Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity, and capital resources during the fiscal years ended December 31, 2024 and 2023. Unless otherwise noted, all references herein for the years 2024 and 2023 represent the fiscal years ended December 31, 2024 and 2023, respectively. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this Annual Report that have been prepared in accordance with accounting principles generally accepted in the United States of America. This discussion and analysis is presented in five sections:
• Executive Overview
• Results of Operations and Non-GAAP Financial Measures
• Liquidity and Capital Resources
• Material Cash Requirements from Contractual and Other Obligations
• Critical Accounting Policies and Estimates
Executive Overview
Ascent Industries Co. is a diverse industrials company focused on the production of specialty chemicals and stainless steel pipe and tube. Ascent Industries Co. was incorporated in 1958 as the successor to a chemical manufacturing business founded in 1945 known as Blackman Uhler Industries Inc.
The Specialty Chemicals segment produces critical ingredients and process aids for the oil & gas, household, industrial and institutional ("HII"), personal care, coatings, adhesives, sealants and elastomers (CASE), pulp and paper, textile, automotive, agricultural, water treatment, construction and other industries. The Tubular Products segment serves markets through pipe and tube production and customers in the appliance, architectural, automotive and commercial transportation, brewery, chemical, petrochemical, pulp and paper, mining, power generation (including nuclear), water and waste-water treatment, liquid natural gas ("LNG"), food processing, pharmaceutical, oil and gas and other industries.
Fiscal 2024 was a year of stabilization, recapitalization of talent and aggressive self-help to establish a foundation for organic and inorganic growth. The team rallied to overcome soft market conditions across both segments, delivering positive bottom line improvements while establishing a more predictable, reliable and profitable operating model. We ended the year with no outstanding debt, $16.1 million of cash and cash equivalents as well as $47.4 million of remaining available capacity on our revolving line of credit, allowing flexibility to continue to execute our strategy and future growth opportunities.
Munhall Closure
During the second quarter of 2023, the Board of Directors of the Company made the decision to permanently cease operations at Munhall effective on or around August 31, 2023. This strategic decision is part of the Company’s ongoing efforts to consolidate manufacturing to drive an increased focus on its core operations and to improve profitability while driving operational efficiencies. Munhall results are included within discontinued operations in all periods presented.
Divestiture of Specialty Pipe & Tube, Inc.
On December 22, 2023, the Company and its wholly-owned subsidiary Specialty Pipe & Tube, Inc. (“SPT”) entered into an Asset Purchase Agreement pursuant to which Ascent and SPT sold substantially all of the assets primarily related to SPT to Specialty Pipe & Tube Operations, LLC, a Delaware limited liability company. The consideration for the transaction was approximately $55 million of cash proceeds subject to certain closing adjustments. The transaction closed on December 22, 2023. As result of the sale, SPT results of operations are classified under discontinued operations for all periods presented. Prior to the divestiture, SPT was reported under the Company's Tubular Products segment. The discussion and analysis of our results of operations refers to continuing operations unless noted.
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Results of Operations
Comparison of 2024 to 2023 – Continuing Operations
Net sales from continuing operations for the full-year 2024 decreased $15.3 million, or 7.9%, over the full-year 2023 to $177.9 million. The decrease in net sales was primarily driven by an 8.8% decrease in average selling prices coupled with a 0.9% decrease in pounds shipped.
Full-year 2024 gross profit from continuing operations increased 1349.1% to $22.1 million, or 12.4% of sales, compared to $1.5 million, or 0.8% of sales, in the full-year 2023. The increase in dollars and percentage of sales for the full-year 2024 were primarily driven by improved strategic sourcing initiatives and product line management resulting in lower raw material costs.
Selling, general and administrative expense (SG&A) from continuing operations for the full-year 2024 decreased $0.1 million to $26.6 million compared to $26.7 million for the full-year 2023. SG&A as a percentage of sales was 14.9% of sales for 2024 and 13.8% of sales for 2023. The changes in SG&A expense were primarily driven by:
• decreases in salaries, wages and benefits driven by lower headcount in the current year;
• decreases in taxes and licenses; and,
• decreases in other expenses primarily driven by decreases in share-based compensation expense
The full-year decreases were partially offset by:
• increases in incentive bonus driven by higher attainment of performance goals in the current year over the prior year;
• increases in professional fees driven by increased IT and legal expenses in the current year
Operating loss from continuing operations for the full-year 2024 improved to $5.1 million compared to an operating loss of $37.4 million for the full-year 2023. The operating loss decrease for the full-year 2024 was primarily driven by aforementioned increase in gross profit as well as the prior year goodwill impairment not present in the current year.
Comparison of 2024 to 2023 – Specialty Chemicals
Net sales for the Specialty Chemicals segment decreased 3.4%, or $2.9 million, to $80.8 million for 2024 compared to $83.6 million in 2023. The decrease in net sales was primarily driven by a 3.4% decrease in pounds shipped and a 2.6% decrease in average selling prices.
SG&A expense increased by $2.6 million, or 37.0%, to $9.5 million in 2024 compared to $7.0 million in 2023. SG&A as a percentage of sales increased to 11.8% in 2024 from 8.3% in 2023. The changes in SG&A expense were primarily driven by increases in corporate allocation, incentive bonus expense and professional fees, partially offset by decreases in salaries, wages and benefits and taxes and license fees.
Operating income for the full-year 2024 totaled $1.2 million compared to an operating loss of $12.6 million for the full-year 2023. The increase in operating income was primarily driven by improved strategic sourcing initiatives and product line management resulting in lower raw material costs.
The following tables summarize operating results for the two years indicated. Reference should be made to Note 13 to the consolidated financial statements included in Item 8 of this Form 10-K.
2024 2023
(in thousands) Amount % Amount %
Net sales $ 80,764 100.0 % $ 83,616 100.0 %
Cost of goods sold 69,574 86.1 % 77,807 93.1 %
Gross profit 11,190 13.9 % 5,809 6.9 %
Selling, general and administrative expense
9,546 11.8 % 6,966 8.3 %
Acquisition costs and other 477 0.6 % 12 — %
Goodwill impairment — — % 11,389 13.6 %
Operating income (loss) $ 1,167 1.4 % $ (12,558) (15.0) %
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Comparison of 2024 to 2023 - Tubular Products
Net sales for the Tubular Products segment totaled $97.1 million for the full year of 2024, a decrease of 11.3% compared to the full-year 2023. The decrease in net sales was primarily driven by a 16.8% decrease in average selling prices offset by a 5.5% increase in pounds shipped.
SG&A expense increased $1.2 million, or 16.0%, for the full-year 2024 when compared to 2023. SG&A as a percentage of sales was 9.0% of sales for 2024 and 6.9% of sales for 2023. The changes in SG&A expense were primarily driven by increases in corporate allocation partially offset by decreases in salaries, wages and benefits, taxes and license fees and professional fees.
Operating income for the full-year 2024 totaled $2.6 million compared to an operating loss of $11.2 million for the full-year 2023. The operating income increase for the full-year 2024 was primarily driven by increases in gross profit partially offset by the aforementioned increases in SG&A expenses.
The following table summarizes operating results for the two years indicated. Reference should be made to Note 13 to the consolidated financial statements included in Item 8 of this Form 10-K.
2024 2023
(in thousands) Amount % Amount %
Net sales $ 97,108 100.0 % $ 109,513 100.0 %
Cost of goods sold 85,686 88.2 % 113,187 103.4 %
Gross profit 11,422 11.8 % (3,674) (3.4) %
Selling, general and administrative expense
8,743 9.0 % 7,536 6.9 %
Acquisition costs and other 30 0.1 % — — %
Operating income (loss) from continuing operations $ 2,649 2.7 % $ (11,210) (10.2) %
Comparison of 2024 to 2023 - Corporate
Corporate expenses decreased $4.1 million to $8.8 million in 2024 down from $12.9 million in 2023. The full-year decrease resulted primarily from allocating corporate expense to locations and decreases in stock compensation expense partially offset by increases in incentive bonus, professional fees, taxes and license expense and insurance expense.
Interest expense was $0.3 million and $4.2 million for the full-years of 2024 and 2023, respectively. The decrease was driven by lower debt outstanding in the current year compared to the prior year. The Company had no debt outstanding as of December 31, 2024.
The Company's effective tax rate for 2024 was less than the U.S. statutory rate of 21% primarily due to discrete tax charges associated with recording a valuation allowance on cumulative US Federal and state deferred tax assets. The Company's effective tax rate for 2023 was less than the U.S. statutory rate of 21% primarily driven by tax benefits associated with non-deductible goodwill impairment.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States ("GAAP"), we use the following non-GAAP financial measures: EBITDA and Adjusted EBITDA. Management believes that these non-GAAP measures are useful because they are key measures used by our management team to evaluate our operating performance, generate future operating plans and make strategic decisions as well as allow readers to compare the financial results between periods. Non-GAAP measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under GAAP.
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EBITDA and Adjusted EBITDA
We define "EBITDA" as earnings before interest, income taxes, depreciation and amortization. We define "Adjusted EBITDA" as EBITDA further adjusted for the impact of non-cash and other items we do not consider in our evaluation of ongoing performance. These items include: goodwill impairment, asset impairment, gain on lease modification, stock-based compensation, non-cash lease cost, acquisition costs and other fees, shelf registration costs, loss on extinguishment of debt, retention costs and restructuring and severance costs from net (loss) income. We caution investors that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not all companies calculate EBITDA and Adjusted EBITDA in the same manner. We present EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and investors' understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations.
Consolidated EBITDA and Adjusted EBITDA from continuing operations are as follows:
Year Ended December 31,
($ in thousands) 2024 2023
Consolidated
Net loss from continuing operations $ (11,225) $ (34,151)
Adjustments:
Interest expense 418 4,238
Income taxes 6,159 (6,924)
Depreciation 5,936 6,161
Amortization 1,487 1,505
EBITDA 2,775 (29,171)
Acquisition costs and other 692 856
Goodwill impairment — 11,389
Gain on lease modification (67) —
Stock-based compensation 204 594
Non-cash lease expense 198 242
Retention expense 3 26
Restructuring and severance costs 208 130
Adjusted EBITDA $ 4,013 $ (15,934)
% sales 2.3 % (8.2) %
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Specialty Chemicals EBITDA and Adjusted EBITDA are as follows:
Year Ended December 31,
($ in thousands) 2024 2023
Specialty Chemicals
Net income (loss) $ 1,093 $ (12,619)
Adjustments:
Interest expense 75 74
Depreciation 3,809 3,798
Amortization 695 634
EBITDA 5,672 (8,113)
Acquisition costs and other 477 12
Goodwill impairment — 11,389
Stock-based compensation 7 8
Non-cash lease expense 66 88
Restructuring and severance costs 110 40
Specialty Chemicals Adjusted EBITDA $ 6,332 $ 3,424
% of segment sales 7.8 % 4.1 %
Tubular Products EBITDA and Adjusted EBITDA from continuing operations are as follows:
Year Ended December 31,
($ in thousands) 2024 2023
Tubular Products
Net income (loss) from continuing operations $ 2,649 $ (11,210)
Adjustments:
Interest expense 1 —
Depreciation 2,052 2,274
Amortization 792 871
EBITDA 5,494 (8,065)
Acquisition costs and other 30 —
Stock-based compensation 10 58
Non-cash lease expense 88 118
Retention expense — 8
Restructuring and severance costs 30 84
Tubular Products Adjusted EBITDA $ 5,652 $ (7,797)
% of segment sales 5.8 % (7.1) %
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Liquidity and Capital Resources
We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including level of investment required to support our business strategies, the performance of our business, capital expenditures, credit facilities and working capital management. Capital expenditures and share repurchases are a component of our cash flow and capital.
Sources of Liquidity
Funds generated by operating activities supplemented by our available cash and cash equivalents and our credit facilities are our most significant sources of liquidity. As of December 31, 2024, we held $16.1 million of cash and cash equivalents, as well as $47.4 million of remaining available capacity on our revolving line of credit. Our existing cash, cash equivalents, and credit facilities balances may fluctuate during 2025. Cash from operations could also be affected by various risks and uncertainties detailed in Item 1A - Risk Factors of this report. We believe our sources of liquidity will be sufficient to fund operations and anticipated capital expenditures as well as repay our debt obligations as they become due over the next 12 months and beyond.
Cash Flows
Cash flows from continuing operations were as follows:
Year ended December 31,
(in thousands) 2024 2023
Total cash provided by (used in):
Operating activities 17,007 6,644
Investing activities (1,892) (2,885)
Financing activities (1,329) (73,169)
Net increase (decrease) in cash and cash equivalents $ 13,786 $ (69,410)
Operating Activities
The increase in cash provided by operating activities for the year ended December 31, 2024 compared to cash used in operating activities in the year ended December 31, 2023 was primarily driven by changes in working capital. Changes in working capital can vary significantly depending on factors such as the timing of inventory production and purchases, customer payments of accounts receivable and payments to vendors in the regular course of business. Inventory increased operating cash flows for the year ended December 31, 2024 by approximately $11.6 million compared to a decrease of approximately $12.2 million for 2023, while accounts payable decreased operating cash flows by approximately $3.6 million for the year ended December 31, 2024 compared to an increase of approximately $1.6 million for the year ended December 31, 2023. The increase in operating cash flows from inventory is primarily due to lower average inventory and higher inventory turns year over year while the decrease in accounts payable is primarily driven by a decreases in days payables outstanding within our Specialty Chemicals segment. Accounts receivable increased operating cash flow by approximately $2.8 million compared to an increase of $6.8 million driven by lower sales in the current year partially offset by lower days sales outstanding. In addition to the working capital changes, changes in deferred income taxes increased cash flows by approximately $6.2 million compared to cash used in operations of approximately $6.9 million in 2023. This was primarily due to discrete tax charges associated with the recording of a valuation allowance on cumulative U.S. federal and state tax assets in the third quarter of 2024.
Investing Activities
Net cash used in investing activities primarily consists of transactions related to capital expenditures, proceeds from the disposal of property, plant and equipment and acquisitions. The decrease in cash used in investing activities for the full-year 2024 compared to cash used in investing activities for the full-year 2023 was primarily driven by a decrease in capital expenditures in the current year over the prior year.
Financing Activities
Net cash used in financing activities primarily consist of transactions related to our long-term debt. The decrease in net cash used in financing activities for the full-year 2024 compared to the full-year 2023 was primarily due to the repayment of the
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Company's asset backed line of credit and delayed draw term loan in the fourth quarter of 2023 driven by the sale of substantially all of the assets of SPT.
Short-term Debt
The Company has a note payable in the amount of $0.9 million with an annual interest rate of 3.70% maturing April 1, 2024, associated with the financing of the Company's insurance premium in the current year. As of December 31, 2024, the outstanding balance was $0.4 million.
Long-term Debt
On November 6, 2024, Ascent entered into a Limited Consent, Third Amendment to Credit Agreement to Loan Documents with BMO Bank N.A. under Ascent’s credit facility (the “Credit Facility Amendment”). The Credit Facility Amendment reduced the maximum revolving loan commitment under the credit facility from $80 million to $60 million and extended the term of the credit facility through December 31, 2027. The Credit Facility Amendment also increased the interest rate for the credit facility from SOFR plus an interest rate margin of between 1.85% and 2.10% to SOFR plus an interest rate margin of between 1.85% and 2.35%, depending on average availability under the credit facility and Ascent’s consolidated fixed charge coverage ratio.
The Facility contains covenants requiring the maintenance of a minimum consolidated fixed charge coverage ratio if excess availability falls below the greater of (i) $6.0 million and (ii) 15% of the revolving credit facility (currently $9.0 million). As of December 31, 2024, the Company was in compliance with all financial debt covenants.
As of December 31, 2024, the Company had no principal payments outstanding on long-term debt. As of December 31, 2024, the Company had $47.4 million of remaining availability under its credit facility. See Note 6 in the notes to the consolidated financial statements for additional information on the Company's line of credit.
Stock Repurchases and Dividends
We may repurchase common stock and pay dividends from time to time pursuant to programs approved by our Board of Directors. The payment of cash dividends is also subject to customary legal and contractual restrictions. Our capital allocation strategy is to first fund operations and investments in growth and then return excess cash over time to shareholders through share repurchases and dividends.
The Company's previous share repurchase program allowed for repurchase of up to 790,383 shares of the Company's outstanding common stock and expired on February 17, 2025. On February 17, 2025, the Board of Directors authorized a new share repurchase program allowing for repurchase of up to 1.0 million shares of the Company's outstanding common stock over 24 months. The shares will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. Under the program, the purchases will be funded from available working capital, and the repurchased shares will be returned to the status of authorized, but unissued shares of common stock or held in treasury. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company may discontinue purchases at any time that management determines additional purchases are not warranted. As of December 31, 2024, the Company had 435,608 shares of its previous share repurchase authorization remaining.
Shares repurchased for the year ended December 31, 2024 and 2023 were as follows:
Year ended December 31,
2024 2023
Number of shares repurchased 101,263 143,108
Average price per share $ 10.21 $ 8.97
Total cost of shares repurchased $ 1,037,346 $ 1,287,416
At the end of each fiscal year, the Board reviews the financial performance and capital needed to support future growth to determine the amount of cash dividend, if any, which is appropriate. In 2024 and 2023, no dividends were declared or paid by the Company.
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Other Financial Measures
Below are additional financial measures that we believe are important in understanding the Company's liquidity position from year to year. The metrics are defined as:
Liquidity Measure:
• Current ratio = current asset divided by current liabilities. The current ratio will be determined by the Company using generally accepted accounting principles, consistently applied.
Profitability Ratio:
• Return on average equity ("ROAE") = net (loss) income divided by the trailing 12-month average of equity. The ROAE will be determined by the Company using generally accepted accounting principles, consistently applied.
Results of these additional financial measures are as follows:
Year ended December 31,
2024 2023
Current ratio 3.8 3.7
Return on average equity (11.3)% (38.6)%
Material Cash Requirements from Contractual and Other Obligations
As of December 31, 2024, our material cash requirements for our known contractual and other obligations were as follows:
• Operating and Finance Leases - The Company enters into various lease agreements for real estate and manufacturing equipment used in the normal course of business. Operating and finance lease obligations were $32.9 million, with $1.8 million payable within 12 months. See Note 7 for further detail of our lease obligations and the timing of expected future payments.
The Company has no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on the Company's financial position, revenues, results of operations, liquidity, or capital expenditures. We expect capital spending in fiscal 2025 to be as much as $7.6 million.
Critical Accounting Policies and Estimates
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in Note 1 to the consolidated financial statements included herein. We believe the following accounting policies affect the most significant estimates and management judgments used in the preparation of the Company's consolidated financial statements.
Business Combinations
Description
Business combinations are accounted for using the acquisition method of accounting in accordance with GAAP. Under this method, the total consideration transferred to consummate the business combination is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the transaction.
Judgments and uncertainties involved in the estimate
The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets acquired, if any, and liabilities assumed. Fair value determinations involve significant assumptions about highly subjective variables, including future cash flows, discount rates, and expected business performance. There are also different valuation models and inputs for each component, the selection of which requires considerable judgment. Our estimates and assumptions may be based, in part, on the availability of listed
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market prices or other transparent market data. These determinations will affect the amount of amortization expense recognized in future periods as well the allocation of goodwill, if any, attributable to the transaction.
Effect if actual results differ from assumptions
We base our fair value estimates on assumptions we believe are reasonable, but recognize the assumptions are inherently uncertain. Depending on the size of the purchase price of a particular acquisition, the mix of intangible assets acquired and expected business performance, the purchase price allocation could be materially impacted by applying a different set of assumptions and estimates. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Inventory
Description
Inventory is stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted average methods. At the end of each quarter, all facilities review recent sales reports to identify sales price trends that would indicate products or product lines that are being sold below our cost. This would indicate that an adjustment would be required.
We record an obsolete inventory reserve for identified aged inventory items with slow or no sales activity for finished goods or slow or no usage for raw materials for a certain period of time. For those inventory items, a reserve is established for a percentage of the inventory cost less any estimated scrap proceeds and is based on our current knowledge with respect to inventory levels, sales trends and historical experience. During 2024, our reserve decreased approximately $0.1 million to $5.5 million as of December 31, 2024.
We also record an inventory reserve for the estimated shrinkage (quantity losses) between physical inventories. This reserve is based upon the most recent physical inventory results. During 2024, the inventory shrink reserve had a $0.3 million decrease in response to estimated shrinkage rates based on results from previous physical inventories. Our inventory reserve for estimated shrinkage was $0.3 million as of December 31, 2024.
Judgments and uncertainties involved in the estimate
We do not believe that our inventories are subject to significant risk of obsolescence in the near term and we have the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions. However, changes in demand, product life cycle, cost trends, product pricing or a deterioration in product quality could result in the need for additional reserves. Likewise, changes in the estimated shrink reserve may be necessary, based on the timing and results of physical inventories. We also apply judgment in the determination of levels of obsolete inventory and assumptions about net realizable value.
Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to establish our reserves for obsolete inventory or inventory shrinkage during the past two fiscal years. However, it is possible that actual results could differ from recorded reserves. For instance, a 10% change in the amount of products considered obsolete would have decreased net earnings by $0.6 million for 2024. A 10% change in the estimated shrinkage rate would not have had a material impact on net earnings for 2024.
Income Taxes
Description
In determining income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax expense, the resultant tax liabilities and the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, deferred tax assets are also recorded with respect to net operating losses and other tax attribute carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when realization of the benefit of deferred tax assets is not deemed to be more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
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We recognize net tax benefits under the recognition and measurement criteria of FASB ASC Topic 740, Income Taxes, which prescribes requirements and other guidance for financial statement recognition and measurement of positions taken or expected to be taken on tax returns. We record interest and penalties, if any, related to uncertain tax positions as a component of income tax expense.
Judgments and uncertainties involved in the estimate
We assess on a tax jurisdictional basis the likelihood that our deferred tax assets can be recovered. If recovery is not expected to exceed a more likely than not (a likelihood of less than 50 percent) threshold, the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to ultimately be recoverable. In this process, certain relevant criteria are evaluated including: the amount of income or loss in prior years, the existence of deferred tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior carryback years that can be used to absorb net operating losses and credit carry backs, future expected taxable income and prudent and feasible tax planning strategies. Changes in taxable income, market conditions, tax laws and other factors may change our judgment regarding whether we will be able to realize the deferred tax assets. These changes, if any, may require material adjustments to the net deferred tax assets and an accompanying reduction or increase in income tax expense which will result in a corresponding increase or decrease in net income in the period when such determinations are made. The utilization of certain deferred tax assets is dependent on the amount and timing of taxable income that we will ultimately generate in the future and other factors, such as changes in tax laws.
We also assess the likelihood that our tax reporting positions will ultimately be sustained. To the extent it is determined it is more likely than not (a likelihood of more than 50 percent) that some portion, or all, of a tax reporting position will ultimately not be recognized and sustained, a provision for unrecognized tax benefit is provided by either reducing the applicable deferred tax asset or accruing an income tax liability. Our judgment regarding the sustainability of our tax reporting positions may change in the future due to changes in tax laws and other factors. These changes, if any, may require material adjustments to the related deferred tax assets or accrued income tax liabilities and an accompanying reduction or increase in income tax expense which will result in a corresponding increase or decrease in net income in the period when such determinations are made.
We have provided valuation allowances as of December 31, 2024, aggregating to $9.1 million, net of federal benefit, against our federal deferred tax assets as well as certain state and local net operating loss carryforwards and other deferred tax assets. As of December 31, 2024, the Company has no liability for unrecognized income tax benefits.
Effect if actual results differ from assumptions
Although management believes that the estimates and judgments discussed herein are reasonable, actual results could differ, which could result in income tax expense or benefits that could be material.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and is not required to provide the information required by this Item.
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