Perimeter Solutions, Inc. (PRM) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes thereto included in this Annual Report. This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, such statements are subject to the “safe harbor” created by those sections and involve risks and uncertainties. Forward-looking statements are based on our management’s beliefs and assumptions and on information available to our management as of the date hereof. As a result of many factors, such as those set forth under Part I, Item 1A “Risk Factors” in this Annual Report, our actual results may differ materially from those anticipated in these forward-looking statements, accordingly, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Overview
Perimeter Solutions, Inc. (“we,” “us,” “our,” or the “Company”) is a global solutions provider for the Fire Safety and Specialty Products industries. Approximately 79% of our annual revenues is derived in the United States, approximately 10% in Europe and approximately 6% in Canada with the remaining approximately 5% spread across various other countries. Our 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 our customers combat various types of fires, including wildland, structural, flammable liquids and other types of fires. Our Fire Safety business also offers specialized equipment and services, typically in conjunction with our fire management products to support firefighting operations. Our specialized equipment includes air base retardant storage, mixing, and delivery equipment; mobile retardant bases; retardant ground application units; mobile foam equipment; and equipment that we custom design and manufacture to meet specific customer needs. Our service network can meet the emergency resupply needs of over 150 air tanker bases in North America, as well as many other customer locations globally. The segment is built on the premise of superior technology, exceptional responsiveness to our customers’ needs, and a “never-fail” service network. 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 includes operations that develop, produce and market products for non-fire safety markets. The Company’s largest end market application for our Specialty Products segment is Phosphorus Pentasulfide (“P2S5”) based lubricant additives. P2S5 is also used in pesticide and mining chemicals applications, and emerging electric battery technologies.
We operate five business units within our two reporting segments. The business unit structure is meant to promote decentralized execution and accountability, and maintain the geography- and product-specific focus and granularity necessary to drive continued improvement in our key operational value drivers. Our key operational value drivers are profitable new business, pricing our products and services to the value they provide, and continued productivity improvements. Each business unit has a business unit manager, who is responsible for achieving targeted financial and operational results.
Factors Affecting Comparability
Redomiciliation
On November 20, 2024, Perimeter Solutions, SA, a public limited liability company duly incorporated and validly existing under the laws of the Grand Duchy of Luxembourg, having its registered office at 28, Boulevard F.W. Raiffeisen, L-2411 Luxembourg, Grand Duchy of Luxembourg, and registered with the Registre de Commerce et des Sociétés, Luxembourg (Luxembourg Trade and Companies Register) under number B 256.548 (“Perimeter Luxembourg”), consummated the conversion (the “Redomiciliation Transaction” or “domestication”) of Perimeter Luxembourg into a corporation incorporated under the laws of the State of Delaware, after which Perimeter Luxembourg continues as an entity under the name “Perimeter Solutions, Inc.” The domestication was completed in accordance with articles 100-2, 100-3 and 1300-2 of the Luxembourg law dated August 10, 1915 on commercial companies, as amended (the “Luxembourg Company Law”), the procedures of article 450-3 et seq. of the Luxembourg Company Law, and the domestication procedures of Section 388 of the General Corporation Law of the State of Delaware (the “DGCL”), pursuant to which the
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Company continued its legal existence in Delaware as if Perimeter Luxembourg had originally been incorporated under Delaware law.
Upon consummation of the Redomiciliation Transaction, each of Perimeter Luxembourg’s issued (i) ordinary shares, with a nominal value of $1.00 per share (the “Lux Ordinary Shares”) and (ii) redeemable preferred shares, with a nominal value of $10.00 each (the “Lux Preferred Shares”), automatically converted by operation of law on a one-for-one basis into (i) shares of common stock of the Company, par value $0.0001 per share (the “Common Stock”), and (ii) shares of preferred stock of the Company, par value $0.0001 per share (the “Preferred Stock”), respectively, in accordance with the terms of the Certificate of Incorporation of the Company (the “Certificate of Incorporation”).
The Common Stock continues to be listed for trading under symbol “PRM” on the New York Stock Exchange (the “NYSE”), which is the same trading symbol as the Lux Ordinary Shares traded under prior to the Redomiciliation Transaction. As a result of the Redomiciliation Transaction, the Company became the successor issuer to Perimeter Luxembourg pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Upon consummation of the Redomiciliation Transaction, the CUSIP number relating to the Company’s Common Stock was changed to 71385M 107.
Warrant Exercise
On November 9, 2021, Perimeter Luxembourg had 34,020,000 warrants issued and outstanding, entitling the holder thereof to purchase one-fourth of one Lux Ordinary Shares at an exercise price of of $12.00 per whole Lux Ordinary Share (the “Warrants”). The subscription period of the Warrants ended on November 11, 2024.
During the year ended December 31, 2022, Perimeter Luxembourg received $0.5 million in connection with 176,460 Warrant exercises and issued 44,115 Lux Ordinary Shares. During the year ended December 31, 2024 Perimeter Luxembourg received $23.5 million in connection with 32,907,728 Warrant exercises and issued 2,601,455 Lux Ordinary Shares. As of December 31, 2024 and 2023, there were zero and 33,843,440 Warrants issued and outstanding, respectively.
Change in Presentation
In 2024, the Company changed the presentation of freight expense on its consolidated statements of operations 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 consolidated financial statements for the prior periods presented in this Annual Report. The impact to the accompanying consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 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.
| Year Ended December 31, 2023 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| As Previously Reported | As Adjusted | Effect of Change | ||||||||
| Cost of goods sold | $ | 183,253 | $ | 193,813 | $ | 10,560 | ||||
| Gross profit | 138,855 | 128,295 | (10,560) | |||||||
| Selling, general and administrative expense | 57,073 | 46,513 | (10,560) | |||||||
| Total operating expenses | 44,405 | 33,845 | (10,560) | |||||||
| Operating income | 94,450 | 94,450 | — | |||||||
| Net income | 67,486 | 67,486 | — |
Known Trends and Uncertainties
Growth in Fire Safety
We believe that our Fire Safety segment benefits from several secular growth drivers, including increasing fire severity, as measured by higher acres burned, longer fire seasons and a growing wildland urban interface resulting in a need for higher quantity of retardant use per acre and thereby necessitating an increase of the airtanker capacity. We believe that these trends are prevalent in North America, as well as globally and we expect these trends to continue and drive growth in demand for fire retardant products.
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We are also working to grow our fire prevention and protection business, which is primarily focused on expanding use of ground-applications for long-term fire retardant. This includes use of ground assets in response to active fires (protection), as well as proactive treatments around critical infrastructure and known high-risk areas (prevention). The protection business expands on our existing aerial support to enhance the ability of customers to effectively fight active fires. Fire prevention products can be used to prevent fire ignitions and protect property from potential fire danger by providing proactive retardant treatment in high-risk areas such as roadways, and critical infrastructure like electrical utilities and railroads. Treating these areas ahead of the fire season can potentially stop ignitions from equipment failures or sparks.
We have invested and intend to continue investing in the expansion of our fire safety business through acquisitions in order to further grow our global customer base.
Weather Conditions and Climate Trends
Our business is highly dependent on the needs of government agencies to suppress fires. As such, our financial condition and results of operations are significantly impacted by weather as well as environmental and other factors affecting climate change, which impact the number and severity of fires in any given year. Historically, sales of our products have been higher in the summer season in the northern hemisphere of each fiscal year due to weather patterns which are generally correlated to a higher prevalence of wildfires. This is in part offset by the disbursement of our operations in both the northern and southern hemispheres, where the summer seasons alternate.
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 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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Results of Operations
Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023
The following table sets forth our results of operations for the years ended December 31, 2024 and December 31, 2023 (in thousands):
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ | % | |||||||||||
| Net sales | $ | 560,968 | $ | 322,108 | $ | 238,860 | 74 | % | ||||||
| Cost of goods sold | 243,882 | 193,813 | 50,069 | 26 | % | |||||||||
| Gross profit | 317,086 | 128,295 | 188,791 | 147 | % | |||||||||
| Operating expenses | ||||||||||||||
| Selling, general and administrative expense | 66,901 | 46,513 | 20,388 | 44 | % | |||||||||
| Amortization expense | 55,032 | 55,065 | (33) | — | % | |||||||||
| Founders advisory fees - related party | 198,308 | (108,481) | 306,789 | (283 | %) | |||||||||
| Intangible impairment | — | 40,738 | (40,738) | 100 | % | |||||||||
| Other operating expense | 612 | 10 | 602 | 6020 | % | |||||||||
| Total operating expenses | 320,853 | 33,845 | 287,008 | 848 | % | |||||||||
| Operating (loss) income | (3,767) | 94,450 | (98,217) | (104 | %) | |||||||||
| Other expense (income): | ||||||||||||||
| Interest expense, net | 40,461 | 41,378 | (917) | (2 | %) | |||||||||
| Gain on contingent earn-out | — | (7,273) | 7,273 | (100 | %) | |||||||||
| Foreign currency loss (gain) | 2,443 | (1,655) | 4,098 | (248 | %) | |||||||||
| Other expense, net | 192 | 417 | (225) | (54 | %) | |||||||||
| Total other expense, net | 43,096 | 32,867 | 10,229 | 31 | % | |||||||||
| (Loss) income before income taxes | (46,863) | 61,583 | (108,446) | (176 | %) | |||||||||
| Income tax benefit | 40,958 | 5,903 | 35,055 | 594 | % | |||||||||
| Net (loss) income | $ | (5,905) | $ | 67,486 | $ | (73,391) | (109 | %) |
Net Sales. Net sales increased by $238.9 million for the year ended December 31, 2024, compared to the same period in 2023. Net sales in the Fire Safety segment increased $210.7 million, representing higher fire retardant sales of $198.4 million, and higher fire suppressant sales of $12.3 million. Fire retardant sales increased $200.0 million in North America, offset by a $1.6 million decrease in other geographies. Fire suppressant sales increased $12.3 million primarily due to sales of fluorine-free foam concentrates. Global Fire Safety strength was driven by increasingly proactive use of air attack, and by extension of fire retardant, by our customers, as they combat the growing threat of wildfires, and by continued successful implementation of the Company’s strategies on profitable new business, as well as pricing our products and services to the value they provide. Net sales in the Specialty Products segment increased $28.2 million, of which $22.1 million was in the Americas and $6.1 million was in Europe. The growth in Specialty Products sales reflects an increase in purchases by our specialty chemicals customers following inventory de-stocking during the prior period.
Cost of Goods Sold. Cost of goods sold increased by $50.1 million for the year ended December 31, 2024 compared to the same period in 2023. The increase in the Fire Safety segment of $38.9 million was primarily due to a $33.3 million increase in material, manufacturing and freight costs and a $4.6 million increase in personnel related expenses, each as a result of the increase in sales. The $11.2 million increase in the Specialty Products segment was primarily due to a $13.7 million increase in material, manufacturing and freight costs and a $0.2 million increase in personnel related expenses, each as a result of the increase in sales.
Selling, General and Administrative Expense. Selling, general and administrative expense increased by $20.4 million for the year ended December 31, 2024 compared to the same period in 2023. The increase was primarily due to a $13.5 million increase in personnel related and share-based compensation expenses. The increase in personnel related and share-based compensation expenses is primarily due to the recognition of $1.3 million in share-based compensation expense during the year ended December 31, 2023 that was impacted by option modifications in the prior year, compared to $12.4 million in share-based compensation expense recognized during the year ended December 31, 2024.
Founder advisory fees - related party. The founder advisory fees - related party represents the change in the fair value of the liability-classified Fixed Annual Advisory Amount and Variable Annual Advisory Amount (collectively, the
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“Annual Advisory Amounts”). The increase in the fair value of the Annual Advisory Amounts for the year ended December 31, 2024 of $198.3 million was primarily due to an increase in the Company’s average price per share from $4.51 as of December 31, 2023 to $12.85 as of December 31, 2024. The decrease in the fair value of the Annual Advisory Amount for the year ended December 31, 2023 of $108.5 million was primarily due to a reduction in the Company’s average price per share from $8.86 as of December 31, 2022 to $4.51 as of December 31, 2023.
Intangible impairment. As there was no intangible impairment during the year ended December 31, 2024, intangible impairment decreased by $40.7 million compared to the same period in 2023. The decrease was due to the prior year impairment on the carrying value of the technology underlying the contingent earn-out eligible fire retardant product acquired by the Company during purchase of LaderaTech in May 2020.
Foreign Currency Loss (Gain). Foreign currency loss of $2.4 million for the twelve months ended December 31, 2024 reflects strengthening U.S. dollar, primarily against the Euro. Foreign currency gain of $1.7 million for the twelve months ended December 31, 2023 reflects weakening U.S. dollar, primarily against the Euro.
Income Tax Benefit. Income tax benefit increased by $35.1 for the year ended December 31, 2024 compared to the same period in 2023. The increase is primarily due to the Redomiciliation Transaction which resulted in the recognition of a U.S. deferred tax asset for deferred compensation, the removal of deferred taxes on undistributed U.S. earnings, and the removal of various Luxembourg deferred taxes and corresponding valuation allowance.
Business Segments
We use segment net sales and segment adjusted earnings before interest, taxes, depreciation and amortization (“Segment Adjusted EBITDA”), to evaluate operating performance by segment, for business planning purposes and to allocate resources. The following tables provide information for our net sales and Segment Adjusted EBITDA (in thousands):
| Year Ended December 31, 2024 | Year Ended December 31, 2023 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fire Safety | Specialty Products | Total | Fire Safety | Specialty Products | Total | |||||||||||||
| Net sales | $ | 436,274 | $ | 124,694 | $ | 560,968 | $ | 225,554 | $ | 96,554 | $ | 322,108 | ||||||
| Segment Adjusted EBITDA | $ | 240,121 | $ | 40,173 | $ | 280,294 | $ | 76,214 | $ | 20,573 | $ | 96,787 |
Adjusted EBITDA for our Fire Safety segment for the year ended December 31, 2024 increased by $163.9 million to $240.1 million compared to the same period in 2023. The increase was primarily due to higher net sales driven by an increase of $198.4 million in fire retardant sales in the current period. Costs grew at a slower pace than revenues due to fixed costs leverage and strong cost control.
Adjusted EBITDA for our Specialty Products segment for the year ended December 31, 2024 increased by $19.6 million to $40.2 million compared to the same period in 2023. The increase was primarily due to higher net sales. The growth in Specialty Products sales reflects an increase in purchases by our specialty chemicals customers following inventory de-stocking during the prior period. Costs grew at a slower pace than revenues due to fixed costs leverage and strong cost control.
The following table provides a reconciliation of financial measures that are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) to Non-GAAP measures. Segment Adjusted EBITDA should not be considered an alternative to net income (loss), operating income (loss), cash flows provided by (used in) operating activities or any other measure of financial performance or liquidity presented in accordance with U.S. GAAP (in thousands).
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| (Unaudited) | Year Ended December 31, 2024 | Year Ended December 31, 2023 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fire Safety | Specialty Products | Total | Fire Safety | Specialty Products | Total | |||||||||||||||||
| (Loss) income before income taxes | $ | (35,277) | $ | (11,586) | $ | (46,863) | $ | 36,073 | $ | 25,510 | $ | 61,583 | ||||||||||
| Depreciation and amortization | 51,365 | 14,353 | 65,718 | 51,178 | 13,677 | 64,855 | ||||||||||||||||
| Interest and financing expense | 39,547 | 914 | 40,461 | 38,305 | 3,073 | 41,378 | ||||||||||||||||
| Founders advisory fees - related party | 169,886 | 28,422 | 198,308 | (85,422) | (23,059) | (108,481) | ||||||||||||||||
| Intangible impairment | — | — | — | 40,738 | — | 40,738 | ||||||||||||||||
| Non-recurring expenses (1) | 5,559 | 1,819 | 7,378 | 2,687 | 1,359 | 4,046 | ||||||||||||||||
| Share-based compensation expense | 8,545 | 4,304 | 12,849 | 592 | 1,004 | 1,596 | ||||||||||||||||
| Gain on contingent earn-out | — | — | — | (7,273) | — | (7,273) | ||||||||||||||||
| Foreign currency loss (gain) | 496 | 1,947 | 2,443 | (664) | (991) | (1,655) | ||||||||||||||||
| Segment Adjusted EBITDA | $ | 240,121 | $ | 40,173 | $ | 280,294 | $ | 76,214 | $ | 20,573 | $ | 96,787 |
(1) For the year ended December 31, 2024, $6.6 million was related to the Redomiciliation Transaction and other non-recurring Luxembourg related costs, $0.6 million was related to acquisition costs, and $0.2 million was related to other non-recurring costs. For the year ended December 31, 2023, $4.0 million was related to restructuring and other non-recurring costs.
Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
For a detailed discussion of our consolidated results of operations for December 31, 2023 compared to December 31, 2022, refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Form 10-K for the year ended December 31, 2023, as filed with the SEC on February 22, 2024. This discussion should be read in conjunction with the change in the presentation of freight expense on our consolidated statements of operations as described in Note 2, “Summary of Significant Accounting Policies and Recent Accounting Pronouncements” in the notes to the consolidated financial statements included in this Annual Report.
Liquidity and Capital Resources
We have historically funded our operations primarily through cash flows from operations, borrowings under our revolving credit facility, and the issuance of debt and equity securities. However, future cash flows are subject to a number of variables, including the length and severity of the fire season, growth of the wildland urban interface and the availability of air tanker capacity, and higher costs from inflation, all of which could negatively impact revenues, earnings and cash flows, and potentially our liquidity if we do not moderate our expenditures accordingly.
We have the following financing arrangements in place to, among other things, fund our operations and supplement our liquidity position.
Revolving Credit Facility
On November 9, 2021, a wholly owned subsidiary of the Company 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. 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 certain exceptions.
Borrowings under the Revolving Credit Facility bear interest at a rate equal to (i) an applicable margin, plus (ii) at the Company’s option, either (x) Term SOFR as published by the Term SOFR Administrator, 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.
As of December 31, 2024, the Company did not have any outstanding borrowings under the Revolving Credit Facility and was in compliance with all covenants, including the financial covenants.
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Senior Notes
On November 9, 2021, a wholly owned subsidiary of the Company assumed $675.0 million principal amount of 5.00% senior secured notes due October 30, 2029 (the “Senior Notes”), 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 Perimeter Holdings, LLC; rank equally in right of payment with all existing and future senior indebtedness of Perimeter Holdings, LLC (including, without limitation, the Revolving Credit Facility); and together with the Revolving Credit Facility, are effectively senior to all existing and future indebtedness that is not secured by the collateral.
For additional information about our long-term debt, refer to Note 6, “Long-Term Debt and Preferred Stock,” in the notes to the consolidated financial statements included in this Annual Report.
Share Repurchase Plan
Under the Share Repurchase Plan, we are authorized to repurchase, from time-to-time, shares of our Common Stock through open market purchases, in privately negotiated transactions or in such other manner as permitted by securities law and as determined by management at such time and in such amounts as management may decide. The Share Repurchase Plan does not obligate us to repurchase any specific number of shares and may be modified, suspended or discontinued at any time. The timing, manner, price and amount of any repurchases are determined by management in its discretion and depend on a variety of factors, including legal requirements, price and economic and market conditions.
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 outstanding shares of Common Stock as of the date of the shareholders’ approval, being 36,310,028 shares at any time during the next five years. As a result of the Redomiciliation Transaction on November 20, 2024, the Company is no longer required to obtain shareholder approval for further share repurchase authorizations. The Board had re-established the limit for 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.
The approximate dollar value of shares that may yet be repurchased under the Share Repurchase Plan was $97.2 million as of December 31, 2024. During the years ended December 31, 2024 and 2023, the Company repurchased 2,988,291 and 12,178,454 shares, respectively. The repurchased shares were recorded at cost and are being held in treasury.
For additional information about our Share Repurchase Plan, refer to Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” and Note 9, “Equity,” in the notes to the consolidated financial statements included in this Annual Report.
Founder Advisory Agreement
On December 12, 2019, EverArc and the EverArc Founder Entity entered into the Founder Advisory Agreement to provide incentives to the EverArc Founders to achieve EverArc’s and the Company’s, objectives. In exchange for the services provided to the Company, including strategic and capital allocation advice, the EverArc Founder Entity is entitled to receive both a Fixed Annual Advisory Amount and a Variable Annual Advisory Amount 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 shares of Common Stock and the remainder in cash.
The Fixed Annual Advisory Amount is equal to 2,357,061 shares of Common Stock (1.5% of 157,137,410 shares outstanding as of November 9, 2021) for each year through December 31, 2027 and valued using the period end volume weighted average closing share price of the Company’s Common Stock 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 the Company’s Common Stock 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 aggregate shares could be settled through a cash payment, 50% are classified as a liability and the remaining 50% is classified within equity. For Advisory Amounts classified within equity, the Company does not subsequently remeasure the fair value. For the Advisory Amounts classified as a liability, the Company remeasures the fair value at each reporting date. As a result, the compensation
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expense recorded by the Company in the future will depend upon changes in the fair value of the liability-classified Advisory Amounts.
As of December 31, 2024, the Advisory Amounts payable to the EverArc Founder Entity over the remaining term of the Founder Advisory Agreement was $480.1 million. The fair value of the Fixed Annual Advisory Amount was calculated to be $90.8 million based on the period end volume weighted average closing share price for ten consecutive trading days of Common Stock of $12.85 and the fair value of the Variable Annual Advisory Amount was determined to be $389.3 million using a Monte Carlo simulation model.
For 2024, the EverArc Founder Entity is entitled to receive Fixed Annual Advisory Amount of 2,357,061 shares of Common Stock or a value of $30.3 million, based on average price of $12.85 per share (the “2024 Fixed Amount”). The EverArc Founder Entity did not qualify to receive Variable Annual Advisory Amount for 2024 as the average price of $12.85 per share for 2024 was lower than the average price of $13.63 per share established in 2021 (the “2024 Variable Amount” and together with the 2024 Fixed Amount, the “2024 Advisory Amount”). The EverArc Founder Entity elected to receive approximately 78% of the 2024 Advisory Amount in Common Stock (1,837,304 shares) and approximately 22% of the 2024 Advisory Amount in cash ($6.7 million). On February 18, 2025, the Company issued 1,837,304 shares of Common Stock and paid $6.7 million in cash in satisfaction of 2024 Advisory Amount.
For additional information about the Founder Advisory Agreement, refer to Note 12, “Related Parties,” in the notes to the consolidated financial statements included in this Annual Report.
We believe that our existing cash and cash equivalents of approximately $198.5 million, net cash flows generated from operations and availability under the Revolving Credit Facility as of December 31, 2024 will be sufficient to meet our current capital expenditures, working capital, founders’ advisory fee payments and debt service requirements for at least 12 months from the filing date of this Annual Report. Our fiscal year 2025 capital expenditure authorization is $20.0 million, which we expect will cover both our maintenance and growth capital expenditure requirements. We may also utilize borrowings available to us under various other financing sources, including the issuance of equity and/or debt securities through public offerings or private placements, to fund our acquisitions, pay the 2024 Advisory Amount and meet long-term liquidity needs. Our ability to complete future offerings of equity or debt securities and the timing of these offerings will depend upon various factors including prevailing market conditions and our financial condition.
Cash flows
The summary of our cash flows is as follows (in thousands):
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Cash provided by (used in): | ||||||
| Operating activities | $ | 188,388 | $ | 193 | ||
| Investing activities | (42,940) | (14,894) | ||||
| Financing activities | 8,349 | (64,453) | ||||
| Effect of foreign currency on cash and cash equivalents | (2,617) | (320) | ||||
| Net change in cash and cash equivalents | $ | 151,180 | $ | (79,474) |
Operating Activities
Cash provided by operating activities was $188.4 million and $0.2 million for the years ended December 31, 2024 and 2023, respectively. For the year ended December 31, 2024, the primary components of operating cash flows were net loss of $5.9 million, non-cash charges of $193.7 million and net operating asset reductions of $0.6 million. For the year ended December 31, 2023, the primary components of operating cash flows were net income of $67.5 million, non-cash benefits of $22.2 million and net operating asset investments of $45.1 million. The non-cash charges for the year ended December 31, 2024 were primarily related to Founders advisory fees, offset by deferred income taxes. The net operating asset reduction for the year ended December 31, 2024 was primarily related to inventories.
Investing Activities
Cash used in investing activities was $42.9 million and $14.9 million for the years ended December 31, 2024 and 2023, respectively. During the year ended December 31, 2024, we purchased a business for $32.8 million and purchased
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property and equipment of $15.5 million offset by proceeds from short-term investments of $5.4 million upon settlement of a Euro denominated certificate of deposit. During the year ended December 31, 2023, we purchased property and equipment of $9.4 million and invested $5.5 million in a Euro denominated certificate of deposit.
Financing Activities
Cash provided by (used in) financing activities was $8.3 million and $(64.5) million for the years ended December 31, 2024 and 2023, respectively. During the year ended December 31, 2024, we repurchased shares of outstanding Ordinary Shares for $14.4 million and made $0.7 million in principal payments on finance lease obligations offset by $23.5 million in proceeds from the exercise of Warrants. During the year ended December 31, 2023, we repurchased outstanding Ordinary Shares for $64.1 million and made $0.4 million in principal payments on finance lease obligations.
Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
For a detailed discussion of our Liquidity and Capital Resources for December 31, 2023 compared to December 31, 2022, refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Form 10-K for the year ended December 31, 2023, as filed with the SEC on February 22, 2024.
Critical Accounting Estimates and Policies
Our consolidated financial statements have been prepared in conformity with U.S. GAAP, which often requires the judgment of management in the selection and application of certain accounting principles and methods. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments. We based our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results could, therefore, differ materially from these estimates under different assumptions or conditions.
We have identified the following estimates as our most critical accounting estimates, which are those that are most important to aid in fully understanding and evaluating the Company’s financial condition and results of operations, and that require management’s most subjective and complex judgments. Information regarding our other significant accounting estimates and policies are described in more detail in Note 2, “Summary of Significant Accounting Policies and Recent Accounting Pronouncements” in the notes to the consolidated financial statements included in this Annual Report. We believe that the following accounting estimates and policies are most critical to the judgments and estimates used in the preparation of the consolidated financial statements.
Impairment of Goodwill and Long-Lived Assets
Goodwill is deemed to have an indefinite life and is assessed for impairment annually at the reporting unit level or more frequently when events or circumstances occur that indicate that it is more likely than not that the fair value of a reporting unit or an intangible asset is less than its carrying value. The Company conducts an annual impairment test on October 1st each year. Depending on the facts and circumstances, the impairment test for goodwill can be performed using either a qualitative or quantitative approach. The qualitative approach consists of a weighting of several qualitative factors, including, but not limited to, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations, the recent and projected financial performance of the reporting unit, changes in the Company's enterprise market value and other relevant factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. This assessment can require significant judgments, including the estimation of future cash flows and an assessment of market and industry dependent risks. If the assessment of all relevant qualitative factors indicates that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, a quantitative goodwill impairment test is not necessary. If the assessment of all relevant qualitative factors indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will perform a quantitative goodwill impairment test. The Company has the unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing a quantitative goodwill impairment assessment. The Company performed a qualitative analysis on October 1, 2024, the date of our annual impairment assessment, and concluded that it was more likely than not that the fair value of our Fire Safety and Specialty
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Products reporting units are greater than the respective carrying amounts. As a result, there was no indication of goodwill impairment for the year ended December 31, 2024.
Long-lived assets include acquired property, plant, and equipment and intangible assets subject to amortization. We evaluate the recoverability of long-lived assets for possible impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Such events and changes may include significant changes in performance relative to expected operating results, significant changes in asset use, significant negative industry or economic trends, and changes in our business strategy. The process of evaluating the potential impairment of long-lived assets under the accounting guidance on property, plant and equipment and intangible assets subject to amortization is also highly subjective and requires significant judgment. In order to estimate the fair value of long-lived assets, we typically make various assumptions about the future prospects of our business or the part of our business to which the long-lived assets relate to estimate future cash flows to be generated by the asset group, which requires significant judgment as it is based on assumptions about market demand for our products over a number of future years. Based on these assumptions and estimates, we determine the recoverability of such assets by comparing an asset’s respective carrying value to estimates of the sum of the undiscounted future cash flows expected to result from its asset group. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors, such as industry and economic trends, and internal factors, such as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions and estimates could materially impact our reported financial results. There was no indication that long-lived assets became impaired for the year ended December 31, 2024.
Income Taxes
We compute income taxes using the asset-and-liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities, as well as loss and tax credit carryforwards. Changes in tax rates and laws are recognized in income in the period such changes are enacted.
On a jurisdiction-by-jurisdiction basis, we establish a valuation allowance if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We consider all positive and negative evidence, including historical operating results, the existence of cumulative losses, estimates of future operating income, and the reversal of existing taxable temporary differences in assessing the need for a valuation allowance.
Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We recognize the tax benefit of an uncertain tax position only if it is more likely than not the position will be sustainable upon examination by the taxing authority, including resolution of any related appeals or litigation processes. This evaluation is based on all available evidence and assumes that the tax authorities have full knowledge of all relevant information concerning the tax position. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not (greater than 50% likely) to be realized upon ultimate settlement with the taxing authority. We record interest and penalties related to unrecognized tax benefits in income tax expense. We make adjustments to these reserves in accordance with the income tax guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results.
Share-Based Compensation
We have granted equity-based awards consisting of performance-based non-qualified stock options ("PBNQSO") to key employees, officers and directors. The PBNQSO are subject to performance conditions such that the number of awards that ultimately vest depends on the calculation of annual operational performance per diluted share (“AOP”) during the performance period compared to targets established at the award date. The probability assessments of achieving the AOP targets is determined using estimated EBITDA, net debt and diluted shares. Because the terms of the PBNQSO granted through December 31, 2022 (“Prior Option Grants”) provided discretion to the compensation committee to make certain adjustments to the performance calculation, the service inception date of these awards preceded the grant date. Accordingly, the Company recognized compensation expense beginning on the service inception date and remeasured the
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fair value of the awards until a grant date was established. The fair value of the Prior Grants for which a grant date has not been established was estimated on the last date of the reporting period using the Black-Scholes option-pricing model.
On February 14, 2023 and to be effective prospectively, the compensation committee approved the elimination of “Unusual or Nonrecurring Transactions or Events” provision in the PBNQSO agreement whereby it could make certain adjustments to operational performance criteria “for unusual or nonrecurring transactions or events affecting the Company or the financial statements of the Company.” This provision had precluded the establishment of a grant date on the date when PBNQSO were awarded in accordance with the technical requirements under Accounting Standards Codification (“ASC”) Topic 718, “Compensation—Stock Compensation”. Further, on May 8, 2023 (“Options Modification Date”), to better account for seasonal fluctuations of the business, and to better align stock option performance with shareholder return, the compensation committee approved modification of certain terms in PBNQSO agreement for all PBNQSO granted through May 8, 2023. One modification eliminated the “Unusual or Nonrecurring Transactions or Events” provision. As of May 8, 2023, it was determined that a mutual understanding of the key terms and conditions of the PBNQSO has been ascertained and the grant date was therefore established for the Prior Grants.
For stock options granted from February 14, 2023 through May 7, 2023 (“Pre Modification 2023 Option Grants”), the Company recognized compensation costs related to PBNQSO granted to employees and non-employees based on the estimated fair value of the awards on the date of grant using the Black-Scholes option-pricing model. On the Options Modification Date, the Company performed a final fair value remeasurement under the original terms of Prior Option Grants and Pre Modification Option Grants using the Hull-White model and determined there was no incremental share-based compensation expense. For Prior Grants and the stock options granted on or after May 8, 2023 (“Post Modification 2023 Option Grants”) the Company recognizes compensation costs related to PBNQSO granted to employees and non-employees based on the estimated fair value of the awards on the date of grant using the Hull-White model as this model considers the future movement in the price of the Company’s shares of Common Stock and option holders’ behavior with respect to option exercises.
The Black-Scholes option-pricing model requires us to make assumptions and judgments about the variables used in the calculation, including the risk-free interest rate, the blended volatility based on the Company’s trading history of its shares of Common Stock and on the trading history from the common stock of a set of comparable publicly listed companies, the expected term and expected dividend. 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 blended volatility based on the Company’s trading history of its shares of Common Stock and on the trading history from the common stock of a set of comparable publicly listed companies, 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.
Service-based restricted stock units are valued using the market price of our shares of Common Stock on the grant date. The grant date fair value of the restricted stock units is expensed on a straight-line basis over the applicable vesting period.
Under the Founder Advisory Agreement, in exchange for the services provided to the Company, including strategic and capital allocation advice, the EverArc Founders Entity is entitled to receive both, a Fixed Annual Advisory Amount and a Variable Annual Advisory Amount until the years ending December 31, 2027 and 2031, respectively. At the election of the EverArc Founders Entity, at least 50% of the Advisory Amounts will be paid in shares of Common Stock and the remainder in cash. The Fixed Annual Advisory Amount will be equal to 2,357,061 shares of Common Stock (1.5% of 157,137,410 shares outstanding as of November 9, 2021) for each year through December 31, 2027 and valued using the period end volume weighted average closing price of the Company’s shares of Common Stock 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 the Company’s shares of Common Stock if such market price exceeds certain trading price minimums at the end of each reporting period. This liability is estimated at the end of each reporting period using a Monte Carlo simulation model, which requires the input of highly subjective assumptions, including the blended volatility based on the Company’s trading history of its shares of Common Stock and on the trading history from the common stock of a set of comparable publicly listed companies, 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 founder advisory fee expense is recognized.
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Business Combinations
We account for our business combinations using the acquisition accounting method, which requires us to determine and recognize assets acquired and liabilities assumed at their acquisition date fair value, including any contingent consideration and the recognition of acquisition-related costs in the consolidated statements of operations and comprehensive income (loss) in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations.
Accounting for business combinations requires us to make significant estimates and assumptions at the acquisition date, including estimates of the fair value of acquired inventory, property and equipment, identifiable intangible assets, contractual obligations assumed, preacquisition contingencies, where applicable, and equity issued. Significant assumptions relevant to the determination of the fair value of the assets acquired and liabilities assumed include, but are not limited to, future expected cash flows, discount rates, royalty rates, and other assumptions. The approach to valuing an initial contingent consideration associated with the purchase price also uses similar unobservable factors such as projected revenues and expenses over the term of the contingent earn-out period, discounted for the period over which the initial contingent consideration is measured, and relevant volatility rates. Based upon these assumptions, the initial contingent consideration is then valued using a Monte Carlo simulation. These significant assumptions are based on company specific information and projections, which are not observable in the market and, therefore, are considered Level 2 and Level 3 measurements. These significant assumptions are forward-looking and could be affected by future changes in economic and market conditions.
We generally use third-party qualified consultants to assist management in determining the fair value of assets acquired and liabilities assumed. This includes, when necessary, assistance with the determination of economic useful lives and valuation of property, plant and equipment and identifiable intangibles. The purchase price allocation process also entails us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained surrounding facts and circumstances existing at acquisition date. The excess of the purchase price over the fair value of the identified assets acquired and liabilities assumed is recorded as goodwill.
New Accounting Standards
For information about new accounting standards, see Note 2, “Summary of Significant Accounting Policies and Recent Accounting Pronouncements” in the notes to the consolidated financial statements included in this Annual Report.