Cadre Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of the financial condition and results of operations of Cadre Holdings, Inc. (D/B/A The Safariland Group) (“Cadre,” “the Company” “we,” “us” and “our”) should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The following discussion contains forward-looking statements that reflect future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside of Cadre’s control. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward- looking statements include, but are not limited to, those discussed in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2022 and the section entitled “Cautionary Statement Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q.

Our Business

Cadre is a global leader in the manufacturing and distribution of safety and survivability equipment for first responders. Our equipment provides critical protection to allow its users to safely and securely perform their duties and protect those around them in hazardous or life-threatening situations. Through our dedication to superior quality, we establish a direct covenant with end users that our products will perform and keep them safe when they are most needed. We sell a wide range of products including body armor, explosive ordnance disposal equipment and duty gear through both direct and indirect channels. In addition, through our owned distribution, we serve as a one-stop shop for first responders providing equipment we manufacture as well as third-party products including uniforms, optics, boots, firearms and ammunition. The majority of our diversified product offering is governed by rigorous safety standards and regulations. Demand for our products is driven by technological advancement as well as recurring modernization and replacement cycles for the equipment to maintain its efficiency, effective performance and regulatory compliance.

We service the ever-changing needs of our end users by investing in research and development for new product innovation and technical advancements that continually raise the standards for safety and survivability equipment in the first responder market. Our target end user base includes domestic and international first responders such as state and local law enforcement, fire and rescue, explosive ordnance disposal technicians, emergency medical technicians, fishing and wildlife enforcement and departments of corrections, as well as federal agencies including the U.S. Department of State, U.S. Department of Defense, U.S. Department of Interior, U.S. Department of Justice, U.S. Department of Homeland Security, U.S. Department of Corrections and numerous foreign government agencies in over 100 countries.

In January 2022, the Company acquired Radar Leather Division S.r.l. (“Radar”) for $19.4 million, net of cash acquired. We recorded an allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values.

In May 2022, the Company acquired Cyalume Technologies, Inc, CT SAS Holdings, Inc. and Cyalume Technologies SAS (collectively “Cyalume”) for $36.2 million, net of cash acquired. We recorded an allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values.

(in thousands, except share and per share amounts)

The following table sets forth a summary of our financial highlights for the periods indicated:

(in thousands)

(1) Adjusted EBITDA is a non-GAAP financial measure. See “Non-GAAP Measures” below for our definition of, and additional information about, Adjusted EBITDA, and for a reconciliation to net income (loss), the most directly comparable U.S. GAAP financial measure.

Net sales increased by $13.6 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily as a result of higher domestic demand for armor products, large international orders for crowd control products partially offset by agency decreased demand for hard goods. Net sales increased by $23.8 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily as a result of higher demand for armor and crowd control products, as well as recent acquisitions, partially offset by a decrease from large international orders for explosive ordinance disposal products fulfilled in the prior year.

Net income increased by $6.1 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily as a result of an increase in gross profit, partially offset by an increase in selling, general and administrative expenses. Net income increased by $29.8 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily as a result of recent acquisitions, an increase in net sales, an increase in gross profit margin, and a decrease in stock compensation expense.

Secondary Offering

On June 9, 2022, the Company completed a secondary offering in which the Company issued and sold 2,250,000 shares of common stock at a price of $23.50 per share. The Company’s net proceeds from the sale of shares were $47.0 million after underwriter discounts and commissions, fees and expenses of $2.7 million, of which $2.0 million was paid to Kanders & Company, Inc., a company controlled by Warren Kanders, our Chief Executive Officer.

On July 14, 2022, the underwriters exercised a portion of their over-allotment option and purchased an additional 300,000 shares of common stock at a price of $23.50 per share, resulting in net proceeds to the Company of $6.6 million after underwriter discounts and commissions, fees and expenses of $0.4 million.

KEY PERFORMANCE METRICS

Orders backlog

We monitor our orders backlog, which we believe is a forward-looking indicator of potential sales. Our orders backlog for products includes all orders that have been received and are believed to be firm. Due to municipal government procurement rules, in certain cases orders included in backlog are subject to budget appropriation or other contract cancellation clauses. Consequently, our orders backlog may differ from actual future sales. Orders backlog can be helpful to investors in evaluating the performance of our business and identifying trends over time.

The following table presents our orders backlog as of the periods indicated:

(in thousands)

28

(in thousands, except share and per share amounts)

Orders comprising backlog as of a given balance sheet date are typically invoiced in subsequent periods. The majority of our products are generally processed and shipped within one to three weeks of an order being placed, though the fulfillment time for certain products, for example, explosive ordnance disposal equipment, may take three months or longer. Our orders backlog could experience volatility between periods, including as a result of customer order volumes and the speed of our order fulfilment, which in turn may be impacted by the nature of products ordered, the amount of inventory on hand and the necessary manufacturing lead time.

Orders backlog increased by $8.3 million as of September 30, 2023 compared to December 31, 2022, primarily due to increases of $9.7 million from explosive ordinance disposal products, including remotely operated vehicles, and $3.5 million from duty gear, partially offset by reductions of $2.8 million from chemiluminescent payloads and $2.3 million from the Distribution segment.

(in thousands, except share and per share amounts)

RESULTS OF OPERATIONS

In order to reflect the way our chief operating decision maker reviews and assesses the performance of the business, Cadre has determined that it has two reportable segments — the Product segment and the Distribution segment. Segment information is consistent with how the chief operating decision maker, our chief executive officer, reviews the business, makes investing and resource allocation decisions and assesses operating performance.

The following table presents data from our results of operations for the three and nine months ended September 30, 2023 and 2022 (in thousands unless otherwise noted):

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

The following tables present segment data for the three and nine months ended September 30, 2023 and 2022 (in thousands):

(in thousands, except share and per share amounts)

(1) Reconciling items consist primarily of intercompany eliminations and items not directly attributable to operating segments

Comparison of Three Months Ended September 30, 2023 to Three Months Ended September 30, 2022

Net sales. Product segment net sales increased by $15.8 million, or 17.0%, from $92.7 million to $108.5 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to increases of $10.0 million from higher domestic demand for armor products and $5.9 million as a result of large international orders for crowd control products. Distribution segment net sales decreased by $1.8 million, or 6.9%, from $26.0 million to $24.2 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to decreased agency demand for hard goods. Reconciling items consisting primarily of intercompany eliminations were $7.6 million and $7.2 million for the three months ended September 30, 2023 and 2022, respectively.

Cost of goods sold and gross profit. Product segment cost of goods sold increased by $6.3 million, or 11.6%, from $54.1 million to $60.4 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to increased volume and increased costs to manufacture product (principally material and labor), partially offset by prior year increases from the amortization of inventory step up adjustments related to 2022 acquisitions, product mix and productivity. Product segment gross profit as a percentage of net sales increased by 270 basis points to 44.3% for the three months ended September 30, 2023 from 41.6% for the three months ended September 30, 2022, mainly driven by favorable pricing, product mix and productivity, partially offset by inflation and pressure from a stronger Mexican peso. Distribution segment cost of goods sold decreased by $2.2 million, or 10.2%, from $20.9 million to $18.7 million for the three months ended September 30, 2023 as compared to the same period in 2022, primarily due to decreased volume. Distribution segment gross profit as a percentage of net sales increased by 290 basis points to 22.7% for the three months ended September 30, 2023 from 19.8% for the three months ended September 30, 2022, mainly driven by favorable mix. Reconciling items consisting primarily of intercompany eliminations were $7.6 million and $7.2 million for the three months ended September 30, 2023 and 2022, respectively.

Selling, general and administrative. Selling, general and administrative increased by $4.6 million, or 14.4%, for the three months ended September 30, 2023 as compared to the same period in 2022, primarily due to employee compensation and related benefits and commissions.

Restructuring and transaction costs. Restructuring and transaction costs decreased by $1.1 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 primarily due to costs incurred in 2022 associated with acquisitions.

Related party expense. Related party expense, which primarily consists of rent expense related to distribution warehouses and retail stores that we lease from related parties, remained consistent for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

(in thousands, except share and per share amounts)

Interest expense. Interest expense decreased by $0.5 million, or 31.5%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to a decrease in outstanding borrowings.

Other (expense) income, net. Other expense, net was $0.3 million for the three months ended September 30, 2023 as compared to $1.9 million for the three months ended September 30, 2022, primarily due to changes in foreign currency exchange rates.

(Provision) benefit for income taxes. Income tax provision was $4.3 million for the three months ended September 30, 2023 compared to $2.0 million for the three months ended September 30, 2022. The effective tax rate was 28.0% and 28.4% for the three months ended September 30, 2023 and 2022, respectively, and differed from the statutory rate primarily due to state taxes and executive compensation, partially offset by research and development tax credits.

Comparison of Nine Months Ended September 30, 2023 to Nine Months Ended September 30, 2022

Net sales. Product segment net sales increased by $27.2 million, or 9.8%, from $277.9 million to $305.1 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to $17.2 million from higher demand for armor products, $8.7 million from higher demand for crowd control products, and $8.1 million from recent acquisitions, partially offset by a reduction of $6.6 million from large international orders for explosive ordnance disposal products fulfilled in the prior year. Distribution segment net sales increased by $0.8 million, or 1.0%, from $73.8 million to $74.6 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to increased agency demand for hard goods. Reconciling items consisting primarily of intercompany eliminations were $21.7 million and $17.6 million for the nine months ended September 30, 2023 and 2022, respectively.

Cost of goods sold and gross profit. Product segment cost of goods sold increased by $5.0 million, or 3.0%, from $166.2 million to $171.2 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to increased volume and increasing costs to manufacture product (principally material and labor), partially offset by prior year increases from the amortization of inventory step up adjustments related to 2022 acquisitions, product mix and productivity. Product segment gross profit as a percentage of net sales increased by 367 basis points to 43.9% for the nine months ended September 30, 2023 from 40.2% for the nine months ended September 30, 2022, mainly driven by favorable pricing, product mix and productivity, partially offset by inflation and pressure from a stronger Mexican peso. Distribution segment cost of goods sold decreased by $1.2 million, or 2.1%, from $58.4 million to $57.2 million for the nine months ended September 30, 2023 as compared to the same period in 2022, primarily due to decreased volume, partially offset by costs to acquire products. Distribution segment gross profit as a percentage of net sales increased by 246 basis points to 23.3% for the nine months ended September 30, 2023 from 20.9% for the nine months ended September 30, 2022, mainly driven by favorable product mix within the agency channel. Reconciling items consisting primarily of intercompany eliminations were $21.4 million and $17.6 million for the nine months ended September 30, 2023 and 2022, respectively.

Selling, general and administrative. Selling, general and administrative decreased by $12.8 million, or 10.8%, for the nine months ended September 30, 2023 as compared to the same period in 2022, primarily due to a $22.3 million decrease in stock-based compensation expense, slightly offset by an increase in employee compensation and related benefits.

Restructuring and transaction costs. Restructuring and transaction costs decreased by $2.2 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 primarily due to costs incurred in 2022 associated with acquisitions.

Related party expense. Related party expense, which consists of rent expense related to distribution warehouses and retail stores that we lease from related parties, decreased by $1.0 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 primarily due to a $1.0 million transaction fee paid to Kanders & Company, Inc., a company controlled by our Chief Executive Officer, in connection with the acquisition of Cyalume in 2022.

(in thousands, except share and per share amounts)

Interest expense. Interest expense decreased by $0.8 million, or 17.1%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to a decrease in outstanding borrowings.

Other (expense) income, net. Other income, net was $0.4 million for the three months ended September 30, 2023 as compared to Other expense, net of $2.8 million for the three months ended September 30, 2022, primarily due to changes in foreign currency exchange rates.

(Provision) benefit for income taxes. Income tax provision was $11.5 million for the nine months ended September 30, 2023 compared to a tax benefit of $2.5 million for the nine months ended September 30, 2022. The effective tax rate was 28.3% and 76.5% for the nine months ended September 30, 2023 and 2022, respectively, and differed from the statutory rate primarily due to state taxes and executive compensation, partially offset by research and development tax credits.

NON-GAAP MEASURES

This Quarterly Report on Form 10-Q includes EBITDA and Adjusted EBITDA, which are non-GAAP financial measures that we use to supplement our results presented in accordance with U.S. GAAP. EBITDA is defined as net income before depreciation and amortization expense, interest expense and provision (benefit) for income tax. Adjusted EBITDA represents EBITDA that excludes restructuring and transaction costs, other (income) expense, net, stock-based compensation expense, stock-based compensation payroll tax expense, long-term incentive plan (“LTIP”) bonus and amortization of inventory step-up as these items do not represent our core operating performance.

EBITDA and Adjusted EBITDA are performance measures that we believe are useful to investors and analysts because they illustrate the underlying financial and business trends relating to our core, recurring results of operations and enhance comparability between periods. Adjusted EBITDA is considered by our board of directors and management as an important factor in determining performance-based compensation.

EBITDA and Adjusted EBITDA are not recognized measures under U.S. GAAP and are not intended to be a substitute for any U.S. GAAP financial measure and, as calculated, may not be comparable to other similarly-titled measures of performance of other companies. Investors should exercise caution in comparing our non-GAAP measures to any similarly titled measures used by other companies. These non-GAAP financial measures exclude certain items required by U.S. GAAP and should not be considered as alternatives to information reported in accordance with U.S. GAAP.

(in thousands, except share and per share amounts)

The table below presents our EBITDA and Adjusted EBITDA reconciled to the most comparable GAAP financial measures for the periods indicated:

(in thousands)

(1) Reflects the “Restructuring and transaction costs” line item on our condensed consolidated statements of operations and comprehensive income, which primarily includes transaction costs composed of legal and consulting fees, and $1.0 million paid to Kanders & Company, Inc., a company controlled by our Chief Executive Officer, for services related to the acquisition of Cyalume, which is included in related party expense in the Company’s condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2022.

(2) Reflects the “Other (expense) income, net” line item on our condensed consolidated statement of operations and comprehensive income and primarily includes gains and losses due to fluctuations in foreign currency exchange rates.

(3) Reflects compensation expense related to equity and liability classified stock-based compensation plans.

(4) Reflects payroll taxes associated with vested stock-based compensation awards.

(5) Reflects the cost of a cash-based long-term incentive plan awarded to employees that vests over three years.

(6) Reflects amortization expense related to the step-up inventory adjustment recorded as a result of our recent acquisitions.

Adjusted EBITDA increased by $3.0 million for the three months ended September 30, 2023 as compared to 2022, primarily due to an increase in gross profit, partially offset by an increase in selling, general and administrative expenses. Adjusted EBITDA increased by $11.8 million for the nine months ended September 30, 2023 as compared to 2022, primarily due to an increase in net sales, an increase in gross profit margin and recent acquisitions.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity refers to our ability to generate sufficient cash flows to meet the cash requirements of our business operations, including working capital needs, capital expenditures, debt service, acquisitions and other commitments. Our principal sources of liquidity have been cash provided by operating activities, cash on hand and amounts available under our revolving loans.

For the nine months ended September 30, 2023, net cash provided from operating activities totaled $46.3 million and as of September 30, 2023, cash and cash equivalents totaled $69.4 million. We believe that our cash flows from operations and cash on

(in thousands, except share and per share amounts)

hand, and available borrowing capacity under our existing credit facilities (as described below) will be adequate to meet our liquidity requirements for at least the 12 months following the date of this Quarterly Report on Form 10-Q. Our future capital requirements will depend on several factors, including future acquisitions and investments in our manufacturing facilities and equipment. We could be required, or could elect, to seek additional funding through public or private equity or debt financings; however, additional funds may not be available on terms acceptable to us, if at all.

Debt

As of September 30, 2023 and December 31, 2022, we had $143.6 million and $149.7 million in outstanding debt, net of debt discounts and debt issuance costs, respectively, primarily related to the term loan facilities.

2021 Credit Agreement

On August 20, 2021 (the “Closing Date”), the Company refinanced its existing credit facilities and entered into a new credit agreement whereby Safariland, LLC, as borrower (the “Borrower”), the Company and certain domestic subsidiaries of the Borrower, as guarantors (the “Guarantors”), closed on and received funding under a credit agreement (initially entered into on July 23, 2021), pursuant to a First Amendment to Credit Agreement (collectively, the “2021 Credit Agreement”) with PNC Bank, National Association (“PNC”), as administrative agent, and the several lenders from time to time party thereto (together with PNC, the “Lenders”) pursuant to which the Borrower (i) borrowed $200.0 million under a term loan (the “Term Loan”), and (ii) may borrow up to $100.0 million under a revolving credit facility (including up to $15.0 million for letters of credit and up to $10.0 million for swing line loans) (the “Revolving Loan”). Each of the Term Loan and the Revolving Loan mature on July 23, 2026. Commencing December 31, 2021, the New Term Loan requires scheduled quarterly payments in amounts equal to 1.25% per quarter of the original aggregate principal amount of the Term Loan, with the balance due at maturity. The 2021 Credit Agreement is guaranteed, jointly and severally, by the Guarantors and, subject to certain exceptions, secured by a first-priority security interest in substantially all of the assets of the Borrower and the Guarantors pursuant to a Security and Pledge Agreement and a Guaranty and Suretyship Agreement, each dated as of the Closing Date.

There were no amounts outstanding under the Revolving Loan as of September 30, 2023 and December 31, 2022. As of September 30, 2023, there were $2.6 million in outstanding letters of credit and $97.4 million of availability.

The Borrower may elect to have the Revolving Loan and Term Loan under the 2021 Credit Agreement bear interest at a base rate or LIBOR, in each case, plus an applicable margin. However, in connection with the market transition away from applicable LIBOR rates to SOFR, on May 31, 2023, the Company, the Borrowers and the Lenders entered into the third amendment to the 2021 Credit Agreement (the “Third Amendment”) pursuant to which the 2021 Credit Agreement was amended to implement the SOFR rates. The applicable margin for these borrowings ranges from 0.50% to 1.50% per annum, in the case of base rate borrowings, and 1.60% to 2.60% per annum, in the case of SOFR (and prior to May 31, 2023, on LIBOR) borrowings, in each case based upon the level of the Company’s consolidated total net leverage ratio.

The 2021 Credit Agreement also contains customary representations and warranties, and affirmative and negative covenants, including limitations on additional indebtedness, dividends, and other distributions, entry into new lines of business, use of loan proceeds, capital expenditures, restricted payments, restrictions on liens on the assets of the Borrowers or any Guarantor, transactions with affiliates, amendments to organizational documents, accounting changes, sale and leaseback transactions, dispositions, and mandatory prepayments in connection with certain liquidity events. The 2021 Credit Agreement contains certain restrictive debt covenants, which require us to: (i) maintain a minimum fixed charge coverage ratio of 1.25 to 1.00, starting with the quarter ended December 31, 2021, which is to be determined for each quarter end on a trailing four quarter basis and (ii) maintain a quarterly maximum consolidated total net leverage ratio of 3.75 to 1.00 from the quarter ended December 31, 2021 until the quarter ended September 30, 2022, and thereafter 3.50 to 1.00, which is in each case to be determined on a trailing four quarter basis; provided that under certain circumstances and subject to certain limitations, in the event of a material acquisition, we may temporarily increase the consolidated total net leverage ratio by up to 0.50 to 1.00 for four fiscal quarters following such acquisition. The 2021 Credit Agreement contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of

(in thousands, except share and per share amounts)

covenants, inaccuracy of representations and warranties, failure to make payment on, or defaults with respect to, certain other material indebtedness, bankruptcy and insolvency events, material judgments and change of control provisions. Upon the occurrence of an event of default, and after the expiration of any applicable grace period, payment of any outstanding loans under the 2021 Credit Agreement may be accelerated and the Lenders could foreclose on their security interests in the assets of the Borrowers and the Guarantors. As of November 3, 2023, there were no amounts outstanding under the Revolving Loan.

The foregoing description of the 2021 Credit Agreement, as amended, does not purport to be complete and is qualified in its entirety by reference to Exhibits 10.15, 10.16 and 10.17 to our Annual Report on Form 10-K for the year ended December 31, 2022 as well to Exhibit 10.1 attached to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, and are incorporated herein by reference as though fully set forth herein.

Canadian Credit Facility

On October 14, 2021, Med-Eng Holdings ULC and Pacific Safety Products Inc., the Company’s Canadian subsidiaries, as borrowers (the “Canadian Borrowers”), and Safariland, LLC, as guarantor (the “Canadian Guarantor”), closed on a line of credit pursuant to a Loan Agreement (the “Canadian Loan Agreement”) and a Revolving Line of Credit Note (the “Note”) with PNC Bank Canada Branch (“PNC Canada”), as lender pursuant to which the Canadian Borrowers may borrow up to CDN$10.0 million under a revolving line of credit (including up to $3.0 million for letters of credit) (the “Revolving Canadian Loan”). The Revolving Canadian Loan matures on July 23, 2026. The Canadian Loan Agreement is guaranteed by the Canadian Guarantor pursuant to a Guaranty and Suretyship Agreement.

The Canadian Borrowers may elect to have borrowings either in United States dollars or Canadian dollars under the Canadian Loan Agreement, which will bear interest at a base rate or LIBOR, in each case, plus an applicable margin, in the case of borrowings in United States dollars, or at a Canadian Prime Rate (as announced from time to time by PNC Canada) or a Canadian deposit offered rate (“CDOR”) as determined from time to time by PNC Canada in accordance with the Canadian Loan Agreement. The applicable margin for these borrowings will range from 0.50% to 1.50% per annum, in the case of base rate borrowings and Canadian Prime Rate borrowings, and 1.50% to 2.50% per annum, in the case of LIBOR borrowings and CDOR borrowings. The Canadian Loan Agreement also requires the Canadian Borrowers to pay (i) an unused line fee on the unused portion of the loan commitments in an amount ranging between 0.175% and 0.25% per annum, based upon the level of the Company’s consolidated total net leverage ratio, and (ii) an upfront fee equal to 0.25% of the principal amount of the Note.

There were no amounts outstanding under the Revolving Canadian Loan as of September 30, 2023 and December 31, 2022.

The Canadian Loan Agreement also contains customary representations and warranties, and affirmative and negative covenants, including, among others, limitations on additional indebtedness, entry into new lines of business, entry into guarantee agreements, making of any loans or advances to, or investments in, any other person, restrictions on liens on the assets of the Canadian Borrowers and mergers, transfers of assets and acquisitions. The Canadian Loan Agreement and Note also contain customary events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, failure to make payment on, or defaults with respect to, certain other material indebtedness, bankruptcy and insolvency events, material judgments and change of control provisions. Upon the occurrence of an event of default, and after the expiration of any applicable grace period, payment of any outstanding loans under the Canadian Loan Agreement may be accelerated. As of November 3, 2023, there were no amounts outstanding under the Revolving Canadian Loan.

The foregoing description of the Canadian Loan Agreement does not purport to be complete and is qualified in its entirety by reference to the Canadian Loan Agreement, which is Exhibit 10.18 to our Annual Report on Form 10-K for the year ended December 31, 2022, and is incorporated herein by reference as though fully set forth herein.

(in thousands, except share and per share amounts)

Cash Flows

The following table presents a summary of our cash flows for the periods indicated:

(in thousands)

Net cash provided by operating activities

During the nine months ended September 30, 2023, net cash provided by operating activities of $46.3 million resulted primarily from net income of $29.0 million, a $12.4 million add back to net income for depreciation and amortization, a $7.1 million add back to net income for stock-based compensation and changes in operating assets and liabilities of $3.3 million. Changes in operating assets and liabilities were primarily driven by a decrease in accounts receivable of $3.4 million, an increase in inventories of $12.2 million and an increase in accounts payable and other liabilities of $8.6 million.

During the nine months ended September 30, 2022, net cash provided by operating activities of $29.5 million resulted primarily from net loss of $0.8 million, a $29.0 million add back to net loss for stock-based compensation, a $11.3 million add back to net loss for depreciation and amortization and changes in operating assets and liabilities of $14.1 million. Changes in operating assets and liabilities were primarily driven by an increase in accounts receivable of $3.3 million, an increase in inventories of $7.2 million and a decrease in accounts payable and other liabilities of $4.6 million.

Net cash used in investing activities

During the nine months ended September 30, 2023, we used $4.0 million of cash in investing activities, primarily consisting of $4.2 million for purchases of property and equipment.

During the nine months ended September 30, 2022, we used $58.0 million of cash in investing activities, consisting of $19.4 million for the acquisition of Radar, $35.7 million for the acquisition of Cyalume and $2.9 million for purchases of property and equipment.

Net cash (used in) provided by financing activities

During the nine months ended September 30, 2023, we used $18.2 million of cash in financing activities, primarily consisting of principal payments on term loans of $7.5 million, taxes paid in connection with employee stock transactions of $2.7 million and dividends distributed of $9.0 million.

During the nine months ended September 30, 2022, net cash provided by financing activities of $31.2 million resulted primarily from proceeds from the secondary offering of $56.3 million, partially offset by principal payments on term loans of $7.5 million, taxes paid in connection with employee stock transactions of $6.2 million and dividends distributed of $8.5 million.

(in thousands, except share and per share amounts)

Contractual Obligations

Our long-term contractual obligations generally include our debt and related interest payments and operating and finance lease payments for our property and equipment, and are expected to be funded from cash-on-hand, cash from operations and availability under our existing credit facilities. There were no significant changes to our contractual obligations from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022.

Off-Balance Sheet Arrangements

We do not engage in off-balance sheet financing arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. Preparation of the financial statements requires us to make judgments, estimates and assumptions that impact the reported amount of net sales and expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We consider an accounting judgment, estimate or assumption to be critical when the estimate or assumption is complex in nature or requires a high degree of judgment and when the use of different judgments, estimates and assumptions could have a material impact on our condensed consolidated financial statements. While our significant accounting policies are described in more detail in notes in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

There have been no significant changes to our critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2022.

Recently Adopted and Issued Accounting Pronouncements

Recently issued and adopted accounting pronouncements are described in notes to our audited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, we are eligible for exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including, but not limited to, presenting only two years of audited financial statements, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation, and an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or golden parachute arrangements.

In addition, an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this provision of the JOBS Act. As a result, we will not be subject to new or revised accounting standards at the same time as other public companies that are not emerging growth companies. Therefore, our condensed consolidated financial statements may not be comparable to those of companies that comply with new or revised accounting pronouncements as of public company effective dates.

(in thousands, except share and per share amounts)

We have in the past and may in the future be exposed to certain market risks, including interest rate, foreign currency exchange in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial condition or results of operations due to adverse changes in financial market prices and rates. These risks are not significant to our results of operations, but they may be in the future. We do not hold or issue financial instruments for speculative or trading purposes. There have not been material changes in market risk exposures as of September 30, 2023.

Interest rate risk

Changes in interest rates affect the amount of interest expense we are required to pay on our floating rate debt. As of September 30, 2023, we had $141.1 million in outstanding floating rate debt, which bears interest at one-month SOFR (5.32% as of September 30, 2023) plus 1.60%.

We entered into the Swap Agreements to convert a portion of the interest rate exposure on our floating rate debt from variable to fixed and designated them as cash flow hedges. Under the terms of the Swap Agreements, we receive payments based on the 1-month SOFR. A portion of the amount included in accumulated other comprehensive income is reclassified into interest expense, net as a yield adjustment as interest is either paid or received on the hedged debt. The fair value of our Swap Agreements is based upon Level 2 inputs. We have considered our own credit risk and the credit risk of the counterparties when determining the fair value of our Swap Agreements.

We performed a sensitivity analysis on the principal amount of debt as of September 30, 2023, as well as the effect of our Swap Agreements. Further, in this sensitivity analysis, the change in interest rates is assumed to be applicable for an entire year. On an annual basis, a change of 100 basis points in the applicable interest rate would cause a change in interest expense of $1.4 million on the principal amount of debt and would have an immaterial effect when including the effect of our Swap Agreements.

As of September 30, 2023, we had the following Swap Agreements (in thousands):

During the nine months ended September 30, 2023, there were no interest rate swap agreements that expired.

Foreign currency exchange rate risk

Our operations are geographically diverse and we are exposed to foreign currency exchange risk primarily for the Canadian dollar and Mexican peso, related to our transactions and our subsidiaries’ balances that are denominated in currencies other than the U.S. dollar, our functional currency. We do not currently hedge our foreign currency transaction or translation exposure, though we have done so in the past and may do so in the future. Significant currency fluctuations could impact the comparability of our results of operations between periods. A 10% increase or decrease in the value of the Canadian dollar to the U.S. dollar would have caused our reported net sales to increase or decrease by approximately $0.3 million and $0.6 million for the three and nine months ended September 30, 2023. A 10% increase or decrease in the value of the Canadian dollar to the U.S. dollar would have caused our reported net income to increase or decrease by approximately $0.1 million and $0.2 million for the three and nine months ended September 30, 2023, excluding unrealized gains or losses from remeasurement. A 10% increase or decrease in the value of the Mexican peso to the U.S. dollar would have caused our reported net income to increase or decrease by approximately $0.6 million and $1.8 million for the three and nine months ended September 30, 2023, excluding unrealized gains or losses from remeasurement.

(in thousands, except share and per share amounts)

Evaluation of Disclosure Controls and Procedures

The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, its principal executive officer and principal financial officer, respectively, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(c) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of September 30, 2023, pursuant to Exchange Act Rule 13a-15. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports we file or submit under the Exchange Act is (i) recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to the appropriate management on a basis that permits timely decisions regarding disclosure. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2023 were effective.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls can prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.