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Table of Contents

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 September 30, 2023
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
x
Accelerated filer
o
Non-accelerated fileroSmaller reporting company
o
Emerging growth company
o
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 November 6, 2023, there were 152,784,298 ordinary shares, nominal value $1.00 per share, outstanding.


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Page
    6. Leases
    10. Equity
Item 1A.
Risk Factors
2

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the period ended September 30, 2023 (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:
future financial performance, financial projections or estimates used, including any growth or expansion plans and opportunities;
our ability to expand our fire safety business;
our beliefs regarding certain trends and growth drivers in our fire safety business, including weather and climate trends;
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;
our ability to offset inflationary pressure;
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;
our expectations regarding the impact of significant infrequent events, such as the COVID-19 pandemic and the conflict in Ukraine, on our business;
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, overall economic conditions and disruptive weather events;
expectations concerning repurchases of our Ordinary Shares (as defined below) 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 regarding our remediation plan for material weaknesses;
our beliefs regarding the assumptions and estimates used in assessing goodwill, including our beliefs regarding the methods and approaches a market participant would use;
our ability to maintain an inventory position that is substantially balanced between our purchases and sales;
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.
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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:
negative or uncertain worldwide economic conditions;
volatility, seasonality and cyclicality in the industries in which we operate;
our ability to realize the strategic and financial benefits of the Business Combination (as defined below);
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 specialty chemicals 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.
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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, 2022 (the “2022 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)
September 30, 2023December 31, 2022
ASSETS(Unaudited)
Current assets:
 Cash and cash equivalents$71,761 $126,750 
Accounts receivable, net72,098 26,646 
Inventories139,785 142,961 
Income tax receivable3,728 214 
Prepaid expenses and other current assets6,984 11,951 
Total current assets294,356 308,522 
Property, plant and equipment, net58,308 58,846 
Operating lease right-of-use assets16,959 18,582 
Finance lease right-of-use assets5,585  
Goodwill1,028,802 1,031,460 
Customer lists, net681,509 710,329 
Technology and patents, net182,518 232,818 
Tradenames, net90,471 94,293 
Other assets, net1,428 1,766 
Total assets$2,359,936 $2,456,616 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable$18,838 $36,794 
Accrued expenses and other current liabilities37,611 32,705 
Founders advisory fees payable - related party5,919 4,655 
Deferred revenue1,169  
Total current liabilities63,537 74,154 
Long-term debt666,184 665,280 
Operating lease liabilities, net of current portion15,385 15,484 
Finance lease liabilities, net of current portion5,036  
Deferred income taxes266,784 278,270 
Founders advisory fees payable - related party55,993 170,718 
Redeemable preferred shares104,767 101,279 
Redeemable preferred shares - related party2,778 3,209 
Other non-current liabilities2,087 9,322 
Total liabilities1,182,551 1,317,716 
Commitments and contingencies (Note 9)
Shareholders’ equity:
Ordinary shares, $1 nominal value per share, 4,000,000,000 shares authorized; 165,066,195 and 163,234,542 shares issued; 152,784,298 and 156,797,806 shares outstanding at September 30, 2023 and December 31, 2022, respectively
165,067 163,235 
Treasury shares, at cost; 12,281,897 shares and 6,436,736 at September 30, 2023 and December 31, 2022, respectively
(86,588)(49,341)
Additional paid-in capital1,696,819 1,698,781 
Accumulated other comprehensive loss(30,336)(25,471)
Accumulated deficit(567,577)(648,304)
Total shareholders’ equity1,177,385 1,138,900 
Total liabilities and shareholders’ equity$2,359,936 $2,456,616 
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)
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net sales$142,658 $160,509 $262,653 $319,232 
Cost of goods sold69,357 73,761 144,509 187,154 
Gross profit73,301 86,748 118,144 132,078 
Operating expenses:
Selling, general and administrative expense16,161 15,650 41,523 54,483 
Amortization expense13,778 13,738 41,312 41,395 
Founders advisory fees - related party(24,544)(73,713)(108,806)(154,026)
Intangible impairment40,738  40,738  
Other operating (income) expense (51)10 405 
Total operating expenses46,133 (44,376)14,777 (57,743)
Operating income27,168 131,124 103,367 189,821 
Other expense (income):
Interest expense, net10,448 9,944 30,938 32,582 
Gain on contingent earn-out(7,665)(3,644)(7,273)(13,042)
Unrealized foreign currency loss1,384 4,705 756 8,741 
Other (income) expense, net(60)(785)29 (820)
Total other expense, net4,107 10,220 24,450 27,461 
Income before income taxes23,061 120,904 78,917 162,360 
Income tax (expense) benefit(3,779)(14,677)1,810 (10,243)
Net income19,282 106,227 80,727 152,117 
Other comprehensive loss, net of tax:
Foreign currency translation adjustments(8,673)(18,181)(4,865)(34,426)
Total comprehensive income$10,609 $88,046 $75,862 $117,691 
Earnings per share:
Basic$0.13 $0.65 $0.52 $0.94 
Diluted$0.12 $0.60 $0.48 $0.86 
Weighted average number of ordinary shares outstanding:
Basic153,694,160 162,635,592 155,958,492 161,943,492 
Diluted165,479,465 176,777,958 167,743,797 176,085,858 
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)

Ordinary SharesTreasury SharesAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Shareholders'
Equity
SharesAmountSharesAmount
Balance, December 31, 2022
163,234,542 $163,235 6,436,736 $(49,341)$1,698,781 $(25,471)$(648,304)$1,138,900 
Share-based compensation— — — — (3,074)— — (3,074)
Ordinary shares issued related to founders advisory fees - related party1,831,653 1,832 — — (1,832)— —  
Ordinary shares repurchased— — 115,570 (864)— — — (864)
Net income— — — — — — 9,431 9,431 
Other comprehensive income— — — — — 1,593 — 1,593 
Balance, March 31, 2023165,066,195 165,067 6,552,306 (50,205)1,693,875 (23,878)(638,873)1,145,986 
Share-based compensation— — — — 1,195 — — 1,195 
Ordinary shares repurchased— — 3,993,056 (26,348)— — — (26,348)
Net income— — — — — — 52,014 52,014 
Other comprehensive income— — — — — 2,215 — 2,215 
Balance, June 30, 2023165,066,195 $165,067 10,545,362 $(76,553)$1,695,070 $(21,663)$(586,859)$1,175,062 
Share-based compensation— — — — 1,749 — — 1,749 
Ordinary shares repurchased— — 1,736,535 (10,035)— — — (10,035)
Net income— — — — — — 19,282 19,282 
Other comprehensive loss— — — — — (8,673)— (8,673)
Balance, September 30, 2023
165,066,195 $165,067 12,281,897 $(86,588)$1,696,819 $(30,336)$(567,577)$1,177,385 
See accompanying notes to condensed consolidated financial statements.
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PERIMETER SOLUTIONS, SA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
(in thousands, except share data)
(Unaudited)

Ordinary SharesTreasury SharesAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Shareholders'
Equity
SharesAmountSharesAmount
Balance, December 31, 2021157,237,435 $157,237  $ $1,670,033 $(7,135)$(738,517)$1,081,618 
Share-based compensation— — — — 4,963 — — 4,963 
Ordinary share issued related to founders advisory fees - related party5,952,992 5,954 — — 7,829 — — 13,783 
Ordinary share issued related to warrants exercised44,115 44 — — 485 — — 529 
Cumulative effect of accounting change on adoption of ASU 2016-13— — — — — — (1,545)(1,545)
Net income— — — — — — 36,963 36,963 
Other comprehensive income— — — — — 126 — 126 
Balance, March 31, 2022163,234,542 163,235   1,683,310 (7,009)(703,099)1,136,437 
Share-based compensation— — — — 3,433 — — 3,433 
Ordinary shares repurchased— — 597,513 (5,008)— — — (5,008)
Net income— — — — — — 8,927 8,927 
Other comprehensive loss— — — — — (16,371)— (16,371)
Balance, June 30, 2022163,234,542 $163,235 597,513 $(5,008)$1,686,743 $(23,380)$(694,172)$1,127,418 
Share-based compensation— — — — (845)— — (845)
Ordinary shares repurchased— — 320,703 (2,564)— — — (2,564)
Net income— — — — — — 106,227 106,227 
Other comprehensive loss— — — — — (18,181)— (18,181)
Balance, September 30, 2022163,234,542 $163,235 918,216 $(7,572)$1,685,898 $(41,561)$(587,945)$1,212,055 
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)
Nine Months Ended September 30,
20232022
Cash flows from operating activities:
Net income$80,727 $152,117 
Adjustments to reconcile net income to net cash used in operating activities:
Founders advisory fees - related party (change in accounting fair value)(108,806)(154,026)
Depreciation and amortization expense48,493 49,536 
Interest and payment-in-kind on preferred shares5,094 4,903 
Share-based compensation(130)7,551 
Non-cash lease expense3,353 4,023 
Deferred income taxes(11,302)(20,488)
Intangible impairment40,738  
Amortization of deferred financing costs1,243 1,196 
Amortization of acquisition related inventory step-up 24,796 
Gain on contingent earn-out(7,273)(13,042)
Unrealized loss on foreign currency756 8,741 
Loss on disposal of assets3 9 
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable(46,216)(63,838)
Inventories2,674 (40,759)
Prepaid expenses and current other assets4,966 9,058 
Accounts payable(17,999)4,975 
Deferred revenue1,169 889 
Income taxes payable, net(8,784)23,271 
Accrued expenses and other current liabilities9,024 15,547 
Founders advisory fees - related party (cash settled)(4,655)(53,547)
Operating lease liabilities(3,206)(3,797)
Finance lease liabilities(172) 
Other liabilities69 (299)
Net cash used in operating activities(10,234)(43,184)
Cash flows from investing activities:
Purchase of property and equipment(6,630)(6,024)
Purchase price adjustment under Business Combination Agreement (1,638)
Net cash used in investing activities(6,630)(7,662)
Cash flows from financing activities:
Ordinary shares repurchased(37,247)(7,572)
Proceeds from exercise of warrants 529 
Principal payments on finance lease obligations(251) 
Net cash used in financing activities(37,498)(7,043)
Effect of foreign currency on cash and cash equivalents(627)(1,409)
Net change in cash and cash equivalents(54,989)(59,298)
Cash and cash equivalents, beginning of period126,750 225,554 
Cash and cash equivalents, end of period$71,761 $166,256 
Supplemental disclosures of cash flow information:
Cash paid for interest$19,971 $18,299 
Cash paid for income taxes$20,562 $7,588 
Non-cash investing and financing activities:
Liability portion of founders advisory fees - related party reclassified to additional paid in capital$ $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. 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." The condensed consolidated financial statements herein include the assets, liabilities, and results of operations of PSSA and its subsidiaries, all of which are wholly owned (collectively, the “Company”).
Business Operations
The Company is a global solutions provider for the fire safety and specialty chemical industries. Approximately 74% of the Company's 2022 annual revenues were derived in the United States, approximately 15% in Europe, approximately 5% in Canada and approximately 2% in Mexico, with the remaining approximately 4% spread across various other countries. The Company’s business is organized and managed in two reporting segments: Fire Safety and Specialty Products.
The Fire Safety business 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 business also offers specialized equipment and services, typically in conjunction with its fire management products to support 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. Significant end markets include primarily government-related entities and are dependent on approvals, qualifications, and permits granted by the respective governments and commercial customers around the world.
The Specialty Products segment produces and sells Phosphorus Pentasulfide ("P2S5") in several end markets and applications, including lubricant additives, various agricultural applications, various mining applications, and emerging electric battery technologies. Within the lubricant additives 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. P2S5 is also used in pesticide and mining chemicals applications.
Global Economic Environment
In recent years, the global economy and labor markets have experienced significant inflationary pressures attributable to ongoing economic recovery and supply chain issues, in part due to the impacts of the COVID-19 pandemic and the conflicts in Ukraine and Israel. While the Company has limited exposure in regions with active conflict, it continues to monitor and 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 they will be successful in fully offsetting increased costs resulting from inflationary pressure. In addition, interest payments for borrowings under the Company’s revolving credit facility are based on variable rates and any continued increase in interest rates may reduce the Company’s cash flow available for other corporate purposes.
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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 2022 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.
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 September 30, 2023, 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 2022 Annual Report, except for performance-based non-qualified stock options ("PBNQSO") granted during the three months ended March 31, 2023 (“Q1-2023 Option Grants”), modifications to PBNQSO’s as of May 8, 2023 and PBNQSO’s granted during the three months ended September 30, 2023 (“Q3-2023 Option Grants”).
For Q1-2023 Option Grants, the Company recognized compensation costs related to PBNQSO’s granted to employees and non-employees based on the estimated fair value of the awards on the date of grant. The Company estimated the grant date fair value, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model. The Company records forfeitures as they are incurred. The grant date fair value of the PBNQSO’s is expensed proportionately for each tranche over the applicable service period. The fair value of PBNQSO’s is recognized as compensation expense beginning at the time in which the performance conditions are deemed probable of achievement, over the remaining applicable service period. The assumptions used in the Black-Scholes option-pricing model are as follows:
Exercise price. The Company's Ordinary Shares’ fair market value on the date of grant.
Fair Market Value of Ordinary Shares. The grant date fair market value is the quoted market price of the Company's Ordinary Shares.
Expected term. The expected term of stock options represents the period that the stock options are expected to remain outstanding and is based on vesting terms, exercise term and contractual lives of the options. The expected term is based on the simplified method and is estimated as the average of the weighted average vesting term and
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the time to expiration as of the grant date. The simplified method was used due to the lack of historical exercise information.
Expected volatility. As the Company does not have sufficient historical stock price information to meet the expected life of the stock option grants, it uses a blended volatility based on the Company’s short trading history and on the trading history from the common stock of a set of comparable publicly listed companies.
Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield with a maturity equal to the expected term of the stock options in effect at the time of grant.
Dividend yield. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plan to pay any dividends on its Ordinary Shares.
As of May 8, 2023, to better account for seasonal fluctuations of the business, and to better align stock option performance with shareholder return, the Company modified certain terms in the PBNQSO agreements. One modification eliminated a term that provided discretion to the compensation committee to make certain adjustments on how the annual operational performance per diluted share (“AOP”) against the performance target will be measured. Such discretion prohibited the establishment of the grant date under Accounting Standards Codification (“ASC”) Topic 718, “Compensation—Stock Compensation” (“Topic 718”). As of May 8, 2023, it was determined that a mutual understanding of the key terms and conditions of the PBNQSO’s has been ascertained and the grant date was therefore established for PBNQSO’s granted through December 31, 2022 (“Prior Grants”).
The modifications were determined to be a Type I (probable to probable) modification under Topic 718. As such, the Company performed a final fair value remeasurement under the original terms of Prior Grants using the Hull-White model and recognized the cumulative compensation cost to reflect the cumulative effect of re-measuring the compensation cost as of May 8, 2023. Subsequently, the Company calculated the modification date fair value for the PBNQSO’s based on the modified terms using (i) the Hull-White model that addresses the performance condition in the option agreements, and (ii) using the Monte Carlo simulation model that addresses the market condition in the option agreements. The modification did not result in any incremental share-based compensation expense for the Q1-2023 Option Grants.
The Company currently expects that the performance condition for the modified awards is probable of being achieved, accordingly, the fair value of the PBNQSO’s on the modification date, calculated using the Hull-White model and Black Scholes option-pricing model, as applicable, is recognized as compensation expense on a proportionate basis, for each tranche, over the remaining applicable service period. The Hull-White model requires us to make assumptions and judgments about the variables used in the calculation, including the sub-optimal exercise factor, drift rate, the volatility of our Ordinary Shares, risk-free interest rate, and expected dividends. Changes in assumptions made on the risk-free interest rate and expected volatility can materially impact the estimate of fair value and ultimately how much share-based compensation expense is recognized. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of modification and corresponds to the remaining contractual term of the PBNQSO’s. As the Company does not have sufficient historical stock price information to meet the expected life of the stock option grants, it uses a blended volatility based on the Company’s short trading history and on the trading history from the common stock of a set of comparable publicly listed companies.
For Q3-2023 Option Grants, the Company recognized compensation costs related to PBNQSO’s granted to employees and non-employees based on the estimated fair value of the awards on the date of grant. The Company estimated the grant date fair value, and the resulting share-based compensation expense, using the Hull-White model as this model considers the future movement in Ordinary Share price and option holders’ behavior with respect to option exercises.
Recently Issued and Adopted Accounting Standards
In July 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-03 to amend various SEC paragraphs in the Accounting Standards Codification (“ASC”) to primarily reflect the issuance of SEC Staff Accounting Bulletin No. 120. ASU No. 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120 (“SAB 120”), SEC Staff Announcement at the March 24, 2022 Emerging Issues Task Force Meeting (“EITF”) Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock.” ASU 2023-03 amends the ASC for SEC
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updates pursuant to SEC Staff Accounting Bulletin No. 120; SEC Staff Announcement at the March 24, 2022 EITF Meeting; and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. SAB 120 provides guidance on the measurement and disclosure of share-based awards shortly before announcing material nonpublic information. These updates were immediately effective and did not have any impact on our condensed consolidated financial statements.
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 provided 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. In December 2022, the FASB issued ASU No. 2022-06, which deferred the sunset date of reference rate reform relief to December 31, 2024. The switch in the reference rates from LIBOR to SOFR, under the Company’s Revolving Credit Facility (defined below), occurred as of June 30, 2023. The Company did not have any outstanding borrowings under the Revolving Credit Facility, accordingly, the switch in the reference rates from LIBOR to SOFR did not have a material impact on the Company’s consolidated financial statements.
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 required an entity to replace the incurred loss impairment methodology in current U.S. GAAP with a new model that uses a forward-looking expected loss method, which generally results in earlier recognition of allowances for losses. The Company adopted the standard as of January 1, 2022 at December 31, 2022. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements with the most significant impact being the increase in allowance for doubtful accounts related to its trade accounts receivable. The adoption adjustment was recorded to accumulated deficit in the accompanying condensed consolidated statements of shareholders’ equity.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which required 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 added 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. The Company adopted Topic 842 as of January 1, 2022 at December 31, 2022, using the optional transition method provided by ASU 2018-11. Refer to Note 6, "Leases," for additional disclosures.
3. BUSINESS ACQUISITIONS
Business Combination
On November 9, 2021 (the “Closing Date”), PSSA consummated the transactions (the “Business Combination”) contemplated by the business combination agreement 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 and EverArc (BVI) Merger Sub Limited, incorporated in the British Virgin Islands and a wholly-owned subsidiary of PSSA (the “Business Combination Agreement”) dated June 15, 2021.
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.

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4. BALANCE SHEET COMPONENTS
Details of certain balance sheet items are presented below (in thousands):
September 30, 2023December 31, 2022
Inventory:
Raw materials and manufacturing supplies$69,950 $65,968 
Work in process228 248 
Finished goods69,607 76,745 
Total inventory$139,785 $142,961 
Prepaid Expenses and Other Current Assets:
Advance to vendors$2,681 $2,047 
Prepaid insurance797 5,870 
Prepaid value-added taxes1,852 2,872 
Other1,654 1,162 
Total prepaid expenses and other current assets$6,984 $11,951 
Property, Plant and Equipment:
Buildings$3,930 $3,948 
Leasehold improvements2,671 2,333 
Furniture and fixtures511 344 
Machinery and equipment60,828 58,314 
Vehicles3,974 4,106 
Construction in progress3,843 1,953 
Total property, plant and equipment, gross75,757 70,998 
Less: Accumulated depreciation(17,449)(12,152)
Total property, plant and equipment, net$58,308 $58,846 
Accrued Expenses and Other Current Liabilities:
Accrued bonus$3,077 $3,278 
Accrued salaries2,152 2,332 
Accrued employee benefits1,251 846 
Accrued interest16,100 8,235 
Accrued purchases5,601 1,790 
Accrued taxes5,258 11,000 
Operating lease liabilities2,235 3,541 
Finance lease liabilities544  
Other1,393 1,683 
Total accrued expenses and other current liabilities$37,611 $32,705 
Other Non-Current Liabilities:
LaderaTech contingent earn-out$ $7,273 
Other2,087 2,049 
Total other non-current liabilities$2,087 $9,322 
Depreciation expense related to property, plant and equipment was $2.5 million and $7.2 million for the three and nine months ended September 30, 2023, respectively, and $2.7 million and $8.1 million for the three and nine months ended September 30, 2022, respectively, substantially all of which was presented in cost of goods sold in the accompanying condensed consolidated statements of operations and comprehensive income (loss).
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The Company had an allowance for doubtful accounts, included in accounts receivable, net of $0.6 million and $0.9 million as of September 30, 2023 and December 31, 2022, respectively. The Company’s account receivable, net as of December 31, 2021 was $24.3 million.
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, 2022
$860,319 $171,141 $1,031,460 
Foreign currency translation(2,078)(580)(2,658)
Balance, September 30, 2023
$858,241 $170,561 $1,028,802 
Intangible assets and related accumulated amortization as of September 30, 2023 and December 31, 2022 are as follows (in thousands):
September 30, 2023
Estimated
Useful Life
(in years)
Gross ValueImpairmentForeign
Currency
Translation
Accumulated
Amortization
Net Book
Value
Definite Lived Intangible Assets:
Customer lists20$761,000 $ $(7,987)$(71,504)$681,509 
Technology and patents20250,000 (40,738)(3,317)(23,427)182,518 
Tradenames20101,000  (1,038)(9,491)90,471 
Balance, September 30, 2023
$1,112,000 $(40,738)$(12,342)$(104,422)$954,498 
As of September 30, 2023, due to a downward revision in the revenue forecast related to a contingent earn-out eligible fire retardant product acquired by the Company in May 2020 during the purchase of LaderaTech, Inc. (“LaderaTech”), the Company determined that the $40.7 million in carrying value of the technology underlying the contingent earn-out eligible fire retardant product is no longer recoverable. As a result, during the three months ended September 30, 2023 the Company recorded an impairment of $40.7 million in the accompanying condensed consolidated statements of operations and comprehensive income (loss).
December 31, 2022
Estimated
Useful Life
(in years)
Gross ValueForeign
Currency
Translation
Accumulated
Amortization
Net Book
Value
Definite Lived Intangible Assets:
Customer lists20$761,000 $(7,451)$(43,220)$710,329 
Technology and patents20250,000 (3,029)(14,153)232,818 
Tradenames20101,000 (970)(5,737)94,293 
Balance, December 31, 2022
$1,112,000 $(11,450)$(63,110)$1,037,440 
Amortization expense for definite-lived intangible assets was $13.8 million and $41.3 million for the three and nine months ended September 30, 2023, respectively, and $13.7 million and $41.4 million for the three and nine months ended September 30, 2022, respectively.
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Estimated annual amortization expense of intangible assets for the next five years ending December 31 and thereafter is as follows (in thousands):
2023 remaining$13,338 
202453,350 
202553,350 
202653,350 
202753,350 
Thereafter727,760 
Total$954,498 

6. LEASES
Lease cost for the three and nine months ended September 30, 2023 and 2022 are as follow (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Operating lease cost(1)
$1,082 $1,381 $3,353 $4,023 
Finance lease cost:
Amortization of right-of-use assets217  335  
Interest on lease liabilities106  181  
Total lease cost$1,405 $1,381 $3,869 $4,023 
Reported in:
Cost of goods sold$1,268 $1,246 $3,532 $3,679 
Selling, general and administrative137 135 337 344 
Total lease cost$1,405 $1,381 $3,869 $4,023 
(1) Operating lease cost does not include short-term leases or variable costs, all of which are immaterial.
As of September 30, 2023 the weighted-average remaining lease term of operating leases and finance leases were approximately 8.4 years and 8.1 years, respectively and the weighted-average discount rates applied were 6.6% and 7.8%, respectively.
Supplemental cash flow information related to leases for the nine months ended September 30, 2023 and 2022 are as follows (in thousands):
Nine Months Ended September 30,
20232022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases$3,206 $3,797 
Operating cash flows for finance leases172  
Financing cash flows for finance leases251  
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases$4,492 $4,326 
Finance leases 5,677  
Net change in operating lease right-of-use assets due to lease modifications resulting in reclassification of leases from operating to finance$(1,514) 
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As of September 30, 2023, the estimated future minimum payment obligations for non-cancelable operating leases and finance leases are as follows (in thousands):
Operating LeasesFinance Leases
Remainder of 2023$976 $244 
20243,173 962 
20253,105 879 
20262,753 731 
20272,577 694 
Thereafter10,880 4,693 
Total Lease payments23,464 8,203 
Less: imputed interest5,844 2,623 
Present value of lease liabilities$17,620 $5,580 
7. LONG-TERM DEBT AND REDEEMABLE PREFERRED SHARES
Long-term debt consists of the following (in thousands):
September 30, 2023December 31, 2022
Senior Notes$675,000 $675,000 
Less: unamortized debt issuance costs(8,816)(9,720)
Long-term debt$666,184 $665,280 
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).
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As of September 30, 2023 and December 31, 2022, 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.
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 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. As of September 30, 2023 and December 31, 2022, the Company was in compliance with all covenants, including the financial covenants.
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 $1.7 million, $5.1 million, $1.6 million and $4.9 million of dividends on these Redeemable Preferred Shares for the three and nine months ended September 30, 2023 and 2022, respectively, is recorded as interest expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss). At September 30, 2023 and December 31, 2022, $7.5 million and $4.5 million, respectively, 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 are senior to the Ordinary Shares with respect to dividends and with respect to dissolution, liquidation or winding up of the Company. At September 30, 2023 and December 31, 2022, the redemption price was $107.5 million and $104.5 million, respectively.
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8. 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 16.39% and (2.29)% for the three and nine months ended September 30, 2023, respectively, and 12.14% and 6.31% for the three and nine months ended September 30, 2022, 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 September 30, 2023 and 2022 primarily relates to net operating loss 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. During the nine months ended September 30, 2023, there was a decrease in unrecognized tax benefits of $34.0 million due to an amended tax filing. As of September 30, 2023, it is not expected that the Company’s remaining unrecognized tax benefits of $2.3 million will decrease within twelve months.
9. 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 nine months ended September 30, 2023 and 2022. However, the Company has no obligation to record a liability, as there is no financial penalty owed to the vendor. Purchases under this supply agreement were $6.5 million and $24.4 million for the three and nine months ended September 30, 2023, respectively, and $9.6 million and $34.0 million for the three and nine months ended September 30, 2022, respectively.
The Company also has an agreement to purchase various types of capital equipment up to $5.0 million through October 2027. As of September 30, 2023, the Company paid $2.6 million to the supplier and the remaining $2.4 million will be paid through October 2027.
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10. EQUITY
The Company’s authorized share capital is $4,100.0 million, consisting of 4,000.0 million 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.
On July 21, 2022, subject to certain limits, the shareholders of the Company approved a proposal authorizing the Company’s Board of Directors (the “Board”) to repurchase up to 25% of the Company’s Ordinary Shares outstanding as of the date of the shareholders’ approval, being 40,659,257 Ordinary Shares, at any time during the next five years (the “Share Repurchase Plan”). On November 3, 2022 the Board re-established the limit for Ordinary Share repurchases at $100.0 million, which is within the repurchase limit approved by the Company’s shareholders on July 21, 2022.
During the three and nine months ended September 30, 2023, the Company repurchased 1,736,535 and 5,845,161 Ordinary Shares, respectively, under its Share Repurchase Plan. The repurchased Ordinary Shares are recorded at cost and are being held in treasury.
As of September 30, 2023, there were 152,784,298 Ordinary Shares, 33,843,440 warrants and 10,000,000 Redeemable Preferred Shares outstanding.
11. SHARE-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
2021 Equity Plan
In connection with the Business Combination, the Company’s 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.
During the three months ended March 31, 2023, the Company granted 2,175,000 PBNQSO’s that vest based on the achievement of certain performance goals for fiscal years 2023-2027 (the “5-Year Option”) to its chief executive officer and independent directors. The Company recognized compensation costs related to the Q1-2023 Option Grants based on the estimated fair value of the awards on the date of grant. The Company estimates the grant date fair value, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model. The Company records forfeitures as they are incurred. The grant date fair value of the PBNQSO is expensed proportionately for each tranche over the applicable service period. The fair value of performance-based stock options is recognized as compensation expense beginning at the time in which the performance conditions are deemed probable of achievement, over the remaining applicable service period.
On March 8, 2023, in connection changes in the Company’s leadership structure, it amended the performance terms and conditions of the outstanding 5-Year Option previously granted to its former chief executive officer (the “Executive”) where by 50% of such outstanding options eligible to vest in each of fiscal years from 2023 through 2026 will remain subject to the existing performance terms and conditions. The remaining 50% of such outstanding options will be eligible to vest in such fiscal years subject to the performance terms and conditions related to the Executive’s position and duties as Vice Chairman. For the remaining 50% of outstanding options, the Company’s compensation committee will establish performance goals and communicate them to the Executive and assess achievement annually. For accounting purposes, the Company will recognize compensation expense related to the remaining 50% of outstanding options when the specified performance goal for future periods have been established and communicated to the Executive.
In March 2023, based on the Company’s performance for 2022, its compensation committee verified and determined the Annual Operational Performance per Diluted Share (“AOP”) for the 2022 tranche of the 5-Year Option to be $8.39. As a result, it was determined that a mutual understanding of the key terms and conditions for the 2022 tranche had been ascertained and the grant date was therefore established. The cumulative compensation expense for the 2022 tranche was adjusted based on the fair value calculated using the Black-Scholes option-pricing model at the grant date. As the AOP for the 2022 tranche was below the minimum vesting AOP target of $11.35 employees separated from the Company through
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the date of determination of the 2022 AOP relinquished 240,000 options retained by them relating the 2022 tranche and such options were cancelled by the Company.
As of May 8, 2023, the Company modified certain terms in the PBNQSO agreements as noted below:
eliminated a term that provided discretion to the compensation committee to make certain adjustments on how AOP against the performance target will be measured with respect to the Prior Grants;
eliminated the two-year look-back and two-year look-forward for excess AOP;
adjusted the minimum and maximum AOP growth targets from 13.5% and 23.5% to 10% and 20%, respectively;
added of cumulative vesting term, under which if the maximum AOP target was achieved in an option performance year, (including in any one of the two years immediately following the fifth and final year of the option term), any number of unvested options that were eligible to vest in all prior performance years, will be eligible to vest based on AOP calculated in such option performance year;
added an alternative vesting provision if the market price of the Company's Ordinary Shares is more than twice the exercise price for a sustained period of time commencing in the third fiscal year after option grant; and
made certain clarifying and other changes.
The above modifications affected all of the outstanding Prior Grants and Q1-2023 Option Grants and there was no incremental share-based compensation expense as a result of modifications.
During the three months ended September 30, 2023, the Company granted 255,000 5-Year Option to certain employees and non-employee directors. The Company recognized compensation costs related to the Q3-2023 Option Grants based on the estimated fair value of the awards on the date of grant. The Company estimates the grant date fair value, and the resulting share-based compensation expense, using (i) the Hull-White model that addresses the performance condition in the option agreements, and (ii) using the Monte Carlo simulation model that addresses the market condition in the option agreements. The Company records forfeitures as they are incurred. The grant date fair value of the PBNQSO is expensed proportionately for each tranche over the applicable service period. The fair value of performance-based stock options is recognized as compensation expense beginning at the time in which the performance conditions are deemed probable of achievement, over the remaining applicable service period.
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The table below summarizes the PBNQSO activity for the nine months ended September 30, 2023:
Number of Options
Weighted-Average
Exercise/Conversion
Price
Weighted-Average
Remaining Contractual
Life (years)
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 2022
10,339,171 $9.75 
Granted2,430,000 $8.02 
Exercised $ 
Forfeited(1,315,000)$10.00 
Outstanding at September 30, 2023
11,454,171 $9.35 8.48$ 
Options vested and exercisable245,004 $10.00 6.45$ 
The weighted-average assumptions used to fair value the PBNQSO for the Q3-2023 Option Grants, the Q1-2023 Option Grants and to the Prior Grants on the modification date were as follows:
Q3-2023 Option GrantsQ1-2023 Option GrantsPrior Grants
Dividend yield % % %
Risk-free interest rate
4.01% to 4.25%
3.93% to 4.18%
3.48%
Expected volatility45.00 %45.00 %
44.00%
Expected term (years)10.006.50
8.50 to 9.25
Suboptimal exercise multiple2.50  2.5 
Drift rate
4.01% to 4.25%
 %
3.51% to 3.52%
Weighted average exercise price of options granted$5.56 $8.31 $9.78 
Weighted average fair value of options granted$2.83 $4.24 $3.15 

Non-cash share-based compensation expense recognized by the Company for the three and nine months ended September 30, 2023 was $1.7 million and $(0.1) 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 September 30, 2023, there was approximately $18.2 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 2.1 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"), 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. Under the Founder Advisory Agreement, at the election of the EverArc Founder Entity, at least 50% of the Advisory Amounts will be paid in Ordinary Shares and the remainder in cash.
The Fixed Annual Advisory Amount will be equal to 2,357,061 Ordinary Shares (1.5% of 157,137,410 Ordinary Shares outstanding) for each year through December 31, 2027 and is valued using the period end volume weighted average closing share price of our Ordinary Shares for ten consecutive trading days. 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. Because up to 50% of the Advisory Amounts 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.
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As of September 30, 2023 and December 31, 2022, the fair value of the Fixed Annual Advisory Amount was calculated to be $59.2 million and $104.5 million, respectively, based on the period end volume weighted average closing share price for ten consecutive trading days of Ordinary Shares of $5.02 and $8.86, respectively. As of September 30, 2023 and December 31, 2022, the fair value of the Variable Annual Advisory Amount, determined using a Monte Carlo simulation model, was $64.6 million and $237.0 million, respectively.
For the three and nine months ended September 30, 2023, the Company recognized a reduction in the compensation expense related to the founders advisory fees payable - related party due to a decrease in fair value for liability-classified Advisory Amounts of $24.5 million and $108.8 million, respectively. For the three and nine months ended September 30, 2022, the Company recognized a reduction in the compensation expense related to the founders advisory fees payable - related party due to a decrease in fair value for liability-classified Advisory Amounts of $73.7 million and $154.0 million, respectively.
12. 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 Redeemable Preferred Shares equals the redemption price, which approximates fair value. At September 30, 2023 and December 31, 2022, the estimated fair value of the Company’s Senior Notes, calculated using Level 2 inputs, based on bid prices obtained from a broker was approximately $544.1 million and $556.9 million, respectively.
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.
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 September 30, 2023 and December 31, 2022 (in thousands):
Fair Value Measurements Using:
September 30, 2023
Level 1Level 2Level 3Total
Liabilities:
Founders advisory fees payable - related party$29,597 $ $32,315 $61,912 
December 31, 2022
Liabilities:
Founders advisory fees payable - related party$56,883 $ $118,490 $175,373 
LaderaTech contingent earn-out included in other liabilities, non-current  7,273 7,273 
Total liabilities$56,883 $ $125,763 $182,646 
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The fair value of the founders advisory fees payable is based on 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, which requires the input of highly subjective assumptions, including the fair value of the underlying Ordinary Shares, the risk-free interest rate, the expected equity volatility, and the expected term of the Founder Advisory Agreement. See Note 11, “Share-Based Compensation” for discussion of the fair value estimation on the founders advisory fees payable.

The fair value of the contingent earn-out related to 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. Significant changes in the projected revenue, projected gross margin, or discount rate would have a downward impact on the fair value of the contingent consideration. As of September 30, 2023, due to a downward revision in the revenue forecast of the contingent earn-out eligible fire retardant product, the Company determined that (i) $40.7 million in carrying value of the technology underlying the contingent earn-out eligible fire retardant product is no longer recoverable, and (ii) $7.7 million in contingent earn-out is no longer payable. Accordingly, the Company recorded an impairment of $40.7 million and a gain of $7.7 million in the accompanying condensed consolidated statements of operations and comprehensive income (loss).
Changes in Level 3 Liabilities
The reconciliations for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows (in thousands):
Three Months Ended
September 30, 2023
Nine Months Ended
September 30, 2023
Founders Advisory Fees Payable - Related PartyLaderaTech
Contingent
Earn-out
Founders Advisory Fees Payable - Related PartyLaderaTech
Contingent
Earn-out
Fair value, beginning of period$51,729 $7,665 $118,490 $7,273 
Founders advisory fees - related party, change in fair value(19,414) (86,175) 
Gain on contingent earn-out, change in fair value (7,665) (7,273)
Fair value, end of period$32,315 $ $32,315 $ 

Three Months Ended
September 30, 2022
Nine Months Ended
September 30, 2022
Founders Advisory Fees Payable - Related PartyLaderaTech
Contingent Earn-out
Founders Advisory Fees Payable - Related PartyLaderaTech
Contingent Earn-out
Fair value, beginning of period$138,637 $10,581 $251,513 $19,979 
Settlements  (40,776) 
Reclassification from liability to equity  (10,495) 
Founders advisory fees - related party, change in fair value(53,216) (114,821) 
Gain on contingent earn-out, change in fair value (3,644) (13,042)
Fair value, end of period$85,421 $6,937 $85,421 $6,937 
13. RELATED PARTIES
On November 9, 2021, in connection with the consummation of the Business Combination, the Company, EverArc and the EverArc Founder Entity entered into an Assignment and Assumption Agreement (the “Founder Assignment Agreement”) pursuant to which the Company assumed, and agreed to pay, perform, satisfy and discharge in full, all of EverArc’s liabilities and obligations under the Founder Advisory Agreement.
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In exchange for the services provided to the Company, including strategic and capital allocation advice, the EverArc Founder Entity is entitled to receive both the Fixed Annual Advisory Amount and the Variable Annual Advisory Amount from the Company.
The Fixed Annual Advisory Amount will be equal to 2,357,061 Ordinary Shares (1.5% of 157,137,410 Ordinary Shares outstanding) 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. 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.
For 2022, the average price was $8.86 per Ordinary Share. The EverArc Founder Entity was entitled to receive the Fixed Annual Advisory Amount of 2,357,061 Ordinary Shares or a value of $20.9 million, based on average price of $8.86 per Ordinary Share (the “2022 Fixed Amount”). The EverArc Founder Entity did not qualify to receive the Variable Annual Advisory Amount as the average price of $8.86 per Ordinary Share for 2022 was lower than the average price of $13.63 per Ordinary Share established in 2021. Per the Founder Advisory Agreement, the EverArc Founder Entity elected to receive approximately 77.7% of the 2022 Fixed Amount in Ordinary Shares (1,831,653 Ordinary Shares) and approximately 22.3% of the 2022 Fixed Amount in cash ($4.7 million). On February 15, 2023, the Company issued 1,831,653 Ordinary Shares and paid $4.7 million in cash in satisfaction of the 2022 Fixed Amount.
As of September 30, 2023, the Company calculated the fair value of the Fixed Annual Advisory Amounts using the period end volume weighted average closing share price of Ordinary Shares for ten consecutive trading days of $5.02 and used a Monte Carlo simulation model to calculate the fair value of the Variable Annual Advisory Amount. These approaches resulted in fair values of $64.6 million for the Variable Annual Advisory Amount and $59.2 million for the Fixed Annual Advisory Amount, of which 50% may be paid in cash and recorded as a liability and the remaining 50% would be settled in Ordinary Shares. While the entire instrument is subject to the fair value calculation described above, the amount classified and recorded as equity remains consistent while the amount classified and recorded as a liability is updated each period.
For the three and nine months ended September 30, 2023, the Company recognized a reduction in share-based compensation expense related to a decrease in fair value for liability-classified Advisory Amounts of $24.5 million and $108.8 million, respectively, primarily due to the decrease in stock price.
The Company leases real property from the sellers of First Response Fire Rescue, LLC, River City Fabrication, LLC, and H&S Transport, LLC (collectively, “Ironman”). Shannon Horn, who serves as our Business Director, North America Retardant and Services, was one of the sellers of Ironman. The Company paid $0.1 million during both the three months ended September 30, 2023 and 2022, and paid $0.3 million during both the nine months ended September 30, 2023 and 2022, to lease real property from Ironman.
14. REVENUE RECOGNITION
Disaggregation of revenues
Amounts recognized at a point in time primarily relate to products sold whereas amounts recognized over time primarily relate to services associated with the full-service retardant contracts. Revenues for the three and nine months ended September 30, 2023 and 2022 are as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Revenues from products$122,347 $139,941 $238,207 $292,603 
Revenues from services19,845 20,126 23,483 24,116 
Other revenues466 442 963 2,513 
Total net sales$142,658 $160,509 $262,653 $319,232 
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15. EARNINGS PER SHARE
Basic earnings per share represents income available to ordinary shareholders divided by the weighted average number of Ordinary Shares outstanding during the reported period. Diluted earnings per share is based upon the weighted-average number of Ordinary Shares outstanding during the period plus additional weighted-average potentially dilutive Ordinary Share equivalents during the period when the effect is dilutive.
Basic and diluted weighted average shares outstanding and earnings per share were as follows (in thousands, except share and per share data):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net income$19,282 $106,227 $80,727 $152,117 
Weighted-average shares outstanding:
Weighted average shares used in computing earnings per share, basic153,694,160 162,635,592 155,958,492 161,943,492 
Founders advisory fees11,785,305 14,142,366 11,785,305 14,142,366 
Weighted average shares used in computing earnings per share, diluted 165,479,465 176,777,958