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MEG Montrose Environmental

Filed: 12 May 21, 5:01pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to         

Commission File Number: 001-39394

 

Montrose Environmental Group, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

46-4195044

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

1 Park Plaza, Suite 1000

Irvine, California

92614

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (949) 988-3500

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.000004 per share

 

MEG

 

The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  

As of May 7, 2021, the registrant had 26,055,727 shares of common stock, $0.000004 par value per share, outstanding.

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1

 

Unaudited Condensed Consolidated Statements of Financial Position

1

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

2

 

Unaudited Condensed Consolidated Statements of Redeemable Series A-1 Preferred Stock, Convertible and Redeemable Series A-2 Preferred Stock and Stockholders’ (Deficit) Equity

3

 

Unaudited Condensed Consolidated Statements of Cash Flows

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.

Controls and Procedures

41

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3.

Defaults Upon Senior Securities

42

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

43

Signatures

44

 

 

 

 

i


 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MONTROSE ENVIRONMENTAL GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(In thousands, except share data)

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and restricted cash

 

$

10,641

 

 

$

34,881

 

Accounts receivable—net

 

 

65,771

 

 

 

54,102

 

Contract assets

 

 

61,636

 

 

 

38,576

 

Prepaid and other current assets

 

 

8,830

 

 

 

6,709

 

Total current assets

 

 

146,878

 

 

 

134,268

 

NON-CURRENT ASSETS:

 

 

 

 

 

 

 

 

Property and equipment—net

 

 

34,941

 

 

 

34,399

 

Goodwill

 

 

282,199

 

 

 

274,667

 

Other intangible assets—net

 

 

157,315

 

 

 

154,854

 

Other assets

 

 

3,896

 

 

 

4,538

 

TOTAL ASSETS

 

$

625,229

 

 

$

602,726

 

LIABILITIES, CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK AND

   STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable and other accrued liabilities

 

$

52,431

 

 

$

34,877

 

Accrued payroll and benefits

 

 

22,564

 

 

 

21,181

 

Business acquisitions contingent consideration, current

 

 

50,364

 

 

 

49,902

 

Current portion of long-term debt

 

 

6,214

 

 

 

5,583

 

Total current liabilities

 

 

131,573

 

 

 

111,543

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Business acquisitions contingent consideration, long-term

 

 

16,971

 

 

 

4,565

 

Other non-current liabilities

 

 

2,514

 

 

 

2,523

 

Deferred tax liabilities—net

 

 

2,591

 

 

 

2,815

 

Conversion option

 

 

21,488

 

 

 

20,886

 

Long-term debt—net of deferred financing fees

 

 

169,425

 

 

 

170,321

 

Total liabilities

 

 

344,562

 

 

 

312,653

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK $0.0001

   PAR VALUE—

 

 

 

 

 

 

 

 

Authorized, issued and outstanding shares: 17,500 at March 31, 2021 and

   December 31, 2020; aggregate liquidation preference of $182.2 million at March 31, 2021 and

   December 31, 2020

 

 

152,928

 

 

 

152,928

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Common stock, $0.000004 par value; authorized shares: 190,000,000 at

    March 31, 2021 and December 31, 2020; issued and outstanding shares: 25,438,857 and

    24,932,527 at March 31, 2021 and December 31, 2020, respectively

 

 

 

 

 

 

Additional paid-in-capital

 

 

261,588

 

 

 

259,427

 

Accumulated deficit

 

 

(133,949

)

 

 

(122,353

)

Accumulated other comprehensive income

 

 

100

 

 

 

71

 

Total stockholders’ equity

 

 

127,739

 

 

 

137,145

 

TOTAL LIABILITIES, CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK

   AND STOCKHOLDERS’ EQUITY

 

$

625,229

 

 

$

602,726

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1


 

MONTROSE ENVIRONMENTAL GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

REVENUES

 

$

133,817

 

 

$

61,031

 

COST OF REVENUES (exclusive of depreciation and

   amortization shown below)

 

 

95,316

 

 

 

44,398

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

 

 

25,000

 

 

 

20,519

 

INITIAL PUBLIC OFFERING EXPENSE

 

 

 

 

 

531

 

FAIR VALUE CHANGES IN BUSINESS ACQUISITIONS

   CONTINGENT CONSIDERATION

 

 

11,064

 

 

 

 

DEPRECIATION AND AMORTIZATION

 

 

10,769

 

 

 

7,560

 

LOSS FROM OPERATIONS

 

 

(8,332

)

 

 

(11,977

)

OTHER EXPENSE

 

 

 

 

 

 

 

 

Other expense

 

 

(574

)

 

 

(29,830

)

Interest expense—net

 

 

(2,688

)

 

 

(2,593

)

Total other expenses—net

 

 

(3,262

)

 

 

(32,423

)

LOSS BEFORE EXPENSE (BENEFIT) FROM INCOME TAXES

 

 

(11,594

)

 

 

(44,400

)

INCOME TAXES EXPENSE (BENEFIT)

 

 

2

 

 

 

(3,152

)

NET LOSS

 

$

(11,596

)

 

$

(41,248

)

 

 

 

 

 

 

 

 

 

EQUITY ADJUSTMENT FROM FOREIGN CURRENCY

   TRANSLATION

 

 

29

 

 

 

(3

)

COMPREHENSIVE LOSS

 

 

(11,567

)

 

 

(41,251

)

ACCRETION OF REDEEMABLE SERIES A-1 PREFERRED

   STOCK

 

 

 

 

 

(5,415

)

CONVERTIBLE AND REDEEMABLE SERIES A-2

   PREFERRED STOCK DIVIDEND

 

 

(4,100

)

 

 

 

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

 

(15,696

)

 

 

(46,663

)

WEIGHTED AVERAGE COMMON SHARES

   OUTSTANDING— BASIC AND DILUTED

 

 

25,117

 

 

 

8,904

 

NET LOSS PER SHARE ATTRIBUTABLE TO COMMON

   STOCKHOLDERS— BASIC AND DILUTED

 

$

(0.62

)

 

$

(5.24

)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


 

 

 

MONTROSE ENVIRONMENTAL GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE SERIES A-1 PREFERRED STOCK, CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total

 

 

 

Redeemable Series A-1

 

 

Convertible and Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Stockholders'

 

 

 

Preferred Stock

 

 

Series A-2 Preferred Stock

 

 

 

Common Stock

 

Additional

 

Accumulated

 

Comprehensive

 

(Deficit)

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

Paid-In Capital

 

Deficit

 

(Loss) Income

 

Equity

 

BALANCE—December 31, 2019

 

 

12,000

 

 

$

128,822

 

 

 

 

 

$

 

 

 

 

8,370,107

 

 

$

 

$

38,153

 

$

(64,404

)

$

(40

)

$

(26,291

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,248

)

 

 

 

(41,248

)

Accretion of the redeemable

   series A-1 preferred stock to

   redeemable value

 

 

 

 

 

5,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,415

)

 

 

 

 

 

(5,415

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,150

 

 

 

 

 

 

1,150

 

Accumulated other comprehensive

   income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37

 

 

37

 

BALANCE—March 31, 2020

 

 

12,000

 

 

$

134,237

 

 

 

 

 

$

 

 

 

 

8,370,107

 

 

$

 

$

33,888

 

$

(105,652

)

$

(3

)

$

(71,767

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE—December 31, 2020

 

 

 

 

$

 

 

 

17,500

 

 

$

152,928

 

 

 

 

24,932,527

 

 

$

 

$

259,427

 

$

(122,353

)

$

71

 

$

137,145

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,596

)

 

 

 

(11,596

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,805

 

 

 

 

 

 

1,805

 

Dividend payment to the Series A-2

   preferred shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,100

)

 

 

 

 

 

(4,100

)

Common stock issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

506,330

 

 

 

 

 

4,456

 

 

 

 

 

 

4,456

 

Accumulated other comprehensive

   income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

 

29

 

BALANCE—March 31, 2021

 

 

 

 

$

 

 

 

17,500

 

 

$

152,928

 

 

 

 

25,438,857

 

 

$

 

$

261,588

 

$

(133,949

)

$

100

 

$

127,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3


 

 

MONTROSE ENVIRONMENTAL GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,596

)

 

$

(41,248

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Provision for bad debt

 

 

508

 

 

 

6,333

 

Depreciation and amortization

 

 

10,769

 

 

 

7,560

 

Stock-based compensation expense

 

 

1,805

 

 

 

1,150

 

Fair value changes in embedded derivatives

 

 

602

 

 

 

29,627

 

Fair value changes in business acquisitions

   contingent consideration

 

 

11,064

 

 

 

 

Deferred income taxes

 

 

2

 

 

 

(3,152

)

Other

 

 

50

 

 

 

(180

)

Changes in operating assets and liabilities—net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable and contract assets

 

 

(29,029

)

 

 

(319

)

Prepaid expenses and other current assets

 

 

787

 

 

 

(683

)

Accounts payable and other accrued liabilities

 

 

3,183

 

 

 

(5,005

)

Accrued payroll and benefits

 

 

(2,058

)

 

 

(2,458

)

Other assets

 

 

 

 

 

(603

)

Net cash used in operating activities

 

 

(13,913

)

 

 

(8,978

)

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(922

)

 

 

(1,558

)

Proprietary software development and other software costs

 

 

(204

)

 

 

(102

)

Cash paid for acquisitions—net of cash acquired

 

 

(6,272

)

 

 

 

Net cash used in investing activities

 

 

(7,398

)

 

 

(1,660

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from line of credit

 

 

 

 

 

50,453

 

Payments on line of credit

 

 

 

 

 

(37,275

)

Repayment of term loan

 

 

(547

)

 

 

(1,250

)

Payment of contingent consideration and other

   purchase price obligations

 

 

 

 

 

(4,703

)

Repayment of capital leases

 

 

(625

)

 

 

(685

)

Payments of deferred offering costs

 

 

 

 

 

(1,175

)

Debt issuance costs

 

 

 

 

 

(127

)

Proceeds from issuance of common stock for

   exercised stock options

 

 

2,185

 

 

 

 

Dividend payment to the Series A-2 shareholders

 

 

(4,100

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(3,087

)

 

 

5,238

 

CHANGE IN CASH, CASH EQUIVALENTS AND

   RESTRICTED CASH

 

 

(24,398

)

 

 

(5,400

)

Foreign exchange impact on cash balance

 

 

158

 

 

 

36

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

 

 

 

 

 

 

 

 

Beginning of year

 

 

34,881

 

 

 

6,884

 

End of period

 

$

10,641

 

 

$

1,520

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS

   INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,500

 

 

$

1,745

 

Cash paid for income tax

 

$

305

 

 

$

64

 

SUPPLEMENTAL DISCLOSURES OF NON-CASH

   INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Accrued purchases of property and equipment

 

$

594

 

 

$

613

 

Property and equipment purchased under

   capital leases

 

$

670

 

 

$

1,493

 

Accretion of the redeemable series A-1 preferred

   stock to redeemable value

 

$

 

 

$

5,415

 

Common stock issued to acquire new businesses

 

$

2,271

 

 

$

 

Acquisitions unpaid contingent consideration

 

$

67,335

 

 

$

4,082

 

Offering costs included in accounts payable and

   other accrued liabilities

 

$

 

 

$

49

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


 

MONTROSE ENVIRONMENTAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except where otherwise indicated)

1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Description of the Business—Montrose Environmental Group, Inc. (“Montrose” or the “Company”) is a corporation formed on November 2013, under the laws of the State of Delaware. The Company has approximately 70 offices across the United States, Canada and Australia and over 2,000 employees as of March 31, 2021.  

Montrose is an environmental services company serving the recurring environmental needs of a diverse client base, including Fortune 500 companies and federal, state and local governments through the following three segments:

Assessment, Permitting and ResponseThrough its Assessment, Permitting and Response segment, Montrose provides scientific advisory and consulting services to support environmental assessments, environmental emergency response, and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. The Company’s technical advisory and consulting offerings include regulatory compliance support and planning, environmental, ecosystem and toxicological assessments and support during responses to environmental disruption. Montrose helps clients navigate regulations at the local, state, provincial and federal levels.

Measurement and AnalysisThrough its Measurement and Analysis segment, Montrose’s teams test and analyze air, water and soil to determine concentrations of contaminants as well as the toxicological impact of contaminants on flora, fauna and human health. Montrose’s offerings include source and ambient air testing and monitoring, leak detection and repair (“LDAR”) and advanced analytical laboratory services such as air, storm water, wastewater and drinking water analysis.

Remediation and ReuseThrough its Remediation and Reuse segment, Montrose provides clients with engineering, design, implementation and operations and maintenance services, primarily to treat contaminated water, remove contaminants from soil or create biogas from waste. The Company does not own the properties or facilities at which it implements these projects or the underlying liabilities, nor does it own material amounts of the equipment used in projects; instead, the Company assists clients in designing solutions, managing projects and mitigating their environmental risks and liabilities at their locations.

Initial Public Offering—On July 27, 2020, the Company completed its initial public offering (“IPO”) of common stock, in which it sold 11,500,000 shares, including 1,500,000 shares issued pursuant to the underwriters full exercise on July 24, 2020 of the underwriters’ option to purchase additional shares, at a price to the public of $15.00 per share, resulting in net proceeds to the Company of approximately $161.3 million after deducting underwriting discounts of $11.2 million. Additionally, the Company offset $4.4 million of deferred IPO costs against IPO proceeds recorded to additional paid in capital. These deferred IPO costs were directly attributable to the IPO offering in accordance with Staff Accounting Bulletin Topic 5: Miscellaneous Accounting. The Company’s common stock began trading on the New York Stock Exchange on July 23, 2020.

Basis of Presentation—The unaudited condensed consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries. These unaudited condensed consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The unaudited condensed consolidated financial statements include all accounts of the Company and, in the opinion of management, include all recurring adjustments and normal accruals necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the dates and periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2020. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. All intercompany transactions, accounts and profits, have been eliminated in the unaudited condensed consolidated financial statements.

2. SUMMARY OF NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements—The Company qualifies as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) and therefore intends to take advantage of certain exemptions from various public company reporting requirements, including delaying adoption of new or revised accounting standards until those standards apply to private companies. The Company has elected to use this extended transition period under the JOBS Act. The effective dates shown below reflect the election to use the extended transition period.

5


 

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standard Codification (“ASC”) 740 and clarifies and amends certain guidance to promote consistent application. The standard was adopted as of January 1, 2021 and did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting. Under the revised guidance, the accounting for awards issued to non-employees will be similar to the accounting for employee awards. The new guidance is effective for fiscal years beginning after December 15, 2019. The standard was adopted as of January 1, 2020 and did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The revised guidance eliminates Step 2 of the current goodwill impairment analysis test, which requires hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance was adopted as of January 1, 2020 and did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted—In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on the unaudited condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the expected transition away from reference rates that are expected to be discontinued, such as LIBOR. ASU 2020-04 was effective upon issuance. The Company may elect to apply the guidance prospectively through December 31, 2022. The Company is currently evaluating the impact of the adoption of the standard on the unaudited condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The standard introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses and will apply to trade receivables. The new guidance will be effective for the Company’s annual and interim periods beginning after December 15, 2022. The Company does not anticipate the adoption of this standard to have a material impact on the unaudited condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842), to improve financial reporting regarding leasing transactions. The ASU primarily affects the accounting by the lessee in that it requires a lessee to recognize lease assets and liabilities, initially measured at the present value of the lease payments, on the balance sheets for those leases classified as operating leases under previous guidance. The new leasing standard is effective for the Company’s annual and interim periods beginning after December 15, 2021. The Company anticipates a material increase in assets and liabilities due to the recognition of the required right-of-use asset and corresponding liability for all significant lease obligations that are currently classified as operating leases.

3. REVENUES AND ACCOUNTS RECEIVABLE

The Company’s main revenue sources derive from the following revenue streams:

Assessment, Permitting and Response Revenues—Assessment, Permitting and Response revenues are generated from multidisciplinary environmental consulting services. The majority of the contracts are fixed-price or time and material based.

Measurement and Analysis Revenues—Measurement and Analysis revenues are generated from emissions sampling, testing and reporting services, leak detection services, ambient air monitoring services and laboratory testing services. The majority of the contracts are fixed-price or time-and-materials based.

6


 

Remediation and Reuse RevenuesRemediation and Reuse revenues are generated from operating and maintenance (“O&M”) services (on biogas and waste water treatment facilities), as well as remediation, monitoring and environmental compliance services. Services on the majority of O&M contracts are provided under long-term fixed-fee contracts. Remediation, monitoring and environmental compliance contracts are predominantly fixed-fee and time-and-materials based.

Disaggregation of Revenue—The Company disaggregates revenue by its operating segments. The Company believes disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, and uncertainty of revenue and cash flows are affected by economic factors. Disaggregated revenue disclosures are provided in Note 19.

Contract Balances—The Company presents contract balances for unbilled receivables (contract assets), as well as customer advances, deposits and deferred revenue (contract liabilities) within contract assets and accounts payable and accrued expenses, respectively, on the unaudited condensed consolidated statements of financial position. Amounts are generally billed at periodic intervals (e.g., weekly, bi-weekly or monthly) as work progresses in accordance with agreed-upon contractual terms. The Company utilizes the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component as the period between when the Company transfers services to a customer and when the customer pays for those services is one year or less. Amounts recorded as unbilled receivables are generally for services the Company is not entitled to bill based on the passage of time. Under certain contracts, billing occurs subsequent to revenue recognition, resulting in contract assets. The Company sometimes receives advances or deposits from customers before revenue is recognized, resulting in contract liabilities.

The following table presents the Company’s contract balances:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Contract assets

 

$

61,636

 

 

$

38,576

 

Contract liabilities

 

 

6,476

 

 

 

6,114

 

 

Contract assets acquired through business acquisitions amounted to $0.5 million and $6.5 million as of March 31, 2021 and December 31, 2020, respectively. Contract liabilities acquired through business acquisitions amounted to $0.5 million and zero as of March 31, 2021 and December 31, 2020, respectively. Revenue recognized during the three months ended March 31, 2021, included in the contract liabilities balance at the beginning of the year was $1.2 million. The revenue recognized from the contract liabilities consisted of the Company satisfying performance obligations during the normal course of business.

The amount of revenue recognized from changes in the transaction price associated with performance obligations satisfied in prior periods during the three months ended March 31, 2021 was not material.

Remaining Unsatisfied Performance Obligations—Remaining unsatisfied performance obligations represent the total dollar value of work to be performed on contracts awarded and in progress. The amount of remaining unsatisfied performance obligations increases with new contracts or additions to existing contracts and decreases as revenue is recognized on existing contracts. Contracts are included in the amount of remaining unsatisfied performance obligations when an enforceable agreement has been reached. As of March 31, 2021 and December 31, 2020, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied was approximately $25.4 million and $24.4 million, respectively. As of March 31, 2021, the Company expected to recognize approximately $22.3 million of this amount as revenue within the next year and $3.1 million the year after.

Accounts Receivable, Net—Accounts receivable, net consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Accounts receivable, invoiced

 

$

64,314

 

 

$

57,228

 

Accounts receivable, other

 

 

5,766

 

 

 

1,139

 

Allowance for doubtful accounts

 

 

(4,309

)

 

 

(4,265

)

Accounts receivable—net

 

$

65,771

 

 

$

54,102

 

 

The Company extends non-interest-bearing trade credit to its customers in the ordinary course of business. Accounts receivable are shown on the face of the unaudited condensed consolidated statements of financial position, net of an allowance for doubtful accounts. In determining the allowance for doubtful accounts, the Company analyzes the aging of accounts receivable, historical bad debts, customer creditworthiness and current economic trends. During the first quarter of 2020, there was a global outbreak of a new strain of coronavirus, COVID-19. The COVID-19 pandemic has added uncertainty to the collectability of certain receivables, particularly in industries hard hit by the pandemic. As a result, the Company recorded a $6.3 million bad debt reserve during the first

7


 

quarter of 2020. The bad debt adjustment included a $5.5 million reserve for one customer in the Company’s Remediation and Reuse segment in which management concluded to discontinue select service lines as of March 31, 2020 (Note 19).

As of March 31, 2021 and December 31, 2020, the Company had one customer who accounted for 15.9% and 10.2%, respectively, of our gross accounts receivable. For the three months ended March 31, 2021, the Company had three customers who accounted for 16.3%, 12.7% and 10.2% of revenue. The Company did not have any customers that exceeded 10.0% of revenue as of March 31, 2020. The Company performs ongoing credit evaluations, and accordingly, believes that the balances from these largest customers do not represent a significant credit risk.

The allowance for doubtful accounts consisted of the following:

 

 

 

Beginning

Balance

 

 

Bad Debt

Expense

 

 

Charged to

Allowance

 

 

Other(1)

 

 

Ending

Balance

 

Three months ended March 31, 2021

 

$

4,265

 

 

$

508

 

 

$

(473

)

 

$

9

 

 

$

4,309

 

Year ended December 31, 2020

 

 

1,327

 

 

 

4,532

 

 

 

(2,633

)

 

 

1,039

 

 

 

4,265

 

____________________

(1)

This amount consists of additions to the allowance due to business acquisitions.

4. PREPAID AND OTHER CURRENT ASSETS

Prepaid and other current assets consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Deposits

 

$

796

 

 

$

708

 

Prepaid expenses

 

 

5,613

 

 

 

3,510

 

Supplies

 

 

2,421

 

 

 

2,491

 

Prepaid and other current assets

 

$

8,830

 

 

$

6,709

 

 

5. PROPERTY AND EQUIPMENT, NET

Property and equipment are stated at cost or estimated fair value for assets acquired through business combinations. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term, including options that are deemed to be reasonably assured, or the estimated useful life of the improvement.

Property and equipment, net, consisted of the following:

 

 

 

Estimated

 

March 31,

 

 

December 31,

 

 

 

Useful Life

 

2021

 

 

2020

 

Lab and test equipment

 

7 years

 

$

19,017

 

 

$

18,631

 

Vehicles

 

5 years

 

 

14,047

 

 

 

13,320

 

Equipment

 

3–7 years

 

 

33,263

 

 

 

32,177

 

Furniture and fixtures

 

7 years

 

 

3,023

 

 

 

2,938

 

Leasehold improvements

 

7 years

 

 

6,884

 

 

 

6,767

 

Aircraft

 

10 years

 

 

834

 

 

 

834

 

Building

 

39 years

 

 

2,975

 

 

 

2,975

 

 

 

 

 

 

80,043

 

 

 

77,642

 

Land

 

 

 

 

725

 

 

 

725

 

Construction in progress

 

 

 

 

489

 

 

 

219

 

Less accumulated depreciation

 

 

 

 

(46,316

)

 

 

(44,187

)

Total property and equipment—

   net

 

 

 

$

34,941

 

 

$

34,399

 

Total depreciation expense included in the unaudited condensed consolidated statements of operations was $2.2 million and $2.0 million for the three months ended March 31, 2021 and March 31, 2020, respectively.  

8


 

6. BUSINESS ACQUISITIONS

In line with the Company’s strategic growth initiatives, the Company acquired one business during the three months ended March 31, 2021 and several businesses during the year ended December 31, 2020. The results of each of those acquired businesses are included in the unaudited condensed consolidated financial statements beginning on the acquisition date. Each transaction qualified as an acquisition of a business and was accounted for as a business combination. All acquisitions resulted in the recognition of goodwill. The Company paid these premiums resulting in such goodwill for a number of reasons, including expected synergies from combining operations of the acquiree and the Company while also growing the Company’s customer base, acquiring assembled workforces, expanding its presence in certain markets and expanding and advancing its product and service offerings. The Company recorded the assets acquired and liabilities assumed at their acquisition date fair value, with the difference between the fair value of the net assets acquired and the acquisition consideration reflected as goodwill.

The identifiable intangible assets for acquisitions are valued using the excess earnings method discounted cash flow approach for customer relationships, the relief from royalty method for trade names, the patent and external proprietary software, the “with and without” method for covenants not to compete and the replacement cost method for the internal proprietary software by incorporating Level 3 inputs as described under the fair value hierarchy of ASC 820. These unobservable inputs reflect the Company’s own assumptions about which assumptions market participants would use in pricing an asset on a non-recurring basis. These assets will be amortized over their respective estimated useful lives.

Other purchase price obligations (primarily deferred purchase price liabilities and target working capital liabilities or receivables) are included on the unaudited condensed consolidated statements of financial position in accounts payable and other accrued liabilities, other non-current liabilities or accounts receivable-net in the case of working capital deficits. Contingent consideration outstanding from acquisitions are included on the unaudited condensed consolidated statements of financial position in business acquisition contingent consideration, current or in business acquisitions contingent consideration, long-term. These obligations are scheduled to be settled if certain performance thresholds are met.

The Company considers several factors when determining whether or not contingent consideration liabilities are part of the purchase price, including the following: (i) the valuation of its acquisitions is not supported solely by the initial consideration paid, (ii) the former stockholders of acquired companies that remain as key employees receive compensation other than contingent consideration payments at a reasonable level compared with the compensation of the Company’s other key employees and (iii) contingent consideration payments are not affected by employment termination. The Company reviews and assesses the estimated fair value of contingent consideration at each reporting period.

Transaction costs related to business combinations totaled $0.2 million and $1.3 million for the three months ended March 31, 2021 and March 31, 2020, respectively. These costs are expensed within selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations.

Acquisitions Completed During the Three Months Ended March 31, 2021

MSE Group—In January 2021, the Company completed the acquisition of MSE Group (“MSE”) by acquiring 100.0% of its membership interests. MSE is a provider of environmental assessment, compliance, engineering, and design services primarily to the U.S. federal government. MSE is based in Orlando, FL with additional offices in Tampa, Orlando, Jacksonville, San Antonio, TX, and Wilmington, NC, and satellite locations nationwide. The upfront cash payment made to acquire MSE was funded through cash on hand and the common stock portion of the purchase price was funded through the issuance of 71,740 shares of common stock.

The following table summarizes the elements of the purchase price of MSE:

 

 

 

Cash

 

 

Common

Stock

 

 

Other

Purchase

Price

Components

Current

 

 

Other

Purchase

Price

Components

Long Term

 

 

Contingent

Consideration

Current

 

 

Contingent

Consideration

Long Term

 

 

Total

Purchase

Price

 

MSE

 

$

9,082

 

 

$

2,271

 

 

$

10,146

 

 

$

 

 

$

 

 

$

1,804

 

 

$

23,303

 

 

The other purchase price components of the MSE purchase price consist of a target working capital amount, a 338 election tax liability, 2020 and 2021 purchase price true ups and contingent consideration. The 2020 and 2021 purchase price true up elements are based on MSE’s actual 2020 and 2021 results.  The contingent consideration element is related to earn-outs which are based on the expected achievement of revenue or earnings thresholds as of the date of the acquisition and for which the maximum potential amount is limited. The Company paid the target working capital amount and the 2020 purchase price true up in April 2021 (Note 22). The Company may be required to make up to $6.2 million in aggregate true up and earn-out payments in 2022 and 2023.

9


 

The preliminary purchase price attributable to the MSE acquisition was allocated as follows:

 

 

 

MSE

 

Cash

 

$

2,810

 

Accounts receivable

 

 

3,068

 

Other current assets

 

 

31

 

Current assets

 

 

5,909

 

Property and equipment

 

 

513

 

Customer relationships

 

 

8,720

 

Trade names

 

 

521

 

Covenants not to compete

 

 

922

 

Goodwill

 

 

7,532

 

Total assets

 

 

24,117

 

Current liabilities

 

 

(814

)

Total liabilities

 

 

(814

)

Purchase price

 

$

23,303

 

 

MSE results of operations have been combined with those of the Company since the date of acquisition. The Company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2021 includes revenue and pre-tax loss of $4.0 million and $0.3 million, respectively. MSE is included in the Company’s Remediation and Reuse segment.

The weighted average useful lives for the acquired customer relationships and related backlog for the MSE acquisition are 7 years and 2 years, respectively. The weighted average useful lives for the acquired tradenames and covenants not to compete for the MSE acquisition are 2 years and 5 years, respectively.

Goodwill associated with the MSE acquisition is deductible for income tax purposes.

The Company has not yet completed the initial purchase price allocation for this acquisition due to the timing of the close of the transaction.

Acquisitions Completed During the Year Ended December 31, 2020

The Center for Toxicology and Environmental Health, L.L.C.—In April 2020, the Company completed the acquisition of The Center for Toxicology and Environmental Health, L.L.C. (“CTEH”) by acquiring 100.0% of its membership interests. CTEH is an environmental consulting company headquartered in Arkansas that specializes in environmental response and toxicology. The cash payment made to acquire CTEH was funded through the issuance of the Convertible and Redeemable Series A-2 Preferred Stock (Note 16) and the common stock portion of the purchase price was funded through the issuance of 791,139 shares of common stock. 

Leed Environmental Inc.— In September 2020, the Company acquired certain testing assets, and operations from Leed Environmental Inc. (“LEED”). LEED provides environmental project management and coordination services. LEED expands the Company’s remediation capabilities in the Northeast region of the United States. The cash payment made to acquire LEED was funded via cash on hand.

American Environmental Testing Co.— In September 2020, the Company acquired certain assets and operations of American Environmental Testing Co. (“AETC”), a stack testing company in Utah. AETC expands the Company’s air measurement and analysis capabilities in the West Coast region. The cash payment made to acquire AETC was funded via cash on hand.

The following table summarizes the elements of purchase price of the acquisitions completed during the year ended December 31, 2020:

 

 

 

Cash

 

 

Common

Stock

 

 

Other

Purchase

Price

Components

Current

 

 

Other

Purchase

Price

Components

Long Term

 

 

Contingent

Consideration

Current

 

 

Contingent

Consideration

Long Term

 

 

Total

Purchase

Price

 

CTEH

 

$

175,000

 

 

$

25,000

 

 

$

(1,939

)

 

$

 

 

$

34,451

 

 

$

10,543

 

 

$

243,055

 

All other acquisitions

 

 

450

 

 

 

 

 

 

50

 

 

 

100

 

 

 

210

 

 

 

 

 

 

810

 

Total

 

$

175,450

 

 

$

25,000

 

 

$

(1,889

)

 

$

100

 

 

$

34,661

 

 

$

10,543

 

 

$

243,865

 

10


 

 

 

The contingent consideration elements of the purchase price of the acquisitions is related to earn-outs which are based on the expected achievement of revenue or earnings thresholds as of the date of the acquisition and for which the maximum potential amount is limited.

The CTEH first year earn-out was calculated at twelve times CTEH’s 2020 EBITDA (as defined in the purchase agreement) in excess of $18.3 million, with a maximum first year earn-out payment of $50.0 million, which was fully achieved. The second year earn-out is to be calculated at ten times CTEH’s 2021 EBITDA in excess of actual 2020 EBITDA (with actual 2020 EBITDA subject to a minimum of $18.3 million and a maximum of $22.5 million), with a maximum second year earn-out payment of $30.0 million. The 2020 earn-out was initially payable 100.0% in common stock, but as a result of the completion of the Company’s IPO (Note 1), 50.0% was payable in cash. In April 2021, the 2020 earn-out payment was made with 50.0% paid in cash and the remaining 50.0% paid in common stock of the Company (Note 22). The 2021 earn-out, if any, is payable 100.0% in cash.

The purchase price attributable to the acquisitions was allocated as follows:

 

 

 

CTEH

 

 

All Other

Acquisitions

 

 

Total

 

Cash

 

$

1,527

 

 

$

 

 

$

1,527

 

Accounts receivable

 

 

17,059

 

 

 

 

 

 

17,059

 

Other current assets

 

 

1,265

 

 

 

 

 

 

1,265

 

Current assets

 

 

19,851

 

 

 

 

 

 

19,851

 

Property and equipment

 

 

7,042

 

 

 

75

 

 

 

7,117

 

Customer relationships

 

 

56,000

 

 

 

 

 

 

56,000

 

Trade names

 

 

4,200

 

 

 

 

 

 

4,200

 

Covenants not to compete

 

 

4,000

 

 

 

109

 

 

 

4,109

 

Proprietary software

 

 

14,700

 

 

 

 

 

 

14,700

 

Goodwill

 

 

146,983

 

 

 

626

 

 

 

147,609

 

Total assets

 

 

252,776

 

 

 

810

 

 

 

253,586

 

Current liabilities

 

 

9,721

 

 

 

 

 

 

9,721

 

Total liabilities

 

 

9,721

 

 

 

 

 

 

9,721

 

Purchase price

 

$

243,055

 

 

$

810

 

 

$

243,865

 

 

CTEH, LEED and AETC are included in the Company’s Assessment, Permitting and Response, Remediation and Reuse and Measurement and Analysis segments, respectively.

The weighted average useful lives for the acquired customer relationships and internal proprietary software for the CTEH acquisition are 15 years and 3 years, respectively. The weighted average useful lives for the acquired tradenames, covenants not to compete and external proprietary software for the CTEH acquisition is 5 years. The weighted average useful lives for the acquired covenants not to compete for the other acquisitions is 4 years.

Goodwill associated with the CTEH, LEED and AETC acquisitions is deductible for income tax purposes.

Supplemental Unaudited Pro-Forma—The unaudited condensed consolidated financial information summarized in the following table gives effect to the 2021 and the 2020 acquisitions discussed above assuming they occurred on January 1, 2020. These unaudited consolidated pro forma operating results do not assume any impact from revenue, cost or other operating synergies that are expected or may have been realized as a result of the acquisitions. These unaudited consolidated pro forma operating results are presented for illustrative purposes only and are not indicative of the operating results that would have been achieved had the acquisitions occurred on January 1, 2020, nor does the information purport to reflect results for any future period.

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

As reported

 

 

Acquisitions

Pro-Forma

(Unaudited)

 

 

Consolidated

Pro-Forma

(Unaudited)

 

 

As reported

 

 

Acquisitions

Pro-Forma

(Unaudited)

 

 

Consolidated

Pro-Forma

(Unaudited)

 

Revenues

 

$

133,817

 

 

$

 

 

$

133,817

 

 

$

61,031

 

 

$

36,197

 

 

$

97,228

 

Net (loss) income

 

 

(11,596

)

 

 

 

 

 

(11,596

)

 

 

(41,248

)

 

 

11,352

 

 

 

(29,896

)

 

11


 

 

During the first quarter of 2020, the Company determined to reduce the footprint of its environmental lab in Berkeley, California, and to exit its non-specialized municipal water engineering service line and its food waste biogas engineering service line, (together, “the Discontinued Service Lines”). Revenues from Discontinued Service Lines included in revenues in the above table for the three months ended March 31, 2021 and March 31, 2020 were zero and $2.5 million, respectively.

7. GOODWILL AND INTANGIBLE ASSETS

Amounts related to goodwill are as follows:

 

 

 

Assessment,

Permitting

and Response

 

 

Measurement

and

Analysis

 

 

Remediation

and

Reuse

 

 

Total

 

Balance as of December 31, 2020

 

$

162,156

 

 

$

69,054

 

 

$

43,457

 

 

$

274,667

 

Goodwill acquired during the period

 

 

 

 

 

 

 

 

7,532

 

 

 

7,532

 

Balance as of March 31, 2021

 

$

162,156

 

 

$

69,054

 

 

$

50,989

 

 

$

282,199

 

 

Amounts related to finite-lived intangible assets are as follows:

 

March 31, 2021

 

Estimated

Useful Life

 

Gross

Balance

 

 

Accumulated

Amortization

 

 

Total

Intangible

Assets—Net

 

Finite lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

2–15 years

 

$

173,502

 

 

$

58,294

 

 

$

115,208

 

Covenants not to compete

 

4–5 years

 

 

30,864

 

 

 

22,471

 

 

 

8,393

 

Trade names

 

1–5 years

 

 

17,459

 

 

 

13,445

 

 

 

4,014

 

Proprietary software

 

3–5 years

 

 

21,260

 

 

 

7,368

 

 

 

13,892

 

Patent

 

16 years

 

 

17,479

 

 

 

1,671

 

 

 

15,808

 

Total other intangible assets

   —net

 

 

 

$

260,564

 

 

$

103,249

 

 

$

157,315

 

 

December 31, 2020

 

Estimated

Useful Life

 

Gross

Balance

 

 

Accumulated

Amortization

 

 

Total

Intangible

Assets—Net

 

Finite lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

7–15 years

 

$

164,782

 

 

$

53,446

 

 

$

111,336

 

Covenants not to compete

 

4–5 years

 

 

29,942

 

 

 

21,469

 

 

 

8,473

 

Trade names

 

1–5 years

 

 

16,938

 

 

 

12,849

 

 

 

4,089

 

Proprietary software

 

3–5 years

 

 

21,007

 

 

 

6,132

 

 

 

14,875

 

Patent

 

16 years

 

 

17,479

 

 

 

1,398

 

 

 

16,081

 

Total other intangible assets

   —net

 

 

 

$

250,148

 

 

$

95,294

 

 

$

154,854

 

 

Intangible assets with finite lives are stated at cost, less accumulated amortization and impairment losses, if any. These intangible assets are amortized using the straight-line method over the estimated useful lives of the assets. Amortization expense was $8.6 million and $5.6 million for the three months ended of March 31, 2021 and March 31, 2020, respectively.   

Future amortization expense is estimated to be as follows for each of the five following years and thereafter:

 

December 31,

 

 

 

 

2021 (remaining)

 

$

22,667

 

2022

 

 

26,545

 

2023

 

 

21,276

 

2024

 

 

18,096

 

2025

 

 

11,854

 

2026 and thereafter

 

 

56,877

 

Total

 

$

157,315

 

 

12


 

 

8. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

Accounts payable and other accrued liabilities consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Accounts payable

 

$

15,470

 

 

$

15,481

 

Accrued expenses

 

 

19,555

 

 

 

11,469

 

Other business acquisitions purchase

   price obligations

 

 

9,511

 

 

 

50

 

Contract liabilities

 

 

6,476

 

 

 

6,114

 

Other current liabilities

 

 

1,229

 

 

 

1,507

 

Income tax payable

 

 

190

 

 

 

256

 

Total accounts payable and

   other accrued liabilities

 

$

52,431

 

 

$

34,877

 

 

9. ACCRUED PAYROLL AND BENEFITS

Accrued payroll and benefits consisted of the following:

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Accrued bonuses

 

$

1,800

 

 

$

5,416

 

Accrued paid time off

 

 

2,355

 

 

 

2,067

 

Accrued payroll

 

 

13,273

 

 

 

9,133

 

Accrued other

 

 

5,136

 

 

 

4,565

 

Total accrued payroll and benefits

 

$

22,564

 

 

$

21,181

 

 

 

 

 

 

 

 

 

 

 

10. INCOME TAXES

The Company calculates its interim income tax provision in accordance with ASC Topic 270, Interim Reporting (“ASC 270”), and ASC 740. The Company’s effective tax rate (“ETR”) from continuing operations was (0.12%) and 7.11% for the three months ended March 31, 2021 and March 31, 2020, respectively. Income tax expense recorded by the Company during the three months ended March 31, 2021 was not material. The Company recorded an income tax benefit of $3.2 million during the three months ended March 31, 2020. The difference between the ETR and federal statutory rate of 21.0% is primarily attributable to items recorded for U.S. GAAP but permanently disallowed for U.S. federal income tax purposes, recognition of a U.S. federal and state valuation allowance, state and foreign income tax provisions and Global Intangible Low Taxed Income (“GILTI”).

A valuation allowance is recorded when it is more-likely-than-not some of the Company’s deferred tax assets may not be realized. Significant judgment is applied when assessing the need for a valuation allowance and the Company considers future taxable income, reversals of existing deferred tax assets and liabilities and ongoing prudent and feasible tax planning strategies, in making such assessment. As of March 31, 2021, the Company’s U.S. federal, state and various foreign net deferred tax assets are not more-likely-than-not to be realized and a full valuation allowance is maintained.

The Company records uncertain tax positions in accordance with ASC 740, on the basis of a two-step process in which (i) the Company determines whether it is more likely than not a tax position will be sustained on the basis of the technical merits of such position and (ii) for those tax positions meeting the more-likely-than-not recognition threshold, the Company would recognize the largest amount of tax benefit that is more than 50.0% likely to be realized upon ultimate settlement with the related tax authority. The Company has determined it has no uncertain tax positions as of March 31, 2021. The Company classifies interest and penalties recognized on uncertain tax positions as a component of income tax expense.

11. WARRANT OPTIONS

In October 2018, in connection with the issuance of the Redeemable Series A-1 Preferred Stock, the Company issued a detachable warrant to acquire 534,240 shares of common stock at a price of $0.01 per share at any given time during a period of ten years beginning on the instrument’s issuance date.

For the three months ended March 31, 2020, fair value gains/(losses) recorded in other expense on the unaudited condensed consolidated statements of operations related to the Redeemable Series A-1 warrant were not material.

13


 

In April 2020, in connection with the issuance of the Convertible and Redeemable Series A-2 Preferred Stock, the Company issued a detachable warrant to acquire 1,351,960 shares of common stock at a price of $0.01 per share at any time following the occurrence of a qualifying IPO, a sale of the Company, or a redemption in full of the Series A-2 preferred stock (each, an “Adjustment Event”), with an expiration date of ten years from the instrument’s issuance date. The number of shares underlying the warrant and issuable upon exercise was subject to adjustment based upon the price per share of common stock upon the occurrence of an Adjustment Event (Note 16) to reflect an aggregate value of $30.0 million.

As a result of the $15.00 per share public offering price in the IPO, the warrant issued in connection with the issuance of the Convertible and Redeemable Series A-2 Preferred Stock was adjusted pursuant to its terms and, upon closing of the IPO, represented a warrant to purchase 1,999,999 shares of common stock (an increase of 648,039 shares).

On July 30, 2020, the Redeemable Series A-1 Preferred Stock and the Convertible and Redeemable Series A-2 Preferred Stock warrants were exercised in full resulting in the issuance of an aggregate of 2,534,239 shares of common stock to the holder for an exercise price of $0.01 per share.  

12. DEBT

Debt consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Term loan facility

 

$

173,359

 

 

$

173,906

 

Capital leases

 

 

3,348

 

 

 

3,088

 

Equipment line of credit

 

 

2,803

 

 

 

3,018

 

Less deferred debt issuance costs

 

 

(3,871

)

 

 

(4,108

)

Total debt

 

 

175,639

 

 

 

175,904

 

Less current portion of long-term debt

 

 

(6,214

)

 

 

(5,583

)

Long-term debt, less current portion

 

$

169,425

 

 

$

170,321

 

 

Deferred Financing Costs—Costs relating to debt issuance have been deferred and are presented as discounted against the underlying debt instrument. These costs are amortized to interest expense over the terms of the underlying debt instruments.

Revolving Line of Credit and Term Loan FacilityOn April 13, 2020, the Company entered into a Unitranche Credit Agreement (the “2020 Credit Facility”) providing for a new $225.0 million credit facility comprised of a $175.0 million term loan and a $50.0 million revolving credit facility and repaid all amounts outstanding under the prior senior secured credit facility. The 2020 Credit Facility matures in April 2025. Up until October 6, 2020, the term loan and the revolver bore interest at LIBOR plus 5.0% with a 1.0% LIBOR floor or the base rate plus 4.0% and LIBOR plus 3.5% or the base rate plus 2.5%, respectively. Effective October 6, 2020, the Company amended the 2020 Credit Facility to provide for a reduction on the applicable interest rate on the term loan from LIBOR plus 5.0% with a 1.0% LIBOR floor to LIBOR plus 4.5% with a 1.0% LIBOR floor. The revolver interest rate remained unchanged. The revolver is also subject to an unused commitment fee of 0.35%. The Term Loan has quarterly repayments that started on September 30, 2020 of $0.5 million, increasing to $1.1 million on September 30, 2021 and further increasing to $1.6 million on September 30, 2022, with the remaining outstanding principal amount due on the maturity date. The Company has the option to borrow incremental term loans up to an aggregate principal amount of $100.0 million subject to satisfaction of certain conditions, including the borrower’s pro forma compliance with the financial covenants under the 2020 Credit Facility. Immediately after giving effect to the incurrence of any such incremental term loans, the lenders must collectively hold at least 70.0% of all pari passu debt of all lenders under the credit facility. The existing lenders are not obligated to participate in any incremental term loan facility.

The 2020 Credit Facility includes a number of covenants imposing certain restrictions on the Company’s business, including, among other things, restrictions on the Company’s ability to incur indebtedness, prepay or amend other indebtedness, create liens, make certain fundamental changes including mergers or dissolutions, pay dividends and make other payments in respect of capital stock, make certain investments, sell assets, change the Company’s lines of business, enter into transactions with affiliates and other corporate actions. The 2020 Credit Facility also contains financial covenants requiring the Company to remain below a maximum consolidated total leverage ratio of 4.25 times, which steps down to 4.00 times beginning December 31, 2021 and then to 3.75 times beginning December 31, 2022, and a minimum consolidated fixed charge coverage ratio of 1.25 times. The 2020 Credit Facility contains mandatory prepayment features upon a number of events, including with the proceeds of certain asset sales, proceeds from the issuance of any debt and proceeds of the capital contribution amounts contributed to cure a financial covenant default. The 2020 Credit Facility also includes mandatory prepayments of 50.0% of excess cash flow minus voluntary prepayments of the term loan and, solely to the extent accompanied by a permanent reduction in the revolving commitment, the revolver, if the Company’s consolidated

14


 

total leverage ratio for the year ending December 31, 2020 is greater than or equal to 3.25 times and, for any year thereafter, the amount of any such mandatory prepayment shall be reduced to 25.0% of excess cash flow if the leverage ratio is less than 3.00 times. As of March 31, 2021 and December 31, 2020, the Company’s consolidated total leverage ratio (as defined in the credit agreement) was 3.1 times and 2.7 times, respectively.

The weighted average interest rate on the 2020 Credit Facility as of March 31, 2021 was 5.5%.

The 2020 Credit Facility contains a number of customary events of default related to, among other things, the non-payment of principal, interest or fees, violations of covenants, inaccuracy of representations or warranties, certain bankruptcy events, default in payment under or the acceleration of other indebtedness and certain change of control events. In the event of a default, subject to varying cure periods and rights for certain events of default, the required lenders may, at their option, declare the commitments to fund the credit facility to be terminated.

The Company’s obligations under the 2020 Credit Facility are guaranteed by certain of the Company’s existing and future direct and indirect subsidiaries, and such obligations are secured by substantially all of the Company’s assets, including the capital stock or other equity interests in those subsidiaries.

Prior Senior Secured Credit Facility—The Company’s Prior Senior Secured Credit Facility (the “Prior Senior Credit Facility”), which was paid in full in April 2020 via proceeds from the issuance of the 2020 Credit Facility, consisted of a $50.0 million term loan and a $130.0 million revolving credit facility.

Borrowings under the Prior Senior Credit Facility bore interest at either (i) LIBOR plus the applicable margin or (ii) a base rate (equal to the highest of (a) the federal funds rate plus 0.5%, (b) Lender A’s prime rate and (c) Eurodollar Rate, which is based on LIBOR, (using a one-month period plus 1.0%), plus the applicable margin, as the Company elects. The applicable margin means a percentage per annum determined in accordance with the following table:

 

Pricing Tier

 

Consolidated

Leverage Ratio

 

Commitment

Fee

 

 

Eurodollar

Rate Loans

and LIBOR

Letter of

Credit Fee

 

 

Daily

Floating

Rate Loans

 

 

Rate

Loans

 

1

 

> 3.75 to 1.0

 

 

0.50

%

 

 

4.00

%

 

 

4.00

%

 

 

3.00

%

2

 

3.75 to 1.0 but > 3.00 to 1.0

 

 

0.50

 

 

 

3.50

 

 

 

3.50

 

 

 

2.50

 

3

 

≤ 3.00 to 1.0 but > 2.25 to 1.0

 

 

0.40

 

 

 

3.00

 

 

 

3.00

 

 

 

2.00

 

4

 

< 2.25 to 1.0

 

 

0.30

 

 

 

2.50

 

 

 

2.50

 

 

 

1.50

 

 

Equipment Line of Credit—On March 12, 2019, the Company increased its equipment line of credit facility for the purchase of equipment and related freight, installation costs and taxes paid for an additional amount not to exceed $2.0 million. On May 16, 2019, the Company entered into a Canadian equipment line of credit facility for an amount not to exceed $1.0 million Canadian dollars. Interest on the line of credit is determined based on a three-year swap rate at the time of funding.

Capital Lease Obligations—The assets and liabilities under capital lease agreements are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are being amortized over the shorter of their related lease terms or their estimated useful lives ranging from three to seven years. The gross amount of assets under capital leases as of March 31, 2021 and December 31, 2020 was $6.2 million and $6.1 million, respectively. The amortization of assets under capital leases was $0.6 million and $0.2 million for the three months ended March 31, 2021 and March 31, 2020, respectively, and was included in depreciation and amortization on the unaudited condensed consolidated statements of operations. All capital leases (including those purchased through the Company’s equipment line of credit) mature by 2025 as follows:

 

March 31,

 

Payments

 

 

Interest

 

 

Principal

 

2022

 

$

2,727

 

 

$

341

 

 

$

2,386

 

2023

 

 

2,203

 

 

 

227

 

 

 

1,976

 

2024

 

 

1,403

 

 

 

98

 

 

 

1,305

 

2025

 

 

507

 

 

 

23

 

 

 

484

 

Total

 

$

6,840

 

 

$

689

 

 

$

6,151

 

 

15


 

 

The following is a schedule of the aggregate annual maturities of long-term debt presented on the unaudited condensed consolidated statement of financial position, based on the terms of the 2020 Credit Facility, capital lease obligations and equipment line of credit:

 

March 31,

 

 

 

 

2022

 

$

6,214

 

2023

 

 

7,992

 

2024

 

 

7,868

 

2025

 

 

7,047

 

2026

 

 

150,389

 

Total

 

$

179,510

 

 

 

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following financial liabilities are measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Business acquisitions contingent consideration,

   current

 

$

50,364

 

 

$

49,902

 

Business acquisitions contingent consideration,

   long-term

 

 

16,971

 

 

 

4,565

 

Conversion option

 

 

21,488

 

 

 

20,886

 

Total

 

$

88,823

 

 

$

75,353

 

 

The estimated fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis:

 

 

Business Acquisitions Contingent Consideration, Current

 

 

Business Acquisitions Contingent Consideration,

Long-term

 

 

Conversion Option

 

 

Contingent

Put Option

 

 

Warrant

Option

 

 

Total

 

Balance—at January 1, 2020

$

8,614

 

 

$

379

 

 

$

 

 

$

7,100

 

 

$

16,878

 

 

$

32,971

 

   Changes in fair value included in earnings

 

 

 

 

 

 

 

 

 

 

29,627

 

 

 

(1

)

 

 

29,626

 

    Payment of contingent consideration

       payable

 

(4,703

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,703

)

    Foreign currency translation of contingent

       consideration payment

 

(208

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(208

)

Balance—at March 31, 2020

$

3,703

 

 

$

379

 

 

$

 

 

$

36,727

 

 

$

16,877

 

 

$

57,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—at January 1, 2021

$

49,902

 

 

$

4,565

 

 

$

20,886

 

 

$

 

 

$

 

 

$

75,353

 

   Acquisitions

 

 

 

 

1,804

 

 

 

 

 

 

 

 

 

 

 

 

1,804

 

   Changes in fair value included in earnings

 

462

 

 

 

10,602

 

 

 

602

 

 

 

 

 

 

 

 

 

11,666

 

Balance—at March 31, 2021

$

50,364

 

 

$

16,971

 

 

$

21,488

 

 

$

 

 

$

 

 

$

88,823

 

 

Quantitative Information about Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3):

Business Acquisitions Contingent Consideration—The fair value of the contingent consideration payable associated with the acquisition of CTEH and MSE was determined using a Monte Carlo simulation of earnings in a risk-neutral Geometric Brownian Motion framework. The fair values of the contingent consideration payables for the other acquisitions were calculated based on expected target achievement amounts, which are measured quarterly and then subsequently adjusted to actuals at the target measurement date.

16


 

The method used to price these liabilities is considered level 3 due to the subjective nature of the unobservable inputs used to determine the fair value. The input is the expected achievement of earn-out thresholds.

Conversion Option—The fair value of the embedded derivative associated with the issuance of the Convertible and Redeemable Series A-2 Preferred Stock (Note 16) was estimated using a “with-and-without” method. The “with-and-without” methodology considers the value of the security on an as-is basis and then without the embedded conversion premium. The difference between the two scenarios is the implied fair value of the embedded derivative. The unobservable input is the required rate of return on the Series A-2. The considerable quantifiable inputs in the valuation relate to the timing of conversions or redemptions.

Contingent Put Option—The fair value of the contingent put option associated with the issuance of the Redeemable Series A-1 Preferred Stock was estimated using a “with-and-without” method. The “with-and-without” methodology considers the value of the security on an as-is basis and then without the embedded contingent put option. The difference between the two scenarios is the implied fair value of the embedded derivative, recorded as the contingent put option liability. In this case the Series A-1 was redeemed on the date of value so the value of the “with” scenario is known. The unobservable input is the required rate of return on the Series A-1 through to maturity in the “without” scenario. The contingent put option was redeemed in July 2020 (Note 15).

Warrant OptionThe warrant option was exercised on July 30, 2020 (Note 11). The fair value of the warrant option associated with the issuance of the Redeemable Series A-1 Preferred Stock was calculated based on the Black-Sholes pricing model using the following assumptions:

 

 

 

March 31,

 

 

 

2020

 

Common stock value (per share)

 

$

31.60

 

Expected volatility

 

 

35.93

%

Risk-free interest rate

 

 

0.70

%

Expected life (years)

 

10

 

 

The method used to price this liability is considered Level 3 due to the subjective nature of the unobservable inputs (common stock value and expected volatility) used to determine the fair value.

14. COMMITMENTS AND CONTINGENCIES

Operating Leases—The Company leases office facilities over various terms expiring through 2030. Certain of these operating leases contain rent escalation clauses. The Company also has office equipment leases that expire through 2025. The following is a schedule of the future minimum lease payments by year under the leases:

 

March 31,

 

Rent

 

 

Office

Equipment

 

 

Total

 

2022

 

$

7,105

 

 

$

371

 

 

$

7,476

 

2023

 

 

5,115

 

 

 

268

 

 

 

5,383

 

2024

 

 

3,598

 

 

 

90

 

 

 

3,688

 

2025

 

 

1,757

 

 

 

22

 

 

 

1,779

 

2026 and thereafter

 

 

4,896

 

 

 

 

 

 

4,896

 

Total

 

$

22,471

 

 

$

751

 

 

$

23,222

 

 

Total rent expense under operating leases was $2.5 million and $2.1million for the three months ended March 31, 2021 and March 31, 2020, respectively.  

Other Commitments—The Company has commitments under the 2020 Credit Facility, its equipment line of credit and its capital lease obligations (Note 12).

Contingencies—The Company is subject to purchase price contingencies related to earn-outs associated with certain acquisitions (Note 6).

Legal—In the normal course of business, the Company is at times subject to pending and threatened legal actions. In management’s opinion, any potential loss resulting from the resolution of these matters is not expected to have a material effect on the unaudited condensed consolidated results of operations, financial position or cash flows of the Company.

17


 

15. REDEEMABLE SERIES A-1 PREFERRED STOCK

On October 19, 2018, the Company issued 12,000 shares of Redeemable Series A-1 Preferred Stock with a par value of $0.0001 per share and a detachable warrant to purchase 534,240 shares of the Company’s common stock. Each preferred share was issued as part of a unit, which consisted of one share of the Redeemable Series A-1 Preferred Stock at $0.01 million per share.

On April 13, 2020, the Company amended and restated the certificate of designation of the Company’s Redeemable Series A-1 Preferred Stock. The most significant changes in the amendment included (i) the Redeemable Series A-1 Preferred Stock became pari passu with the Convertible and Redeemable Series A-2 Preferred Stock (Note 16), (ii) the maturity was extended to October 2024; (iii) the Company could use up to $50.0 million of indebtedness or cash on hand to redeem the Redeemable Series A-1 Preferred Stock, and (iv) upon an IPO, up to 50.0% of accumulated dividends could be paid in shares of common stock and (v) the Company could elect to reduce the three year make whole penalty to a two year make whole penalty if the warrant issued in connection with the issuance of the Redeemable Series A-1 Preferred Stock was redeemed in full at a share price of no less than $31.60. Following a partial redemption of outstanding Redeemable Series A-1 Preferred Stock, the dividend rate of the remaining Redeemable Series A-1 Preferred Stock would be reduced proportionally (between 15.0% and 9.0%) in relation to the proportion of Redeemable Series A-1 Preferred Stock redeemed, with the rate increasing by an additional 1.0% for dividends that are accrued versus paid in cash. Based on a qualitative assessment performed by the Company, the Redeemable Series A-1 Preferred Stock amendments did not represent a significant long-term change to the original terms of the instrument and, therefore, there was no change in the accounting of the instrument.

On July 27, 2020, the Company redeemed in full the Redeemable Series A-1 Preferred Stock, including the guaranteed minimum two-year dividend.    

The Redeemable Series A-1 Preferred Stock contained restrictive covenants. Prior to its redemption, the Company was subject to a consolidated total leverage ratio (including the outstanding principal and accrued dividend on the Redeemable Series A-1 Preferred Stock) limit of less than 10.0 times as of the end of any fiscal quarter ending until maturity.  

Before redemption, the Redeemable Series A-1 Preferred Stock accrued dividends quarterly at an annual rate of 15.0% with respect to dividends that were paid in cash and at an annual rate of 14.2% with respect to dividends that were accrued.  

At issuance the Company determined that the detachable warrant (Note 11) and the contingent put option were required to be accounted for separately. The contingent put option change in value of $29.6 million for the three months ended March 31, 2020 was recorded to other expense.

16. CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK

On April 13, 2020, the Company entered into an agreement to issue 17,500 shares of the Convertible and Redeemable Series A-2 Preferred Stock with a par value of $0.0001 per share and a detachable warrant to purchase shares of the Company’s common stock with a 10-year life, in exchange for gross proceeds of $175.0 million, net of $1.3 million debt issuance costs. Before the Company’s IPO, each share of Convertible and Redeemable Series A-2 Preferred Stock accrued dividends at the rate of 15.0% per annum, with respect to dividends that were paid in cash, and 14.2% per annum, with respect to dividends that were accrued. The Company paid dividends on shares of the Convertible and Redeemable Series A-2 Preferred Stock of $4.1 million during the three months ended March 31, 2021.

At issuance, the Company determined that Convertible and Redeemable Series A-2 Preferred Stock and the detachable warrant (Note 11), were required to be accounted for separately.

Upon the Company’s IPO, following which the Redeemable Series A-1 Preferred Stock was fully redeemed, the Convertible and Redeemable Series A-2 Preferred Stock terms automatically updated to the following: (i) no mandatory redemption, (ii) no stated value cash repayment obligation other than in the event of certain defined liquidation events, (iii) only redeemable at the Company’s option, (iv) the instrument became convertible into common stock beginning on the four year anniversary of issuance at a 15.0% discount to the common stock market price (with a limit of $60.0 million in stated value of Convertible and Redeemable Series A-2 Preferred Stock eligible to be converted in any 60-day period prior to the seventh anniversary of issuance and the amount of stated value of the Convertible and Redeemable Series A-2 Preferred Stock eligible for conversion limited to $60.0 million during year 5 and $120.0 million (which includes the aggregate amount of the stated value of the Convertible and Redeemable Series A-2 Preferred Stock and any accrued but unpaid dividends added to such stated value of any shares of Convertible and Redeemable Series A-2 Preferred Stock converted in year 5) during year 6), (v) the dividend rate stepped down to 9.0% per year with required quarterly cash payments, (vi) in an event of noncompliance, the dividend rate shall increase to 12.0% per annum for the first 90-day period from and including the date the noncompliance event occurred, and thereafter shall increase to 14.0% per annum, (vii) the debt incurrence test

18


 

ratio increased to 4.5 times, (viii) the total leverage cap covenant was removed, and (ix) minimum repayment amount dropped down from $50.0 million to $25.0 million.

The Company may, at its option on any one or more dates, redeem all or a minimum portion (the lesser of (i) $25.0 million in aggregate stated value of the Convertible and Redeemable Series A-2 Preferred Stock and (ii) all of the Convertible and Redeemable Series A-2 Preferred Stock then outstanding) of the outstanding Convertible and Redeemable Series A-2 Preferred Stock in cash.

With respect to any redemption of any share of the Convertible and Redeemable Series A-2 Preferred Stock prior to the third-year anniversary, the Company is subject to a make whole penalty in which the holders of the Convertible and Redeemable Series A-2 Preferred Stock are guaranteed a minimum repayment equal to outstanding redeemed stated value plus three years of dividends accrued or accruable thereon.

The Convertible and Redeemable Series A-2 Preferred Stock does not meet the definition of a liability pursuant to “ASC 480- Distinguishing Liabilities from Equity.” However, as (i) the instrument is redeemable upon a change of control as defined in the certificate of designations governing the terms of the Convertible and Redeemable Series A-2 Preferred Stock, and (ii) the Company cannot assert it would have sufficient authorized and unissued shares of common stock to settle all future conversion requests due to the variable conversion terms, the instrument is redeemable upon the occurrence of events that are not solely within the control of the Company, and therefore the Company classifies the Convertible and Redeemable Series A-2 Preferred Stock as mezzanine equity. Subsequent adjustment of the carrying value of the instrument is required if the instrument is probable of becoming redeemable. As of March 31, 2021, the Company has determined that a change of control is not probable. Additionally, as of March 31, 2021, the Company has determined that it is not probable that there will be a future conversion request that the Company is unable to settle with authorized and issued shares based on the Company’s current stock price and available shares as well as the Company’s monitoring efforts to ensure there are a sufficient number of shares available to settle any conversion request. Therefore, as of March 31, 2021, the Company has determined that the instrument is not probable of becoming redeemable, and does not believe subsequent adjustment of the carrying value of the instrument will be necessary. The Convertible and Redeemable Series A-2 Preferred Stock had an aggregate liquidation preference of $182.2 million as of March 31, 2021.

The Convertible and Redeemable Series A-2 Preferred Stock contains embedded features that are required to be bifurcated and are subject to separate accounting treatment from the instrument itself. At issuance, these embedded features consisted of (i) a contingent dividend feature associated with the decrease in the dividend rate upon an IPO and (ii) a conversion option of the preferred shares to shares of common stock beginning on the fourth-year anniversary of the issuance date. Upon the Company’s IPO, the embedded derivative only consisted of the conversion option. As of March 31, 2021, this conversion embedded feature had a net fair value of $21.5 million. The change in value of $0.6 million for the three months ended March 31, 2021 was recorded to other expense.

17. STOCKHOLDERS’ EQUITY (DEFICIT)

Authorized Capital Stock—The Company was authorized to issue 190,000,000 shares of common stock, with a par value of $0.000004 per share as of March 31, 2021 and December 31, 2020.

Warrants—In May 2015, the Company issued warrants to acquire 116,350 shares of Common Stock at a price of approximately $17.19 per share to the placement agent as consideration for backstopping the financing completed in May 2015. These warrants were exercised in full as a cashless transaction during the three months ended March 31, 2021. As a result of this cashless transaction, the resulting number of shares issued was 67,713 shares.

Common Stock Issuances—The Company issued the following shares of common stock:

 

 

Three Months Ended March,

 

 

2021

 

 

2020

 

 

Shares

 

 

Average Price per Share

 

 

Shares

 

 

Average Price per Share

 

Acquisitions

 

71,740

 

 

$

31.65

 

 

 

 

 

$

 

Exercise of warrants

 

67,713

 

 

 

17.19

 

 

 

 

 

 

 

Exercise of options

 

330,060

 

 

 

6.62

 

 

 

 

 

 

 

Restricted shares, net

 

36,817

 

 

 

29.88

 

 

 

 

 

 

 

Total

 

506,330

 

 

$

13.27

 

 

 

 

 

$

 

 

19


 

 

Employee Equity Incentive Plans—The Company has two plans under which stock-based awards have been issued: (i) the Montrose Amended & Restated 2017 Stock Incentive Plan (“2017 Plan”) and (ii) the Montrose Amended & Restated 2013 Stock Option Plan (“2013 Plan”) (collectively the “Plans”).

As of March 31, 2021 and March 31, 2020, there was $18.8 million and $7.2 million, respectively, of total unrecognized stock compensation expense related to unvested options and restricted stock granted under the Plans. Such unrecognized expense is expected to be recognized over a weighted-average three year period. The following number of shares were authorized to be issued and available for grant:

 

 

 

March 31, 2021

 

 

 

2017 Plan

 

 

2013 Plan

 

 

Total

 

Shares authorized to be issued

 

 

3,944,750

 

 

 

2,047,269

 

 

 

5,992,019

 

Shares available for grant

 

 

1,618,996

 

 

 

 

 

 

1,618,996

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

2017 Plan

 

 

2013 Plan

 

 

Total

 

Shares authorized to be issued

 

 

1,057,785

 

 

 

2,058,619

 

 

 

3,116,404

 

Shares available for grant

 

 

8,217

 

 

 

4,775

 

 

 

12,992

 

 

Total stock compensation expense for the Plans was as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

2017 plan

 

 

2013 plan

 

 

 

 

 

 

2017 plan

 

 

2013 plan

 

 

 

 

 

 

 

Options

 

 

Restricted Stock

 

 

Options

 

 

Total

 

 

Options

 

 

Restricted Stock

 

 

Options

 

 

Total

 

Cost of revenue

 

$

606

 

 

$

 

 

$

10

 

 

$

616

 

 

$

355

 

 

$

 

 

$

70

 

 

$

425

 

Selling, general and

   administrative expense

 

 

1,004

 

 

 

182

 

 

 

3

 

 

 

1,189

 

 

 

287

 

 

 

370

 

 

 

68

 

 

 

725

 

Total

 

$

1,610

 

 

$

182

 

 

$

13

 

 

$

1,805

 

 

$

642

 

 

$

370

 

 

$

138

 

 

$

1,150

 

 

Montrose Amended & Restated 2017 Stock Incentive Plan

Restricted Stock—During the three months ended March 31, 2021 and March 31, 2020, the Company issued 14,532 and 33,229 shares of restricted stock with a fair market value of $30.96 and $31.60 per share, respectively, to certain 2017 Plan participants as Director’s compensation. These shares of restricted stock granted in the three months ended March 31, 2021 and March 31, 2020 vest one year from the date of grant, or, in each case, in full upon a change in control, subject to the participant’s continued service as a Director throughout such date, or upon retirement. Members of the Board of Directors that receive stock-based compensation are treated as employees for accounting purposes. There were 36,817 and zero shares of restricted stock that became fully vested and were released as unrestricted shares of common stock during the three months ended March 31, 2021 and March 31, 2020, respectively. There were no forfeitures of restricted shares during the three months ended March 31, 2021 and March 31, 2020. There were an aggregate of 281,705 and 273,122 restricted shares outstanding as of March 31, 2021 and March 31, 2020, respectively.

20


 

Options—Options issued to all optionees under the 2017 Plan vest over four years from the date of issuance (or earlier vesting start date, as determined by the Board of Directors) as follows: one half on the second anniversary of date of grant and the remaining half on the fourth anniversary of the date of grant, with the exception of certain annual grants to certain executive officers, which vest annually over a 3-year and 1-year period. The following summarizes the options activity of the 2017 Plan:

 

 

 

Options to

Purchase

Common

Stock

 

 

Weighted-

Average

Exercise

Price per

Share

 

 

Weighted

Average

Grant Date

Fair Value

per Share

 

 

Weighted

Average

Remaining

Contract Life

(in Years)

 

 

Aggregate

Intrinsic

Value

of In-The-

Money

Options (in

Thousands)

 

Outstanding at January 1, 2020

 

 

617,852

 

 

$

24

 

 

$

12

 

 

 

7.82

 

 

$

4,696

 

Granted

 

 

158,062

 

 

 

32

 

 

 

12

 

 

 

 

 

 

 

Forfeited/ cancelled

 

 

(2,000

)

 

 

32

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2020

 

 

773,914

 

 

 

26

 

 

 

12

 

 

 

8.50

 

 

 

4,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2021

 

 

1,840,229

 

 

 

23

 

 

 

12

 

 

 

9.09

 

 

 

15,598

 

Granted

 

 

224,270

 

 

 

38

 

 

 

20

 

 

 

 

 

 

 

Forfeited/ cancelled

 

 

(10,000

)

 

 

26

 

 

 

 

 

 

 

 

 

 

Expired

 

 

(1,250

)

 

 

18

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(17,188

)

 

 

16

 

 

 

 

 

 

 

 

 

519

 

Outstanding at March 31, 2021

 

 

2,036,061

 

 

 

24

 

 

 

13

 

 

 

8.97

 

 

 

52,317

 

Exercisable at March 31, 2021

 

 

218,379

 

 

 

24

 

 

 

 

 

 

7.79

 

 

 

5,702

 

Options vested and expected to vest

 

 

2,036,061

 

 

 

24

 

 

 

 

 

 

8.97

 

 

 

52,317

 

 

The following weighted-average assumptions were used in the Black-Sholes option-pricing model calculation:

 

 

 

March 31,

 

March 31,

 

 

 

2021

 

2020

 

Common stock value (per share)

 

$ 37.61

 

$ 31.60

 

Expected volatility

 

 

58.01

%

 

31.87

%

Risk-free interest rate

 

 

0.71

%

 

1.78

%

Expected life (years)

 

5.5-7.0

 

7.0

 

Forfeiture rate

 

None

 

None

 

Dividend rate

 

None

 

None

 

 

Montrose Amended & Restated 2013 Stock Option Plan—The following summarizes the activity of the 2013 Plan:

 

 

 

Options to

Purchase

Common

Stock

 

 

Weighted-

Average

Exercise

Price per

Share

 

 

Weighted

Average

Grant Date

Fair Value

per Share

 

 

Weighted

Average

Remaining

Contract Life

(in Years)

 

 

Aggregate

Intrinsic

Value

of In-The-

Money

Options (in

Thousands)

 

Outstanding at January 1, 2020

 

 

1,855,469

 

 

$

6

 

 

$

1

 

 

 

6.14

 

 

 

46,617

 

Expired

 

 

(725

)

 

 

6

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2020

 

 

1,854,744

 

 

 

6

 

 

 

1

 

 

 

6.14

 

 

 

46,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2021

 

 

1,787,869

 

 

 

6

 

 

 

 

 

 

5.40

 

 

 

43,867

 

Exercised

 

 

(311,872

)

 

 

6

 

 

 

 

 

 

 

 

 

12,321

 

Outstanding at March 31, 2021

 

 

1,475,997

 

 

 

6

 

 

 

 

 

 

5.14

 

 

 

64,492

 

Exercisable at March 31, 2021

 

 

1,456,922

 

 

 

6

 

 

 

 

 

 

5.13

 

 

 

63,740

 

Options vested and expected to vest

 

 

1,475,997

 

 

 

6

 

 

 

 

 

 

5.14

 

 

 

64,492

 

 

Total shares outstanding from exercised options were 579,260 shares and 201,600 shares as of March 31, 2021 and March 31, 2020, respectively.

 

21


 

 

Common Stock Reserved for Future Issuances—The Company has reserved certain stock of its authorized but unissued common stock for possible future issuance in connection with the following:

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Warrants

 

 

 

 

 

650,590

 

Montrose 2013 Stock Incentive Plan

 

 

2,047,269

 

 

 

2,058,619

 

Montrose 2017 Stock Incentive Plan

 

 

3,944,750

 

 

 

1,057,785

 

Common stock reserved for future issuance

 

 

5,992,019

 

 

 

3,766,994

 

 

18. NET LOSS PER SHARE

Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during each period. The Redeemable Series A-1 Preferred Stock, which was outstanding prior to its redemption on July 27, 2020, and the Convertible and Redeemable Series A-2 Preferred Stock are considered a participating security during the applicable period. Net losses are not allocated to the Redeemable Series A-1 Preferred stockholders nor the Convertible and Redeemable Series A-2 stockholders, as they were not contractually obligated to share in the Company’s losses.

Diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common and dilutive common equivalent shares outstanding for the period using the treasury-stock method or the as-converted method. During the three months ended March 31, 2020, shares issuable in connection with the warrant options (Note 11) were considered outstanding common shares for purposes of calculating net loss per share since they did not contain any conditions that must be satisfied for the holder to exercise the warrant. Potentially dilutive shares are comprised of restricted stock and shares of common stock underlying stock options outstanding under the Plans and warrants (other than warrant options) to purchase common stock. During the three months ended March 31, 2021 and March 31, 2020, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss and potentially dilutive shares being anti-dilutive.

The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders of the Company:

 

 

 

Three Months Ended March 31,

 

(In thousands, except for net loss per share)

 

2021

 

 

2020

 

Net loss

 

$

(11,596

)

 

$

(41,248

)

Accretion of redeemable series A-1 preferred stock

 

 

 

 

 

(5,415

)

Convertible and redeemable series A-2 preferred stock dividend

 

 

(4,100

)

 

 

 

Net loss attributable to common stockholders – basic

   and diluted

 

 

(15,696

)

 

 

(46,663

)

Weighted-average common shares outstanding –

   basic and diluted

 

 

25,117

 

 

 

8,904

 

Net loss per share attributable to common stockholders –

   basic and diluted

 

$

(0.62

)

 

$

(5.24

)

 

The following equity shares were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive:

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Stock options

 

 

3,293,679

 

 

 

2,095,909

 

Restricted stock

 

 

26,201

 

 

 

19,059

 

Warrants

 

 

 

 

 

116,350

 

 

19. SEGMENT INFORMATION

The Company has three operating and reportable segments: Assessment, Permitting and Response, Measurement and Analysis and Remediation and Reuse. These segments are monitored separately by management for performance against budget and prior year and are consistent with internal financial reporting. The Company’s operating segments are organized based upon primary services provided, the nature of the production process, their type of customers, methods used to distribute the products and the nature of the regulatory environment.

22


 

Segment Adjusted EBITDA is the primary measure of operating performance for all three operating segments. Segment Adjusted EBITDA is the calculated Company’s Earnings before Interest, Tax, Depreciation and Amortization (“EBITDA”), adjusted to exclude certain transactions such as stock-based compensation, acquisition costs and fair value changes in financial instruments, amongst others. The Chief Operating Decision Maker (“CODM”) does not review segment assets as a measure of segment performance.

Corporate and Other includes costs associated with general corporate overhead (including executive, legal, finance, safety, human resources, marketing and IT related costs) that are not directly related to supporting operations. Overhead costs that are directly related to supporting operations (such as insurance, software, licenses, shared services and payroll processing costs) are allocated to the operating segments on a basis that reasonably approximates an estimate of the use of these services.

Segment revenues and Adjusted EBITDA consisted of the following:

 

 

 

Three Months Ended March 31,

 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

Segment

 

 

 

 

 

 

Segment

 

 

 

 

Segment

 

 

Adjusted

 

 

Segment

 

 

Adjusted

 

 

 

 

Revenues

 

 

EBITDA

 

 

Revenues

 

 

EBITDA

 

 

Assessment, Permitting and Response

 

$

75,262

 

 

$

15,804

 

 

$

4,530

 

 

$

1,442

 

 

Measurement and Analysis

 

 

33,440

 

 

 

4,860

 

 

 

36,440

 

 

 

7,379

 

 

Remediation and Reuse

 

 

25,115

 

 

 

2,481

 

 

 

20,061

 

 

 

2,107

 

 

Total Operating Segments

 

 

133,817

 

 

 

23,145

 

 

 

61,031

 

 

 

10,928

 

 

Corporate and Other

 

 

 

 

 

(6,345

)

 

 

 

 

 

(5,375

)

 

Total

 

$

133,817

 

 

$

16,800

 

 

$

61,031

 

 

$

5,553

 

 

 

Presented below is a reconciliation of the Company’s segment measure to loss before (expense) benefit from income taxes:

 

 

 

For the Three Months

Ended March 31,

 

 

 

 

2021

 

 

2020

 

 

Total

 

$

16,800

 

 

$

5,553

 

 

Interest expense, net

 

 

(2,688

)

 

 

(2,593

)

 

Income tax (expense) benefit

 

 

(2

)

 

 

3,152

 

 

Depreciation and amortization

 

 

(10,769

)

 

 

(7,560

)

 

Stock-based compensation

 

 

(1,805

)

 

 

(1,150

)

 

Start-up losses and investment in new services

 

 

(968

)

 

 

(379

)

 

Acquisition costs

 

 

(237

)

 

 

(1,307

)

 

Fair value changes in financial instruments

 

 

(602

)

 

 

(29,626

)

 

Fair value changes in business acquisitions contingent consideration

 

 

(11,064

)

 

 

 

 

Short term purchase accounting fair value adjustment

   to deferred revenue

 

 

 

 

 

(243

)

 

Initial public offering expense

 

 

 

 

 

(531

)

 

Discontinued services (i)

 

 

 

 

 

(6,417

)

 

Expenses related to financing transactions

 

 

(50

)

 

 

 

 

Other losses or expenses

 

 

(211

)

 

 

(147

)

 

Net loss

 

$

(11,596

)

 

$

(41,248

)

 

 

(i)During the first quarter of 2020, the Company determined to reduce the footprint of its environmental lab in Berkeley, California, and to exit its non-specialized municipal water engineering service line and its food waste biogas engineering service line. As a part of discontinuing service lines, the Company made the decision to book an additional bad debt reserve related to the uncertainty around the ability to collect on receivables related to these service lines (Note 3). It was determined that the discontinuation of these service lines did not represent a strategic shift that had (or will have) a major effect on the Company’s operations and financial results therefore did not meet the requirements to be classified as discontinued operations.

20. RELATED-PARTY TRANSACTIONS

The Company engaged a related party to provide Quality of Earnings reports on acquisition targets. The Company paid this related party approximately zero and $0.1 million during the three months ended March 31, 2021 and March 31, 2020, respectively for its services. This expense is included within selling, general and administrative expenses on the unaudited condensed consolidated

23


 

statements of operations. As of March 31, 2021 and December 31, 2020, the Company had no significant unpaid invoices to this related party, which would be/are included in accounts payable and other accrued liabilities on the unaudited condensed consolidated statements of financial position. The related party used by the Company is partially owned through investment vehicles controlled by certain members of the Company’s Board of Directors. The Company ceased using the services of this related party during 2020.

During the year ended December 31, 2020, the holder of the Redeemable Series A-1 Preferred Stock and Convertible and Redeemable A-2 Preferred Stock became a stockholder in the Company. On the redemption date of the Redeemable Series A-1 Preferred Stock (Note 15), the Company issued 1,786,739 shares of common stock as dividend payment. Additionally, this related party exercised its warrant options (Note 11), becoming the holder of 2,534,239 additional common shares.

21. DEFINED CONTRIBUTION PLAN

On January 1, 2014, the Company established the Montrose Environmental Group 401(k) Savings Plan (the “401(k) Savings Plan”). As of March 31, 2021 and December 31, 2020, plan participants may defer up to 85.0% of their eligible wages for the year, up to the Internal Revenue Service dollar limit and catch up contribution allowed by law. Prior to May 22, 2020, the Company provided employer matching contributions equal to 100.0% of the first 3.0% of the participant’s compensation and 50.0% of the participant’s elective deferrals that exceed 3.0% but do not exceed 4.0% of the participant’s compensation. Beginning on May 22, 2020, the Company temporarily ceased making employer contributions. Employer contributions were reinstated beginning on April 23, 2021. Employer contributions under the 401(k) Savings Plan for the three months ended March 31, 2021 and March 31, 2020 were zero and $0.8 million, respectively, and are included within selling, general, and administrative expenses on the unaudited condensed consolidated statements of operations.

22. SUBSEQUENT EVENTS   

Business Acquisitions—On April 1, 2021, the Company issued 539,607 shares of common stock valued at a price per share of $46.33 and paid in cash $25.0 million as additional consideration for the acquisition of CTEH pursuant to the 2020 earn-out provision of the transaction agreement.

On April 1, 2021, the Company issued 24,200 shares of common stock valued at a price per share of $44.81 and paid in cash $8.0 million as additional consideration for the acquisition of MSE pursuant to the purchase price true up and working capital surplus provision of the transaction agreement.

Debt—Effective April 27, 2021, the Company entered into a new Senior Secured Credit Agreement providing for a new $300.0 million credit facility comprised of a $175.0 million term loan and a $125.0 million revolving line of credit (the “2021 Credit Facility”), and used a portion of the proceeds from the 2021 Credit Facility to repay all amounts outstanding under the 2020 Credit Facility (Note 12). The 2021 revolving credit facility includes a $20.0 million sublimit for the issuance of letters of credit. Subject to certain exceptions, all amounts under the 2021 Credit Facility will become due on April 27, 2026. The company has the option to borrow incremental term loans or request an increase in the aggregate commitments under the revolving credit facility up to an aggregate amount of $150.0 million subject to the satisfaction of certain conditions.

The 2021 Credit Facility term loan must be repaid in quarterly installments and shall amortize at the following annualized rates beginning with the quarter ended December 31, 2021 with the remaining balance due and payable in full upon the five-year anniversary from the closing date:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization Table

 

Year 1

 

 

Year 2

 

 

Year 3

 

 

Year 4

 

 

Year 5

 

 

Term Loan

 

5.0

 

%

 

5.0

 

%

 

7.5

 

%

 

7.5

 

%

 

10.0

 

%

 

24


 

 

The 2021 Credit Facility term loan and the revolver bear interest subject to the Company’s leverage ratio and LIBOR as follows:

 

Pricing Tier

 

Net Leverage Ratio

 

Senior Credit Facilities

 

 

Commitment

Fee

 

Letter of Credit Fee

 

 

 

 

 

 

LIBOR

 

 

Base Rate

 

 

 

 

 

 

 

 

1

 

≥ 3.75x to 1.0

 

 

2.50

 

%

 

1.50

 

%

0.25

%

 

2.50

 

%

2

 

<3.75x to 1.0 but ≥ 3.25 to 1.0

 

 

2.25

 

 

 

1.25

 

 

0.23

 

 

2.25

 

 

3

 

<3.25 to 1.0 but ≥ 2.50 to 1.0

 

 

2.00

 

 

 

1.00

 

 

0.20

 

 

2.00

 

 

4

 

<2.50 to 1.0 but ≥ 1.75 to 1.0

 

 

1.75

 

 

 

0.75

 

 

0.15

 

 

1.75

 

 

5

 

<1.75 to 1.0

 

 

1.50

 

 

 

0.50

 

 

0.15

 

 

1.50

 

 

Additionally, the Company may receive an interest rate adjustment of up to 0.05% under the 2021 Credit Facility based on the Company’s performance against certain defined sustainability and environmental, social and governance related objectives.

The 2021 Credit Facility includes a number of covenants imposing certain restrictions on the Company’s business, as well as financial covenants requiring the Company to remain below a maximum total net leverage ratio of 4.25 times, which steps down to 4.00 times beginning with the fiscal quarter ending December 31, 2022 through and including the fiscal quarter ending September 30, 2023 and then to 3.75 times beginning with the fiscal quarter ending December 31, 2023, and a minimum fixed charge coverage ratio of 1.25 times. 

 

   

25


 

 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity, capital resources and other financial and operating information. We use words such as “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “position,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements in this filing. All of our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we are expecting, including:

 

our limited operating history;

 

our history of losses and ability to achieve profitability;

 

general global economic, business and other conditions, the cyclical nature of our industry and the significant fluctuations in events that impact our business;

 

the impact of the COVID-19 pandemic on our business operations and on local, national and global economies;

 

the parts of our business that depend on difficult to predict natural or manmade events and the fluctuations in our revenue and customer concentration as a result thereof;

 

the highly competitive nature of our business;

 

our ability to execute on our acquisition strategy and successfully integrate and realize benefits of our acquisitions;

 

our ability to promote and develop our brands;

 

our ability to maintain and expand our client base;

 

our ability to maintain necessary accreditations and other authorizations in varying jurisdictions;

 

significant environmental governmental regulation;

 

our ability to attract and retain qualified managerial and skilled technical personnel;

 

safety-related issues;

 

allegations regarding compliance with professional standards, duties and statutory obligations and our ability to provide accurate results;

 

the lack of formal long-term agreements with many of our clients;

 

our ability to successfully implement our new enterprise resource planning system;

 

our ability to adapt to changing technology, industry standards or regulatory requirements;

 

government clients and contracts;

 

our ability to maintain our prices and manage costs;

 

our ability to protect our intellectual property or claims that we infringe on the intellectual property rights of others;

 

laws and regulations regarding handling of confidential information;

 

any failure in or breach of our networks and systems;

 

our international operations;

 

product related risks;

 

environmental regulations and liabilities; and

 

additional factors discussed in our filings with the Securities and Exchange Commission, or the SEC.

26


 

 

The forward-looking statements in this Quarterly Report on Form 10-Q are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control, as well as the other factors described in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 24, 2021, or the 2020 Form 10-K. Further, many of these factors are, and may continue to be, amplified by the COVID-19 pandemic.

Additional factors or events that could cause our actual results to differ may also emerge from time to time, and it is not possible for us to predict all of them. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by any forward-looking statement and, therefore, you should not regard any forward-looking statement as a representation or warranty by us or any other person that we will successfully achieve the expectation, plan or objective expressed in such forward-looking statement in any specified time frame, or at all. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us speaks only as of the date on which we make it. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.

 

27


 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical audited and unaudited consolidated financial statements and related notes and other information included elsewhere in this filing and our other filings with the SEC, including our unaudited condensed consolidated financial statements and the accompanying notes as of and for the three months ended March 31, 2021 and 2020 included in Part I, Item 1. “Financial Statements” in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section entitled “Forward-Looking Statements”, and elsewhere in this filing and our other filings with the SEC.

Overview

Since our inception in 2012, our mission has been to help clients and communities meet their environmental goals and needs. Today, we have emerged as one of the fastest growing companies in a highly fragmented and growing $1.25 trillion global environmental industry.

Our Segments

We provide environmental services to our clients through three business segments—Assessment, Permitting and Response, Measurement and Analysis and Remediation and Reuse.

Assessment, Permitting and Response

Through our Assessment, Permitting and Response segment, we provide scientific advisory and consulting services to support environmental assessments, environmental emergency response, and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. Our technical advisory and consulting offerings include regulatory compliance support and planning, environmental, ecosystem and toxicological assessments and support during responses to environmental disruption. We help clients navigate regulations at the local, state, provincial and federal levels. In addition to environmental toxicology, and given our expertise in helping businesses plan for and respond to disruptions, our scientists and response teams have helped clients navigate their preparation for and response to the COVID-19 pandemic.

Measurement and Analysis

Through our Measurement and Analysis segment, our highly credentialed teams test and analyze air, water and soil to determine concentrations of contaminants as well as the toxicological impact of contaminants on flora, fauna and human health. Our offerings include source and ambient air testing and monitoring, leak detection and advanced analytical laboratory services such as air, storm water, wastewater and drinking water analysis.

Remediation and Reuse

Through our Remediation and Reuse segment, we provide clients with engineering, design, implementation and operations and maintenance services, primarily to treat contaminated water, remove contaminants from soil or create biogas from waste. We do not own the properties or facilities at which we implement these projects or the underlying liabilities, nor do we own material amounts of the equipment used in projects; instead, we assist our clients in designing solutions, managing projects and mitigating their environmental risks and liabilities.

These operating segments have been structured and organized to align with how we view and manage the business with the full lifecycle of our clients’ targeted environmental concerns and needs in mind. Within each segment, we cover similar service offerings, regulatory frameworks, internal operating structures and client types. Corporate activities not directly related to segment performance, including general corporate expenses, interest and taxes, are reported separately. For more information on each of our operating segments, see Item 1. “Business” in the 2020 Form 10-K.

COVID-19

We are closely monitoring the impact of the COVID-19 pandemic on our business, including the impact on our customers, employees and suppliers. While COVID-19 did not have a material adverse effect on our reported results, we did experience some changes to our business operations. The changes were primarily composed of client postponement of on-site environmental

28


 

compliance testing, delays in project start dates particularly within our Remediation and Reuse segment, and postponement or reformatting of scientific presentations and sales visits. We have also had small numbers of employees either exposed to or contract COVID-19 outside of the workplace. Exposed employees have been asked to quarantine per company protocols. To date, COVID-19 related quarantines have not had a material adverse effect on our reported results. We believe these COVID-19 impacts are temporary and accordingly, in the second quarter of 2020 we instituted temporary cost mitigation measures such as reducing non-billable time for a subset of our impacted workforce. We have now ended some of these cost containment measures. Some of these cost mitigation measures were reversed at the beginning of 2021, with the remaining measures expected to be fully reversed in the second quarter of 2021. Our businesses exposed to commercial food waste and non-specialized municipal water engineering projects also saw more significant disruptions and, as a result, in the first quarter of 2020 we exited those service lines as described further below. On the other hand, we have seen benefits from COVID-19 given client demand for CTEH’s toxicology and response services, which represented a meaningful revenue stream in the three months ended March 31, 2021, and that, once the pandemic subsides, we may not be able to replace in future periods. Although many parts of our business saw some impact from COVID-19, in the aggregate, our overall business benefitted from COVID-19 during the three months ended March 31, 2021, primarily as a result of COVID-19 response work performed by CTEH.

COVID-19 has had an impact on our historical seasonality trends given the various government stay at home or business closure orders staring in the second quarter of 2020. We have not experienced a significant slowdown in cash collections, and as a result cash flow from operations has not been materially adversely impacted. In addition, in the second quarter of 2021 we entered into a 2021 Credit Facility, replacing our 2020 Credit Facility, and as a result, increased borrowing capacity. We expect our sources of liquidity to be sufficient for our operating needs for the next twelve months. See “—Liquidity and Capital Resources.”

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was enacted. The CARES Act includes several significant provisions for corporations, including those pertaining to net operating losses, interest deductions and payroll tax benefits. We utilized certain of these provisions in 2020, including the deferral of the employer side social security payments for payroll for the eligible portion of the year. In total, we deferred approximately $5.0 million of 2020 payments to 2021 and 2022.

It is difficult to predict the future impact COVID-19 may have on our business, results of operations, financial position, or cash flows. The extent to which we may be impacted will depend largely on future and rapidly evolving developments, including new information on the severity of new strains, the roll-out and long-term efficacy of vaccines, and actions by various government authorities to contain the pandemic and mitigate its impact. We intend to closely monitor the impact of COVID-19 on our business and will respond as we believe is appropriate.

Key Factors that Affect Our Business and Our Results

Our operating results and financial performance are influenced by a variety of internal and external trends and other factors. Some of the more important factors are discussed briefly below.

Acquisitions

We have been, and expect to continue to be, an acquisitive company. Acquisitions have expanded our environmental service capabilities across all three segments, our access to technology, as well as our geographic reach in the United States, Canada and Australia. The table below sets forth the number of acquisitions completed, revenues generated by and the percentage of total revenues attributable to those acquisitions completed during the three months ended March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

Percentage

 

 

 

 

Acquisitions

 

Attributable

 

 

of

 

 

(revenues in thousands)

 

Completed

 

to Acquisitions

 

 

Revenues

 

 

Three months ended March 31, 2021

 

 

1

 

$

 

3,981

 

 

 

 

2.97

 

%

We did not acquire any companies during the three months ended March 31, 2020.

Revenues from acquired companies exclude intercompany revenues from revenue synergies realized between business lines within operating segments, as these are eliminated at the consolidated segment and Company level. We expect our revenue growth to continue to be driven in significant part by acquisitions.

As a result of our acquisitions, goodwill and other intangible assets represent a significant proportion of our total assets, and amortization of intangible assets has historically been a significant expense. Our historical financial statements also include other

29


 

acquisition-related costs, including costs relating to external legal support, diligence and valuation services and other transaction and integration-related matters. In addition, in any year gains and losses from changes in the fair value of earn-out related contingent consideration related to acquisitions could be significant. The amount of each for the three months ended March 31, was:

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2021

 

 

2020

 

Amortization expense

 

$

8,595

 

 

$

5,609

 

Acquisition-related costs

 

 

237

 

 

 

1,307

 

Fair value changes in business acquisitions

   contingent consideration

 

 

11,064

 

 

 

 

 

We expect that amortization of identifiable intangible assets and other acquisition-related costs, assuming we continue to acquire, will continue to be significant.

 

Additionally, we made a $50.0 million earn-out payment in April 2021 (50.0% of which was paid in the form of shares of our common stock) and may pay up to $30.0 million in earn-out payments in 2022 in connection with our CTEH acquisition. In connection with our most recent acquisition, MSE, we may make up to $6.2 million in aggregate purchase price true up and earn-out payments in 2022 and 2023. See Note 6 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

 

Organic Growth

We have grown organically and expect to continue to do so. We define organic growth as the change in revenues excluding revenues from acquisitions for the first twelve months following the date of acquisition and excluding revenues from businesses disposed of or discontinued. As a result of the significance of the CTEH acquisition to Montrose, and the potential annual volatility in CTEH’s revenues, we may also disclose organic growth combined with the annual organic revenue growth of CTEH, but excluding CTEH’s revenues from projects contributing more than $4.0 million of revenue. We expect to continue to disclose organic revenue growth with and without CTEH on an annual basis. Management uses organic growth as one of the means by which it assesses our results of operations. Organic growth is not, however, a measure of revenue growth calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should be considered in conjunction with revenue growth calculated in accordance with GAAP. We have grown organically and expect to continue to do so.

Discontinued Service Lines

Periodically, or when circumstances warrant, we evaluate the performance of our business services to ensure that performance and outlook are consistent with expectations. During the first quarter of 2020, as part of this evaluation, we determined to scale back operations of our environmental lab in Berkeley, California, and to exit our non-specialized municipal water engineering service line and our food-waste biogas engineering service line, collectively, the Discontinued Service Lines. The factors underlying these decisions were accelerated and amplified by the COVID-19 pandemic, which for example, has made the collection of commercial food waste used in biodigesters less consistent and delayed the approval or initiation of certain projects dependent on municipal or state funding. As a part of discontinuing these service lines, a process which was completed in the second quarter of 2020, we eliminated select personnel and, in the first quarter of 2020, booked an additional bad debt reserve related to the increased uncertainty around the ability to collect on receivables related to these service lines. Revenues from our non-specialized municipal water engineering service line and our food-waste biogas engineering, which are included in the results of our Remediation and Reuse segment, were zero and $1.0 million in the three months ended March 31, 2021 and March 31, 2020, respectively. Revenues from our Berkeley lab, which are included in the results of our Measurement and Analysis segment, were zero and $1.5 million in the three months ended March 31, 2021 and March 31, 2020, respectively. We no longer generate any revenues from the Discontinued Service Lines.

Revenue Mix

Our segments generate different levels of profitability and, accordingly, shifts in the mix of revenues between segments can impact our consolidated reported net income, operating margin, Adjusted EBITDA and Adjusted EBITDA margin from quarter to quarter and year to year. Inter-company revenues between business lines within segments have been eliminated. See Note 19 to our unaudited condensed consolidated financial statements included in Part 1, Item 1 “Financial Statements.”

 

30


 

 

Financing Costs

Financing costs, relating primarily to interest expense on our debt, continue to be a significant component of our results of operations. For the three months ended March 31, 2021 and March 31, 2020, we incurred interest expense of $2.7 million and $2.6 million, respectively.

On April 13, 2020, we entered into a new Credit Agreement providing for a $225.0 million credit facility comprised of a $175.0 million term loan and a $50.0 million revolving credit facility, the 2020 Credit Facility, and used the proceeds therefrom to repay in full all amounts outstanding under our prior senior secured credit facility. We incurred debt extinguishment costs of $1.4 million in connection with this refinancing transaction. Effective October 6, 2020, the Company amended its 2020 Credit Facility to provide for a reduction on the applicable interest rate on the term loan from LIBOR plus 5.0% with a 1.0% LIBOR floor to LIBOR plus 4.5% with a 1.0% LIBOR floor. The revolver interest rate remained unchanged.

On April 27, 2021, we entered into a new Credit Agreement, the 2021 Credit Facility, and repaid all amounts outstanding under the 2020 Credit Facility. The 2021 Credit Facility consists of a $175.0 million term loan and a $125.0 million revolving credit facility. The interest rate on the 2021 Credit Facility varies depending on leverage, with a minimum of LIBOR plus 1.5% and a maximum of LIBOR plus 2.5%.

As a result of the lower interest rates under the 2021 Credit Facility, we expect interest expense to be lower for the remainder of 2021 as compared to 2020 periods despite higher outstanding debt balances. We expect interest expense to remain a significant cost as we continue to leverage our credit facility to support our operations and future acquisitions.

See Notes 12 and 22 to our unaudited condensed consolidated financial statements included in Part 1, Item 1 “Financial Statements” and “Liquidity and Capital Resources.”

Corporate and Operational Infrastructure Investments

Our historical operating results reflect the impact of our ongoing investments in our corporate infrastructure to support our growth. We have made and expect to continue to make investments in our business platform that we believe have laid the foundation for continued growth. Investments in logistics, quality, risk management, sales and marketing, safety, human resources, research and development, finance and information technology and other areas enable us to support continued growth. These investments have allowed us to improve our operating margins.

Seasonality

Because demand for environmental services is not driven by specific or predictable patterns in one or more fiscal quarters, our business is better assessed based on yearly results. In addition, our operating results experience some quarterly variability. Excluding the impact of revenues and earnings from new acquisitions, and the temporary impact of COVID, we typically generate slightly lower revenues and lower earnings in the first and fourth quarters and higher overall revenues and earnings in the second and third quarters. Historically, quarterly variability has been driven by weather patterns, which generally impact our field-based teams’ ability to operate in the winter months. As we continue to grow and expand into new geographies and service lines, quarterly variability may deviate from historical trends.

Earnings Volatility

The acquisition of CTEH exposes us to potentially significant revenue and earnings fluctuations tied both to the timing of large environmental emergency response projects following an incident or natural disaster, and more recently, the benefit from COVID related work. We expect lower demand for COVID-19 related response services by CTEH after the second quarter of 2021. As a result, we may experience revenues and earnings in a quarter or year that are not indicative of future results.

31


 

Results of Operations

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

 

 

 

For the Three Months

Ended March 31,

 

(in thousands, except per share and percentage data)

 

2021

 

 

2020

 

Statements of operations data:

 

 

 

 

 

 

 

 

Revenues

 

$

133,817

 

 

$

61,031

 

Cost of revenues (exclusive of depreciation and amortization)

 

 

95,316

 

 

 

44,398

 

Selling, general and administrative expenses

 

 

25,000

 

 

 

20,519

 

Initial public offering expense

 

 

 

 

 

531

 

Fair value changes in business acquisitions

   contingent consideration

 

 

11,064

 

 

 

 

Depreciation and amortization

 

 

10,769

 

 

 

7,560

 

Loss from operations

 

$

(8,332

)

 

$

(11,977

)

Other expense

 

 

(574

)

 

 

(29,830

)

Interest expense, net

 

 

(2,688

)

 

 

(2,593

)

Loss before income taxes

 

 

(11,594

)

 

 

(44,400

)

Income tax expense (benefit)

 

 

2

 

 

 

(3,152

)

Net loss

 

$

(11,596

)

 

$

(41,248

)

Accretion of Series A-1 redeemable preferred stock

 

 

 

 

 

(5,415

)

Series A-2 dividend payment

 

 

(4,100

)

 

 

 

Net loss attributable to common stockholders

 

$

(15,696

)

 

$

(46,663

)

Weighted average number of shares (basic and diluted)

 

 

25,117

 

 

 

8,904

 

Loss per share

 

$

(0.62

)

 

$

(5.24

)

Other financial data:

 

 

 

 

 

 

 

 

Operating margin(1)

 

 

(6.2

)%

 

 

(19.6

)%

Adjusted EBITDA(2)

 

$

16,800

 

 

$

5,553

 

Adjusted EBITDA margin(2)

 

 

12.6

%

 

 

9.1

%

 

 

(1)

Operating margin represents loss from operations as a percentage of revenues.

 

(2)

Non-GAAP measure. See “—Non-GAAP Financial Information” for a discussion of non-GAAP measures and a reconciliation thereof to the most directly comparable GAAP measure.

 

Revenues

For the three months ended March 31, 2021, we had revenues of $133.8 million, an increase of $72.8 million, or 119.3% over the three months ended March 31, 2020. Excluding revenues from Discontinued Service Lines of zero and $2.5 million in the three months ended March 31, 2021 and March 31, 2020, respectively, revenues increased $75.3 million or 128.7%. The $75.3 million increase in revenues was driven by acquisitions, which contributed $74.5 million during the three months ended March 31, 2021, and organic growth. All segments continue to be impacted by COVID-19 in 2021 compared to Q1 2020 which was mostly prior to the onset of the pandemic. COVID-19 related project delays and other impacts were offset by COVID-19 response work in our Assessment, Permitting and Response segment from the CTEH acquisition. Revenue by segment and as a percentage of total revenues was as follows:

 

 

 

Three Months Ended March 31,

 

 

2021

 

2020

(revenue in thousands)

 

Revenues

 

 

% of Total Revenues

 

Revenues

 

 

% of Total Revenues

Assessment, Permitting and

   Response

 

$

 

75,262

 

 

 

56.2

 

%

 

$

 

4,530

 

 

 

7.4

 

%

Measurement and Analysis

 

 

 

33,440

 

 

 

25.0

 

 

 

 

 

36,440

 

 

 

59.7

 

 

Remediation and Reuse

 

 

 

25,115

 

 

 

18.8

 

 

 

 

 

20,061

 

 

 

32.9

 

 

 

See “—Segment Results of Operations” below.

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Cost of Revenues

Cost of revenues consists of all direct costs required to provide services, including fixed and variable direct labor costs, equipment rental and other outside services, field and lab supplies, vehicle costs and travel-related expenses. Variable costs of revenues generally follow the same seasonality trends as revenue, while fixed costs tend to change primarily as a result of acquisitions.

For the three months ended March 31, 2021, cost of revenues was $95.3 million or 71.2% of revenues, and was comprised of direct labor of $36.1 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $41.0 million, field supplies, testing supplies and equipment rental of $11.1 million, project-related travel expenses of $5.1 million and other direct costs of $2.0 million. For the three months ended March 31, 2020, cost of revenues was $44.4 million or 72.7% of revenues, and was comprised of direct labor of $27.4 million, outside services (including construction, laboratory, shipping and freight and other outside services) of $9.3 million, field supplies, testing supplies and equipment rental of $4.3 million, project-related travel expenses of $1.6 million and other direct costs of $1.8 million.

For the three months ended March 31, 2021, cost of revenues as a percentage of revenue fell 1.5% from the three months ended March 31, 2020, as a result of lower labor as a percentage of revenue. This decline was primarily attributable to a shift in roles and responsibilities of certain employees from providing direct field support to providing more specialized, multi-location overhead support functions (such as accounting, HR and management) as result of acquisitions and growth in our business. These changes in employee roles resulted in a decrease in labor costs recorded as cost of revenues and a corresponding increase in labor costs recorded as selling, general and administrative expenses in the current quarter.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of general corporate overhead, including executive, legal, finance, safety, risk management, human resource, marketing and information technology related costs, as well as indirect operational costs of labor, rent, insurance and stock-based compensation.

For the three months ended March 31, 2021, selling, general and administrative expenses were $25.0 million, an increase of $4.5 million or 21.8% versus the three months ended March 31, 2020, of which $6.3 million was from selling, general and administrative expenses pertaining to companies we acquired subsequent to the first quarter of 2020, an increase in public company related costs of $1.0 million, as well as the impact of the shift of employee roles and responsibilities as described above, and an increase in investments in corporate infrastructure (primarily sales and marketing, finance, administrative, IT, legal and human resources). These increases were partially offset by a decrease in bad debt of $5.8 million, primarily related to the 2020 Discontinued Service Lines and a decrease in acquisition related costs of $1.1 million.

For the three months ended March 31, 2021, selling, general and administrative expense was comprised of indirect labor of $13.9 million, facilities costs of $3.5 million, stock-based compensation of $1.2 million, acquisition-related costs of $0.2 million, bad debt expense of $0.5 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $5.7 million.

For the three months ended March 31, 2020, selling, general and administrative expenses were $20.5 million, and were comprised of indirect labor of $5.9 million, facilities costs of $2.9 million, stock-based compensation of $0.7 million, acquisition-related costs of $1.3 million, bad debt expense of $6.3 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $3.4 million.

Initial Public Offering Expense

Initial public offering expense for the three months ended March 31, 2021 and March 31, 2020, was zero and $0.5 million, respectively, and represented expenses incurred to prepare for the initial public offering.

Fair Value Changes in Business Acquisitions Contingent Consideration

For the three months ended March 31, 2021, fair value changes in business acquisitions contingent consideration were $11.1 million versus zero for the three months ended March 31, 2020. The increase was primarily driven by fair value adjustments to contingent consideration associated with CTEH’s earn-out. See Note 6 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended March 31, 2021, was $10.8 million and was comprised of amortization of finite lived intangibles of $8.6 million, arising as a result of our acquisition activity, and depreciation of property and equipment of $2.2 million. Depreciation and amortization expense for the three months ended March 31, 2020, was $7.6 million and

33


 

was comprised of amortization of finite lived intangibles of $5.6 million and depreciation of property and equipment of $2.0 million. The increase in both depreciation and amortization for the three months ended March 31, 2021 versus the three months ended March 31, 2020, was primarily a result of acquisitions.

Other Expense

Other expense for the three months ended March 31, 2021 of $0.6 million was driven by fair value adjustments related to the Series A-2 preferred stock conversion option. Other expense of $29.8 million for the three months ended March 31, 2020 was driven primarily by fair value adjustments related to the Series A-1 preferred stock contingent put option.  See Notes 15 and 16 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”

Interest Expense, Net

Interest expense, net incurred in the three months ended March 31, 2021, was $2.7 million, compared to $2.6 million for the three months ended March 31, 2020. The increase in interest expense was driven by higher outstanding debt, partially offset by lower average interest rates under the 2020 Credit Facility. See Note 12 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

Income Taxes Expense (Benefit)

Income tax expense was not material during the three months ended March 31, 2021, compared to an income tax benefit of $3.2 million for the three months ended March 31, 2020.

Segment Results of Operations

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

 

 

 

Three Months Ended March 31,

 

 

 

 

2021

 

 

 

2020

 

 

(in thousands)

 

Segment Revenues

 

 

Segment

Adjusted

EBITDA(1)

 

 

Segment

Adjusted

EBITDA

Margin(2)

 

 

 

Segment Revenues

 

 

Segment

Adjusted

EBITDA(1)

 

 

Segment

Adjusted

EBITDA

Margin(2)

 

 

Assessment, Permitting and Response

 

$

75,262

 

 

$

15,804

 

 

 

21.0

 

%

 

$

4,530

 

 

$

1,442

 

 

 

31.8

 

%

Measurement and Analysis

 

 

33,440

 

 

 

4,860

 

 

 

14.5

 

 

 

 

36,440

 

 

 

7,379

 

 

 

20.2

 

 

Remediation and Reuse

 

 

25,115

 

 

 

2,481

 

 

 

9.9

 

 

 

 

20,061

 

 

 

2,107

 

 

 

10.5

 

 

Total Operating Segments

 

$

133,817

 

 

$

23,145

 

 

 

17.3

 

%

 

$

61,031

 

 

$

10,928

 

 

 

17.9

 

%

Corporate and Other

 

 

 

 

 

 

(6,345

)

 

n/a

 

 

 

 

 

 

 

 

(5,375

)

 

n/a

 

 

 

(1)

For purposes of evaluating segment profit, the Company’s chief operating decision maker reviews Segment Adjusted EBITDA as a basis for making the decisions to allocate resources and assess performance. See Note 19 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

(2)

Represents Segment Adjusted EBITDA as a percentage of revenues.

34


 

Revenues

Assessment, Permitting and Response segment revenues for the three months ended March 31, 2021 were $75.3 million, compared to $4.5 million for the three months ended March 31, 2020. The increase was driven by the acquisition of CTEH in the second quarter of 2020, which expanded our product portfolio and our scientific and technical advisory services footprint. CTEH benefited from COVID-19 related response work performed in the quarter ended March 31, 2021.

Measurement and Analysis segment revenues for the three months ended March 31, 2021 were $33.4 million, a decrease of $3.0 million or 8.2% compared to revenues for the three months ended March 31, 2020 of $36.4 million. The decrease was partially driven by a decline in revenues from Discontinued Service Lines. Revenues from Discontinued Service Lines in the Measurement and Analysis segment were zero and $1.5 million for the three months ended March 31, 2021 and March 31, 2020, respectively. Excluding revenues from Discontinued Service Lines, revenues decreased $1.5 million or 4.3%, driven by expected seasonality, the negative impact of COVID in the current year, as well as the timing of projects in the current year versus the prior year.

Remediation and Reuse segment revenues for the three months ended March 31, 2021 were $25.1 million, an increase of $5.0 million or 25.2% compared to revenues for the three months ended March 31, 2020 of $20.1 million. Revenues from Discontinued Service Lines were $1.0 million for the three months ended March 31, 2020. Excluding revenues from Discontinued Service Lines, revenues increased $6.0 million or 31.4%. This $6.0 million increase was primarily driven by $4.0 million from the acquisition of MSE, which closed on January 4, 2021, and organic growth.

Segment Adjusted EBITDA

Assessment, Permitting and Response Segment Adjusted EBITDA was $15.8 million for the three months ended March 31, 2021, compared to $1.4 million for the three months ended March 31, 2020. For the three months ended March 31, 2021 and March 31, 2020, Segment Adjusted EBITDA margin was 21.0% and 31.8%, respectively. The increase in Segment Adjusted EBITDA was primarily a result of the acquisition of CTEH in the second quarter of 2020. The decline in Segment Adjusted EBITDA margin is as a result of lower margin COVID response work performed by CTEH.

Measurement and Analysis Segment Adjusted EBITDA for the three months ended March 31, 2021 was $4.9 million, a decrease of $2.5 million compared to Segment Adjusted EBITDA for the three months ended March 31, 2020 of $7.4 million. For the three months ended March 31, 2021 Segment Adjusted EBITDA margin was 14.5% compared to 20.2% for the three months ended March 31, 2020. The decline in Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was primarily a result of lower revenues due to COVID-19 and business mix.

Remediation and Reuse Segment Adjusted EBITDA for the three months ended March 31, 2021 was $2.5 million, an increase of $0.4 million compared to Segment Adjusted EBITDA for the three months ended March 31, 2020 of $2.1 million. For the three months ended March 31, 2021 Segment Adjusted EBITDA margin was 9.9% compared to 10.5% in the three months ended March 31, 2020. The increase in Segment Adjusted EBITDA was primarily a result of higher revenues. The slight decline in Segment Adjusted EBITDA margin was a result of business mix and continued investment in the segment.

Corporate and other costs were $6.3 million for the three months ended March 31, 2021 compared to $5.4 million for the three months ended March 31, 2020. The cost increase was driven by public company related costs, higher recruiting costs and higher IT security and infrastructure investments, partially offset by a decrease in bad debt expense of $0.3 million.

Liquidity and Capital Resources

Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and other sources, including availability under our credit facility, and their sufficiency to fund our operating and investing activities.

Our principal sources of liquidity have been borrowings under our current and prior credit facilities, other borrowing arrangements, proceeds from the issuance of preferred stock and cash generated by operating activities. Historically, we have financed our operations and acquisitions from a combination of cash generated from operations, periodic borrowings under senior secured credit facilities, other prior secured and unsecured borrowings and proceeds from the issuance of common and preferred stock. Our primary cash needs are for day to day operations, to fund working capital requirements, to fund our acquisition strategy and any related cash earn-out obligations, to pay interest and principal on our indebtedness and dividends on our Series A-2 preferred stock, and to make capital expenditures. Additionally, the CTEH acquisition agreement includes an earn-out provision that provides for the payment of contingent consideration based on CTEH’s 2020 and 2021 results in an aggregate amount not to exceed $80.0 million, with each payment equal to a specified multiple of CTEH’s EBITDA for the relevant year in excess of specified targets. Earn-out

35


 

payments in respect of fiscal years 2020 and 2021 are capped at $50.0 million and $30.0 million, respectively. We made a $50.0 million earn-out payment, 50.0% in cash and 50.0% in shares of common stock, in April 2021. Any payment in respect of 2021 will be payable in cash. See Note 6 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”

We expect to continue to finance our liquidity requirements, including any cash earn-out payments that may be required in connection with acquisitions, through cash generated from operations and borrowings under our credit facility. We believe these sources will be sufficient to fund our cash needs for the next twelve months. See “—COVID-19” above for a discussion of the impact of the pandemic on our liquidity.

Cash Flows

The following table summarizes our cash flows for the periods presented:

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2021

 

 

2020

 

Consolidated Statement of Cash Flows Data:

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$

(13,913

)

 

$

(8,978

)

Net cash used in investing activities

 

 

(7,398

)

 

 

(1,660

)

Net cash (used in) provided by financing activities

 

 

(3,087

)

 

 

5,238

 

Change in cash, cash equivalents and restricted cash

 

$

(24,398

)

 

$

(5,400

)

 

Operating Activities

Cash flows from operating activities can fluctuate from period-to-period as earnings, working capital needs and the timing of payments for contingent consideration, taxes, bonus payments and other operating items impact reported cash flows.

 

For the three months ended March 31, 2021, net cash used in operating activities was $13.9 million, a decrease of $4.9 million, when compared to net cash used in operating activities of $9.0 million for the three months ended March 31, 2020. This decrease in cash flows from operating activities in the three months ended March 31, 2021 primarily reflects an increase in change in working capital of $18.6 million driven by revenue growth, higher interest payments of $0.8 million, as well as higher taxes paid of $0.2 million, partially offset by higher earnings before non-cash items, including bad debt, depreciation and amortization, stock-based compensation expense and fair value adjustments of $12.7 million, lower acquisition related costs of $1.1 million, lower cloud computing costs of $0.6 million (related to the implementation of new ERP and CRM (Customer Relationship Management) systems) and lower non-capitalizable IPO costs of $0.5 million, when compared to the prior year.

 

Working capital increased by $27.1 million in the three months ended March 31, 2021, primarily due to an increase in accounts receivable and contract assets of $29.0 million (as a result of significantly higher revenues in the quarter ended March 31, 2021 when compared to the quarter ended December 31, 2020), offset by an increase in accounts payable and accrued payroll and benefits of $1.1 million, as compared to an increase in working capital of $8.5 million in the three months ended March 31, 2020, which was driven by a decrease in accounts payable and accrued payroll and benefits of $7.5 million.

Investing Activities

For the three months ended March 31, 2021, net cash used in investing activities was $7.4 million, primarily driven by cash paid for the acquisition of MSE, net of cash acquired, of $6.3 million, as well as purchases of property and equipment for cash consideration of $1.1 million.

 

For the three months ended March 31, 2020, net cash used in investing activities was $1.7 million, primarily driven by purchases of property and equipment for cash consideration of $1.6 million.

Financing Activities

For the three months ended March 31, 2021, net cash used in financing activities was $3.1 million. Cash used in financing activities was driven by the payment of the quarterly dividend on the Series A-2 preferred stock of $4.1 million, the repayment of capital leases of $0.6 million, and term loan amortization payments of $0.5 million related to our 2020 credit facility, partially offset by proceeds received from the exercise of stock options of $2.2 million.

36


 

 

For the three months ended March 31, 2020, net cash provided by financing activities was $5.2 million. Cash provided by financing activities was driven by a $13.2 million increase in net borrowings under our credit facility, partially offset by the payment of acquisition-related contingent consideration of $4.7 million, an amortization payment of $1.3 million related to our term loan under our prior senior secured credit facility, the repayment of capital leases of $0.7 million, and the payment of debt issuance costs of $0.1 million.

Credit Facilities

2021 Credit Facility

On April 27, 2021, we entered into a new Senior Secured Credit Agreement (the “2021 Credit Facility”) providing for a new $300.0 million credit facility comprised of a $175.0 million term loan and a $125.0 million revolving credit facility, and used a portion of the proceeds to repay all amounts outstanding under the 2020 Credit Facility. The 2021 revolving credit facility includes a $20.0 million sublimit for the issuance of letters of credit. Subject to certain exceptions, all amounts under the 2021 Credit Facility will become due on April 27, 2026. We have the option to borrow incremental term loans or request an increase in the aggregate commitments under the revolving credit facility up to an aggregate amount of $150.0 million subject to the satisfaction of certain conditions.

The 2021 Credit Facility term loan must be repaid in quarterly installments and shall amortize at the following annualized rates beginning with the quarter ended December 31, 2021 with the remaining balance due and payable in full upon the five-year anniversary from the closing date:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization Table

 

Year 1

 

 

Year 2

 

 

Year 3

 

 

Year 4

 

 

Year 5

 

 

Term Loan

 

5.0

 

%

 

5.0

 

%

 

7.5

 

%

 

7.5

 

%

 

10.0

 

%

The 2021 Credit Facility term loan and the revolver bear interest subject to the Company’s leverage ratio and LIBOR as follows:

Pricing Tier

 

Consolidated

Leverage Ratio

 

Senior Credit Facilities

LIBOR

 

 

Senior Credit Facilities

Base Rate

 

 

Commitment

Fee

 

 

Letter of Credit Fee

 

 

1

 

≥ 3.75 to 1.0

 

 

2.50

 

%

 

1.50

 

%

 

0.25

 

%

 

2.50

 

%

2

 

< 3.75 to 1.0 but ≥ 3.25 to 1.0

 

 

2.25

 

 

 

1.25

 

 

 

0.23

 

 

 

2.25

 

 

3

 

<3.25 to 1.0 but ≥ 2.50 to 1.0

 

 

2.00

 

 

 

1.00

 

 

 

0.20

 

 

 

2.00

 

 

4

 

<2.50 to 1.0 but ≥ 1.75 to 1.0

 

 

1.75

 

 

 

0.75

 

 

 

0.15

 

 

 

1.75

 

 

5

 

<1.75 to 1.0

 

 

1.50

 

 

 

0.50

 

 

0.15

 

 

 

1.50

 

 

 

Additionally, we may receive an interest rate adjustment of up to 0.05% under the 2021 Credit Facility based on our performance against certain defined sustainability and environmental, social and governance related objectives.

Our obligations under the 2021 Credit Facility are guaranteed by certain of our existing and future direct and indirect subsidiaries, and such obligations are secured by substantially all of our assets. The 2021 Credit Facility includes a number of covenants imposing certain restrictions on our business, including, among other things, restrictions on our ability to incur indebtedness, prepay or amend other indebtedness, create liens, make certain fundamental changes including mergers or dissolutions, pay dividends and repurchase or make other payments in respect of capital stock, make certain investments, sell assets, change our lines of business, enter into transactions with affiliates and other corporate actions. The 2021 Credit Facility also includes financial covenants requiring us to remain below a maximum total net leverage ratio of 4.25 times, which steps down to 4.00 times beginning with the quarter ending December 31, 2022 through and including the quarter ending September 30, 2023 and then to 3.75 times beginning with the quarter ending December 31, 2023 (provided that, subject to certain requirements, the maximum net leverage ratio may be increased by 0.50:1.00, not to exceed 4.25:1.00, for a period of four consecutive fiscal quarters in connection with certain permitted acquisitions), and a minimum fixed charge coverage ratio of 1.25 times.

The 2021 Credit Facility contains a mandatory prepayment feature upon a number of events, including with the proceeds of certain asset sales and proceeds from the issuance of any debt.

See Note 22 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.

37


 

2020 Credit Facility

On April 13, 2020, we entered into a Unitranche Credit Agreement (the “2020 Credit Facility”) providing for $225.0 million credit facility comprised of a $175.0 million term loan and a $50.0 million revolving credit facility, and used a portion of the proceeds from the 2020 Credit Facility to repay all amounts outstanding under the Prior Senior Secured Credit Facility. The 2020 Credit Facility would have matured on the earliest of (a) April 13, 2025 and (b) so long as our Series A-2 preferred stock had not been redeemed in full or otherwise not converted into common stock of Montrose, the date that was 180 days before the Series A-2 preferred equity mandatory redemption date, unless prior to such date, the Series A-2 preferred equity mandatory redemption date had been extended to a date not earlier than one hundred eighty (180) days after April 13, 2025.

Initially, the term loan bore interest at a rate of LIBOR plus 5.0% (subject to a 1.0% LIBOR floor) or the base rate plus 4.0%. Effective October 6, 2020, we amended the 2020 credit facility to provide for a reduction on the applicable interest rate on the term loan from LIBOR plus 5.0% with a 1.0% LIBOR floor to LIBOR plus 4.5% with a 1.0% LIBOR floor. The revolver bore interest at a rate of LIBOR plus 3.5% or the base rate plus 2.5%. The revolver was also subject to an unused commitment fee of 0.35%.

The term loan began amortizing quarterly with fiscal quarter ending September 30, 2020, with a required repayment of (a) $0.5 million for fiscal quarter ending September 30, 2020 and each other fiscal quarter through and including June 30, 2021, (b) $1.1 million for fiscal quarter ending September 30, 2021 and each other fiscal quarter through and including June 30, 2022, and (c) $1.6 million for each fiscal quarter ending thereafter.

The 2020 Credit Facility also contained financial covenants requiring us to remain below a maximum consolidated total leverage ratio of 4.25 times, which stepped down to 4.00 times beginning December 31, 2021 and then to 3.75 times beginning December 31, 2022, and a minimum consolidated fixed charge coverage ratio of 1.25 times. As of March 31, 2021, the Company’s leverage ratio, which included the impact of contingent consideration payable in cash, was 3.1 times. The weighted average interest rate on the 2020 Credit Facility as of March 31, 2021 was 5.5%. We were in compliance with all applicable covenants under the 2020 Credit Facility as of March 31, 2021.

See Note 12 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

Prior Credit Facility

Our Prior Senior Secured Credit Facility most recently amended and restated in July 2019 (the “Prior Credit Facility”) consisted of a $50.0 million term loan and a $130.0 million revolving credit facility.

Borrowings under the Prior Credit Facility bore interest at either (i) LIBOR plus the applicable margin or (ii) a base rate (equal to the highest of (a) the federal funds rate plus 0.5%, (b) Bank of America, N.A.’s prime rate and (c) the Eurocurrency Rate, which is based on LIBOR, (using a one-month period plus 1.0%), plus the applicable margin, as we elected). The applicable margin meant a percentage per annum determined in accordance with the following table:

 

Pricing Tier

 

Consolidated

Leverage Ratio

 

Commitment

Fee

 

 

Eurodollar

Rate Loans

and LIBOR

Letter of

Credit Fee

 

 

Daily

Floating

Rate Loans

 

 

Rate

Loans

 

1

 

> 3.75 to 1.0

 

 

0.50

%

 

 

4.00

%

 

 

4.00

%

 

 

3.00

%

2

 

≤ 3.75 to 1.0 but > 3.00 to 1.0

 

 

0.50

 

 

 

3.50

 

 

 

3.50

 

 

 

2.50

 

3

 

≤ 3.00 to 1.0 but > 2.25 to 1.0

 

 

0.40

 

 

 

3.00

 

 

 

3.00

 

 

 

2.00

 

4

 

< 2.25 to 1.0

 

 

0.30

 

 

 

2.50

 

 

 

2.50

 

 

 

1.50

 

 

The weighted average interest rate on the Prior Credit Facility as of March 31, 2020 was 4.95%. All amounts outstanding under the Prior Senior Secured Credit Facility were repaid on April 13, 2020.

See Note 12 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

Series A-1 Preferred Stock

On October 19, 2018, we issued 12,000 shares of our Series A-1 preferred stock. The Series A-1 preferred stock accrued dividends quarterly at an annual rate of 15.0% with respect to any dividends paid in cash and at an annual rate of 14.2%, compounded quarterly with respect to dividends that are accrued. In the event of a redemption, a holder was guaranteed a minimum of either two or three years of dividends depending on the nature of the redemption. As of March 31, 2020, we were subject to a maximum

38


 

consolidated total leverage ratio, including the outstanding principal and accrued dividend on the Series A-1 preferred stock, of 10.0 times as of the end of any fiscal quarter until maturity. We were in compliance with the covenants as of March 31, 2020.

On July 27, 2020, we redeemed in full the Series A-1 preferred stock, including the guaranteed minimum two-year dividend. We used $131.8 million of the IPO proceeds and 1,786,739 shares of common stock to redeem all outstanding shares of the redeemable Series A-1 preferred stock.

See Note 15 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

Series A-2 Preferred Stock

On April 13, 2020, we issued 17,500 shares of the Series A-2 preferred stock with a par value of $0.0001 per share and a warrant to purchase common stock, in exchange for $175.0 million. Prior to the completion of the IPO, each share of Series A-2 preferred stock accrued dividends at the rate of 15.0% per annum with respect to dividends that were paid in cash, and 14.2% per annum, with respect to dividends that accrued and compounded, resulting in an annual dividend rate of 15.0%, and 9.0% per annum after the IPO. Following the completion of the IPO, the Series A-2 preferred stock does not mature or have a cash repayment obligation; however, it is redeemable at our option. The Series A-2 preferred stock becomes convertible into our common stock beginning on the four-year anniversary of the Series A-2 preferred stock issuance. Upon the four-year anniversary of the issuance, holders of Series A-2 preferred stock may convert up to $60.0 million of such shares into our common stock at a conversion rate discounted to 85.0% of the volume weighted average trading value, with the permitted amount of Series A-2 preferred stock to be converted increasing at each subsequent anniversary of the issuance until the sixth anniversary, after which all of the Series A-2 preferred stock may be converted at the holder’s option. Following the completion of the IPO and redemption of the Series A-1 preferred stock on July 27, 2020 with a portion of the proceeds therefrom and newly issued shares of common stock, the Series A-2 preferred stock dividend rate changed to 9.0% per annum with required quarterly cash payments. If permitted under our existing debt facilities, we must pay the Series A-2 preferred stock dividend in cash each quarter.

With respect to any redemption of any share of the Series A-2 preferred stock prior to April 13, 2023, we are subject to a make whole penalty in which the holder is guaranteed at least three years of dividend payments on the redeemed amount.

See Note 16 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

Off-Balance Sheet Arrangements

During the period presented, we did not have, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our 2020 Form 10-K includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no material changes to those critical accounting policies as disclosed therein.

JOBS Act Accounting Election

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

NON-GAAP Financial Information

In addition to our results under GAAP, we also present in this Quarterly report on Form 10-Q other supplemental financial measures of financial performance that are not required by, or presented in accordance with, GAAP, including Adjusted EBITDA and Adjusted EBITDA margin. We calculate Adjusted EBITDA as net income (loss) before interest expense, income tax expense (benefit) and depreciation and amortization, adjusted for the impact of certain other items, including stock-based compensation expense and acquisition-related costs, as set forth in greater detail in the table below. Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of revenues for a given period.

39


 

Adjusted EBITDA and Adjusted EBITDA margin are two of the primary metrics used by management to evaluate our financial performance and compare it to that of our peers, evaluate the effectiveness of our business strategies, make budgeting and capital allocation decisions and in connection with our executive incentive compensation. These measures are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. Further, we believe they are helpful in highlighting trends in our operating results because they allow for more consistent comparisons of financial performance between periods by excluding gains and losses that are non-operational in nature or outside the control of management, as well as items that may differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments.

These non-GAAP measures do, however, have certain limitations and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP. Our presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items for which we may make adjustments. In addition, Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similarly titled measures used by other companies in our industry or across different industries, and other companies may not present these or similar measures. Management compensates for these limitations by using these measures as supplemental financial metrics and in conjunction with our results prepared in accordance with GAAP. We encourage investors and others to review our financial information in its entirety, not to rely on any single measure and to view Adjusted EBITDA and Adjusted EBITDA margin in conjunction with the related GAAP measures.

The following is a reconciliation of our net loss to Adjusted EBITDA:

 

 

 

For the Three Months

Ended March 31,

 

(in thousands)

 

2021

 

 

2020

 

Net loss

 

$

(11,596

)

 

$

(41,248

)

Interest expense

 

 

2,688

 

 

 

2,593

 

Income tax expense (benefit)

 

 

2

 

 

 

(3,152

)

Depreciation and amortization

 

 

10,769

 

 

 

7,560

 

EBITDA

 

$

1,863

 

 

$

(34,247

)

Stock-based compensation (1)

 

 

1,805

 

 

 

1,150

 

Start-up losses and investment in new services (2)

 

 

968

 

 

 

379

 

Acquisition costs (3)

 

 

237

 

 

 

1,307

 

Fair value changes in financial instruments (4)

 

 

602

 

 

 

29,626

 

Expenses related to financing transactions (5)

 

 

50

 

 

 

 

Fair value changes in business acquisitions

   contingent consideration (6)

 

 

11,064

 

 

 

 

Short term purchase accounting fair value adjustment

   to deferred revenue (7)

 

 

 

 

 

243

 

IPO expense (8)

 

 

 

 

 

531

 

Discontinued service lines and closing of Berkley

   lab (9)

 

 

 

 

 

6,417

 

Other losses and expenses(10)

 

 

211

 

 

 

147

 

Adjusted EBITDA

 

$

16,800

 

 

$

5,553

 

 

(1)

Represents non-cash stock-based compensation expenses related to option awards issued to employees and restricted stock grants issued to directors.

(2)

Represent start-up losses related to losses incurred on (i) the expansion of lab testing methods and lab capacity, including into new geographies, (ii) expansion of our Remediation and Consulting services and (iii) expansion into Europe in advance of projects driven by new regulations.

(3)

Includes financial and tax diligence, consulting, legal, valuation, accounting and travel costs and acquisition-related incentives related to our acquisition activity.

(4)

Amounts relate to the change in fair value of the embedded derivatives and warrant option attached to the Series A-1 preferred stock and the Series A-2 preferred stock.

(5)

Amounts represent non-capitalizable expenses associated with refinancing and amending our debt facilities.

(6)

Reflects the difference between the expected settlement value of acquisition related earn-out payments at the time of the closing of acquisitions and the expected (or actual) value of earn-outs at the end of the relevant period.

(7)

Purchase accounting fair value adjustment to deferred revenue represents the impact of the fair value adjustment to the carrying value of deferred revenue as of the date of acquisition of ECT2.

(8)

Represents expenses incurred by us to prepare for our initial public offering, as well as costs from IPO-related bonuses.

(9)

Represents losses from the Discontinued Service Lines and the Berkeley lab.

(10)

Represents non-operational charges incurred as a result of lease abandonments and non-capitalizable costs related to the implementation of a new ERP.

40


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

We have market risk exposure arising from changes in interest rates on our credit facility, which bears interest at rates that are benchmarked against LIBOR. Based on our overall interest rate exposure to variable rate debt outstanding as of March 31, 2021, a 1.0% increase in interest rates above the 1.0% LIBOR floor on the term loan would increase annual income (loss) before income taxes by approximately $1.7 million. Due to the 1.0% LIBOR floor under the terms of the term loan, and the LIBOR rate of 0.1% in effect on the revolver at March 31, 2021, any decrease in LIBOR rates would have had a de minimis benefit to annual income (loss) before income taxes.

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial. We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation in the future.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of March 31, 2021, the end of the period covered by this Quarterly Report on Form 10-Q.  Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2021, the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level.

Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our system of internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed or operated, can provide only reasonable, but not absolute, assurance that the objectives of the system of internal control are met. The design of our control system reflects the fact that there are resource constraints, and that the benefits of such control system must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control failures and instances of fraud, if any, within the Company have been detected. These inherent limitations include 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 intentional acts of individuals, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurance that the design of any particular control will always succeed in achieving its objective under all potential future conditions.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we are subject to various legal proceedings that arise in the normal course of our business activities, including those involving labor and employment, anti-discrimination, commercial disputes and other matters. We are not a party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our results of operations or financial position. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.  

Item 1A. Risk Factors.

There have been no material changes to our risk factors from the risk factors disclosed in our 2020 Form 10-K. The risks described in our 2020 Form 10-K, in addition to the other information set forth in this Quarterly Report on Form 10-Q, are not the only risks facing we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

On January 1, 2021, we issued an aggregate of 71,740 shares of common stock as consideration for the acquisition of MSE. The issuance of common stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof as a transaction by an issuer not involving any public offering.

On February 18, 2021, we issued 49,154 shares of common stock in connection with the exercise in full of warrants to purchase 87,250 shares of common stock at an exercise price of $17.19 per share of common stock. The warrants were exercised on a cashless basis with a share of common stock valued at $39.37 per share, the closing price on the date of exercise. The issuance of common stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof as a transaction by an issuer not involving any public offering.

On March 1, 2021, we issued 18,559 shares of common stock in connection with the exercise in full of warrants to purchase 29,100 shares of common stock at an exercise price of $17.19 per share of common stock. The warrants were exercised on a cashless basis with a share of common stock valued at $47.46 per share, the closing price on the date of exercise. The issuance of common stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof as a transaction by an issuer not involving any public offering.

On April 1, 2021, we issued 539,607 and 24,230 shares of common stock as additional consideration for (i) the acquisition of CTEH pursuant to the earn-out provision of the transaction agreement, and (ii) the acquisition of MSE pursuant to the purchase price true up provision of the transaction agreement, respectively. These issuances of common shares were exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof as a transaction by an issuer not involving any public offering.

Use of Proceeds

In connection with our initial public offering, we filed a Registration Statement on Form S-1 (File No. 333-239542) on June 29, 2020. The SEC declared the registration statement effective on July 22, 2020. The balance of the IPO proceeds which were unused as of December 31, 2020 were used to partially fund the acquisition of MSE in January 2021 ($6.3 million) and to fund operating needs during the three months ended March 31, 2021 ($12.9 million).

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

 

Exhibit

Number

 

Description

 

 

 

31.1*

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1*

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2*

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

*

Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Montrose Environmental Group, Inc.

 

 

 

 

Date:  May 12, 2021

 

By:

/s/ Allan Dicks

 

 

 

Allan Dicks

 

 

 

Chief Financial Officer

 

 

 

44