate, vehicles, and field equipment that are currently accounted for as operating leases. To track these lease arrangements and facilitate compliance with this ASU, the Company is implementing a third-party lease accounting software solution and is in the process of designing processes and internal controls.
The adoption of this ASU will increase asset and liability balances on the consolidated balance sheets due to the required recognition of right of use assets and corresponding lease liabilities and will result in changes to the Company’s existing accounting policies, business processes, and internal controls. The Company plans to elect the available package of practical expedients provided in the standard and adopt Topic 842 as of January 1, 2022 on its Form 10-K for the year ending December 31, 2022, using the optional transition method provided by ASU 2018-11 and continues to assess potential effects of the standard.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and issued subsequent amendments to the initial guidance within ASU 2019-04, ASU 2019-05 and ASU 2019-11. The amendments require an entity to replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The new standard is effective for the Company for annual periods beginning after December 15, 2022. The Company expects to adopt the new standard on January 1, 2023 and continues to assess potential effects of the standard.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve
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consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted ASU 2019-12 on January 1, 2021 and the adoption of this standard did not have a material impact on its consolidated financial statements and disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and in January 2021 issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. These ASUs provide temporary optional expedients and exceptions to existing guidance on contract modifications and hedge accounting to facilitate the market transition from existing reference rates, such as London Interbank Offered Rate (“LIBOR”) which is being phased out, to alternate reference rates, such as Secured Overnight Financing Rate (“SOFR”). These standards are elective and are effective upon issuance for all entities through December 31, 2022. The Company continues to evaluate the optional relief guidance provided within these ASUs and the impact of adopting these standards on the Company’s consolidated financial statements and disclosures.
3. BUSINESS ACQUISITIONS
Successor
Business Combination – Perimeter Solutions
Pursuant to the Business Combination Agreement, EverArc entered into an escrow agreement with SK Holdings and Wilmington Trust, N.A., a national banking association, as escrow agent, which provided that approximately $7.6 million of the cash consideration payable pursuant to the Business Combination Agreement be held in escrow pending a determination of the post-Closing purchase price adjustments under the Business Combination Agreement.
On March 3, 2022, the post-Closing purchase price adjustments under the Business Combination Agreement were finalized. Approximately $7.6 million held in escrow was released and an additional $1.6 million related to the difference in estimated and actual working capital as of the Closing Date was also paid to SK Holdings.
Predecessor
PC Australasia Asset Acquisition
On April 1, 2021, the Company used cash on hand to purchase all of the wildfire retardant and foam assets of PC Australasia Pty Ltd (“PC Australasia”). The asset purchase agreement provided for approximately $2.7 million in cash to be paid at closing. The PC Australasia acquisition provides the Company direct access to existing markets within the Fire Safety segment. The Company has performed a purchase price allocation, where the Company allocated $1.0 million to goodwill in the predecessor entity. Other amounts allocated to the individual assets and liabilities included within the condensed consolidated balance sheet were not material.
Budenheim Asset Acquisition
On March 2, 2021, the Company used cash on hand to purchase all of the wildfire retardant and foam assets of Budenheim Iberica, S.L.U (“Budenheim”). The asset purchase agreement provided for approximately $3.6 million in cash to be paid at closing. The Budenheim acquisition expands the Company’s access to new markets and is expected to result in additional revenue within the Fire Safety segment. The Company performed a purchase price allocation, where the Company allocated $3.2 million to goodwill in the predecessor entity. Other amounts allocated to the individual assets and liabilities included within the condensed consolidated balance sheet were not material.
For segment reporting purposes, the results of operations and assets from the above predecessor acquisitions have been included in the Company’s Fire Safety segment since the acquisition dates. For the three and six months ended June 30, 2021, sales, earnings related to the operations consisting of the assets and liabilities and direct costs related to PC Australasia and Budenheim were not material. Pro forma financial information has not been presented for these acquisitions as the net effects were neither significant nor material to the Company’s results of operations or financial position.

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4. BALANCE SHEET COMPONENTS
Details of certain balance sheet items are presented below (in thousands):
June 30,
2022
December 31,
2021
Inventory:
Raw materials and manufacturing supplies$64,736 $34,008 
Work in process213 213 
Finished goods58,116 75,866 
Total inventory$123,065 $110,087 
Prepaid Expenses and Other Current Assets:
Advance to vendors$33 $2,984 
Prepaid insurance3,510 8,441 
Other3,220 2,736 
Total prepaid expenses and other current assets$6,763 $14,161 
Property, Plant and Equipment:
Buildings$3,912 $4,021 
Leasehold improvements2,337 2,301 
Furniture and fixtures536 558 
Machinery and equipment50,857 50,177 
Vehicles4,531 4,579 
Construction in progress3,673 1,983 
Total property, plant and equipment, gross65,846 63,619 
Less: Accumulated depreciation(6,691)(1,372)
Total property, plant and equipment, net$59,155 $62,247 
Accrued Expenses and Other Current Liabilities:
Accrued bonus$1,961 $7,728 
Accrued salaries2,492 900 
Accrued employee benefits839 591 
Accrued interest7,305 5,341 
Accrued purchases6,671 1,930 
Accrued taxes1,554 355 
Other2,054 2,180 
Total accrued expenses and other current liabilities$22,876 $19,025 
Other Non-Current Liabilities:
LaderaTech contingent earn-out$10,581 $19,979 
Other2,062 2,216 
Total other non-current liabilities$12,643 $22,195 
Depreciation expense related to property, plant and equipment was $2.9 million and $5.4 million for the three and six months ended June 30, 2022, respectively, and $1.9 million and $3.8 million for the three and six months ended June 30, 2021, respectively, substantially all of which was presented in cost of goods sold in the accompanying condensed consolidated statements of operations and comprehensive income (loss).
The Company had an allowance for doubtful accounts, included in accounts receivable, net of $0.9 million and $1.0 million as of June 30, 2022 and December 31, 2021, respectively.
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5. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by reportable segment are as follows (in thousands):
Fire SafetySpecialty ProductsTotal
Balance, December 31, 2021
$867,807 $173,518 $1,041,325 
Purchase price adjustment under Business Combination Agreement1,638  1,638 
Foreign currency translation(8,224)(3,520)(11,744)
Balance, June 30, 2022
$861,221 $169,998 $1,031,219 
Intangible assets and related accumulated amortization as of June 30, 2022 and December 31, 2021 are as follows (in thousands):
June 30, 2022
Estimated
Useful Life
(in years)
Gross ValueForeign
Currency
Translation
Accumulated
Amortization
Net Book
Value
Definite Lived Intangible Assets:
Technology and patents20$250,000 $(2,953)$(8,004)$239,043 
Customer lists20761,000 (6,244)(24,417)730,339 
Tradenames20101,000 (799)(3,241)96,960 
Balance, June 30, 2022
$1,112,000 $(9,996)$(35,662)$1,066,342 
December 31, 2021
Estimated
Useful Life
(in years)
Gross ValueForeign
Currency
Translation
Accumulated
Amortization
Net Book
Value
Definite Lived Intangible Assets:
Technology and patents20$250,000 $(836)$(1,796)$247,368 
Customer lists20761,000 (2,059)(5,482)753,459 
Tradenames20101,000 (268)(727)100,005 
Balance, December 31, 2021
$1,112,000 $(3,163)$(8,005)$1,100,832 
Amortization expense for definite-lived intangible assets was $13.8 million and $27.7 million for the three and six months ended June 30, 2022, respectively, and $13.3 million and $26.5 million for the three and six months ended June 30, 2021, respectively.
Estimated annual amortization expense of intangible assets for the next five years ended December 31 and thereafter is as follows (in thousands):
2022 remaining$27,800 
202355,600 
202455,600 
202555,600 
202655,600 
Thereafter816,142 
Total$1,066,342 
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6. LONG-TERM DEBT AND REDEEMABLE PREFERRED SHARES
Long-term debt consists of the following (in thousands):
June 30,
2022
December 31,
2021
Senior Notes$675,000 $675,000 
Less: unamortized debt issuance costs(10,304)(10,872)
Long-term debt$664,696 $664,128 
Successor
Revolving Credit Facility
On November 9, 2021, SK Invictus Intermediate II S.à r.l., a private limited liability company governed by the laws of the Grand Duchy of Luxembourg (“SK Intermediate II”), as borrower, entered into a five-year revolving credit facility (the “Revolving Credit Facility”), which provides for a senior secured Revolving Credit Facility in an aggregate principal amount of up to $100.0 million.
The Revolving Credit Facility matures on November 9, 2026. The Revolving Credit Facility includes a $20.0 million swingline sub-facility and a $25.0 million letter of credit sub-facility. The Revolving Credit Facility allows SK Intermediate II to increase commitments under the Revolving Credit Facility up to an aggregate amount not to exceed the greater of (i) $143.0 million and (ii) 100.00% of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the most recent four-quarter period (minus the aggregate outstanding principal amount of certain ratio debt permitted to be incurred thereunder). All borrowings under the Revolving Credit Facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations and warranties, subject to customary exceptions.
Solely to the extent that on the last day of the applicable fiscal quarter, the utilization of the Revolving Credit Facility (excluding cash collateralized letters of credit and up to $10.0 million of undrawn letters of credit) exceeds 40% of the aggregate commitments, the Revolving Credit Facility requires compliance on a quarterly basis with a maximum secured net leverage ratio of 7.50:1.00.
The Revolving Credit Facility is fully and unconditionally guaranteed by the Company and each of SK Intermediate II’s existing and future wholly-owned material restricted subsidiaries, subject to customary exceptions, and is secured by a first priority lien, subject to certain permitted liens, on substantially all of SK Intermediate II’s and each of the guarantors’ existing and future property and assets, subject to customary exceptions.
Deferred financing costs incurred in connection with securing the Revolving Credit Facility were $2.3 million, which is carried as a long-term asset in the accompanying condensed consolidated balance sheets and is amortized on a straight-line over the term of the Revolving Credit Facility and included in interest expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss).
As of June 30, 2022 and December 31, 2021, the Company did not have any outstanding borrowings under the Revolving Credit Facility and was in compliance with all covenants, including the financial covenants.
Senior Notes
On the Closing Date, SK Intermediate II assumed $675.0 million principal amount of 5.00% senior secured notes due October 30, 2029 (“Senior Notes”) issued by EverArc Escrow S.à r.l. (“Escrow Issuer”), a newly-formed limited liability company governed by the laws of the Grand Duchy of Luxembourg and a wholly owned subsidiary of EverArc under an indenture dated as of October 22, 2021 (“Indenture”). The Senior Notes bear interest at an annual rate of 5.00%. Interest on the Senior Notes is payable in cash semi-annually in arrears on April 30 and October 30 of each year, commencing on April 30, 2022.
The Senior Notes are general, secured, senior obligations of SK Intermediate II; rank equally in right of payment with all existing and future senior indebtedness of SK Intermediate II (including, without limitation, the Revolving Credit Facility); and together with the Revolving Credit Facility, are effectively senior to all existing and future indebtedness of
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SK Intermediate II that is not secured by the collateral. The Senior Notes are fully and unconditionally guaranteed on a senior secured basis, jointly and severally, by all of SK Intermediate II’s existing or future restricted subsidiaries (other than certain excluded subsidiaries) that guarantee the Revolving Credit Facility. The Senior Notes contain certain covenants limiting SK Intermediate II’s ability and the ability of the restricted subsidiaries (as defined in the indenture governing the Senior Notes) to, under certain circumstances, prepay subordinated indebtedness, pay distributions, redeem stock or make certain restricted investments; incur indebtedness; create liens on the SK Intermediate II’s assets to secure debt; restrict dividends, distributions or other payments; enter into transactions with affiliates; designate subsidiaries as unrestricted subsidiaries; sell or otherwise transfer or dispose of assets, including equity interests of restricted subsidiaries; effect a consolidation or merger; and change the Company’s line of business.
Deferred financing costs incurred in connection with securing the Senior Notes were $11.0 million, which were capitalized and will be amortized using the effective interest method over the term of the Senior Notes and included in interest expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss). The unamortized portion of the deferred financing costs is included as a reduction to the carrying value of the Senior Notes which have been recorded as long-term debt, net in the accompanying condensed consolidated balance sheets.
Redeemable Preferred Shares
In connection with the Business Combination, the Company issued 10 million redeemable preferred shares of PSSA (“Redeemable Preferred Shares”), nominal value $10 per share, valued at $100.0 million. The Redeemable Preferred Shares are entitled to a preferred annual cumulative right to a dividend equal to 6.50% of its nominal value. The preferred dividend will generally be paid 40.00% in cash and 60.00% in kind each year within three business days following the Company's annual general meeting. Holders of the Redeemable Preferred Shares generally have no voting rights.
The Company, under its articles of association (the “Articles”) is mandatorily required to redeem the Redeemable Preferred Shares at any time prior to the earliest of (i) six months following the latest maturity date of the above-mentioned Senior Notes, (ii) nine years after the date of issuance of the Redeemable Preferred Shares or (iii) upon the occurrence of a change of control, as defined in the Company’s Articles. Due to the fact that the Redeemable Preferred Shares are mandatorily redeemable, the Redeemable Preferred Shares are classified as a liability in the accompanying unaudited condensed consolidated balance sheets, and $1.6 million and $3.3 million of dividends on these Redeemable Preferred Shares for the three and six months ended June 30, 2022, respectively, is recorded as interest expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss). At June 30, 2022, $2.5 million of preferred dividends were in arrears.
The Redeemable Preferred Shares have an aggregate liquidation preference of $100.0 million, plus any accrued and unpaid dividends thereon and is senior to the Ordinary Shares with respect to dividends and with respect to dissolution, liquidation or winding up of the Company. At June 30, 2022, the redemption price was $102.5 million.
Predecessor
On March 28, 2018, Invictus U.S., LLC and SK Intermediate II, two wholly owned subsidiaries of SK Intermediate, entered into credit agreements providing for committed credit facilities of $815.0 million, a substantial portion of which was used to fund the acquisition of the Company’s assets.
Pursuant to the credit agreements, the Company’s First Lien Credit Facility (the “First Lien”) consisted of a $545.0 million U.S. dollar term loan with a maturity of March 28, 2025, a multicurrency revolving credit facility (the “Revolver”), and a $16.0 million extension on the original term loan. The Second Lien Credit Facility (the “Second Lien”) consisted of a $155.0 million U.S. dollar term loan with a maturity of March 28, 2026. The Revolver provided for maximum borrowings of $100.0 million with a maturity of March 28, 2023. Interest was based on the same terms as the First Lien and was subject to a 0.50% unused commitment fee. The Revolver also contained a $10.0 million standby letter of credit sub-facility and a $10.0 million swing line sub-facility.
On the Closing Date, $541.5 million outstanding under the First Lien and $155.0 million outstanding under the Second Lien were repaid and the related unamortized debt issue costs of $11.0 million was charged to interest expense.
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7. INCOME TAXES
The Company is subject to U.S. federal income tax, U.S. state and local tax and tax in foreign jurisdictions. The Company estimates its annual effective tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates. The Company’s effective tax rate was (8.93)% and (31.64)% for the three and six months ended June 30, 2022, respectively, and 2.61% and 19.69% for the three and six months ended June 30, 2021, respectively. The primary differences between the effective tax rate and the amount computed by applying the Luxembourg statutory rate of 24.94% are related to losses not expected to be benefited in certain jurisdictions that have a valuation allowance, permanently non-deductible compensation, withholding taxes accrued on unremitted earnings and the impact of foreign tax rate differences.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. While the Company expects to realize the remaining net deferred tax assets, changes in future taxable income or in tax laws may alter this expectation and result in future increases to the valuation allowance. The valuation allowance for deferred tax assets as of June 30, 2022 and 2021 primarily relates to net operating loss and interest deduction limitation carryforwards that, in the judgment of the Company, are not more likely than not to be realized.
The Company evaluates its tax positions and recognizes only tax benefits that, more likely than not, will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax position is measured at the largest amount of benefit that has a greater than 50.0% likelihood of being realized upon settlement. The Company did not have any uncertain tax benefits as of June 30, 2022 and 2021. As of June 30, 2022 and 2021, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts had been recognized in the accompanying condensed consolidated statement of operations and comprehensive income (loss).
The Company files income tax returns in Luxembourg, U.S. federal and state jurisdictions, and other foreign jurisdictions. As of June 30, 2022, tax years 2018 through 2020 are subject to examination by the tax authorities in the U.S. The Alberta, Canada audit concluded as of January 12, 2022 and no material adjustments were identified.
8. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in various claims, actions, and legal proceedings arising in the ordinary course of business, including a number of matters related to the aqueous film forming foam litigation consolidated in the District of South Carolina multi-district litigation and other similar matters pending in other jurisdictions in the United States. The Company’s exposure to losses, if any, is not considered probable or reasonably estimable at this time.
Commitments
The Company has a supply agreement to purchase elemental phosphorus (“P4”) from a supplier through 2023. The contract price is tied to the contract year cost times a multiplier, subject to a market-driven benchmark price adjustment, which is generally settled once per year. The Company did not purchase the anticipated minimum pounds of P4 for the three and six months ended June 30, 2022 and 2021. However, the Company has no obligation to record a liability, as there is no financial penalty owed to the vendor. Costs incurred under this supply agreement were $10.3 million and $24.3 million for the three and six months ended June 30, 2022, respectively, and $8.8 million and $17.1 million for the three and six months ended June 30, 2021, respectively.
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Leases
The Company leases facilities and other machinery and equipment under long-term noncancelable operating leases through August 14, 2037. As of June 30, 2022, the future minimum rental payments required by the long-term noncancelable operating leases are as follows (in thousands):
Amount
Remainder of 2022$2,234 
20233,730 
20242,953 
20252,604 
20262,461 
Thereafter3,554 
Total$17,536 
Minimum rental payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent. Rent expense for operating leases was $1.5 million and $2.5 million for the three and six months ended June 30, 2022, respectively, of which $1.3 million and $2.2 million, respectively, was presented in cost of goods sold and $0.2 million and $0.3 million, respectively, was presented in selling, general, and administrative expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss). Rent expense for operating leases was $1.1 million and $1.8 million for the three and six months ended June 30, 2021, respectively, of which $1.0 million and $1.6 million, respectively, was presented in cost of goods sold and $0.1 million and $0.2 million, respectively, was presented in selling, general, and administrative expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss).
9. EQUITY
The Company’s authorized share capital is $4,100.0 million, consisting of 4.0 billion Ordinary Shares with a nominal value of $1.00 per share and 10.0 million Redeemable Preferred Shares with a nominal value of $10.00 per share. Each Ordinary Share entitles the holder thereof to one vote.
Due to the fact that the Redeemable Preferred Shares are mandatorily redeemable, the Redeemable Preferred Shares are classified as a liability on the accompanying unaudited condensed consolidated balance sheets.
On December 7, 2021, subject to the approval of the shareholders of the Company, the Company's board of directors (the “Board”) authorized a share repurchase plan (the “Share Repurchase Plan”). Under the Share Repurchase Plan, the Company is authorized to repurchase up to $100.0 million of its issued and outstanding Ordinary Shares at any time during the next 24 months or, if different, such other timeframe as approved by the shareholders of the Company. Until such time as the Share Repurchase Plan was approved by the shareholders of the Company, the Board authorized any subsidiary of the Company to take such actions necessary to purchase Ordinary Shares of the Company. Repurchases under the Share Repurchase Plan may be made, from time to time, in such quantities, in such manner and on such terms and conditions and at prices the Company deems appropriate. For the three and six months ended June 30, 2022, the Company repurchased 597,513 Ordinary Shares on behalf of a wholly-owned subsidiary. The repurchased Ordinary Shares were recorded at cost and are being held in treasury.
On July 21, 2022, subject to certain limits, the shareholders of the Company approved a proposal authorizing the Board to repurchase up to 25% of the Company’s Ordinary Shares outstanding as of the date of shareholders approval at any time during the next five years.
As of June 30, 2022, there were 162,637,029 Ordinary Shares, 33,843,440 warrants and 10,000,000 Redeemable Preferred Shares outstanding.
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10. SHARE-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
2021 Equity Plan
In connection with the Business Combination, the Board adopted, and its shareholders approved, the 2021 Equity Incentive Plan (the “2021 Equity Plan”). A total of 31,900,000 Ordinary Shares are authorized and reserved for issuance under the 2021 Equity Plan which provides for the grant of stock options (either incentive or non-qualified), stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), performance shares, performance share units and other share-based awards with respect to the Ordinary Shares. Shares associated with underlying awards that are expired, forfeited, or otherwise terminated without the delivery of shares, or are settled in cash, and any shares tendered to or withheld by the Company for the payment of an exercise price or for tax withholding will again be available for issuance under the 2021 Equity Plan.
The table below summarizes the performance-based non-qualified stock options (“PBNQSO”) activity for the six months ended June 30, 2022:
Number of Options
Weighted-Average
Exercise/Conversion
Price
Weighted-Average
Remaining Contractual
Life (years)
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 2021
8,763,754 $10.04 
Granted2,504,167 $8.83 
Exercised $ 
Forfeited(843,750)$10.11 
Outstanding at June 30, 2022
10,424,171 $9.75 9.48$11,844 
Options vested and exercisable29,167 $10.00 
The weighted-average assumptions used to fair value the PBNQSO on the grant date using the Black-Scholes option-pricing model were as follows:
2022
Dividend yield %
Risk-free interest rate
1.71% to 3.11%
Expected volatility
39.08% to 43.00%
Expected term (years)6.50
Weighted average exercise price of options granted$8.83 
Weighted average fair value of options granted$4.02 
Non-cash share-based compensation expense recognized by the Company for the three and six months ended June 30, 2022 was $6.7 million and $12.5 million, respectively. Compensation expense is recognized based upon probability assessments of PBNQSOs that are expected to vest in future periods. Such probability assessments are subject to revision and, therefore, unrecognized compensation expense is subject to future changes in estimate. As of June 30, 2022, there was approximately $42.7 million of total unrecognized compensation expense related to non-vested PBNQSOs expected to vest, which is expected to be recognized over a weighted-average period of 2.4 years.
Founder Advisory Amounts
Upon consummation of the Business Combination, the Company assumed the advisory agreement entered into on December 12, 2019 by EverArc (“Founder Advisory Agreement”) with EverArc Founders, LLC, a Delaware limited liability company (“EverArc Founder Entity”), which is owned and operated by William N. Thorndike, Jr., W. Nicholas Howley, Tracy Britt Cool, Vivek Raj and Haitham Khouri (“EverArc Founders”), pursuant to which the EverArc Founder Entity, for the services provided to the Company, including strategic and capital allocation advice, is entitled to receive both a fixed amount (the “Fixed Annual Advisory Amount”) and a variable amount (the “Variable Annual Advisory Amount,” each an “Advisory Amount” and collectively, the “Advisory Amounts”) until the years ending December 31, 2027 and 2031, respectively.
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The Variable Annual Advisory Amount for each year through December 31, 2031 is based on the appreciation of the market price of Ordinary Shares if such market price exceeds certain trading price minimums at the end of each reporting period and is valued using a Monte Carlo simulation model. The Fixed Annual Advisory Amount will be equal to 2,357,061 Ordinary Shares (1.5% of 157,137,410 Ordinary Shares outstanding as of November 9, 2021) for each year through December 31, 2027 and valued using the period end volume weighted average closing share price for ten consecutive trading days of Ordinary Shares. Because up to 50% of the aggregate shares could be settled through a cash payment, 50% are classified as a liability and the remaining 50% is classified within equity. For Advisory Amounts classified within equity, the Company does not subsequently remeasure the fair value. For the Advisory Amounts classified as a liability, the Company remeasures the fair value at each reporting date, accordingly, the compensation expense recorded by the Company in the future will depend upon changes in the fair value of the liability-classified Advisory Amounts.
As of June 30, 2022, the fair value of the Variable Annual Advisory Amount was determined to be $277.3 million using a Monte Carlo simulation model and the fair value of the Fixed Annual Advisory Amount was calculated to be $159.0 million based on the period end volume weighted average closing share price for ten consecutive trading days of Ordinary Shares of $11.24.
For the three and six months ended June 30, 2022, the Company recognized a reduction in share-based compensation expense related to a decrease in fair value for liability-classified Advisory Amounts of $20.5 million and $80.3 million, respectively.
11. FAIR VALUE MEASUREMENTS
Fair Value Measurement
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximates fair value due to the short-term nature of their maturities. Borrowings under the Company’s Revolving Credit Facility accrues interest at a floating rate tied to a standard short-term borrowing index, selected at the Company’s option, plus an applicable margin. The carrying amount of this floating rate debt approximates fair value based upon the respective interest rates adjusting with market rate adjustments. The carrying amount of the Company's Senior Notes and Redeemable Preferred Shares also approximates fair value.
The Company uses valuation approaches that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or a liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 inputs: Other than quoted prices in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
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Liabilities by Hierarchy Level
The following tables set forth the Company’s liabilities that were measured at fair value on a recurring basis, by level, within the fair value hierarchy as of June 30, 2022 and December 31, 2021 (in thousands):
Fair Value Measurements Using:
June 30, 2022
Level 1Level 2Level 3Total
Liabilities:
Founders advisory fees payable - related party$79,510 $ $138,637 $218,147 
LaderaTech contingent earn-out included in other liabilities, non-current  10,581 10,581 
Total liabilities$79,510 $ $149,218 $228,728 
December 31, 2021
Liabilities:
Founders advisory fees payable - related party$114,276 $ $251,513 $365,789 
LaderaTech contingent earn-out included in other liabilities, non-current  19,979 19,979 
Total liabilities$114,276 $ $271,492 $385,768 
At June 30, 2022 and December 31, 2021, the fair value of the contingent earn-out related to the May 2020 purchase of LaderaTech, Inc. (“LaderaTech”) is measured on a recurring basis using Level 3 fair value inputs. The earn-out is based on 20% of gross profits upon achieving a revenue threshold exceeding $5.0 million through December 31, 2026 and is valued using a Monte Carlo simulation model. As of June 30, 2022, the fair value of the contingent earn-out decreased due to a change in the forecast of the product mix from an earn-out eligible fire retardant to a non earn-out eligible Company developed fire retardant. Significant changes in the projected revenue, projected gross margin, or discount rate would have a material impact on the fair value of the contingent consideration.
See Note 10, “Share-Based Compensation” for discussion of the fair value estimation on the founders advisory fees payable - related party.
Changes in Level 3 Liabilities