10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 12, 2024
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-Q
__________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
OR
TRANSITION 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
_______________________________
(Exact name of Registrant as specified in its Charter)
_______________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
352 2668 62-1
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(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 class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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.
x |
Accelerated filer | o |
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Non-accelerated filer | o |
Smaller reporting company | ||||||||||||
Emerging growth company |
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 5, 2024, there were 146,227,972 ordinary shares, nominal value $1.00 per share, outstanding.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the period ended September 30, 2024 (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 ongoing commitment to manufacturing high-quality products in an environmentally conscious way as well as our ongoing commitment to promoting diversity;
•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 as well as our ability to remain an innovation leader by enhancing our products and services and investing in expansions through acquisitions;
•expectations concerning sources of revenue;
•expectations about demand for fire retardant products, equipment and services, including our ability to accurately identify key market drivers and leverage our relationships with customers and stakeholders;
•our expectations regarding the impact of significant infrequent events such as the ongoing regional conflicts in Ukraine or the Middle East, on our business as well as our ability to mitigate inflationary pressures;
•expectations concerning certain of our products’ ability to protect life and property as population settlement locations change;
•expectations concerning the markets in which we currently operate and intend to expand to in the coming years, overall economic conditions and disruptive weather events;
•our expectations regarding market risk;
•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 beliefs regarding assumptions and estimates used in 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;
•our plans to incorporate disclosure and reporting requirements pursuant to newly issued Accounting Standard Updates issued by the Financial Accounting Standards Board and their impact on our disclosures and consolidated financial statements;
•our expectations regarding the timing and impacts of the Redomiciliation Transaction (as defined below);
•our ability to pursue intellectual property protection on product and equipment enhancements; and
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•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:
•negative or uncertain worldwide economic conditions;
•volatility, seasonality and cyclicality in the industries in which we operate;
•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 that 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;
•compliance with securities regulations and Accounting Standard Updates issued by the Financial Accounting Standards Board;
•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, 2023 (the “2023 Annual Report”); (2) Part II, “Item 1A. Risk Factors” in this Quarterly Report; (3)
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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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Table of Contents
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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, 2024 | December 31, 2023 | ||||||||||
ASSETS | (Unaudited) | ||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net | |||||||||||
Inventories | |||||||||||
Prepaid expenses and other current assets | |||||||||||
Total current assets | |||||||||||
Property, plant and equipment, net | |||||||||||
Operating lease right-of-use assets | |||||||||||
Finance lease right-of-use assets | |||||||||||
Goodwill | |||||||||||
Customer lists, net | |||||||||||
Technology and patents, net | |||||||||||
Tradenames, net | |||||||||||
Other assets, net | |||||||||||
Total assets | $ | $ | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | $ | |||||||||
Accrued expenses and other current liabilities | |||||||||||
Founders advisory fees payable - related party | |||||||||||
Deferred revenue | |||||||||||
Total current liabilities | |||||||||||
Long-term debt, net | |||||||||||
Operating lease liabilities, net of current portion | |||||||||||
Finance lease liabilities, net of current portion | |||||||||||
Deferred income taxes | |||||||||||
Founders advisory fees payable - related party | |||||||||||
Redeemable preferred shares | |||||||||||
Redeemable preferred shares - related party | |||||||||||
Other liabilities | |||||||||||
Total liabilities | |||||||||||
Commitments and contingencies (Note 8) | |||||||||||
Shareholders’ equity: | |||||||||||
Ordinary shares, $ |
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Treasury shares, at cost; |
( |
( |
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Additional paid-in capital | |||||||||||
Accumulated other comprehensive loss | ( |
( |
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Accumulated deficit | ( |
( |
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Total shareholders’ equity | |||||||||||
Total liabilities and shareholders’ equity | $ | $ |
See accompanying notes to condensed consolidated financial statements.
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PERIMETER SOLUTIONS, SA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE (LOSS) INCOME
(in thousands, except share and per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
Net sales | $ | $ | $ | $ | |||||||||||||||||||
Cost of goods sold | |||||||||||||||||||||||
Gross profit | |||||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Selling, general and administrative expense | |||||||||||||||||||||||
Amortization expense | |||||||||||||||||||||||
Founders advisory fees - related party | ( |
( |
|||||||||||||||||||||
Intangible impairment | |||||||||||||||||||||||
Other operating expense | |||||||||||||||||||||||
Total operating expenses | |||||||||||||||||||||||
Operating (loss) income | ( |
( |
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Other expense (income): | |||||||||||||||||||||||
Interest expense, net | |||||||||||||||||||||||
Gain on contingent earn-out | ( |
( |
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Foreign currency (gain) loss | ( |
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Other expense (income), net | ( |
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Total other expense, net | |||||||||||||||||||||||
(Loss) income before income taxes | ( |
( |
|||||||||||||||||||||
Income tax (expense) benefit | ( |
( |
( |
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Net (loss) income | ( |
( |
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Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
Foreign currency translation adjustments | ( |
( |
|||||||||||||||||||||
Total comprehensive (loss) income | $ | ( |
$ | $ | ( |
$ | |||||||||||||||||
(Loss) earnings per share: | |||||||||||||||||||||||
Basic | $ | ( |
$ | $ | ( |
$ | |||||||||||||||||
Diluted | $ | ( |
$ | $ | ( |
$ | |||||||||||||||||
Weighted average number of ordinary shares outstanding: | |||||||||||||||||||||||
Basic | |||||||||||||||||||||||
Diluted | |||||||||||||||||||||||
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 Shares | Treasury Shares | Additional Paid-in Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total Shareholders' Equity |
||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2023 | $ | $ | ( |
$ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Ordinary shares issued related to founders advisory fees - related party | — | — | ( |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Ordinary shares repurchased | — | — | ( |
— | — | — | ( |
||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | ( |
— | ( |
|||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2024 | $ | $ | ( |
$ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Ordinary shares repurchased | — | — | ( |
— | — | — | ( |
||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | ( |
— | ( |
|||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2024 | $ | $ | ( |
$ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Ordinary shares repurchased | — | — | ( |
— | — | — | ( |
||||||||||||||||||||||||||||||||||||||||
Warrants exercised | |||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2024 | $ | $ | ( |
$ | $ | ( |
$ | ( |
$ |
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 Shares | Treasury Shares | Additional Paid-in Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total Shareholders' Equity |
||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2022 | $ | $ | ( |
$ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | — | ( |
— | — | ( |
|||||||||||||||||||||||||||||||||||||||
Ordinary shares issued related to founders advisory fees - related party | — | — | ( |
— | — | ||||||||||||||||||||||||||||||||||||||||||
Ordinary shares repurchased | — | — | ( |
— | — | — | ( |
||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2023 | $ | $ | ( |
$ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Ordinary shares repurchased | — | — | ( |
— | — | — | ( |
||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2023 | $ | $ | ( |
$ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Ordinary shares repurchased | — | — | ( |
— | — | — | ( |
||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | ( |
— | ( |
|||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2023 |
$ | $ | ( |
$ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||||||||||||
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, | |||||||||||
2024 | 2023 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net (loss) income | $ | ( |
$ | ||||||||
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | |||||||||||
Founders advisory fees - related party (change in fair value) | ( |
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Depreciation and amortization expense | |||||||||||
Interest and payment-in-kind on preferred shares | |||||||||||
Share-based compensation | ( |
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Non-cash lease expense | |||||||||||
Deferred income taxes | ( |
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Intangible impairment | |||||||||||
Amortization of deferred financing costs | |||||||||||
Gain on contingent earn-out | ( |
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Foreign currency loss | |||||||||||
Loss on disposal of assets | |||||||||||
Changes in operating assets and liabilities, net of acquisitions: | |||||||||||
Accounts receivable | ( |
( |
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Inventories | |||||||||||
Prepaid expenses and other current assets | |||||||||||
Accounts payable | ( |
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Deferred revenue | |||||||||||
Income taxes payable, net | ( |
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Accrued expenses and other current liabilities | |||||||||||
Founders advisory fees - related party (cash settled) | ( |
( |
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Operating lease liabilities | ( |
( |
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Financing lease liabilities | ( |
( |
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Other, net | ( |
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Net cash provided by (used in) operating activities | ( |
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Cash flows from investing activities: | |||||||||||
Purchase of property and equipment | ( |
( |
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Proceeds from short-term investments | |||||||||||
Net cash used in investing activities | ( |
( |
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Cash flows from financing activities: | |||||||||||
Ordinary shares repurchased | ( |
( |
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Principal payments on finance lease obligations | ( |
( |
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Net cash used in financing activities | ( |
( |
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Effect of foreign currency on cash and cash equivalents | ( |
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Net change in cash and cash equivalents | ( |
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Cash and cash equivalents, beginning of period | |||||||||||
Cash and cash equivalents, end of period | $ | $ | |||||||||
Supplemental disclosures of cash flow information: | |||||||||||
Cash paid for interest | $ | $ | |||||||||
Cash paid for income taxes | $ | $ | |||||||||
Non-cash activities: | |||||||||||
Warrants exercised | $ | $ | |||||||||
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 business operations across the globe. 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 by PSSA (collectively, the “Company”).
Business Operations
The Company is a global solutions provider for the fire safety and specialty products industries. Approximately 65 % of the Company's 2023 annual revenues were derived in the United States, approximately 15 % in Europe and approximately 14 % in Canada with the remaining approximately 6 % 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 high quality specialty chemicals, various agricultural applications, various mining applications, and emerging electric battery technologies. Within the high quality specialty chemicals 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 conflicts in Ukraine and the Middle East. While the Company has limited exposure in regions with active conflicts, 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 condensed consolidated financial statements are unaudited and 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 disclosures 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 2023 Annual Report filed with the SEC on February 22, 2024.
Principles of Consolidation
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 condensed consolidated financial statements include the useful lives of long-lived and intangible assets, the fair value of financial assets and liabilities, the valuation of goodwill, stock options, and founder advisory fees, and the realizability of deferred tax assets. Actual results could differ from those estimates.
Accounting Policies
As of September 30, 2024, the Company’s significant accounting policies are consistent with those discussed in Note 2, “Summary of Significant Accounting Policies and Recent Accounting Pronouncements” to its consolidated financial statements included in the Company’s 2023 Annual Report.
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Reclassification
In 2024, the Company changed the presentation of freight expense from selling, general and administrative expense to cost of goods sold, to better match freight expense with freight income. The change has been applied retrospectively to the condensed consolidated financial statements for the prior periods presented in this Quarterly Report. The impact to the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2023 is presented in the following table (in thousands). There was no impact on previously reported balances in the accompanying condensed consolidated balance sheet or statement of cash flows.
Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||
As Previously Reported | As Adjusted | Effect of Change | As Previously Reported | As Adjusted | Effect of Change | ||||||||||||||||||||||||||||||
Cost of goods sold | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Gross profit | ( |
( |
|||||||||||||||||||||||||||||||||
Selling, general and administrative expense | ( |
( |
|||||||||||||||||||||||||||||||||
Total operating expenses | ( |
( |
|||||||||||||||||||||||||||||||||
Operating income | |||||||||||||||||||||||||||||||||||
Net income |
Recently Issued and Adopted Accounting Standards
In March 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2024-02 “Codification Improvements,” which amends the Codification to remove references to various concepts statements and impacts a variety of topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances, the references removed are extraneous and not required in order to understand or apply the guidance. Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities. ASU 2024-02 is effective January 1, 2025, and the Company does not expect that the application of this standard will have a material impact on its consolidated financial statements and disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to disclose disaggregated information about a reporting entity’s effective tax rate reconciliation, using both percentages and reporting currency amounts for specific standardized categories, as well as disclosure of income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company does not plan to early adopt and is currently assessing the potential effects of this standard.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU requires disclosure of incremental segment information, primarily through enhanced disclosures about significant segment expense categories and amounts for each reportable segment on an annual and interim basis. This guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The most significant provision of this standard requires the Company to disclose information about significant segment expenses and other segment items that are regularly provided to the chief operating decision-maker (“CODM”). The Company will adopt this ASU retrospectively for the annual period beginning on January 1, 2024 and for interim periods beginning on January 1, 2025.
In October 2023, the FASB issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative,” to amend certain disclosure and presentation requirements for a variety of topics within the ASC. These amendments align the requirements in the ASC to the removal of certain disclosure requirements set out in Regulation S-X and Regulation S-K, announced by the SEC. The effective date for each amended topic in the ASC is either the date on which the SEC’s removal of the related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, or on June 30, 2027, if the SEC has not removed the requirements by that date. Early adoption is prohibited. The Company does not expect that the application of this standard will have a material impact on its consolidated financial statements and disclosures.
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3. BALANCE SHEET COMPONENTS
Details of certain balance sheet items are presented below (in thousands):
September 30, 2024 | December 31, 2023 | ||||||||||
Inventories: | |||||||||||
Raw materials and manufacturing supplies | $ | $ | |||||||||
Work in process | |||||||||||
Finished goods | |||||||||||
Total inventories | $ | $ | |||||||||
Prepaid Expenses and Other Current Assets: | |||||||||||
Advance to vendors | $ | $ | |||||||||
Prepaid insurance | |||||||||||
Prepaid value-added taxes | |||||||||||
Short-term investments | |||||||||||
Income tax receivable | |||||||||||
Other | |||||||||||
Total prepaid expenses and other current assets | $ | $ | |||||||||
Property, Plant and Equipment: | |||||||||||
Buildings | $ | $ | |||||||||
Leasehold improvements | |||||||||||
Furniture and fixtures | |||||||||||
Machinery and equipment | |||||||||||
Vehicles | |||||||||||
Construction in progress | |||||||||||
Total property, plant and equipment, gross | |||||||||||
Less: Accumulated depreciation | ( |
( |
|||||||||
Total property, plant and equipment, net | $ | $ | |||||||||
Accrued Expenses and Other Current Liabilities: | |||||||||||
Accrued bonus | $ | $ | |||||||||
Accrued salaries | |||||||||||
Accrued employee benefits | |||||||||||
Accrued interest | |||||||||||
Accrued purchases | |||||||||||
Accrued income taxes | |||||||||||
Operating lease liabilities | |||||||||||
Finance lease liabilities | |||||||||||
Other | |||||||||||
Total accrued expenses and other current liabilities | $ | $ | |||||||||
Depreciation expense related to property, plant and equipment was $2.7 million and $7.9 million for the three and nine months ended September 30, 2024, respectively, and $2.5 million and $7.2 million for the three and nine months ended September 30, 2023, respectively, substantially all of which was presented in cost of goods sold in the accompanying condensed consolidated statements of operations and comprehensive (loss) income.
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4. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by reportable segment are as follows (in thousands):
Fire Safety | Specialty Products | Total | |||||||||||||||
Balance, December 31, 2023 |
$ | $ | $ | ||||||||||||||
Foreign currency translation | ( |
||||||||||||||||
Balance, September 30, 2024 |
$ | $ | $ |
Intangible assets and related accumulated amortization as of September 30, 2024 and December 31, 2023 are as follows (in thousands):
September 30, 2024 |
|||||||||||||||||||||||||||||||||||
Estimated Useful Life (in years) |
Gross Value | Impairment | Foreign Currency Translation |
Accumulated Amortization |
Net Book Value |
||||||||||||||||||||||||||||||
Definite Lived Intangible Assets: | |||||||||||||||||||||||||||||||||||
Customer lists | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
Technology and patents | ( |
( |
( |
||||||||||||||||||||||||||||||||
Tradenames | ( |
( |
|||||||||||||||||||||||||||||||||
Balance, September 30, 2024 |
$ | $ | ( |
$ | ( |
$ | ( |
$ |
December 31, 2023 | |||||||||||||||||||||||||||||||||||
Estimated Useful Life (in years) |
Gross Value | Impairment | Foreign Currency Translation |
Accumulated Amortization |
Net Book Value |
||||||||||||||||||||||||||||||
Definite Lived Intangible Assets: | |||||||||||||||||||||||||||||||||||
Customer lists | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
Technology and patents | ( |
( |
( |
||||||||||||||||||||||||||||||||
Tradenames | ( |
( |
|||||||||||||||||||||||||||||||||
Balance, December 31, 2023 |
$ | $ | ( |
$ | ( |
$ | ( |
$ |
During the year ended December 31, 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 was no longer recoverable. As a result, during the year ended December 31, 2023, the Company recorded an impairment of $40.7 million.
Amortization expense for definite-lived intangible assets was $13.8 million for the three months ended September 30, 2024, and 2023, and $41.3 million for the nine months ended September 30, 2024 and 2023.
Estimated annual amortization expense of intangible assets for the next five years ended December 31 and thereafter is as follows (in thousands):
Amount | ||||||||
2024 remaining | $ | |||||||
2025 | ||||||||
2026 | ||||||||
2027 | ||||||||
2028 | ||||||||
Thereafter | ||||||||
Total | $ |
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5. LEASES
Lease cost for the three and nine months ended September 30, 2024 and 2023 are as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
Operating lease cost (1)
|
$ | $ | $ | $ | |||||||||||||||||||
Finance lease cost: | |||||||||||||||||||||||
Amortization of right-of-use assets | |||||||||||||||||||||||
Interest on lease liabilities | |||||||||||||||||||||||
Total lease cost | $ | $ | $ | $ | |||||||||||||||||||
Reported in: | |||||||||||||||||||||||
Cost of goods sold | $ | $ | $ | $ | |||||||||||||||||||
Selling, general and administrative expense | |||||||||||||||||||||||
Total lease cost | $ | $ | $ | $ |
(1)Operating lease cost does not include short-term leases or variable costs, all of which are immaterial.
As of September 30, 2024, the weighted-average remaining lease terms of the Company’s operating leases and finance leases were approximately 7.9 years and 6.5 years , respectively, and the weighted-average discount rates applied were 6.8 % and 7.6 %, respectively.
Supplemental cash flow information related to leases for the nine months ended September 30, 2024 and 2023 are as follows (in thousands):
Nine Months Ended September 30, | ||||||||||||||
2024 | 2023 | |||||||||||||
Cash paid for amounts included in the measurement of operating lease liabilities: | ||||||||||||||
Operating cash flows for operating leases | $ | $ | ||||||||||||
Operating cash flows for finance leases | ||||||||||||||
Financing cash flows for finance leases | ||||||||||||||
Right-of-use assets obtained in exchange for new lease obligations: | ||||||||||||||
Operating leases | $ | $ | ||||||||||||
Financing leases | ||||||||||||||
Net change in operating lease right-of-use assets due to lease modifications resulting in reclassification of leases from operating to finance | $ | ( |
$ | ( |
As of September 30, 2024, the estimated future minimum payment obligations for non-cancelable operating and finance leases are as follows (in thousands):
Operating Leases | Finance Leases | |||||||||||||
Remainder of 2024 | $ | $ | ||||||||||||
2025 | ||||||||||||||
2026 | ||||||||||||||
2027 | ||||||||||||||
2028 | ||||||||||||||
Thereafter | ||||||||||||||
Total lease payments | ||||||||||||||
Less: imputed interest | ( |
( |
||||||||||||
Present value of lease liabilities | $ | $ |
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6. LONG-TERM DEBT AND REDEEMABLE PREFERRED SHARES
Long-term debt consists of the following (in thousands):
September 30, 2024 | December 31, 2023 | ||||||||||
Senior Notes | $ | $ | |||||||||
Less: unamortized debt issuance costs | ( |
( |
|||||||||
Long-term debt, net | $ | $ |
Revolving Credit Facility
SK Invictus Intermediate II S.à r.l.’s, a private limited liability company governed by the laws of the Grand Duchy of Luxembourg (“SK Intermediate II”), five-year Revolving Credit Facility (the “Revolving Credit Facility”) 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.
Borrowings under the Revolving Credit Facility bear interest at a rate equal to (i) an applicable margin, plus (ii) at SK Intermediate II’s option, either (x) Secured Overnight Financing Rate for the applicable corresponding tenor (“Term SOFR”) as published by CME Group Benchmark Administration, adjusted for certain additional costs or (y) a base rate determined by reference to the highest of (a) the prime commercial lending rate published by the Wall Street Journal, (b) the federal funds rate plus 0.50 %, (c) the one-month Term SOFR rate plus 1.00 % and (d) a minimum floor of 1.00 %. The applicable margin is 3.25 % in the case of Term SOFR-based loans and 2.25 % in the case of base rate-based loans, with two step downs of 0.25 % each based upon the achievement of certain leverage ratios.
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 40.00 % 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 are 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 September 30, 2024, the Company did no t have any outstanding borrowings under the Revolving Credit Facility and was in compliance with all covenants.
Senior Notes
SK Intermediate II has $675.0 million principal amount of 5.00 % senior secured notes due October 30, 2029 (“Senior Notes”). 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.
17
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, 2024 the Company was in compliance with all covenants.
Deferred financing costs incurred in connection with securing the Senior Notes were $11.0 million, which were capitalized and 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
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 business days following the Company's annual general meeting. Holders of the Redeemable Preferred Shares have no voting rights (only protective 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 condensed consolidated balance sheets, and $1.8 million, $5.3 million, $1.7 million, and $5.1 million of dividends on these Redeemable Preferred Shares for the three and nine ended September 30, 2024 and 2023, respectively, were recorded as interest expense in the accompanying condensed consolidated statements of operations and comprehensive (loss) income. Preferred dividends in arrears were $11.7 million and $8.6 million at September 30, 2024 and December 31, 2023, respectively.
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, 2024 and December 31, 2023, the redemption price was $111.7 million and $108.6 million, respectively.
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 (102.24 )% and (55.05 )% for the three and nine months ended September 30, 2024, respectively, and 16.39 % and (2.29 )% for the three and nine months ended September 30, 2023, 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.
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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, 2024 and 2023 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. As of September 30, 2024, it is not expected that the Company's unrecognized tax benefits will decrease within twelve months.
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 an agreement to purchase various types of capital equipment up to $5.0 million through October 2027. As of September 30, 2024, the Company has paid $3.2 million to the supplier and the remaining $1.8 million will be paid through April 2027.
9. 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 May 23, 2024, 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 the shareholders’ approval, being 36,310,028 Ordinary Shares, at any time during the next five years . The Board had re-established the limit for Ordinary Share repurchases at $100.0 million on February 21, 2024, which is within the repurchase limit approved by the Company’s shareholders’ on May 23, 2024.
During the three and nine months ended September 30, 2024, the Company repurchased 399 and 2,988,291 Ordinary Shares, respectively, under its Share Repurchase Plan. The repurchased Ordinary Shares were recorded at cost and are being held in treasury.
During both the three and nine months ended September 30, 2024, the Company issued 19,160 Ordinary Shares related to 76,640 warrants that were exercised in September 2024.
As of September 30, 2024, there were 145,240,338 Ordinary Shares, 33,766,800 warrants and 10,000,000 Redeemable Preferred Shares outstanding.
10. SHARE-BASED COMPENSATION
2021 Equity Plan
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
19
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 nine months ended September 30, 2024, the Company granted 4,655,000 performance-based non-qualified stock options ("PBNQSO") that vest based on the achievement of certain performance goals to its employees and independent directors. The Company recognizes compensation costs for PBNQSO granted in 2024 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. 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 PBNQSO is recognized as compensation expense beginning at the time in which the performance conditions are deemed probable of achievement, over the remaining requisite service period.
In March 2024, based on the Company’s performance for 2023, its compensation committee verified and determined the Annual Operational Performance per Diluted Share (“AOP”) for 2023 to be $5.31 . As the AOP for 2023 was below the minimum vesting AOP target of $12.10 , employees separated from the Company through the date of determination of the 2023 AOP relinquished 240,000 options retained by them and such options were cancelled by the Company.
As of September 30, 2024, there were 15,134,171 PBNQSO outstanding. The exercise prices of these PBNQSO ranged from $2.94 to $14.00 per Ordinary Share and expire ten years from the grant date.
The table below summarizes the PBNQSO activity for the nine months ended September 30, 2024:
Number of Options |
Weighted-Average
Exercise/ Conversion
Price
|
Weighted-Average Remaining Contractual Life (years) |
Aggregate Intrinsic Value (in thousands) |
||||||||||||||||||||
Outstanding at December 31, 2023 |
$ | ||||||||||||||||||||||
Granted | $ | ||||||||||||||||||||||
Exercised | $ | ||||||||||||||||||||||
Forfeited | ( |
$ | |||||||||||||||||||||
Cancelled | ( |
$ | |||||||||||||||||||||
Outstanding at September 30, 2024 |
$ | $ | |||||||||||||||||||||
Options vested and exercisable | $ | $ |
The assumptions used to fair value the PBNQSO granted during the nine months ended September 30, 2024 using the Hull-White model was as follows:
September 30, 2024 | |||||
Dividend yield | % | ||||
Expected volatility | |||||
Expected term (years) | |||||
Suboptimal exercise multiple | |||||
Drift rate | |||||
Weighted average exercise price of options granted | $ | ||||
Weighted average fair value of options granted | $ |
Non-cash share-based compensation expense recognized by the Company for the three and nine months ended September 30, 2024 was $3.3 million and $8.0 million, respectively. Non-cash share-based compensation expense (benefit) 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 PBNQSO 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 estimates. As of September 30, 2024, there was approximately $21.6 million of total
20
unrecognized compensation expense related to non-vested PBNQSO expected to vest, which is expected to be recognized over a weighted-average period of 1.59 years.
Founder Advisory Amounts
On November 9, 2021, 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 on November 9, 2021) for each year through December 31, 2027 and is valued using the period end volume weighted average closing share price of 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 % are 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 September 30, 2024 and December 31, 2023, the fair value of the Fixed Annual Advisory Amount was calculated to be $121.2 million and $42.5 million, respectively, based on the period end volume weighted average closing share price for ten consecutive trading days of Ordinary Shares of $12.85 and $4.51 , respectively. As of September 30, 2024 and December 31, 2023, the fair value of the Variable Annual Advisory Amount, determined using a Monte Carlo simulation model, was $498.8 million and $71.3 million, respectively.
For the three and nine months ended September 30, 2024, the Company recognized an increase in the compensation expense related to the founders advisory fees-related party due to an increase in fair value for liability-classified Advisory Amounts of $184.2 million and $253.1 million, respectively. For the three and nine months ended September 30, 2023, the Company recognized a decrease in the compensation expense related to the founders advisory fees-related party due to a decrease in fair value for liability-classified Advisory Amounts of $24.5 million and $108.8 million, respectively.
11. FAIR VALUE MEASUREMENTS
Fair Value Measurement
The carrying value of cash and cash equivalents, short-term investments, 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, 2024 and December 31, 2023, 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 $649.1 million and $587.9 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.
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•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, 2024 and December 31, 2023 (in thousands):
Fair Value Measurements Using: | |||||||||||||||||||||||
September 30, 2024 |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Founders advisory fees payable - related party | $ | $ | $ | $ | |||||||||||||||||||
December 31, 2023 |
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Liabilities: | |||||||||||||||||||||||
Founders advisory fees payable - related party | $ | $ | $ | $ |
The fair value of the founders advisory fees payable 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, which requires the input of 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 10, “Share-Based Compensation” for discussion of the fair value estimation on the founders advisory fees payable.
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, 2024 | Nine Months Ended September 30, 2024 | ||||||||||
Founders Advisory Fees Payable - Related Party | Founders Advisory Fees Payable - Related Party | ||||||||||
Fair value, beginning of period | $ | $ | |||||||||
Founders advisory fees - related party, change in fair value | |||||||||||
Fair value, end of period | $ | $ |
Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | |||||||||||||||||||
Founders Advisory Fees Payable - Related Party | LaderaTech Contingent Earn-out |
Founders Advisory Fees Payable - Related Party | LaderaTech Contingent Earn-out |
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Fair value, beginning of period | $ | $ | $ | $ | ||||||||||||||||
Founders advisory fees - related party, change in fair value | ( |
( |
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Gain on contingent earn-out | ( |
( |
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Fair value, end of period | $ | $ | $ | $ | ||||||||||||||||
During the year ended December 31, 2023, due to a downward revision in the revenue forecast of the contingent earn-out eligible fire retardant product, the Company determined that $7.7 million in contingent earn-out payable to LaderaTech was no longer probable. Accordingly, the Company recorded a gain of $7.7 million during the year ended December 31, 2023. For this reason, the Company no longer recognizes a contingent earn-out payable as of September 30, 2024.
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12. RELATED PARTIES
On November 9, 2021, 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.
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 2023, the EverArc Founder Entity was entitled to receive the Fixed Annual Advisory Amount of 2,357,061 Ordinary Shares or a value of $10.6 million, based on an average price of $4.51 per Ordinary Share (the “2023 Fixed Amount”). The EverArc Founder Entity did not qualify to receive the Variable Annual Advisory Amount for 2023 as the average price of $4.51 per Ordinary Share for 2023 was lower than the average price of $13.63 per Ordinary Share established in 2021 (the “2023 Variable Amount” and together with the 2023 Fixed Amount, the “2023 Advisory Amount”). The EverArc Founder Entity elected to receive approximately 74.6 % of the 2023 Advisory Amount in Ordinary Shares (1,758,464 Ordinary Shares) and approximately 25.4 % of the 2023 Fixed Amount in cash ($2.7 million). On February 15, 2024, the Company issued 1,758,464 Ordinary Shares and paid $2.7 million in cash in satisfaction of the 2023 Advisory Amount.
As of September 30, 2024, 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 $12.85 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 $121.2 million for the Fixed Annual Advisory Amount and $498.8 million for the Variable 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.
13. REVENUE RECOGNITION
Disaggregation of revenues
Amounts for products sold are recognized at a point in time, whereas amounts for contract services associated with full-service and portable retardant are recognized over time. Revenues for the three and nine months ended September 30, 2024 and 2023 are presented below (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
Revenues from products | $ | $ | $ | $ | |||||||||||||||||||
Revenues from services | |||||||||||||||||||||||
Other revenues | |||||||||||||||||||||||
Total net sales | $ | $ | $ | $ |
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14. (LOSS) 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 (loss) earnings per share were as follows (in thousands, except share and per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||||||||||
Net (loss) income | $ | ( |
$ | $ | ( |
$ | ||||||||||||||
Weighted-average shares outstanding: | ||||||||||||||||||||
Weighted average shares used in computing (loss) earnings per share, basic | ||||||||||||||||||||
Founders advisory fees | ||||||||||||||||||||
Weighted average shares used in computing (loss) earnings per share, diluted | ||||||||||||||||||||
Basic (loss) earnings per share | $ | ( |
$ | < |