Mercer International Inc.: Form 10-Q for the period ended Sep 30, 2024

In this document: (i) unless the context otherwise requires, references to “we”, “our”, “us”, the “Company” or “Mercer” mean Mercer International Inc. and its subsidiaries; (ii) references to “Mercer Inc.” mean the Company excluding its subsidiaries; (iii) information is provided as of September 30, 2024, unless otherwise stated; (iv) our reporting currency is dollars and references to “€” mean euros and “C$” mean Canadian dollars; (v) “ADMTs” mean air-dried metric tonnes; (vi) “CLT” mean cross-laminated timber; (vii) “glulam” mean glue-laminated timber; (viii) “m3” mean cubic meters; (ix) “NBSK” mean northern bleached softwood kraft; (x) “NBHK” mean northern bleached hardwood kraft; (xi) “MW” mean megawatts and “MWh” mean megawatt hours; (xii) “Mfbm” mean thousand board feet of lumber and “MMfbm” mean million board feet of lumber; and (xiii) our lumber metrics are converted from m3 to Mfbm using a conversion ratio of 1.6 m3 of lumber equaling one Mfbm, which is the ratio commonly used in the industry.

Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide and percentages may not precisely reflect the absolute figure.

The following discussion and analysis of our results of operations and financial condition for the three and nine months ended September 30, 2024 should be read in conjunction with our Interim Consolidated Financial Statements and related notes included in this quarterly report, as well as our most recent annual report on Form 10-K for the fiscal year ended December 31, 2023 filed with the Securities and Exchange Commission, referred to as the “SEC”.

Results of Operations

General

We have two reportable operating segments:

• Pulp – consists of the manufacture, sale and distribution of pulp, electricity and chemicals at our pulp mills.
• Solid Wood – consists of the manufacture, sale and distribution of lumber, manufactured products (including CLT, glulam and finger joint lumber), wood pallets, electricity, biofuels and wood residuals at our sawmills and other facilities in Germany and our mass timber facilities in North America.

Each segment offers primarily different products and requires different manufacturing processes, technology and sales and marketing.

Current Market Environment

In the third quarter of 2024, we continued to benefit from strong softwood pulp markets as prices remained mostly stable during a period of traditionally weaker seasonal demand. In the third quarter of 2024, hardwood prices decreased in China when compared to the second quarter of 2024 as the market absorbed increased hardwood capacity. In the third quarter of 2024, our lumber sales realizations were slightly down compared to the second quarter of 2024 as a result of continued weakness in both the U.S. and Europe.

As of September 30, 2024, the third party industry quoted NBSK pulp list price in Europe and North America were approximately $1,535 per ADMT and $1,735 per ADMT, respectively, and the third party industry quoted NBSK pulp net price in China was approximately $754 per ADMT. Prices for China are net of discounts, allowances and rebates.

As we move into the fourth quarter of 2024, we currently expect relatively stable pulp sales realizations as somewhat weaker demand is offset by continued supply constraints.

In our solid wood segment, we currently expect U.S. and European lumber prices to increase in the fourth quarter of 2024 due to modestly stronger demand and reduced supply and pallet prices to remain flat due to weak economic conditions in Europe. We currently expect relatively steady mass timber prices in the fourth quarter of 2024.

Per unit fiber costs for the pulp and solid wood segments were flat in the third quarter of 2024 compared to the second quarter of 2024. For the fourth quarter of 2024, we currently expect relatively stable per unit fiber costs in our pulp segment and modestly higher per unit fiber costs in our solid wood segment due to strong demand.

Summary Financial Highlights

(in thousands, other than per share amounts)

(1) The following table provides a reconciliation of net loss to operating income (loss) and Operating EBITDA for the periods indicated:

(in thousands)

FORM 10-Q

Selected Production, Sales and Other Data

(1) Source: RISI pricing report. Europe and North America are list prices. China are net prices which include discounts, allowances and rebates.

(2) Sales realizations after customer discounts, rebates and other selling concessions. Incorporates the effect of pulp price variations occurring between the order and shipment dates.

(3) Does not include our 50% joint venture interest in the Cariboo Pulp & Paper Company mill (“CPP”), which is accounted for using the equity method. In the first quarter of 2024, we disposed of our investment in CPP.

(4) Manufactured products primarily includes CLT, glulam, and finger joint lumber.

(5) Biofuels includes pellets and briquettes.

(6) Average Federal Reserve Bank of New York Noon Buying Rates over the reporting period.

Consolidated – Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

Total revenues for the third quarter of 2024 increased by approximately 7% to $502.1 million from $470.8 million in the same quarter of 2023 primarily due to higher pulp and manufactured products sales realizations partially offset by lower overall sales volumes. Particularly, in the third quarter of 2024, pulp sales volumes were impacted by several unrelated events, including unscheduled downtime at our Peace River mill, a slower than normal maintenance start-up at our Stendal mill and isolated mechanical incidents at our Celgar mill.

Costs and expenses in the third quarter of 2024 increased by approximately 4% to $493.3 million from $474.2 million in the same quarter of 2023 driven by higher per unit fiber costs partially offset by lower pulp sales volumes. In the third quarter of 2024, we recorded a $4.0 million non-cash inventory impairment at our Peace River mill as a result of lower NBHK pulp prices. Per unit fiber costs increased relative to the third quarter of 2023 because the comparative period included the sale and revaluation of previously impaired inventory. After giving effect to such impairments, overall per unit fiber costs in the third quarter of 2024 decreased slightly compared to the same period of 2023.

In the third quarter of 2024, cost of sales depreciation and amortization was flat at $41.5 million compared to $40.9 million in the same quarter of 2023.

Selling, general and administrative expenses decreased slightly to $29.2 million in the third quarter of 2024 from $30.1 million in the same quarter of 2023 primarily due to lower employee compensation.

In the third quarter of 2024, our operating income was $8.8 million compared to an operating loss of $3.4 million in the same quarter of 2023 primarily as a result of higher pulp and manufactured products sales realizations partially offset by higher costs and expenses and lower pulp sales volumes as a result of unplanned downtime.

Interest expense increased by approximately 21% to $26.4 million in the third quarter of 2024 from $21.9 million in the same quarter of 2023 primarily due to the issuance in September 2023 of $200.0 million of 12.875% senior notes which mature on October 1, 2028 (the “2028 Senior Notes”).

In the third quarter of 2024, other expenses were $0.1 million compared to other income of $3.3 million in the same quarter of 2023. Other expenses in the third quarter of 2024 primarily consisted of foreign exchange losses on dollar denominated cash held at our operations as the dollar weakened at the end of the third quarter of 2024 mostly offset by interest earned on cash. In the third quarter of 2023, other income primarily consisted of interest earned on cash.

In the third quarter of 2024, we had an income tax recovery of $0.1 million, or an effective tax rate of 1%, and in the same quarter of 2023, we had an income tax provision of $4.0 million, on a loss before income taxes. Our effective tax rates were different from the statutory rates of the jurisdictions in which we operate as we do not recognize tax recoveries for certain entities which we do not expect to realize a tax benefit.

In the third quarter of 2024, our net loss was $17.6 million, or $0.26 per share, compared to $26.0 million, or $0.39 per share in the same quarter of 2023.

In the third quarter of 2024, Operating EBITDA increased by approximately 35% to $50.5 million from $37.5 million in the same quarter of 2023 primarily due to higher pulp and manufactured products sales realizations partially offset by higher costs and expenses and lower pulp sales volumes as a result of unplanned downtime.

Operating Results by Business Segment

None of the income or loss items following operating income (loss) in our Interim Consolidated Statements of Operations are allocated to our segments, since those items are reviewed separately by management.

Pulp Segment – Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

Selected Financial Information

(in thousands)

Pulp segment revenues, which includes pulp, energy and chemical revenues, in the third quarter of 2024 increased by approximately 7% to $373.3 million from $348.9 million in the same quarter of 2023 as higher pulp revenues were partially offset by lower energy and chemical revenues.

Pulp revenues in the third quarter of 2024 increased by approximately 11% to $354.2 million from $318.1 million in the same quarter of 2023 as a result of higher sales realizations partially offset by lower sales volumes.

Energy and chemical revenues in the third quarter of 2024 decreased by approximately 38% to $19.1 million from $30.8 million in the same quarter of 2023 primarily due to lower sales realizations and sales volumes.

Total pulp production in the third quarter of 2024 decreased by approximately 13% to 415,837 ADMTs compared with 479,924 ADMTs in the same quarter of 2023 as a result of the disposal of the CPP joint venture investment in the first quarter of 2024, unplanned downtime at the Peace River mill to complete necessary repairs to the mill’s digester after experiencing a mechanical failure, the impacts of a slower than normal maintenance start-up at our Stendal mill and isolated mechanical incidents at our Celgar mill, partially offset by the port strike related curtailment at the Celgar mill in the third quarter of 2023. In the third quarter of 2024, our pulp mills had 43 days of downtime (approximately 57,600 ADMTs) which included 20 days of planned annual maintenance and 23 days of unplanned downtime at the Peace River mill. In the third quarter of 2023, our pulp mills had 39 days of downtime (approximately 48,400 ADMTs) which included 13 days for planned annual maintenance downtime and 26 days for the curtailment at the Celgar mill.

The Peace River mill had an additional 12 days of unplanned downtime in the fourth quarter of 2024 in connection with the completion of repairs to the mill’s digester. We currently do not have any remaining planned annual maintenance downtime in the fourth quarter of 2024.

We estimate that annual maintenance downtime in the third quarter of 2024 adversely impacted our operating income by approximately $17.8 million, comprised of approximately $11.2 million in direct out-of-pocket expenses and the balance in reduced production. We estimate that unplanned downtime at the Peace River mill in the third quarter of 2024 adversely impacted our operating income by approximately $9.2 million in direct out-of-pocket expenses and reduced production.

Total pulp sales volumes in the third quarter of 2024 decreased by approximately 8% to 448,856 ADMTs from 487,199 ADMTs in the same quarter of 2023 primarily due to lower production.

In the third quarter of 2024, third party industry quoted average list prices for NBSK pulp increased in both Europe and North America from the same quarter of 2023. Third party industry quoted average net prices for NBSK pulp in China also increased from the same quarter of 2023. Average list prices for NBSK pulp in Europe and North America were approximately $1,573 per ADMT and $1,762 per ADMT, respectively, in the third quarter of 2024 compared to approximately $1,160 per ADMT and $1,293 per ADMT, respectively, in the same quarter of 2023. Average NBSK pulp net prices in China were approximately $771 per ADMT in the third quarter of 2024 compared to approximately $680 per ADMT in the same quarter of 2023. Prices quoted for China are net of discounts, allowances and rebates whereas quoted prices for Europe and North America are before applicable discounts, allowances and rebates.

Our average NBSK pulp sales realizations in the third quarter of 2024 increased by approximately 22% to $814 per ADMT from $666 per ADMT in the same quarter of 2023. In the third quarter of 2024, average NBHK pulp sales realizations increased by approximately 19% to $632 per ADMT from $530 per ADMT in the same quarter of 2023.

In the third quarter of 2024, primarily due to the effect of a weaker dollar on dollar denominated receivables held by our mills, we had a negative impact of approximately $5.9 million in operating income driven by foreign exchange compared to the same quarter of 2023.

Costs and expenses in the third quarter of 2024 increased by approximately 6% to $348.6 million from $327.9 million in the same quarter of 2023 primarily due to higher per unit fiber, maintenance and freight costs and the negative impact of a weaker dollar, partially offset by lower pulp sales volumes and lower per unit energy and chemical costs.

On average, in the third quarter of 2024, overall per unit fiber costs increased by approximately 25% compared to the same quarter of 2023. In the third quarter of 2024 we recorded a $4.0 million non-cash inventory impairment at our Peace River mill caused by low NBHK pulp prices. Per unit fiber costs increased relative to the third quarter of 2023 because the comparative period included the sale and revaluation of previously impaired inventory. After giving effect to such impairments, per unit fiber costs in the third quarter of 2024 decreased slightly compared to the same period of 2023. We currently expect relatively flat per unit fiber costs in the fourth quarter of 2024.

In the third quarter of 2024, transportation costs for our pulp segment increased by approximately 6% to $36.5 million from $34.3 million in the same quarter of 2023 driven by higher freight rates partially offset by lower pulp sales volumes.

In the third quarter of 2024, depreciation and amortization was relatively flat at $28.7 million compared to $28.2 million in the same quarter of 2023.

Pulp segment operating income increased by approximately 23% to $26.0 million in the third quarter of 2024 from $21.2 million in the same quarter of 2023 primarily due to higher pulp sales realizations partially offset by higher costs and expenses and lower sales volumes caused by unplanned downtime.

Solid Wood Segment – Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

Selected Financial Information

(in thousands)

(1) Manufactured products primarily includes CLT, glulam and finger joint lumber.

(2) Biofuels includes pellets and briquettes.

Solid wood segment revenues in the third quarter of 2024 increased by approximately 5% to $125.1 million from $119.5 million in the same quarter of 2023 due to higher manufactured products revenues partially offset by lower revenues from our other products.

Lumber revenues in the third quarter of 2024 modestly decreased to $49.1 million from $50.8 million in the same quarter of 2023 primarily as a result of lower sales volumes.

Energy, biofuels and wood residuals revenues in the third quarter of 2024 decreased by approximately 28% to $13.7 million from $19.1 million in the same quarter of 2023 primarily due to lower biofuels and wood residuals sales realizations and lower energy sales volumes.

In the third quarter of 2024, as a result of the continued ramp-up of our mass timber business, manufactured products revenues increased by approximately 71% to $35.8 million from $20.9 million in the same quarter of 2023.

Pallet revenues in the third quarter of 2024 decreased by approximately 8% to $26.5 million from $28.8 million in the same quarter of 2023 as a result of lower sales volumes as weak economic conditions in Europe negatively impacted demand.

Lumber production in the third quarter of 2024 increased by approximately 30% to 122.5 MMfbm from 94.4 MMfbm in the same quarter of 2023 primarily due to lower planned maintenance downtime and higher production at our Torgau facility.

Lumber sales volumes in the third quarter of 2024 decreased by approximately 5% to 108.8 MMfbm from 114.7 MMfbm in the same quarter of 2023 as a result of the timing of sales.

Average lumber sales realizations in the third quarter of 2024 increased to $451 per Mfbm from $443 per Mfbm in the same quarter of 2023 driven by a modest increase in demand in Europe. In the U.S. market, realized lumber prices decreased compared to the same quarter of 2023 due to weak demand. The U.S. market accounted for approximately 46% of our lumber revenues and approximately 43% of our lumber sales volumes in the third quarter of 2024. The majority of the balance of our lumber sales were to Europe.

Manufactured products sales realizations increased to $3,463 per m3 in the third quarter of 2024 from $1,752 per m3 in the same quarter of 2023 as a result of higher CLT and glulam sales realizations.

Fiber costs were approximately 70% of our lumber cash production costs in the third quarter of 2024. In the third quarter of 2024, per unit fiber costs for lumber production were relatively flat compared to the same quarter of 2023. We currently expect modestly increasing per unit fiber costs in the fourth quarter of 2024 due to strong demand.

In the third quarter of 2024, depreciation and amortization was relatively flat at $12.7 million compared to $12.5 million in the same quarter of 2023.

Transportation costs for our solid wood segment in the third quarter of 2024 decreased by approximately 9% to $12.6 million from $13.9 million in the same quarter of 2023 primarily as a result of lower sales volumes.

In the third quarter of 2024, our solid wood segment had an operating loss of $14.7 million compared to $19.7 million in the same quarter of 2023 primarily due to the higher mass timber sales realizations partially offset by lower biofuels and wood residuals sales realizations.

Consolidated – Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

Total revenues for the nine months ended September 30, 2024 modestly increased to $1,555.0 million from $1,523.4 million in the same period of 2023 as higher pulp, manufactured products and lumber sales realizations were mostly offset by lower sales realizations from our other products and lower lumber sales volumes.

In the nine months ended September 30, 2024, costs and expenses included a non-cash loss of $23.6 million in connection with the dissolution of the CPP joint venture and a non-cash goodwill impairment of $34.3 million related to the Torgau facility, which was recognized as a result of ongoing weakness in lumber, pallet and biofuels markets in Europe stemming from high interest rates and other economic conditions. We have achieved some of the planned synergies from the Torgau acquisition and expect to realize further synergies as market and economic conditions improve.

Costs and expenses in the nine months ended September 30, 2024 decreased by approximately 4% to $1,590.3 million from $1,655.7 million in the same period of 2023 primarily as a result of lower per unit fiber, energy and chemical costs and lower lumber and pulp sales volumes partially offset by higher planned maintenance downtime at our pulp mills, the non-cash goodwill impairment and the non-cash loss on disposal of the CPP joint venture investment.

In the nine months ended September 30, 2024, cost of sales depreciation and amortization decreased by approximately 5% to $121.8 million from $128.5 million in the same period of 2023 primarily due to the amortization in the first quarter of 2023 of an order backlog intangible asset acquired in the Torgau facility acquisition, which has been fully amortized.

Selling, general and administrative expenses decreased by approximately 6% to $90.6 million in the nine months ended September 30, 2024 from $96.4 million in the same period of 2023 primarily as a result of lower employee compensation and consulting fees.

In the nine months ended September 30, 2024, our operating loss was $35.4 million compared to $132.4 million in the same period of 2023 primarily due to lower per unit fiber and other production costs and higher pulp, manufactured products and lumber sales realizations partially offset by lower sales realizations from our other products, higher planned maintenance downtime, the non-cash goodwill impairment and the non-cash loss on disposal of the CPP joint venture investment.

Interest expense in the nine months ended September 30, 2024 increased by approximately 32% to $80.8 million from $61.0 million in the same period of 2023 primarily as a result of the issuance of $200.0 million of 2028 Senior Notes in September 2023.

In the nine months ended September 30, 2024, other income decreased by approximately 6% to $9.1 million from $9.7 million in the same period of 2023. Other income in the nine months ended September 30, 2024 and 2023 primarily consisted of interest earned on cash.

During the nine months ended September 30, 2024, we had an income tax recovery of $5.2 million, or an effective tax rate of 5% primarily due to the non-deductibility of the non-cash goodwill impairment and because we do not recognize a tax recovery for certain entities which we do not expect to realize a tax benefit. In the same period of 2023, we had an income tax recovery of $28.9 million, or an effective tax rate of 16% as we did not recognize a tax recovery for certain entities which we did not expect to realize a tax benefit.

In the nine months ended September 30, 2024, our net loss was $101.8 million, or $1.53 per share, compared to $154.8 million, or $2.33 per share in the same period of 2023. The net loss in the nine months ended September 30, 2024 included the non-cash goodwill impairment of $34.3 million, or $0.51 per share, and the non-cash loss of $23.6 million, or $0.35 per share, relating to the disposal of the CPP joint venture investment.

In the nine months ended September 30, 2024, Operating EBITDA increased to $144.5 million from negative Operating EBITDA of $3.7 million in the same period of 2023 primarily as a result of lower per unit fiber and other production costs and higher pulp, manufactured products and lumber sales realizations partially offset by lower sales realizations from our other products and higher planned maintenance downtime at our pulp mills.

Operating Results by Business Segment

None of the income or loss items following operating income (loss) in our Interim Consolidated Statements of Operations are allocated to our segments, since those items are reviewed separately by management.

Pulp Segment – Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

Selected Financial Information

(in thousands)

Pulp segment revenues, which includes pulp, energy and chemical revenues, in the nine months ended September 30, 2024 modestly increased to $1,173.0 million compared to $1,151.9 million in the same period of 2023 as higher pulp revenues were offset by lower energy and chemical revenues.

Pulp revenues in the nine months ended September 30, 2024 increased by approximately 4% to $1,109.3 million from $1,061.9 million in the same period of 2023 as a result of higher sales realizations partially offset by lower sales volumes.

Energy and chemical revenues in the nine months ended September 30, 2024 decreased by approximately 29% to $63.8 million from $90.0 million in the same period of 2023 primarily due to lower sales realizations.

Total pulp production in the nine months ended September 30, 2024 decreased by approximately 6% to 1,376,436 ADMTs compared with 1,457,911 ADMTs in the same period of 2023 primarily as a result of the disposal of the CPP joint venture investment in the first quarter of 2024, the impacts of planned and unplanned downtime events partially offset by the market curtailment at the Peace River and CPP mills and the port strike related curtailment at the Celgar mill in the same period of 2023. In the nine months ended September 30, 2024, our pulp mills had 87 days of downtime (approximately 135,100 ADMTs) which included 57 days of planned annual maintenance, 23 days of unplanned downtime at our Peace River mill and seven additional days due to slower than expected start-up in the second quarter of 2024. In the nine months ended September 30, 2023, our pulp mills had 109 days of downtime (approximately 120,900 ADMTs) which included 48 days of planned annual maintenance and 61 days for curtailments at the Peace River, CPP and Celgar mills.

We estimate that annual maintenance downtime in the nine months ended September 30, 2024 adversely impacted our operating income by approximately $78.0 million, comprised of approximately $56.1 million in direct out-of-pocket expenses and the balance in reduced production. We estimate that unplanned downtime at the Peace River mill in the nine months ended September 30, 2024 adversely impacted our operating income by approximately $9.2 million in direct out-of-pocket expenses and reduced production.

Total pulp sales volumes in the nine months ended September 30, 2024 remained generally flat at 1,447,840 ADMTs from 1,460,050 ADMTs in the same period of 2023.

In the nine months ended September 30, 2024, third party industry quoted average list prices for NBSK pulp increased in both Europe and North America from the same period of 2023. Third party industry quoted average net prices for NBSK pulp in China increased in the nine months ended September 30, 2024 compared to the same period of 2023. Average list prices for NBSK pulp in Europe and North America were approximately $1,525 per ADMT and $1,633 per ADMT, respectively, in the nine months ended September 30, 2024 compared to approximately $1,261 per ADMT and $1,493 per ADMT, respectively, in the same period of 2023. Average NBSK net prices in China were approximately $776 per ADMT in the nine months ended September 30, 2024 compared to approximately $746 per ADMT in the same period of 2023. Prices quoted for China are net of discounts, allowances and rebates whereas quoted prices for Europe and North America are before applicable discounts, allowances and rebates.

Our average NBSK pulp sales realizations in the nine months ended September 30, 2024 increased by approximately 6% to $781 per ADMT from $735 per ADMT in the same period of 2023. In the nine months ended September 30, 2024, average NBHK pulp sales realizations modestly increased to $650 per ADMT from $642 per ADMT in the same period of 2023.

In the nine months ended September 30, 2024, primarily as a result of the effect of a strengthening dollar on our Canadian dollar denominated costs and expenses, we had a positive impact of approximately $5.1 million in operating income due to foreign exchange compared to the same period of 2023.

Costs and expenses in the nine months ended September 30, 2024 decreased by approximately 6% to $1,129.1 million from $1,202.2 million in the same period of 2023 primarily as a result of lower per unit fiber, chemical and energy costs and lower pulp sales volumes partially offset by higher planned maintenance downtime and the non-cash loss on disposal of the CPP joint venture investment of $23.6 million.

On average, in the nine months ended September 30, 2024, overall per unit fiber costs, after giving effect to impairments, decreased by approximately 12% from the same period of 2023 due to stable supply.

Transportation costs for our pulp segment in the nine months ended September 30, 2024 modestly decreased to $113.9 million from $118.0 million in the same period of 2023 primarily driven by lower freight rates.

In the nine months ended September 30, 2024, depreciation and amortization was flat at $83.2 million compared to $83.4 million in the same period of 2023.

In the nine months ended September 30, 2024, our pulp segment operating income increased to $47.9 million from an operating loss of $49.5 million in the same period of 2023 primarily as a result of higher pulp sales realizations and lower per unit fiber and other production costs partially offset by higher planned maintenance downtime and the non-cash loss on disposal of the CPP joint venture investment.

Solid Wood Segment – Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

Selected Financial Information

(in thousands)

(1) Manufactured products primarily includes CLT, glulam and finger joint lumber.

(2) Biofuels includes pellets and briquettes.

Solid wood segment revenues in the nine months ended September 30, 2024 modestly increased to $374.4 million from $366.6 million in the same period of 2023 as a result of higher manufactured products revenues partially offset by lower revenues from our other products.

Lumber revenues in the nine months ended September 30, 2024 decreased by approximately 7% to $158.9 million from $170.1 million in the same period of 2023 primarily due to lower sales volumes partially offset by higher sales realizations.

Energy, biofuels and wood residuals revenues in the nine months ended September 30, 2024 decreased by approximately 18% to $46.3 million from $56.2 million in the same period of 2023 as a result of lower sales realizations.

In the nine months ended September 30, 2024, our mass timber business had strong production and manufactured products revenues more than doubled to $87.9 million from $42.6 million in the same period of 2023.

Pallet revenues in the nine months ended September 30, 2024 decreased by approximately 17% to $81.3 million from $97.7 million in the same period of 2023 due to lower sales realizations and sales volumes as weak economic conditions in Europe negatively impacted demand.

Lumber production in the nine months ended September 30, 2024 modestly increased to 360.9 MMfbm from 350.7 MMfbm in the same period of 2023.

Lumber sales volumes in the nine months ended September 30, 2024 decreased by approximately 11% to 346.8 MMfbm from 388.4 MMfbm in the same period of 2023 primarily due to timing of sales.

Average lumber sales realizations in the nine months ended September 30, 2024 increased by approximately 5% to $458 per Mfbm from $438 per Mfbm in the same period of 2023 driven by a modest increase in demand in both the U.S. and European markets. The U.S. market accounted for approximately 48% of our lumber revenues and approximately 41% of our lumber sales volumes in the nine months ended September 30, 2024. The majority of the balance of our lumber sales were to Europe.

Manufactured products sales realizations increased to $3,260 per m3 in the nine months ended September 30, 2024 from $1,672 per m3 in the same period of 2023 as a result of higher CLT sales volumes, which generate higher sales realizations relative to other manufactured products.

In the nine months ended September 30, 2024, due to ongoing weakness in lumber, pallet and biofuels markets in Europe stemming from high interest rates and other economic conditions, we recognized a non-cash goodwill impairment of $34.3 million related to the Torgau facility.

Fiber costs were approximately 75% of our lumber cash production costs in the nine months ended September 30, 2024. In the nine months ended September 30, 2024, per unit fiber costs for lumber production decreased by approximately 9% compared to the same period of 2023 because of stable supply.

In the nine months ended September 30, 2024, depreciation and amortization decreased by approximately 14% to $38.1 million from $44.5 million in the same period of 2023 primarily due to the amortization in the first quarter of 2023 of an order backlog intangible asset acquired in the Torgau facility acquisition, which has been fully amortized.

Transportation costs for our solid wood segment in the nine months ended September 30, 2024 decreased by approximately 16% to $40.5 million from $48.0 million in the same period of 2023 as a result of lower sales volumes and freight rates.

In the nine months ended September 30, 2024, our solid wood segment had an operating loss of $72.1 million compared to $69.3 million in the same period of 2023 primarily due to the non-cash goodwill impairment charge and lower wood residuals, pallets and biofuels sales realizations partially offset by higher mass timber sales volumes and lower per unit fiber and energy costs.

Liquidity and Capital Resources

Summary of Cash Flows

(in thousands)

FORM 10-Q

We operate in a cyclical industry and our operating cash flows vary accordingly. Our principal operating cash expenditures are for fiber, labor and chemicals. Working capital levels fluctuate throughout the year and are affected by maintenance downtime, changing sales patterns, seasonality and the timing of receivables and sales and the payment of payables and expenses.

Cash Flows from (used in) Operating Activities. Cash from operating activities was $19.0 million in the nine months ended September 30, 2024 compared to cash used in operating activities of $60.3 million in the same period of 2023. An increase in accounts receivable used cash of $40.9 million in the nine months ended September 30, 2024 and a decrease in accounts receivable provided cash of $89.1 million in the same period of 2023. In the nine months ended September 30, 2024, adjusting for inventory impairments of $4.0 million, a decrease in inventories provided cash of $25.2 million in the nine months ended September 30, 2024 and, adjusting for inventory impairments of $56.6 million, an increase in inventories used cash of $19.0 million in the same period of 2023. A decrease in accounts payable and accrued expenses used cash of $25.4 million in the nine months ended September 30, 2024 and $107.6 million in the same period of 2023.

Cash Flows from (used in) Investing Activities. Investing activities in the nine months ended September 30, 2024 used cash of $60.5 million. In the nine months ended September 30, 2024, we incurred $63.6 million of capital expenditures primarily related to log yard upgrades and other strategic projects at our Torgau facility, equipment enhancements at our Peace River mill, optimization projects at our mass timber facilities and maintenance projects across all mills and facilities. In the nine months ended September 30, 2024, we received proceeds from the sale of property, plant and equipment of $5.2 million primarily related to the sale of land from our sandalwood business.

Investing activities in the nine months ended September 30, 2023 used cash of $179.7 million. In the nine months ended September 30, 2023 we acquired the Structurlam Mass Timber Corporation and its subsidiaries for $82.1 million and incurred capital expenditures of $110.3 million primarily related to costs to complete the Rosenthal lignin plant, upgrades to the wood rooms at our Canadian mills and maintenance and optimization projects at our German mills. In the nine months ended September 30, 2023, we received $5.4 million of insurance proceeds for our property damage claim related to a fire at our Stendal mill and we received $4.6 million of government grants for the Peace River mill wood room project.

Cash Flows from (used in) Financing Activities. Financing activities in the nine months ended September 30, 2024 used cash of $33.7 million. In the nine months ended September 30, 2024, we repaid approximately $15.5 million under our revolving credit facilities and we paid dividends of $10.0 million.

Financing activities in the nine months ended September 30, 2023 provided cash of $230.6 million. In the nine months ended September 30, 2024 we received proceeds from the issuance of $200.0 million of 2028 Senior Notes and borrowed approximately $51.3 million under our revolving credit facilities. In the nine months ended September 30, 2023, we paid dividends of $10.0 million, and incurred aggregate debt issuance costs of $4.6 million related to the issuance of the 2028 Senior Notes and the increase in our maximum borrowing capacity under our German revolving credit facility.

Balance Sheet Data

The following table is a summary of selected financial information as of the dates indicated:

(in thousands)

Sources and Uses of Funds

Our principal sources of funds are cash flows from operations and cash and cash equivalents on hand. Our principal uses of funds consist of operating expenditures, capital expenditures and interest payments on our senior notes.

The following table sets out our total capital expenditures and interest expense for the periods indicated:

(in thousands)

(1) Amounts differ from interest expense, which includes non-cash items. See supplemental disclosure of cash flow information from our Interim Consolidated Statements of Cash Flows included in this report.

(2) Interest on our senior notes due 2026 (the “2026 Senior Notes”) is paid semi-annually in January and July of each year. Interest on our senior notes due 2029 is paid semi-annually in February and August of each year. Interest on our 2028 Senior Notes is paid semi-annually in April and October of each year.

As of September 30, 2024, we had cash and cash equivalents of $239.0 million, approximately $315.2 million available under our revolving credit facilities and aggregate liquidity of about $554.2 million.

In October 2024, we completed an add-on offering of $200.0 million of our existing 2028 Senior Notes. The new issuance was at a 103.000% premium to their principal amount, for a yield to worst of 11.624%. The proceeds and cash on hand were used to redeem $300.0 million in principal amount of 2026 Senior Notes.

We currently expect aggregate capital expenditures in 2024 to be between $95 million and $120 million. This includes certain high return projects, including projects at the Torgau facility designed to position it for improved market conditions by, among other things, increasing its lumber production capacity to approximately 440 MMfbm and planing capacity to approximately 145 MMfbm. In addition, other high return projects include optimization projects at the Mercer Spokane facility designed to reduce production costs.

We currently consider the majority of undistributed earnings of our foreign subsidiaries to be indefinitely reinvested and, accordingly, no U.S. income tax has been provided on such earnings. However, if we were required to repatriate funds to the U.S., we believe that we currently could repatriate the majority thereof without incurring any material amount of taxes as a result of our shareholder advances and U.S. tax reform. However, it is currently not practical to estimate the income tax liability that might be incurred if such earnings were remitted to the U.S. Substantially all of our undistributed earnings are held by our foreign subsidiaries outside of the U.S.

Based upon the current level of operations and our current expectations for future periods in light of the current economic environment, and in particular, current and expected pulp and lumber pricing and foreign exchange rates, we believe that cash flow from operations and available cash, together with available borrowings under our revolving credit facilities, will be adequate to finance the capital requirements for our business including the payment of our quarterly dividend during the next 12 months.

In the future we may make acquisitions of businesses or assets or commitments to additional capital projects. To achieve the long-term goals of expanding our assets and earnings, including through acquisitions, capital resources will be required. Depending on the size of a transaction, the capital resources that will be required can be substantial. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against our assets or the issuance of securities.

Debt Covenants

Certain of our long-term obligations contain various financial tests and covenants customary to these types of arrangements. See our annual report on Form 10-K for the fiscal year ended December 31, 2023.

As of September 30, 2024, we were in full compliance with all of the covenants of our indebtedness.

Contractual Obligations and Commitments

There were no material changes outside the ordinary course to any of our material contractual obligations during the nine months ended September 30, 2024.

Foreign Currency

As a majority of our assets, liabilities and expenditures are held or denominated in euros or Canadian dollars, our consolidated financial results are subject to foreign currency exchange rate fluctuations.

We translate foreign denominated assets and liabilities into dollars at the rate of exchange on the balance sheet date. Equity accounts are translated using historical exchange rates. Unrealized gains or losses from these translations are recorded in other comprehensive income (loss) and do not affect our net earnings.

As a result of the strengthening of the dollar versus the Canadian dollar partially offset by the weakening of the dollar versus the euro as of September 30, 2024, we recorded a net non-cash decrease of $1.7 million in the carrying value of our net assets denominated in Canadian dollars and euros, consisting primarily of our property, plant and equipment. This non-cash decrease does not affect our net loss, Operating EBITDA or cash but is reflected in our other comprehensive income (loss) and as a decrease to our total equity. As a result, our accumulated other comprehensive loss increased to $133.1 million.

Based upon the exchange rate as of September 30, 2024, the dollar has strengthened by approximately 2% against the Canadian dollar and weakened by approximately 1% against the euro since December 31, 2023. See “Quantitative and Qualitative Disclosures about Market Risk”.

Credit Ratings of Senior Notes

We and our senior notes are rated by Standard & Poor's Rating Services, referred to as “S&P”, Moody's Investors Service, Inc., referred to as “Moody's” and Fitch Ratings, referred to as “Fitch”.

S&P, Moody’s and Fitch base their assessment of the credit risk on our senior notes on the business and financial profile of Mercer Inc. and our restricted subsidiaries under the indentures governing the senior notes. Factors that may affect our credit rating include changes in our operating performance and liquidity. Credit rating downgrades can adversely impact, among other things, future borrowing costs and access to capital markets.

In August 2024, Moody's downgraded its rating on our senior notes to B3 from B2 and confirmed its outlook is negative. In October 2024, S&P confirmed its outlook is negative and confirmed its rating on our senior notes is B. In October 2024, Fitch assigned its first time rating on our senior notes as B+ and gave a stable rating for its outlook.

Credit ratings are not recommendations to buy, sell or hold securities and may be subject to revision or withdrawal by the assigning rating organization. Each rating should be evaluated independently of any other rating.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect both the amount and the timing of the recording of assets, liabilities, revenues, and expenses in the consolidated financial statements and accompanying note disclosures. Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increases, these judgments become even more subjective and complex.

Our significant accounting policies are disclosed in Note 1 to our audited annual financial statements included in our annual report on Form 10-K for the fiscal year ended December 31, 2023. While all of the significant accounting policies are important to the consolidated financial statements, some of these policies may be viewed as having a high degree of judgment. On an ongoing basis using currently available information, management reviews its estimates, including those related to accounting for, among other things, future cash flows associated with impairment testing for goodwill and long-lived assets, depreciation and amortization, pension and other post-retirement benefit obligations, deferred income taxes (valuation allowance and permanent reinvestment), the allocation of the purchase price in a business combination to the assets acquired and liabilities assumed, revenues under long-term contracts, inventory impairment, assets and liabilities classified as held for sale and the fair value of disposal groups, legal liabilities and contingencies. Actual results could differ materially from these estimates and changes in these estimates are recorded when known.

We have identified certain accounting policies that are the most important to the portrayal of our current financial condition and results of operations.

Goodwill

Goodwill is evaluated for impairment annually or whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying value. Application of the goodwill impairment test requires significant judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. The fair value of a reporting unit is estimated primarily through the use of a discounted cash flow model, using market participant assumptions, and requires us to make certain assumptions and estimates regarding industry economic factors and the future profitability of the reporting unit. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of the discount rate. The estimates used to calculate the fair value of a reporting unit may change from year to year based on operating results, market conditions, and other factors. Changes in these assumptions and estimates could materially affect the determination of fair value and goodwill impairment for each reporting unit.

Goodwill was assigned to the Torgau facility, the reporting unit. The annual goodwill impairment test conducted as of August 31, 2023, was based on the discounted cash flow methodology. Some of the more significant assumptions inherent in estimating fair value include the prospective cash flows which anticipates the impact of market cyclicality in the next five years and the terminal period, the terminal value growth rate which reflects modest long-term growth, in line with the outlook for inflation, and the selected discount rate based on the weighted average cost of capital which considers the risk and nature of the reporting unit’s cash flows and the rates of return market participants would expect when investing their capital in the reporting unit.

After completing our annual impairment test on August 31, 2023, we concluded that goodwill was not impaired. The fair value of the reporting unit exceeded its carrying value by approximately 6%. The carrying value of goodwill was approximately $35.4 million as of December 31, 2023. For the period between August 31, 2023 and the first quarter of 2024, there were no triggering events or circumstances that would, more likely than not, have reduced the fair value of the reporting unit below its carrying value and therefore no interim goodwill impairment tests were required.

In the second quarter of 2024, ongoing weakness in lumber, pallet and biofuels markets in Europe, stemming from high interest rates and other economic conditions, was determined to, more likely than not, have reduced the fair value of the reporting unit below its carrying value and an interim goodwill impairment test was performed. The results of the impairment test showed the fair value of the reporting unit was less than its carrying value and this difference was greater than the carrying value of the goodwill. Accordingly, we recognized an impairment against all of the goodwill for the reporting unit in the second quarter of 2024. The carrying value of goodwill prior to this impairment was approximately $34.3 million.

For information about our other significant and critical accounting policies, see our annual report on Form 10-K for the fiscal year ended December 31, 2023.

Cautionary Statement Regarding Forward-Looking Information

The statements in this report that are not reported financial results or other historical information are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.

Generally, forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, or words of similar meaning, or future or conditional verbs, such as “will”, “should”, “could”, or “may”, although not all forward-looking statements contain these identifying words. Forward-looking statements are based on expectations, forecasts and assumptions by our management and involve a number of risks, uncertainties and other factors, many of which are beyond our control, that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, the following:

Risks Related to our Business

• Our business is highly cyclical in nature;
• cyclical fluctuations in the price and supply of our raw materials, particularly fiber, could adversely affect our business;
• inflation or a sustained increase in our key production and other costs would lead to higher manufacturing costs which could reduce our margins;
• our business, financial condition and results of operations could be adversely affected by disruptions in the global and European economies caused by geopolitical conflicts, including Russia's invasion of Ukraine and conflicts in the Middle East;
• we face intense competition in the forest products industry;
• our business is subject to risks associated with climate change and social and government responses thereto;
• if we are unable to offer products certified to globally recognized forestry management and chain of custody standards or meet customers’ product or project specifications, it could adversely affect our ability to compete;
• our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such capital requirements;
• trends in non-print media and changes in consumer habits regarding the use of paper have and are expected to continue to adversely affect the demand for market pulp;
• fluctuations in prices and demand for lumber and mass timber products could adversely affect our business;
• our solid wood segment lumber products are vulnerable to declines in demand due to competing technologies or materials;
• we may experience material disruptions to our production;
• acquisitions may result in additional risks and uncertainties in our business;
• we are subject to risks related to our employees;
• we are dependent on key personnel;
• if our long-lived assets become impaired, we may be required to record non-cash impairment charges that could have a material impact on our results of operations;
• our insurance coverage may not be adequate;
• we rely on third parties for transportation services;
• failures or security breaches of our information technology systems could disrupt our operations and negatively impact our business;
• an increased focus on sustainability reporting and the importance of environmental, social and governance scores from customers, investors and other stakeholders, which may impact our business;

Risks Related to our Debt

• our level of indebtedness could negatively impact our financial condition, results of operations and liquidity;
• changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities;
• we are exposed to interest rate fluctuations;

Risks Related to Macroeconomic Conditions

• a weakening of the global economy, including capital and credit markets, could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources;
• we are exposed to currency exchange rate fluctuations;
• globally, various central banks raised interest rates in 2022 and 2023 in response to high inflation rates, leading to a relatively high interest rate environment, which could dampen macroeconomic conditions and business activity and reduce demand for our products;
• political uncertainty, an increase in trade protectionism or geopolitical conflict could have a material adverse effect on global macroeconomic activities and trade and adversely affect our business, results of operations and financial condition;
• health epidemics or pandemics could adversely affect our business and financial results;
• we may incur losses as a result of unforeseen or catastrophic events, including terrorist attacks or natural disasters;

Legal and Regulatory Risks

• we are subject to extensive environmental regulation and we could incur substantial costs as a result of compliance with, violations of or liabilities under applicable environmental laws and regulations;
• we sell surplus green energy in Germany and are subject to changing energy legislation in response to high prices and energy shortages;
• our international sales and operations are subject to applicable laws relating to trade, export controls, foreign corrupt practices and competition laws, the violation of which could adversely affect our operations;
• product liability claims could adversely affect our operating results;

Risks Related to Ownership of our Shares

• the price of our common stock may be volatile; and
• a small number of our shareholders could significantly influence our business.

Given these uncertainties, you should not place undue reliance on our forward-looking statements. The foregoing review of important factors is not exhaustive or necessarily in order of importance and should be read in conjunction with the risks and assumptions including those set forth under “Part II. Other Information – Item 1A. Risk Factors” and in reports and other documents we have filed with or furnished to the SEC, including in our annual report on Form 10-K for the fiscal year ended December 31, 2023. We advise you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf. Unless required by law, we do not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. However, you should carefully review the reports and other documents we file from time to time with the SEC.

Cyclical Nature of Business

Revenues

The pulp and lumber businesses are highly cyclical in nature and markets are characterized by periods of supply and demand imbalance, which in turn can materially affect prices. Pulp and lumber markets are sensitive to cyclical changes in the global economy, industry capacity and foreign exchange rates, all of which can have a significant influence on selling prices and our operating results. The length and magnitude of industry cycles have varied over time but generally reflect changes in macroeconomic conditions and levels of industry capacity. Pulp and lumber are commodities that are generally available from other producers. Because commodity products have few distinguishing qualities from producer to producer, competition is generally based upon price, which is primarily determined by supply relative to demand.

Industry capacity can fluctuate as changing industry conditions can influence producers to idle production capacity or permanently close mills. In addition, to avoid substantial cash costs in idling or closing a mill, some producers will choose to operate at a loss, sometimes even a cash loss, which can prolong weak pricing environments due to oversupply. Oversupply of our products can also result from producers introducing new capacity in response to favorable pricing trends. Certain integrated pulp and paper producers have the ability to discontinue paper production by idling their paper machines and selling their pulp production on the market, if market conditions, prices and trends warrant such actions.

Demand for each of pulp and lumber has historically been determined primarily by general global macroeconomic conditions and has been closely tied to overall business activity. Pulp and lumber prices have been and are likely to continue to be volatile and can fluctuate widely over time.

The third party industry quoted average European list prices for NBSK pulp between 2015 and 2024 have fluctuated between a low of $790 per ADMT in 2016 to a high of $1,635 per ADMT in 2024. In the same period, third party industry quoted average North American list prices for NBHK pulp have fluctuated between a low of $820 per ADMT in 2016 to a high of $1,620 per ADMT in 2022.

As a key construction material, the pricing and demand for lumber is also significantly influenced by the number of housing starts, especially in the U.S. In the U.S., third party industry quoted monthly average western spruce/pine/fir (WSPF) 2 x 4 #2&Btr prices between 2015 and 2024 have fluctuated between a low of $245 per Mfbm in 2015 to a high of $1,604 per Mfbm in 2021. Similarly, the demand for CLT and glulam is primarily driven by the wood construction market and increased government policies focused on a low-carbon economy.

Our mills and operations voluntarily subject themselves to third-party certification as to compliance with internationally recognized, sustainable management standards because end use paper and lumber customers have shown an increased interest in understanding the origin of products they purchase. Demand for our products could be adversely affected if we, or our suppliers, are unable to achieve compliance, or are perceived by the public as failing to comply, with these standards or if our customers require compliance with alternate standards for which our operations are not certified.

A pulp producer's actual sales price realizations are net of customer discounts, rebates and other selling concessions. Accordingly, prices for pulp and lumber are driven by many factors outside our control, and we have little influence over the timing and extent of price changes, which are often volatile. Because market conditions beyond our control determine the prices for pulp and lumber, prices may fall below our cash production costs, requiring us to either incur short-term losses on product sales or cease production at one or more of our mills. Therefore, our profitability depends on managing our cost structure, particularly raw materials which represent a significant component of our operating costs and can fluctuate based upon factors beyond our control. If the prices of our products decline, or if prices for our raw materials increase, or both, our results of operations and cash flows could be materially adversely affected.

Costs

Our production costs are influenced by the availability and cost of raw materials, energy and labor, and our plant efficiencies and productivity. Our main raw material is fiber in the form of wood chips, pulp logs, sawlogs and lumber. Wood chip, pulp log and sawlog costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both highly cyclical. Higher fiber prices could affect producer profit margins if they are unable to pass along price increases to pulp and lumber customers or purchasers of surplus energy.

Currency

We have manufacturing operations in Germany, Canada and the U.S. Most of the operating costs and expenses of our German mills are incurred in euros and those of our Canadian mills in Canadian dollars. However, the majority of our sales are in products quoted in dollars. Our results of operations and financial condition are reported in dollars. As a result, our costs generally benefit from a strengthening dollar but are adversely affected by a decrease in the value of the dollar relative to the euro and to the Canadian dollar. Such declines in the dollar relative to the euro and the Canadian dollar reduce our operating margins and the cash flow available to fund our operations and to service our debt. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are exposed to market risks from changes in interest rates and foreign currency exchange rates, particularly the exchange rates between the dollar and the euro and Canadian dollar. Changes in these rates may affect our results of operations and financial condition and, consequently, our fair value. We seek to manage these risks through internal risk management policies as well as the periodic use of derivatives.

For additional information, please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our annual report on Form 10-K for the fiscal year ended December 31, 2023.

Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, referred to as the “Exchange Act”), as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness and there can be no assurance that any design will succeed in achieving its stated goals.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the factors disclosed in Item 1A. Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2023.