EASTERN CO 10-Q

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to highlight significant changes in the financial position and results of operations of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the three and nine months ended September 28, 2024. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended December 30, 2023 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2023, which was filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2024 (the “2023 Form 10-K”). The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References in this Quarterly Report on Form 10-Q for the quarterly period ended September 28, 2024 (this “Form 10-Q”) to 2023, the 2023 fiscal year or fiscal 2023 mean the 52-week period ended on December 30, 2023, and references to 2024, the 2024 fiscal year or fiscal 2024 mean the 52-week period ending on December 28, 2024. In a 52-week fiscal year, each quarter has 13 weeks. References to the third quarter of 2023, the third fiscal quarter of 2023 or the three months ended September 30, 2023 mean the 13-week period from July 2, 2023 to September 30, 2023. References to the third quarter of 2024, the third fiscal quarter of 2024 or the three months ended September 28, 2024 mean the 13-week period from June 30, 2024 to September 28, 2024. References to the first nine months of 2023 or the nine months ended September 30, 2023 mean the period from January 1, 2023 to September 30, 2023. References to the first nine months of 2024 or the nine months ended September 28, 2024 mean the period from December 31, 2023 to September 28, 2024. Safe Harbor for Forward-Looking Statements Statements contained in this Form 10-Q that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as “would,” “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” “plan,” “potential,” “opportunities,” or similar terms or variations of those terms or the negative of those terms. There are many factors that affect the Company’s business and the results of its operations and that may cause the actual results of operations in future periods to differ materially from those currently expected or anticipated. These factors include: · the impact of higher raw material and component costs and cost inflation, supply chain disruptions and shortages, particularly with respect to steel, plastics, scrap iron, zinc, copper, and electronic components; · delays in delivery of our products to our customers; · the impact of global economic conditions and rising interest rates, and more specifically conditions in the automotive, construction, aerospace, energy, oil and gas, transportation, electronic, and general industrial markets, including the impact, length and degree of economic downturns on the customers and markets we serve and demand for our products, reductions in production levels, the availability, terms and cost of financing, including borrowings under credit arrangements or agreements, the potential impact of bank failures on our ability to access financing or capital markets, and the impact of market conditions on pension plan funded status; · restrictions on operating flexibility imposed by the agreement governing our credit facility; · risks associated with doing business overseas, including fluctuations in exchange rates and the inability to repatriate foreign cash, the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs and the impact of political, economic, and social instability; · the inability to achieve the savings expected from global sourcing of materials; · lower-cost competition; · our ability to design, introduce and sell new or updated products and related components; · market acceptance of our products; · the inability to attain expected benefits from acquisitions or the inability to effectively integrate acquired businesses and achieve expected synergies; · costs and liabilities associated with environmental compliance; · the impact of climate change, natural disasters, geopolitical events and elections, including a change in administration from the upcoming U.S. presidential election, and public health crises, including pandemics (such as COVID-19) and epidemics, and any related Company or government policies or actions; 18 Table of Contents · military conflict (including the Russia/Ukraine conflict, the conflict in the Middle East, the possible expansion of such conflicts and geopolitical consequences) or terrorist threats and the possible responses by the U.S. and foreign governments; · failure to protect our intellectual property; · cyberattacks; and · materially adverse or unanticipated legal judgments, fines, penalties, or settlements. The Company is also subject to other risks identified and discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Part I, Item 1A, Risk Factors , and in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , of the 2023 Form 10-K, and that may be identified from time to time in our quarterly reports on Form 10-Q, current reports on Form 8-K and other filings we make with the SEC. Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, future revenue and margin trends cannot be reliably predicted, and the Company may alter its business strategies to address changing conditions. Also, the Company makes estimates and assumptions that may materially affect reported amounts and disclosures. These relate to valuation allowances for accounts receivable and excess and obsolete inventories, accruals for pensions and other postretirement benefits (including forecasted future cost increases and returns on plan assets), provisions for depreciation (estimating useful lives), uncertain tax positions, and, on occasion, accruals for contingent losses. The Company undertakes no obligation to update, alter, or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events, or otherwise, except as required by law. Recent Development In the third quarter of 2024 we determined that the Big 3 Mold business no longer fits with our long-term strategy, and we have initiated the process of selling the business. The Mold business is cyclical in nature, requires significant capital investment to remain competitive, and serves different markets than our other businesses. Selling the Big 3 Mold business will allow management to focus on our core capabilities, offerings, and markets served. In the third quarter of 2024, we determined that the Big 3 Mold business met the criteria to be held for sale and that the assets held for sale qualify for discontinued operations. As such, the financial results of the Big 3 Mold business are reflected in our unaudited condensed consolidated statements of operations as discontinued operations for all periods presented. Additionally, current and non-current assets and liabilities of discontinued operations are reflected in the unaudited condensed consolidated balance sheets for both periods presented. The loss recognized in the write-down of the Big 3 Mold business to fair value in the third quarter of 2024 was $19.2 million, net of tax. The following analysis excludes discontinued operations. Net sales in the third quarter of 2024 increased 15% to $71.3 million from $62.0 million in the corresponding period in 2023. Net sales for the first nine months of 2024 increased 6% to $206.1 million from $195.1 million in the corresponding period last year. Sales increased in the third quarter of 2024 primarily due to increased demand for returnable transport packaging products, truck mirror assemblies, and truck accessories of $7.4 million, $1.2 million, and $0.7 million, respectively. Sales increases in the first nine months of 2024 were driven by increased demand for truck mirror assemblies and returnable transport packaging products of $13.3 million and $4.6 million respectively, offset by lower demand for truck accessories of $6.9 million. Our backlog as of September 28, 2024 increased 13% to $97.2 million from $86.2 million as of September 30, 2023, primarily driven by increased orders for various truck mirror assemblies of $11.6 million and returnable transport packaging products of $3.2 million. Net sales of existing products increased 9% in the third quarter of 2024 and decreased 2% for the first nine months of 2024 compared to the corresponding periods in 2023. Price increases and new products increased net sales by 5% in the third quarter of 2024 and 6% in the first nine months of 2024, compared to the corresponding periods in 2023. New products included various truck mirror assemblies, rotary latches, D-rings, handles, and mirror cams. 19 Table of Contents Cost of products sold increased $6.5 million, or 14%, in the third quarter of 2024 and increased $3.8 million, or 3% in the first nine months of 2024 compared to the corresponding period in 2023 primarily due to higher sales volume, partially offset by other cost savings initiatives. Additionally, the Company paid tariff costs on China-sourced products of approximately $0.6 million and $1.9 million in the third quarter of 2024 and first nine months of 2024 respectively, compared to $0.6 million and $1.7 million in the third quarter of 2023 and first nine months of 2023, respectively. Most tariffs on China-sourced products have been recovered through price increases. Gross margin as a percentage of sales was 25.5% in the third quarter of 2024 and 25.2% in the first nine months of 2024 compared to 24.9% in the third quarter of 2023 and 22.9% in the first nine months of 2023. Our gross margins in the third quarter of 2024 primarily reflect the impact of price increases to customers to recover increases in raw material costs and other cost savings initiatives. Product development expenses decreased $0.3 million in the third quarter of 2024 and decreased $0.5 million in the first nine months of 2024 compared to the corresponding periods in 2023 as we continue to invest in new products at our Eberhard, Velvac, and Big 3 businesses. As a percentage of net sales, product development costs were 1.5% for the third quarter of 2024 and 1.8% for the first nine months of 2024, compared to 2.3% and 2.2% for the corresponding periods in 2023. Selling, general and administrative expenses increased $1.9 million, or 22.1%, in the third quarter of 2024 when compared to the third quarter of 2023 primarily due to higher payroll-related expenses of $1.2 million, legal and professional expenses of $0.3 million, travel expenses of $0.1 million, and other selling and administrative expenses of $0.3 million. Selling and administrative expenses increased $2.0 million, or 6.8%, in the first nine months of 2024 when compared to the corresponding period in 2023 primarily due to higher payroll-related expenses of $1.7 million and other administrative costs. Interest expense decreased $0.1 million in the third quarter of 2024 and was flat in the first nine months of 2024 compared to the corresponding periods in 2023 due to lower principal balances, partially offset by higher interest rates. Other income and expense increased $0.1 million in the third quarter of 2024 and decreased $1.1 million in the first nine months of 2024 when compared to the corresponding periods in 2023. The increase in other income and expense of $0.1 million in the third quarter of 2024 was primarily driven by lower pension expense of $0.1 million when compared to the third quarter of 2023. The decrease in other income and expense of $1.1 million for the first nine months of 2024 when compared to the corresponding period in 2023 was primarily driven by $0.3 million lower pension expense in the second quarter of 2023, and an unfavorable final working capital adjustment of $0.4 million related to the sale of the Greenwald business in the first quarter of 2023, partially offset by a $1.6 million favorable adjustment for the final settlement of our swap agreement with Santander in the second quarter of 2023. Net income for the third quarter of fiscal 2024 was $4.7 million, or $0.75 per diluted share compared to net income of $3.5 million, or $0.55 per diluted share, for the comparable period in 2023. In the first nine months of 2024 net income was $11.7 million, or $1.87 per diluted share compared to net income of $7.8 million, or $1.24 per diluted share for the comparable period in 2023. A more detailed analysis of the Company’s results of operations and financial condition follows. 20 Table of Contents Results of Operations The following table shows, for the periods indicated, selected line items from the condensed consolidated statements of operations as a percentage of net sales: Three Months Ended Nine Months Ended September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of products sold 74.5 % 75.1 % 74.8 % 77.1 % Gross margin 25.5 % 24.9 % 25.2 % 22.9 % Product development expense 1.5 % 2.3 % 1.8 % 2.2 % Selling and administrative expense 14.5 % 13.6 % 15.1 % 14.9 % Operating Profit 9.5 % 9.0 % 8.3 % 5.8 % The following table shows the change in sales and operating profit for the third quarter and first nine months of 2024 compared to the third quarter and first nine months of 2023 (dollars in thousands): Three Months Nine Months Ended Ended September 28, 2024 September 28, 2024 Net Sales $ 9,273 $ 11,006 Volume 9.3 % -1.6 % Price 0.1 % 1.4 % New products 4.3 % 4.7 % 13.7 % 4.5 % Operating Profit $ 1,227 $ 5,772 Liquidity and Sources of Capital The Company generated $8.3 million of cash from operations during the first nine months of fiscal 2024 compared to generating $18.2 million during the first nine months of fiscal 2023. Cash flow from operations in the first nine months of 2024 was lower when compared to the corresponding period in 2023 primarily due to increases in accounts receivable of $11.7 million due to increases in revenue in the third quarter of 2024 when compared to the corresponding period in 2023 and approximately $3.0 million in accounts receivable due to the pre-billing to cover material costs on a specific job. Additions to property, plant, and equipment were $7.6 million and $4.1 million for the first nine months of 2024 and 2023, respectively. As of September 28, 2024, there were approximately $4.0 million of outstanding commitments for capital expenditures. 21 Table of Contents The following table shows key financial ratios at the end of each specified period: Third Quarter 2024 Third Quarter 2023 Fiscal Year 2023 Current ratio 2.6 2.6 2.6 Average days’ sales in accounts receivable 62 53 48 Inventory turnover 3.8 3.4 3.5 Total debt to shareholders’ equity 37.5 % 37.8 % 33.2 % The following table shows important liquidity measures as of the balance sheet date for each specified period or for the period, as applicable (in millions): Third Third Fiscal Quarter Quarter Year 2024 2023 2023 Cash and cash equivalents - Held in the United States $ 5.9 $ 6.9 $ 6.9 - Held by a foreign subsidiary 1.7 2.0 1.1 7.6 8.9 8.0 Working capital 78.2 73.5 69.5 Net cash provided by operating activities 8.3 5.4 9.7 Change in working capital impact on net cash used in operating activities (8.2 ) 7.0 9.7 Net cash used in investing activities (8.1 ) (2.4 ) (5.4 ) Net cash used in financing activities (0.5 ) (16.9 ) (22.9 ) 22 Table of Contents Inventories of $58.1 million as of September 28, 2024 declined by $0.3 million, or 0.5%, when compared to $59.3 million at the end of fiscal year 2023 and declined $1.9 million, or 3.2%, when compared to $60.0 million at the end of the third quarter of fiscal 2023. Accounts receivable, less allowances, were $46.0 million as of September 28, 2024, as compared to $34.2 million at 2023 fiscal year end and $40.0 million at the end of the third quarter of fiscal 2023. Accounts receivable as of September 28, 2024 included approximately $3.0 million for pre-billing to cover material costs on a specific job and adversely impacted average days sales in accounts receivable by 4 days. On June 16, 2023, the Company entered into a credit agreement with TD Bank, N.A., Wells Fargo Bank, Bank of America, and M&T Bank as lenders (the “Credit Agreement”), and incurred indebtedness under the Credit Agreement in the aggregate principal amount of $60 million in the form of a term loan, the proceeds of which were used to repay the Company’s remaining outstanding term loan and to terminate its existing credit facility with Santander. See Note H Debt , for additional information regarding the terms of the Credit Agreement, including repayment terms, interest rates, and applicable loan covenants. Under the terms of the Credit Agreement, the Company is subject to restrictive covenants that limit our ability to, among other things, incur additional indebtedness, pay dividends, or make other distributions, and consolidate, merge, sell or otherwise dispose of assets, as well as financial covenants that require us to maintain a fixed charge coverage ratio and a maximum senior net leverage ratio. These covenants may limit how we conduct our business, and in the event of certain defaults, our repayment obligations may be accelerated. We were in compliance with all of our covenants as of September 28, 2024 and had no outstanding borrowings under the revolving commitment portion of the credit facility as of such date. On September 6, 2024, the Company drew down $3.0 million on its revolving credit facility to support ongoing working capital requirements. The Company has $27.0 million available on its revolving line of credit. Cash, cash flow from operating activities and funds available under the revolving credit portion of the Credit Agreement are expected to be sufficient to cover future foreseeable working capital requirements in the short-term (i.e., the next 12 months from September 28, 2024) and separately in the long-term (i.e., beyond the next 12 months). However, the Company cannot provide any assurances of the availability of future financing or the terms on which it might be available. In addition, the interest rate on borrowings under the Credit Agreement varies based on our senior net leverage ratio, and the Credit Agreement requires us to maintain a senior net leverage ratio not to exceed 3.50 to 1 and a fixed charge coverage ratio to be not less than 1.25 to 1. A decrease in earnings due to the impact of current economic conditions and inflationary pressures or the resulting harm to the financial condition of our customers, or an increase in indebtedness incurred to offset such a decrease in earnings, would have a negative impact on our senior net leverage ratio and our fixed charge coverage ratio, which in turn would increase the cost of borrowing under the Credit Agreement and could cause us to fail to comply with the covenants under our Credit Agreement. In addition to funding capital requirements, we may use available cash to pay down our indebtedness, to make investments, which may include investments in publicly traded securities, or to make acquisitions that we believe will complement or expand our existing businesses. As of the end of the third quarter of 2024, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Critical Accounting Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. For a full description of our critical accounting estimates, refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of the 2023 Form 10-K. While there have been no material changes to our critical accounting estimates since the filing of the 2023 Form 10-K, we continue to monitor the methodologies and assumptions underlying such critical accounting estimates. 23 Table of Contents Non-GAAP Financial Measures The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP. To supplement the condensed consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted Net Income from Continuing Operations, Adjusted Earnings Per Share from Continuing Operations, Adjusted EBITDA from Continuing Operations, Adjusted EBITDA from Discontinued Operations and Adjusted EBITDA, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, net income, diluted earnings per share, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures. Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when incurred, gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring costs. Adjusted Net Income from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis across periods by removing the impact of certain items that management believes do not directly reflect our underlying operating performance. Adjusted Earnings Per Share from Continuing Operations is defined as earnings per share from continuing operations excluding, when incurred, certain per share gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring costs. We believe that Adjusted Earnings Per Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis from period to period. Adjusted EBITDA from Continuing Operations is defined as net income from continuing operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain losses or gains that we do not believe reflect our ongoing operations, including, for example, impairment losses, gains/losses on sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring expenses. Adjusted EBITDA from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations. Adjusted EBITDA from Discontinued Operations is defined as net income from discontinued operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain losses or gains that we do not believe reflect our ongoing operations, including, for example, impairment losses, gains/losses on sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring expenses. Adjusted EBITDA from Discontinued Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations. Adjusted EBITDA is defined as net income before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain losses or gains that we do not believe reflect our ongoing operations, including, for example, impairment losses, gains/losses on sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring expenses. Adjusted EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations. Management uses such measures to evaluate performance period over period, to analyze the underlying trends in our business, to assess our performance relative to our competitors, and to establish operational goals and forecasts that are used in allocating resources. These financial measures should not be considered in isolation from, or as a replacement for, U.S. GAAP financial measures. We believe that presenting non-GAAP financial measures in addition to U.S. GAAP financial measures provides investors greater transparency to the information used by our management for its financial and operational decision-making. We further believe that providing this information better enables our investors to understand our operating performance and to evaluate the methodology used by management to evaluate and measure such performance. 24 Table of Contents Reconciliation of Non-GAAP Measures Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share from Continuing Operations Calculation For the Three and Nine Months ended September 28, 2024 and September 30, 2023 ($000's) Three Months Ended Nine Months Ended September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Net income from continuing operations as reported per generally accepted accounting principles (GAAP) $ 4,669 $ 3,463 $ 11,676 $ 7,773 Earnings per share from continuing operations as reported under generally accepted accounting principles (GAAP): Basic $ 0.75 $ 0.55 $ 1.88 $ 1.25 Diluted $ 0.75 $ 0.55 $ 1.87 $ 1.24 Adjustments: Severance and accrued compensation - - - 1,799 a Greenwald final sale adjustment - - - 390 b Non-GAAP tax impact of adjustments (1) - - - (909 ) Total adjustments (non-GAAP) $ - $ - $ - $ 1,280 Adjusted net income from continuing operations (non-GAAP) $ 4,669 $ 3,463 $ 11,676 $ 9,053 Adjusted earnings per share from continuing operations (non-GAAP): Basic $ 0.75 $ 0.56 $ 1.88 $ 1.45 Diluted $ 0.75 $ 0.55 $ 1.87 $ 1.44 (1) We estimate the tax effect of the items identified to determine a non-GAAP annual effective tax rate applied to the pre-tax amount in order to calculate the non-GAAP provision for income taxes a) Severance expenses associated with accrued compensation and severance related to the elimination of the Chief Operating Officer position and the departure of the Chief Executive Officer b) Final settlement of working capital adjustment associated with Greenwald sale 25 Table of Contents Reconciliation of Non-GAAP Measures Calculations of Adjusted EBITDA from Continuing Operations, Adjusted EBITDA from Discontinued Operations and Adjusted EBITDA For the Three and Nine Months ended September 28, 2024 and September 30, 2023 ($000's) Three Months Ended Nine Months Ended September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Net income from continuing operations as reported per generally accepted accounting principles (GAAP) $ 4,669 $ 3,463 $ 11,676 $ 7,773 Interest expense 710 854 2,050 2,060 Provision for income taxes 1,334 1,114 3,335 2,574 Depreciation and amortization 2,033 1,317 4,266 3,914 Severance and accrued compensation - - - 1,799 a Greenwald final sale adjustment - - - 390 b Adjusted EBITDA from continuing operations (non-GAAP) $ 8,745 $ 6,748 $ 21,327 $ 18,510 Net income from discontinued operations as reported per generally accepted accounting principles (GAAP) $ (19,966 ) $ (401 ) $ (21,518 ) $ (2,704 ) Interest expense 177 214 512 515 Provision for income taxes (3,889 ) (129 ) (4,321 ) (896 ) Depreciation and amortization 546 534 1,595 1,558 Loss on classification as held for sale 23,088 c - 23,088 c - Adjusted EBITDA from discontinued operations (non-GAAP) $ (44 ) $ 217 $ (644 ) $ (1,527 ) Net income as reported per generally accepted accounting principles (GAAP) $ (15,297 ) $ 3,062 $ (9,842 ) $ 5,068 Interest expense 887 1,068 2,562 2,575 Provision for income taxes (2,555 ) 984 (985 ) 1,679 Depreciation and amortization 2,579 1,851 5,861 5,472 Severance and accrued compensation - - - 1,799 a Greenwald final sale adjustment - - - 390 b Loss on classification as held for sale 23,088 c - 23,088 c - Adjusted EBITDA (non-GAAP) $ 8,701 $ 6,965 $ 20,683 $ 16,983 a) Severance expenses associated with accrued compensation and severance related to the elimination of the Chief Operating Officer position and the departure of the Chief Executive Officer b) Final settlement of working capital adjustment associated with Greenwald sale c) Impact of classifying Big 3 Mold business as held for sale 26 Table of Contents ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a result of the Company’s status as a smaller reporting company pursuant to Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide information under this Item 3.