Form 10-Q Montrose Environmental For: Mar 31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact Name of Registrant as Specified in its Charter)
( State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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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.
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).
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.
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
As of May 5, 2022, the registrant had
Table of Contents
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PART I. |
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Item 1. |
1 |
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Unaudited Condensed Consolidated Statements of Financial Position |
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Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss |
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3 |
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4 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
5 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
29 |
Item 3. |
41 |
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Item 4. |
41 |
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PART II. |
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Item 1. |
42 |
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Item 1A. |
42 |
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Item 2. |
42 |
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Item 3. |
42 |
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Item 4. |
42 |
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Item 5. |
42 |
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Item 6. |
43 |
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44 |
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
MONTROSE ENVIRONMENTAL GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands, except share data)
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March 31, |
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December 31, |
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2022 |
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2021 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and restricted cash |
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$ |
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$ |
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Accounts receivable—net |
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Contract assets |
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Prepaid and other current assets |
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Total current assets |
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NON-CURRENT ASSETS: |
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Property and equipment—net |
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Operating lease right-of-use asset—net |
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Finance lease right-of-use asset—net |
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Goodwill |
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Other intangible assets—net |
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Other assets |
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TOTAL ASSETS |
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$ |
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$ |
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LIABILITIES, CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK AND |
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CURRENT LIABILITIES: |
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Accounts payable and other accrued liabilities |
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$ |
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$ |
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Accrued payroll and benefits |
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Business acquisitions contingent consideration, current |
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Current portion of operating lease liabilities |
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Current portion of finance lease liabilities |
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Current portion of long-term debt |
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Total current liabilities |
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NON-CURRENT LIABILITIES: |
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Business acquisitions contingent consideration, long-term |
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Other non-current liabilities |
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Deferred tax liabilities—net |
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Conversion option |
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Operating lease liability—net of current portion |
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Finance lease liability—net of current portion |
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Long-term debt—net of deferred financing fees |
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Total liabilities |
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CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK $ |
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Authorized, issued and outstanding shares: |
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STOCKHOLDERS’ EQUITY: |
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Common stock, $ |
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— |
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— |
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Additional paid-in-capital |
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Accumulated deficit |
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( |
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( |
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Accumulated other comprehensive income |
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Total stockholders’ equity |
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TOTAL LIABILITIES, CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK |
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$ |
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$ |
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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)
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Three Months Ended |
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March 31, |
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2022 |
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2021 |
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REVENUES |
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$ |
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$ |
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COST OF REVENUES (exclusive of depreciation and |
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSE |
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FAIR VALUE CHANGES IN BUSINESS ACQUISITIONS |
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DEPRECIATION AND AMORTIZATION |
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LOSS FROM OPERATIONS |
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( |
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OTHER INCOME (EXPENSE) |
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Other income (expense) |
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( |
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Interest expense—net |
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( |
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( |
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Total other income (expense)—net |
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( |
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LOSS BEFORE EXPENSE FROM |
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( |
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( |
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INCOME TAX EXPENSE |
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NET LOSS |
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$ |
( |
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$ |
( |
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EQUITY ADJUSTMENT FROM FOREIGN |
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COMPREHENSIVE LOSS |
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( |
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CONVERTIBLE AND REDEEMABLE SERIES A-2 |
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( |
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( |
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NET LOSS ATTRIBUTABLE TO |
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( |
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WEIGHTED AVERAGE COMMON SHARES |
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NET LOSS PER SHARE ATTRIBUTABLE TO |
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$ |
( |
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$ |
( |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
MONTROSE ENVIRONMENTAL GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(In thousands, except share data)
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Accumulated |
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Convertible and Redeemable |
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Other |
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Total |
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Series A-2 Preferred Stock |
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Common Stock |
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Additional |
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Accumulated |
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Comprehensive |
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Stockholders' |
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Shares |
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Amount |
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Shares |
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Amount |
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Paid-In Capital |
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Deficit |
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Income |
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Equity |
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BALANCE—December 31, 2020 |
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$ |
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$ |
— |
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$ |
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$ |
( |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Dividend payment to the Series A-2 |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Common stock issued |
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— |
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— |
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— |
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— |
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— |
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Accumulated other comprehensive |
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— |
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— |
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— |
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— |
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— |
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— |
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BALANCE—March 31, 2021 |
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$ |
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$ |
— |
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$ |
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$ |
( |
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$ |
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$ |
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Accumulated |
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Convertible and Redeemable |
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Other |
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Total |
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Series A-2 Preferred Stock |
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Common Stock |
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Additional |
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Accumulated |
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Comprehensive |
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Stockholders' |
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Shares |
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Amount |
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Shares |
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Amount |
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Paid-In Capital |
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Deficit |
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Income |
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Equity |
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BALANCE—December 31, 2021 |
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$ |
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$ |
— |
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$ |
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$ |
( |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Dividend payment to the Series A-2 |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Common stock issued |
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— |
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— |
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— |
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— |
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— |
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Accumulated other comprehensive |
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— |
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— |
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— |
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— |
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— |
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— |
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BALANCE—March 31, 2022 |
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$ |
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$ |
— |
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$ |
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$ |
( |
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$ |
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$ |
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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)
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Three Months Ended March 31, |
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2022 |
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2021 |
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OPERATING ACTIVITIES: |
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Net loss |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Provision for bad debt |
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Depreciation and amortization |
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Amortization of right-of-use asset |
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Stock-based compensation expense |
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Fair value changes in financial instruments |
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Fair value changes in business acquisitions contingent consideration |
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Deferred income taxes |
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Other |
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Changes in operating assets and liabilities—net of acquisitions: |
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Accounts receivable and contract assets |
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( |
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Prepaid expenses and other current assets |
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Accounts payable and other accrued liabilities |
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( |
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Accrued payroll and benefits |
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( |
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( |
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Payment of contingent consideration |
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( |
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— |
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Change in operating leases |
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( |
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Net cash used in operating activities |
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INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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( |
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Proceeds received from corporate owned insurance |
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— |
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Proprietary software development and other software costs |
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( |
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Purchase price true ups |
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( |
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— |
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Cash paid for acquisitions—net of cash acquired |
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( |
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( |
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Net cash used in investing activities |
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( |
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FINANCING ACTIVITIES: |
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Repayment of term loan |
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( |
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Payment of contingent consideration |
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( |
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— |
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Repayment of finance leases |
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Proceeds from issuance of common stock for exercised stock options |
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Dividend payment to the Series A-2 shareholders |
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( |
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( |
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Payments of deferred offering costs |
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( |
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— |
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Net cash used in financing activities |
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( |
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( |
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CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
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Foreign exchange impact on cash balance |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH: |
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Beginning of year |
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End of period |
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$ |
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$ |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income tax |
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$ |
— |
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$ |
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SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: |
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Accrued purchases of property and equipment |
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$ |
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$ |
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Property and equipment purchased under finance leases |
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$ |
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$ |
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Common stock issued to acquire new businesses |
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$ |
— |
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$ |
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Acquisitions unpaid contingent consideration |
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$ |
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$ |
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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
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
Assessment, Permitting and Response—Through 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 Analysis—Through 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 Reuse—Through 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.
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, 2021. 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.
As disclosed in the Company's 2021 Annual Report on Form 10-K, in June 2021, with an effective adoption date of January 1, 2021, the Company adopted Accounting Standard Codification ("ASC") 842, Leases. As a result, the Company has adjusted the previously reported unaudited condensed consolidated financial statements effective January 1, 2021. The retroactive adoption of ASC 842 resulted in adjustments to depreciation and amortization expense and other income (expense) financial statement line items amounting to $
2. SUMMARY OF NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements—Through the end of the year ended December 31, 2021, the Company qualified as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) and therefore has historically taken 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 elected to use this
5
extended transition period under the JOBS Act. The adoption dates discussed below are based on the Company no longer qualifying as an emerging growth company.
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("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, 2021, including interim periods within those fiscal years, and early adoption is permitted. The new guidance was
Recently Issued Accounting Pronouncements Not Yet Adopted—In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805):Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. Under the new guidance (ASC 805-20-30-28), the acquirer should determine what contract assets and/or contract liabilities it would have recorded under ASC 606 (the revenue guidance) as of the acquisition date, as if the acquirer had entered into the original contract at the same date and on the same terms as the acquiree. The new guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of the standard on the consolidated financial statements.
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.
Remediation and Reuse Revenues—Remediation 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 18.
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, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Contract assets |
|
$ |
|
|
$ |
|
||
Contract liabilities |
|
|
|
|
|
|
6
Contract assets acquired through business acquisitions amounted to $
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, 2022 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, 2022 and December 31, 2021, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied was approximately $
Accounts Receivable, Net—Accounts receivable, net consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Accounts receivable, invoiced |
|
$ |
|
|
$ |
|
||
Accounts receivable, other |
|
|
|
|
|
|
||
Allowance for doubtful accounts |
|
|
( |
) |
|
|
( |
) |
Accounts receivable—net |
|
$ |
|
|
$ |
|
As of March 31, 2022, the Company did
The allowance for doubtful accounts consisted of the following:
|
|
Beginning |
|
|
Bad Debt |
|
|
Charged to |
|
|
Other(1) |
|
|
Ending |
|
|||||
Three months ended March 31, 2022 |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
Year ended December 31, 2021 |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
____________________
4. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Deposits |
|
$ |
|
|
$ |
|
||
Prepaid expenses |
|
|
|
|
|
|
||
Supplies |
|
|
|
|
|
|
||
Income tax receivable |
|
|
|
|
|
|
||
Prepaid and other current assets |
|
$ |
|
|
$ |
|
7
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 |
|
2022 |
|
|
2021 |
|
||
Lab and test equipment |
|
|
$ |
|
|
$ |
|
|||
Vehicles |
|
|
|
|
|
|
|
|||
Equipment |
|
|
|
|
|
|
|
|||
Furniture and fixtures |
|
|
|
|
|
|
|
|||
Leasehold improvements |
|
|
|
|
|
|
|
|||
Aircraft |
|
|
|
|
|
|
|
|||
Building |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
||
Land |
|
|
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
|
|
||
Less accumulated depreciation |
|
|
|
|
( |
) |
|
|
( |
) |
Total property and equipment— |
|
|
|
$ |
|
|
$ |
|
Total depreciation expense included in the unaudited condensed consolidated statements of operations was $
6. LEASES
In June 2021, with an effective adoption date of January 1, 2021, the Company adopted ASU 2016-02 using the modified retrospective approach, which permits application of this guidance at the beginning of the period of adoption.
Leases are classified as either finance leases or operating leases based on criteria in ASC 842. The Company has finance leases for its vehicle and equipment leases and operating leases for its real estate space and office equipment leases. The Company’s operating and finance leases generally have original lease terms between
Finance and operating lease assets represent the right to use an underlying asset for the lease term, and finance and operating lease liabilities represent the obligation to make lease payments arising from the lease.
The Company calculates the present value of its finance and operating leases using an estimated incremental borrowing rate (“IBR”), which requires judgment. For real estate operating leases, the Company estimates the IBR based on prevailing market rates for collateralized debt in a similar economic environment with similar payment terms and maturity dates commensurate with the terms of the lease. For all other leases, the Company estimates the IBR based on the stated interest rate on the contract. Since many of the inputs used to calculate the rate implicit in the leases are not readily determinable from the lessee’s perspective, the Company will not use the implicit interest rate.
Certain leases contain variable payments, these payments are expensed as incurred and not included in the Company’s operating lease right-of-use assets and operating lease liabilities. These amounts primarily include payments for maintenance, utilities, taxes, and insurance and are excluded from the present value of the Company’s lease obligations.
Effective January 1, 2021, the Company recognized operating lease right-of-use assets, current operating lease liabilities and operating lease liabilities, net of current portion of $
8
Company also recognized finance lease right-of-use assets, current finance lease liabilities and finance lease liabilities, net of current portion of $
The Company does not record operating lease right-of-use assets or operating lease liabilities for leases with an initial term of 12 months or less. The Company also combines lease and non-lease components on all new or modified operating leases into a single lease component for all classes of assets.
The components of lease expense were as follows:
|
|
For the Three Months Ended March 31, |
|
|
|||||
|
Statement of Operations Location |
2022 |
|
|
2021 |
|
|
||
Operating lease cost |
|
|
|
|
|
|
|
||
Lease cost |
Selling, general and administrative expense |
$ |
|
|
$ |
|
|
||
Variable lease cost |
Selling, general and administrative expense |
|
|
|
|
|
|
||
Total operating lease cost |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Finance lease cost |
|
|
|
|
|
|
|
||
Amortization of right of use assets |
Depreciation and amortization |
|
|
|
|
|
|
||
Interest on lease liabilities |
Interest expense—net |
|
|
|
|
|
|
||
Total finance lease cost |
|
|
|
|
|
|
|
||
Total lease cost |
|
$ |
|
|
$ |
|
|
Supplemental cash flows information related to leases was as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
||
Operating cash flows used in operating leases |
|
$ |
|
|
$ |
|
||
Operating cash flows used in finance leases |
|
|
|
|
|
|
||
Financing cash flows used in finance leases |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Lease liabilities arising from new ROU assets |
|
|
|
|
|
|
||
Operating leases |
|
|
|
|
|
|
||
Finance leases |
|
|
|
|
|
|
Weighted average remaining lease terms and weighted average discount rates were:
|
|
Three Months Ended March 31, 2022 |
|
|||||
|
|
Operating Leases |
|
|
Finance Leases |
|
||
Weighted average remaining lease term (years) |
|
|
|
|
|
|||
Weighted average discount rate |
|
|
% |
|
|
% |
||
|
|
|
|
|
|
|
||
|
|
Three Months Ended March 31, 2021 |
|
|||||
|
|
Operating Leases |
|
|
Finance Leases |
|
||
Weighted average remaining lease term (years) |
|
|
|
|
|
|||
Weighted average discount rate |
|
|
% |
|
|
% |
The following is a schedule by year of the maturities of lease liabilities with original terms in excess of one year:
|
|
Operating Leases |
|
|
Finance Leases |
|
||
Remainder of 2022 |
|
$ |
|
|
$ |
|
||
2023 |
|
|
|
|
|
|
||
2024 |
|
|
|
|
|
|
||
2025 |
|
|
|
|
|
|
||
2026 and thereafter |
|
|
|
|
|
|
||
Total undiscounted future minimum lease payments |
|
|
|
|
|
|
||
Less imputed interest |
|
|
( |
) |
|
|
( |
) |
Total discounted future minimum lease payments |
|
$ |
|
|
$ |
|
9
7. BUSINESS ACQUISITIONS
In line with the Company’s strategic growth initiatives, the Company acquired certain businesses during the three months ended March 31, 2022 and during the year ended December 31, 2021. 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. The contingent consideration elements of the purchase price of the acquisitions are 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 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.
The Company may be required to make up to $
Transaction costs related to business combinations totaled $
10
Acquisitions Completed During the Three Months Ended March 31, 2022
Environmental Standards, Inc. (“EnvStd”)—In January 2022, the Company completed the acquisition of Environmental Standards, Inc. by acquiring
Industrial Automation Group, Inc. (“IAG”)—In January 2022, the Company completed the acquisition of Industrial Automation Group, Inc. by acquiring certain of its employees and a covenant not to compete. The upfront cash payment made to acquire IAG was funded through cash on hand.
The following table summarizes the elements of the purchase price of the acquisitions completed during the three months ended March 31, 2022:
|
|
Cash |
|
|
Common |
|
|
Other |
|
|
Other |
|
|
Contingent |
|
|
Contingent |
|
|
Total |
|
|||||||
EnvStd |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||||
IAG |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
The other purchase price components of the EnvStd purchase price consist of a surplus working capital amount, which is not finalized at this time.
The preliminary purchase price attributable to the acquisitions was allocated as follows:
|
|
EnvStd |
|
|
IAG |
|
|
Total |
|
|||
Cash |
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Accounts receivable and contract assets |
|
|
|
|
|
— |
|
|
|
|
||
Other current assets |
|
|
|
|
|
— |
|
|
|
|
||
Current assets |
|
|
|
|
|
— |
|
|
|
|
||
Property and equipment |
|
|
|
|
|
— |
|
|
|
|
||
Operating lease right-of-use asset—net |
|
|
|
|
|
— |
|
|
|
|
||
Customer relationships |
|
|
|
|
|
— |
|
|
|
|
||
Trade names |
|
|
|
|
|
— |
|
|
|
|
||
Covenants not to compete |
|
|
|
|
|
|
|
|
|
|||
Goodwill |
|
|
|
|
|
|
|
|
|
|||
Total assets |
|
|
|
|
|
|
|
|
|
|||
Current liabilities |
|
|
|
|
|
— |
|
|
|
|
||
Operating lease liability—net of |
|
|
|
|
|
— |
|
|
|
|
||
Total liabilities |
|
|
|
|
|
— |
|
|
|
|
||
Purchase price |
|
$ |
|
|
$ |
|
|
$ |
|
The weighted average useful lives for the acquired companies’ identifiable intangible assets are as follows:
|
Customer Relationships |
Tradenames |
Covenants Not to Compete |
EnvStd |
|||
IAG |
n/a |
n/a |
Goodwill associated with the IAG acquisition is deductible for income tax purposes.
For the acquisitions completed during the three months ended March 31, 2022, the results of operations since the acquisition dates have been combined with those of the Company. The Company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2022 includes revenue of $
11
Acquisitions Completed During the Year Ended December 31, 2021
MSE Group, LLC (“MSE”)—In January 2021, the Company completed the acquisition of MSE Group, LLC by acquiring
Vista Analytical Laboratory, Inc. (“Vista”)—In June 2021, the Company completed the acquisition of Vista Analytical Laboratory, Inc. (“Vista”) by acquiring
Environmental Intelligence, LLC (“EI”) —In July, 2021 the Company completed the acquisition of Environmental Intelligence, LLC (“EI”) by acquiring
SensibleIoT, LLC (“Sensible”) —In August, 2021, the Company completed the business acquisition of SensibleIoT, LLC (“Sensible”) by acquiring
Environmental Chemistry, Inc. (“ECI”) —In October 2021, the Company completed the business acquisition of Environmental Chemistry, Inc. (“ECI”) by acquiring
Horizon Water and Environment, LLC (“Horizon”)— In November 2021, the Company completed the business acquisition of Horizon Water and Environment, LLC (“Horizon”) by acquiring
The following table summarizes the elements of the purchase price of the acquisitions completed during the year ended December 31, 2021:
|
|
Cash |
|
|
Common |
|
|
Other |
|
|
Contingent |
|
|
Contingent |
|
|
Total |
|
||||||
MSE |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
EI |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|||
All other 2021 acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
The other purchase price components of the MSE purchase price consist of a surplus working capital amount on the date of close, a seller make-whole for taxes related to a 338(h)(10) election, an integration payment liability and a purchase price true up related to MSE’s financial performance in the fourth quarter of 2020. The other purchase price components of the EI purchase price consist of a surplus working capital amount on the date of close. The other purchase price components of all the other acquisitions
12
purchase price mainly consist of surplus/deficit working capital amounts and 338(h)(10) election liabilities. Horizon's closing working capital surplus/deficit amounts have not been finalized at this time.
The purchase price attributable to the acquisitions was allocated as follows:
|
|
MSE |
|
|
EI |
|
|
All other |
|
|
Total |
|
||||
Cash |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Accounts receivable |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Property and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating lease right-of-use asset—net |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Customer relationships |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Trade names |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Covenants not to compete |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Acquired Technology |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating lease liability—net of |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Purchase price |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
The weighted average useful lives for the acquired companies’ identifiable intangible assets are as follows:
|
Customer Relationships |
Tradenames |
Covenants Not to Compete |
Developed Technology |
MSE |
n/a |
|||
EI |
n/a |
|||
All other 2021 acquisitions |
n/a- |
n/a- |
n/a- |
Goodwill associated with all of these acquisitions is deductible for income tax purposes.
For the acquisitions completed during the three months ended March 31, 2021, the results of operations since the acquisition dates have been combined with those of the Company. The Company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2021 includes revenue of $
Supplemental Unaudited Pro-Forma—
|
|
For the Three Months Ended March 31, |
|
|||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||||||||||
|
|
As |
|
|
Acquisitions |
|
|
Consolidated |
|
|
As |
|
|
Acquisitions |
|
|
Consolidated |
|
||||||
Revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Net (loss) income |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
8. GOODWILL AND INTANGIBLE ASSETS
Amounts related to goodwill are as follows:
|
|
Assessment, |
|
|
Measurement |
|
|
Remediation |
|
|
Total |
|
||||
Balance as of December 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Goodwill acquired during the period |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Acquisitions measurement period adjustments |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
|
||
Balance as of March 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Amounts related to finite-lived intangible assets are as follows:
March 31, 2022 |
|
Estimated |
|
Gross |
|
|
Accumulated |
|
|
Total |
|
|||
Finite lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|||
Customer relationships |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Covenants not to compete |
|
|
|
|
|
|
|
|
|
|
||||
Trade names |
|
|
|
|
|
|
|
|
|
|
||||
Proprietary software |
|
|
|
|
|
|
|
|
|
|
||||
Patent |
|
|
|
|
|
|
|
|
|
|
||||
Total other intangible assets |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
December 31, 2021 |
|
Estimated |
|
Gross |
|
|
Accumulated |
|
|
Total |
|
|||
Finite lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|||
Customer relationships |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Covenants not to compete |
|
|
|
|
|
|
|
|
|
|
||||
Trade names |
|
|
|
|
|
|
|
|
|
|
||||
Proprietary software |
|
|
|
|
|
|
|
|
|
|
||||
Patent |
|
|
|
|
|
|
|
|
|
|
||||
Total other intangible assets |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
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 $
Future amortization expense is estimated to be as follows for each of the five following years and thereafter:
December 31, |
|
|
|
|
2022 (remaining) |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 and thereafter |
|
|
|
|
Total |
|
$ |
|
14
9. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Accounts payable and other accrued liabilities consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Accrued expenses |
|
|
|
|
|
|
||
Other business acquisitions purchase |
|
|
|
|
|
|
||
Contract liabilities |
|
|
|
|
|
|
||
Other current liabilities |
|
|
|
|
|
|
||
Total accounts payable and |
|
$ |
|
|
$ |
|
10. ACCRUED PAYROLL AND BENEFITS
Accrued payroll and benefits consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Accrued bonuses |
|
$ |
|
|
$ |
|
||
Accrued paid time off |
|
|
|
|
|
|
||
Accrued payroll |
|
|
|
|
|
|
||
Accrued other |
|
|
|
|
|
|
||
Total accrued payroll and benefits |
|
$ |
|
|
$ |
|
11. 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 (
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, 2022, 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
15
12. DEBT
Debt consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Term loan facility |
|
$ |
|
|
$ |
|
||
Revolving Line of Credit |
|
|
— |
|
|
|
— |
|
Less deferred debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Total debt |
|
|
|
|
|
|
||
Less current portion of long-term debt |
|
|
( |
) |
|
|
( |
) |
Long-term debt, less current portion |
|
$ |
|
|
$ |
|
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.
2021 Credit Facility—On April 27, 2021, the Company entered into a Senior Secured Credit Agreement providing for a $
The 2021 Credit Facility term loan must be repaid in quarterly installments and shall amortize at the following annualized rates that were scheduled to begin with the quarter ended December 31, 2021 and with the remaining balance due and payable in full on April 27, 2026:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Amortization Table |
|||||||||||||||||||
|
Year 1 |
|
|
Year 2 |
|
|
Year 3 |
|
|
Year 4 |
|
|
Year 5 |
|
|
|||||
Term Loan |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
The first quarterly installment repayment, amounting to $
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 |
|
Senior Credit Facilities |
|
|
Senior Credit Facilities |
|
|
Commitment |
|
|
Letter of Credit Fee |
|
|
||||
1 |
|
≥ |
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
2 |
|
< |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
3 |
|
< |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
4 |
|
< |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
5 |
|
< |
|
|
|
|
|
|
|
|
|
|
|
|
The 2021 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, subject to certain exceptions and baskets, to incur indebtedness, incur liens on its assets, agree to any additional negative pledges, pay dividends or repurchase stock, limit the ability of its subsidiaries to pay dividends or distribute assets, make investments, enter into any transaction of merger or consolidation, liquidate, wind-up or dissolve, or convey any part of its business, assets or property, or acquire the business, property or assets of another person, enter into sale and leaseback transactions, enter into certain transactions with affiliates, engage in any material line of business substantially different from those engaged on the closing date, modify the terms of indebtedness subordinated to the loans incurred under the 2021 Credit Facility and modify the terms of its organizational documents. The 2021 Credit Facility also includes financial covenants requiring the
16
Company to remain below a maximum total net leverage ratio of
The 2021 Credit Facility requires customary mandatory prepayments of the term loan and revolver and cash collateralization of letters of credit, subject to customary exceptions, including
The weighted average interest rate on the 2021 Credit Facility for the three months ended March 31, 2022 was
The Company’s obligations under the 2021 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.
2020 Credit Facility—On April 13, 2020, the Company entered into a Unitranche Credit Agreement (the “2020 Credit Facility”) providing for a $
The 2020 Credit Facility contained financial covenants requiring the Company to remain below a maximum consolidated total leverage ratio of
The weighted average interest rate on the 2020 Credit Facility for the three months ended March 31, 2021 was
Equipment Line of Credit—In the first quarter of 2022, the Company entered into a new $
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 2021 Credit Facility:
March 31, |
|
|
|
|
2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Total |
|
$ |
|
17
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following financial instruments are measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Interest rate swap |
|
$ |
|
|
$ |
— |
|
|
Total assets |
|
$ |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
||
Business acquisitions contingent consideration, |
|
$ |
|
|
$ |
|
||
Business acquisitions contingent consideration, |
|
|
|
|
|
|
||
Conversion option |
|
|
|
|
|
|
||
Total liabilities |
|
$ |
|
|
$ |
|
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:
|
Interest |
|
|
Total |
|
|
Business |
|
|
Business |
|
|
Conversion |
|
|
Total |
|
||||||
Balance—at January 1, 2021 |
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Acquisitions |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Changes in fair value included in earnings |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance—at March 31, 2021 |
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
. |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance—at January 1, 2022 |
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Acquisitions |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Changes in fair value included in earnings |
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
||||
Payment of contingent consideration |
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Balance—at March 31, 2022 |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Quantitative Information about Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3):
Interest Rate Swap—The interest rate swap fair value is estimated based on a mid-market price for the swap as of the close of business of the reporting period. The fair value is prepared by discounting future cash flows of the swap to arrive at a current value of the swap. Forward curves and volatility levels inputs are determined on the basis of observable market inputs when available and on the basis of estimates when observable market inputs are not available. The Company does not apply hedge accounting but instead recognizes the instrument at fair value on the unaudited condensed consolidated statement of financial position within other assets, with changes in fair value recognized in earnings in each reporting period. The change in fair value of $
Business Acquisitions Contingent Consideration—The fair value of the contingent consideration payable associated with the acquisition of CTEH, MSE and Sensible was determined using a Monte Carlo simulation of earnings in a risk-neutral Geometric Brownian Motion framework. The fair value of the contingent consideration payable associated with the acquisition of EnvStd was determined using a Probabilistic (Scenario Based) method. 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. 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—Upon the Company’s initial public offering ("IPO"), the fair value of the conversion option associated with the issuance of the Convertible and Redeemable Series A-2 Preferred Stock (Note 15) was estimated using a “with-and-without”
18
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.
14. COMMITMENTS AND CONTINGENCIES
Leases—The Company leases office facilities over various terms expiring through
Other Commitments—The Company has commitments under the 2021 Credit Facility, its equipment line of credit and its lease obligations (Note 6 and 12).
Contingencies—The Company is subject to purchase price contingencies related to earn-outs associated with certain acquisitions (Note 7 and 13).
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.
15. CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK
On April 13, 2020, the Company entered into an agreement to issue
At issuance, the Company determined that the Convertible and Redeemable Series A-2 Preferred Stock and the detachable warrant, were required to be accounted for separately.
Upon the Company’s IPO, 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
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
19
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, 2022, the Company has determined that a change of control is not probable. Additionally, as of March 31, 2022, 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, 2022, 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 $
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, 2022 and March 31, 2021, this conversion embedded feature had a net fair value of $
20
16. STOCKHOLDERS’ EQUITY
Authorized Capital Stock—The Company was authorized to issue
Warrants—In May 2015, the Company issued warrants to acquire
Common Stock Issuances—
|
Three Months Ended March 31, |
|
|
|||||||||||||||||||||
|
2022 |
|
|
2021 |
|
|
||||||||||||||||||
|
Shares |
|
|
Average Price per Share |
|
|
Total |
|
|
Shares |
|
|
Average Price per Share |
|
|
Total |
|
|
||||||
Acquisitions |
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
$ |
|
|
$ |
|
|
|||
Exercise of warrants (1) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
||
Exercise of options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Restricted shares, net (1) |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
||||
Total |
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
(1) Represents the release of common shares due to the exercise of warrants options and the vesting of restricted stock.
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, 2022, and March 31, 2021, there was $
|
|
March 31, 2022 |
|
|||||||||
|
|
2017 Plan |
|
|
2013 Plan |
|
|
Total |
|
|||
Shares authorized to be issued |
|
|
|
|
|
|
|
|
|
|||
Shares available for grant(1) |
|
|
|
|
|
— |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|||
|
|
March 31, 2021 |
|
|||||||||
|
|
2017 Plan |
|
|
2013 Plan |
|
|
Total |
|
|||
Shares authorized to be issued |
|
|
|
|
|
|
|
|
|
|||
Shares available for grant |
|
|
|
|
|
— |
|
|
|
|
(1) In January 2022 the Board of Directors ratified the addition of
21
Total stock compensation expense for the Plans was as follows:
|
|
Three Months Ended March 31, |
|
||||||||||||||||
|
|
2022 |
|
||||||||||||||||
|
|
2017 plan |
|
|
2013 plan |
|
|
|
|
||||||||||
|
|
Options |
|
|
Restricted Stock |
|
SARs |
|
|
Options |
|
|
Total |
|
|||||
Cost of revenue |
|
$ |
|
|
$ |
— |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Selling, general and |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
— |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Three Months Ended March 31, |
|
||||||||||||||||
|
|
2021 |
|
||||||||||||||||
|
|
2017 plan |
|
|
2013 plan |
|
|
|
|
||||||||||
|
|
Options |
|
|
Restricted Stock |
|
SARs |
|
|
Options |
|
|
Total |
|
|||||
Cost of revenue |
|
$ |
|
|
$ |
— |
|
$ |
— |
|
|
$ |
|
|
$ |
|
|||
Selling, general and |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Montrose Amended & Restated 2017 Stock Incentive Plan
Restricted Stock—The Company issues restricted stock to certain 2017 Plan participants as Director’s compensation. These shares of restricted stock granted in the three months ended March 31, 2022 and March 31, 2021 vest
During the year ended December 31, 2021, the Board of Directors approved the grant of
During 2021 and 2022, the Board of Directors approved the creation of certain supplemental incentive plans (“SI Plans”) for selected employees to reward exceptional performance. These SI Plans provide supplemental bonus opportunities payable in RSUs under the 2017 Plan upon meeting certain financial performance targets.
During 2021, the Board approved and reserved for future issuance an aggregate of
22
Restricted stock activity was as follows:
|
Three Months Ended March 31, |
|
|
|||||||||||||||||||||
|
2022 |
|
|
2021 |
|
|
||||||||||||||||||
|
Shares |
|
|
Average Price per Share |
|
|
Fair Value |
|
|
Shares |
|
|
Average Price per Share |
|
|
Fair Value |
|
|
||||||
Shares granted |
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
There were
There were
Stock Appreciation Rights— During the year ended December 31, 2021, the Board of Directors approved the grant of
SARs Stock Price Performance Hurdle |
|
Portion of SARs Subject to Performance Hurdle |
|
$ |
|
||
$ |
|
||
$ |
|
The performance hurdles shall be deemed achieved if the average trading price per share of the Company’s common stock equals or exceeds the applicable stock price performance hurdle set forth above for the trading days falling in a consecutive 20-day period prior to the vesting date. The SARs expire
Options—Options issued to all optionees under the 2017 Plan vest over
|
|
Options to |
|
|
Weighted- |
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate |
|
|||||
Outstanding at January 1, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||
Forfeited/ cancelled |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Expired |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Exercised |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Outstanding at March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Outstanding at January 1, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||
Forfeited/ cancelled |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Exercised |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Outstanding at March 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|||||
Exercisable at March 31, 2022 |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Options vested and expected to vest |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
23
The following weighted-average assumptions were used in the Black-Sholes option-pricing model calculation:
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Common stock value (per share) |
|
$ |
|
|
$ |
|
||
Expected volatility |
|
|
% |
|
|
% |
||
Risk-free interest rate |
|
|
% |
|
|
% |
||
Expected life (years) |
|
|
|
|
|
|
||
Forfeiture rate |
|
|
|
|
||||
Dividend rate |
|
|
|
|
Montrose Amended & Restated 2013 Stock Option Plan—
|
|
Options to |
|
|
Weighted- |
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate |
|
|||||
Outstanding at January 1, 2021 |
|
|
|
|
$ |
|
|
$ |
— |
|
|
|
|
|
$ |
|
||||
Exercised |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Outstanding at March 31, 2021 |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Outstanding at January 1, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|||||
Exercised |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Outstanding at March 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|||||
Exercisable at March 31, 2022 |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Options vested and expected to vest |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
Total shares outstanding from exercised options were
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, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Montrose 2013 Stock Incentive Plan |
|
|
|
|
|
|
||
Montrose 2017 Stock Incentive Plan(1) |
|
|
|
|
|
|
||
Total |
|
|
|
|
|
|
(1) In January 2022, the Board of Directors ratified the addition of
17. 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 Convertible and Redeemable Series A-2 Preferred Stock is considered a participating security during the applicable period. Net losses are not allocated to 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
24
as-converted method. Potentially dilutive shares are comprised of restricted stock, RSUs, SARs and shares of common stock underlying stock options outstanding under the Plans to purchase common stock. During the three months ended March 31, 2022 and three months ended March 31, 2021, 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) |
|
2022 |
|
|
2021 |
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
Convertible and redeemable series A-2 preferred |
|
|
( |
) |
|
|
( |
) |
|
Net loss attributable to common stockholders |
|
|
( |
) |
|
|
( |
) |
|
Weighted-average common shares outstanding – |
|
|
|
|
|
|
|
||
Net loss per share attributable to common |
|
$ |
( |
) |
|
$ |
( |
) |
|
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, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Stock options |
|
|
|
|
|
|
||
Restricted stock |
|
|
|
|
|
|
||
SARs |
|
|
|
|
|
— |
|
18. SEGMENT INFORMATION
The Company has
Segment Adjusted EBITDA is the primary measure of operating performance for all
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.
25
Segment revenues and Adjusted EBITDA consisted of the following:
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||
|
|
|
|
|
Segment |
|
|
|
|
|
Segment |
|
||||
|
|
Segment |
|
|
Adjusted |
|
|
Segment |
|
|
Adjusted |
|
||||
|
|
Revenues |
|
|
EBITDA |
|
|
Revenues |
|
|
EBITDA |
|
||||
Assessment, Permitting and Response |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Measurement and Analysis |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Remediation and Reuse |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Operating Segments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate and Other |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Presented below is a reconciliation of the Company’s segment measure to net loss:
|
|
For the Three Months |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Total |
|
$ |
|
|
$ |
|
||
Interest expense, net |
|
|
( |
) |
|
|
( |
) |
Income tax expense |
|
|
( |
) |
|
|
( |
) |
Depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Stock-based compensation |
|
|
( |
) |
|
|
( |
) |
Start-up losses and investment in new services |
|
|
( |
) |
|
|
( |
) |
Acquisition costs |
|
|
( |
) |
|
|
( |
) |
Fair value changes in financial instruments |
|
|
|
|
|
( |
) |
|
Fair value changes in business acquisitions contingent consideration |
|
|
|
|
|
( |
) |
|
Expenses related to financing transactions |
|
|
( |
) |
|
|
( |
) |
Other losses or expenses |
|
|
( |
) |
|
|
( |
) |
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
19. RELATED-PARTY TRANSACTIONS
The Company did
20. DEFINED CONTRIBUTION PLAN
On January 1, 2014, the Company established the Montrose Environmental Group
26
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:
27
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 or outcomes 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, 2021 filed with the SEC on March 1, 2022, or the 2021 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 or outcomes to differ may also emerge from time to time, and it is not possible for us to predict all of them. In addition, historical, current and forward-looking sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results or outcomes 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.
28
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, 2022 and March 31, 2021 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, including in Item 1A. Risk Factors in the 2021 Form 10-K.
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 $1.3 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. For more information on each of our operating segments, see Item 1. “Business” in the 2021 Form 10-K.
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.
29
COVID-19
To date, COVID-19 related adverse impacts such as temporarily delayed project start dates, particularly within our Remediation and Reuse segment, exiting certain service lines and employee quarantines have not had a material adverse effect on our reported results. 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, although declining, revenue stream in the three months ended March 31, 2022 and 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, 2022 and March 31, 2021, primarily as a result of COVID-19 response work performed by CTEH. For additional information regarding the historical impacts of COVID-19 on our business, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2021 Form 10-K.
COVID-19 has had an impact on our historical seasonality trends. We have not experienced a significant slowdown in cash collections, and as a result cash flow from operations has not been materially adversely impacted.
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, of which $2.5 million was repaid in December 2021 and we expect to pay the remaining $2.3 million in the fourth quarter of 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, 2022 and March 31, 2021:
|
|
Three Months Ended March 31, |
|
|||||
(Revenues in thousands) |
|
2022 |
|
|
2021 |
|
||
Acquisitions completed |
|
2 |
|
|
1 |
|
||
Revenues attributable to acquisitions |
|
|
3,333 |
|
|
|
3,981 |
|
Percentage of revenues |
|
|
2.5 |
% |
|
|
3.0 |
% |
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 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, 2022 and March 31, 2021, was:
30
|
|
Three Months Ended March 31, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Amortization expense |
|
$ |
9,419 |
|
|
$ |
8,595 |
|
Acquisition-related costs |
|
|
467 |
|
|
|
237 |
|
Fair value changes in business acquisitions |
|
|
(21 |
) |
|
|
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 earn-out payments of $30.0 million and $50.0 million in March 2022 and April 2021, respectively, in connection with our CTEH acquisition. $25.0 million of the 2021 CTEH earn-out payment was made in the form of shares of our common stock. In connection with our Vista, Sensible, ECI and EnvStd acquisitions, we may make up to $8.7 million in aggregate earn-out payments between the years 2022 and 2025. See Note 7 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”
Organic Growth
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 potential annual volatility in CTEH’s revenues due to the emergency response aspect of their business, we also disclose organic growth without the annual organic revenue growth of CTEH. We expect to continue to disclose organic revenue growth with and without CTEH. 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.
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, net loss 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 18 to our unaudited condensed consolidated financial statements included in Part 1, Item 1 “Financial Statements.”
Financing Costs
Financing costs, relating primarily to interest expense on our debt, continue to be a significant component of our results of operations. We incurred interest expense of $1.1 million and $2.7 million during the three months ended March 31, 2022 and March 31, 2021, respectively.
On April 27, 2021, we entered into the 2021 Credit Facility and repaid all amounts outstanding under the prior 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%. We incurred debt extinguishment costs of $4.1 million in connection with this refinancing.
Furthermore, effective January 27, 2022, we entered into an interest rate swap transaction fixing the floating component of the interest rate on $100.0 million of borrowings to 1.39% until January 27, 2025.
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 Note 12 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
31
development, finance and information technology and other areas enable us to support continued growth. These investments have allowed us to improve our margins.
Seasonality
Due to the field-based nature of certain of our services, weather patterns generally impact our field-based teams’ ability to operate in the winter months. As a result, our operating results in our Measurement and Analysis segment experience some quarterly variability with generally lower revenues and lower earnings in the first and fourth quarters and higher overall revenues and earnings in the second and third quarters. As we continue to grow and expand into new geographies and service lines, quarterly variability in our Measurement and Analysis segment may deviate from historical trends.
Earnings Volatility
In addition to the impact of seasonality on earnings, 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. The benefit from COVID related work began in the third quarter of 2020, peaked in the first quarter of 2021 and has declined each subsequent quarter, although demand has continued through March 31, 2022. Demand for COVID-19 related or environmental emergency response services provided by CTEH remains difficult to predict and as a result, we may have experienced revenues and earnings in both the three months ended March 31, 2022 and March 31, 2021 that are not indicative of future results, making those periods particularly difficult comparisons for future periods. We do however expect that a portion of the lost COVID-19 response revenues will be offset by other CTEH service line revenues as internal resources are freed up from the COVID-19 response work. Earnings volatility is also driven by the timing of large projects, particularly in our Remediation and Reuse segment, and the impact of acquisitions. As a result of these factors, and 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.
32
Results of Operations
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
|
|
Three Months Ended March 31, |
|
|||||
(in thousands, except per share and percentage data) |
|
2022 |
|
|
2021 |
|
||
Statements of operations data: |
|
|
|
|
|
|
||
Revenues |
|
$ |
134,680 |
|
|
$ |
133,817 |
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
88,386 |
|
|
|
95,316 |
|
Selling, general and administrative expense |
|
|
41,807 |
|
|
|
25,000 |
|
Fair value changes in business acquisitions |
|
|
(21 |
) |
|
|
11,064 |
|
Depreciation and amortization |
|
|
12,144 |
|
|
|
11,796 |
|
Loss from operations |
|
$ |
(7,636 |
) |
|
$ |
(9,359 |
) |
Other income (expense) |
|
|
2,461 |
|
|
|
(882 |
) |
Interest expense, net |
|
|
(1,092 |
) |
|
|
(2,688 |
) |
Loss before income taxes |
|
|
(6,267 |
) |
|
|
(12,929 |
) |
Income tax expense |
|
|
1,269 |
|
|
|
2 |
|
Net loss |
|
$ |
(7,536 |
) |
|
$ |
(12,931 |
) |
Series A-2 dividend payment |
|
|
(4,100 |
) |
|
|
(4,100 |
) |
Net loss attributable to common stockholders |
|
$ |
(11,636 |
) |
|
$ |
(17,031 |
) |
Weighted average number of shares — basic and diluted |
|
|
29,662 |
|
|
|
25,117 |
|
Loss per share — basic and diluted |
|
$ |
(0.39 |
) |
|
$ |
(0.68 |
) |
Other financial data: |
|
|
|
|
|
|
||
Net loss margin(1) |
|
|
(5.6 |
)% |
|
|
(9.7 |
)% |
Adjusted EBITDA (2) |
|
$ |
16,451 |
|
|
$ |
16,800 |
|
Adjusted EBITDA margin (2) |
|
|
12.2 |
% |
|
|
12.6 |
% |
Revenues
For the three months ended March 31, 2022, we had revenues of $134.7 million, an increase of $0.9 million, or 0.6% over the three months ended March 31, 2021. The period over period increase in revenues was driven by organic growth in our Measurement and Analysis and Remediation and Reuse segments, and acquisitions completed subsequent to the quarter ended March 31, 2021, which contributed revenues of $13.6 million. These increases were partially offset by significantly lower COVID-19 related services provided by CTEH. Revenue from CTEH was $29.9 million in the three months ended March 31, 2022 compared to $70.4 million in the three months ended March 31, 2021. Revenue by segment and as a percentage of total revenues was as follows:
|
|
Three Months Ended March 31, |
||||||||||||||||||
|
|
2022 |
|
2021 |
||||||||||||||||
(Revenues in thousands) |
|
Revenues |
|
|
% of Total Revenues |
|
Revenues |
|
|
% of Total Revenues |
||||||||||
Assessment, Permitting and |
|
$ |
|
45,600 |
|
|
|
33.9 |
|
% |
|
$ |
|
75,262 |
|
|
|
56.2 |
|
% |
Measurement and Analysis |
|
|
|
39,761 |
|
|
|
29.5 |
|
|
|
|
|
33,440 |
|
|
|
25.0 |
|
|
Remediation and Reuse |
|
|
|
49,319 |
|
|
|
36.6 |
|
|
|
|
|
25,115 |
|
|
|
18.8 |
|
|
|
|
$ |
|
134,680 |
|
|
|
|
|
|
$ |
|
133,817 |
|
|
|
|
|
See “—Segment Results of Operations” below.
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 trends as revenue, while fixed costs tend to change primarily as a result of acquisitions.
For the three months ended March 31, 2022, cost of revenues was $88.4 million or 65.6% of revenues, and was comprised of direct labor of $38.8 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services)
33
of $19.1 million, field supplies, testing supplies and equipment rental of $21.8 million, project-related travel expenses of $4.0 million and other direct costs of $4.7 million.
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, 2022, cost of revenues as a percentage of revenue decreased 5.6% from the three months ended March 31, 2021, as a result of significantly lower outside service costs in 2022 when compared to 2021 driven primarily by a decrease in external lab expenses needed to support CTEH’s COVID-19 response work during 2022.
Selling, General and Administrative Expense
Selling, general and administrative expense consists 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, 2022, selling, general and administrative expense was $41.8 million, an increase of $16.8 million or 67.2% versus the three months ended March 31, 2021, of which $8.9 was related to an increase in stock compensation expense, $2.6 million was from selling, general and administrative expense pertaining to companies we acquired subsequent to the first quarter of 2021, an increase in the defined contribution plan employer contributions of $1.7 million, an increase in acquisition costs of $0.2 million, as well as the impact of an increase in investments in corporate infrastructure (primarily administrative, sales and marketing, finance, IT, legal and human resources).
For the three months ended March 31, 2022, selling, general and administrative expense was comprised of indirect labor of $19.5 million, stock-based compensation of $10.1 million, facilities costs of $4.4 million, acquisition-related costs of $0.5 million, a bad debt credit of $0.5 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $7.8 million.
For the three months ended March 31, 2021, selling, general and administrative expense was $25.0 million, and 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.
Fair Value Changes in Business Acquisitions Contingent Consideration
For the three months ended March 31, 2022, fair value changes in business acquisitions contingent consideration were not material when compared to $11.1 million for the three months ended March 31, 2021. The majority of the change in value in the three months ended March 31, 2021 period was attributable to the CTEH earn-outs. See “—Key Factors that Affect Our Business and Our Results—Acquisitions” and Note 7 and 13 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, 2022, was $12.1 million and was comprised of amortization of finite lived intangibles of $9.4 million, arising as a result of our acquisition activity, depreciation of property and equipment of $1.8 million and finance leases right-of-use asset amortization of $0.9 million.
Depreciation and amortization expense for the three months ended March 31, 2021, was $11.8 million and was comprised of amortization of finite lived intangibles of $8.6 million, depreciation of property and equipment of $2.4 million and finance leases right-of-use asset amortization of $0.8 million.
The increase in amortization for the three months ended March 31, 2022 versus the three months ended March 31, 2021, was primarily a result of acquisitions. The change in depreciation of property and equipment, and the amortization of finance leases
34
right-of-use asset, is primarily a result of the adoption of ASC 842, partially offset by the impact of acquisitions on depreciation. See Notes 5 and 6 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”
Other Income (Expense)
Other income for the three months ended March 31, 2022 of $2.5 million was driven by a gain related to the fair value adjustment on our interest rate swap of $3.0 million, which was partially offset by an expense of $0.6 million related to the fair value adjustment of the Series A-2 preferred stock conversion option. Other expense of $0.9 million for the three months ended March 31, 2021 was driven by fair value adjustments related to the Series A-2 preferred stock conversion option. See Note 12 and 15 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, 2022, was $1.1 million, compared to $2.7 million for the three months ended March 31, 2021. The decrease in interest expense was driven by lower average interest rates under the 2021 Credit Facility as compared to the prior facility which was still in place in the first quarter of 2021. See “—Key Factors that Affect Our Business and Our Results—Financing Costs” and Note 12 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”
Income Tax Expense
Income tax expense was $1.3 million during the three months ended March 31, 2022. Income tax expense was immaterial for the three months ended March 31, 2021.
Segment Results of Operations
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
|
|
Three Months Ended March 31, |
|
|
||||||||||||||||||||||
|
|
2022 |
|
|
|
2021 |
|
|
||||||||||||||||||
(in thousands) |
|
Segment Revenues |
|
|
Segment |
|
|
Segment |
|
|
|
Segment Revenues |
|
|
Segment |
|
|
Segment |
|
|
||||||
Assessment, Permitting and Response |
|
$ |
45,600 |
|
|
$ |
9,623 |
|
|
|
21.1 |
|
% |
|
$ |
75,262 |
|
|
$ |
15,804 |
|
|
|
21.0 |
|
% |
Measurement and Analysis |
|
|
39,761 |
|
|
|
6,322 |
|
|
|
15.9 |
|
|
|
|
33,440 |
|
|
|
4,860 |
|
|
|
14.5 |
|
|
Remediation and Reuse |
|
|
49,319 |
|
|
|
7,993 |
|
|
|
16.2 |
|
|
|
|
25,115 |
|
|
|
2,481 |
|
|
|
9.9 |
|
|
Total Operating Segments |
|
$ |
134,680 |
|
|
$ |
23,938 |
|
|
|
17.8 |
|
% |
|
$ |
133,817 |
|
|
$ |
23,145 |
|
|
|
17.3 |
|
% |
Corporate and Other |
|
|
— |
|
|
|
(7,487 |
) |
|
n/a |
|
|
|
|
— |
|
|
|
(6,345 |
) |
|
n/a |
|
|
35
Revenues
Assessment, Permitting and Response segment revenues for the three months ended March 31, 2022 were $45.6 million, compared to $75.3 million for the three months ended March 31, 2021. The decrease was driven by significantly lower CTEH revenues in the first quarter of 2022 when compared to the first quarter of 2021, as a result of lower revenue from COVID-19 related services, partially offset by revenues of $11.4 million from acquisitions completed subsequent to the quarter ended March 31, 2021. CTEH revenues were $29.9 million in the three months ended March 31, 2022 compared to $70.4 million in the three months ended March 31, 2021.
Measurement and Analysis segment revenues for the three months ended March 31, 2022 were $39.8 million, an increase of $6.4 million or 18.9% compared to revenues for the three months ended March 31, 2021 of $33.4 million. The increase was driven primarily by organic growth, as well as by revenues of $2.2 million from acquisitions completed subsequent to the quarter ended March 31, 2021.
Remediation and Reuse segment revenues for the three months ended March 31, 2022 were $49.3 million, an increase of $24.2 million or 96.4% compared to revenues for the three months ended March 31, 2021 of $25.1 million. The increase was driven by organic growth. This organic revenue growth was driven by increases in demand for our water treatment technology (PFAS removal) and waste-to-resources (agricultural waste to biogas) services.
Segment Adjusted EBITDA
Assessment, Permitting and Response Segment Adjusted EBITDA was $9.6 million for the three months ended March 31, 2022, compared to $15.8 million for the three months ended March 31, 2021. For the three months ended March 31, 2022 and March 31, 2021, Segment Adjusted EBITDA margin was 21.1% and 21.0%, respectively. The decrease in Segment Adjusted EBITDA was a result of a decrease in CTEH COVID-19 related revenues during the three months ended March 31, 2022 when compared to the three months ended March 31, 2021. Segment Adjusted EBITDA margin was flat despite the decrease in revenues primarily due to CTEH COVID-19 related services' comparatively lower margin profile.
Measurement and Analysis Segment Adjusted EBITDA for the three months ended March 31, 2022 was $6.3 million, an increase of $1.4 million compared to Segment Adjusted EBITDA for the three months ended March 31, 2021 of $4.9 million. For the three months ended March 31, 2022 and March 31, 2021 Segment Adjusted EBITDA margin was 15.9% and 14.5%, respectively. The increase in both Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was a result of higher revenues. Segment Adjusted EBITDA margins benefit from higher revenues due the benefit of operating leverage once fixed costs are covered.
Remediation and Reuse Segment Adjusted EBITDA for the three months ended March 31, 2022 was $8.0 million, an increase of $5.5 million compared to Segment Adjusted EBITDA for the three months ended March 31, 2021 of $2.5 million. For the three months ended March 31, 2022 and March 31, 2021 Segment Adjusted EBITDA margin was 16.2% and 9.9%, respectively. The increase in both Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was a result of significantly higher revenues despite our continued investments in operating infrastructure in this segment which temporarily impact margins.
Corporate and other costs were $7.5 million for the three months ended March 31, 2022 compared to $6.3 million for the three months ended March 31, 2021. The cost increase was primarily driven by continued investment in corporate support functions to support anticipated future growth. Corporate and other costs were 5.6% and 4.7% of revenues for the three months ended March 31, 2022 and March 31, 2021, respectively.
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 credit facilities, other borrowing arrangements, proceeds from the issuance of common and 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, to pay interest and principal on our indebtedness and dividends on our Series A-2 preferred stock, and to make capital expenditures. Additionally, in connection with certain acquisitions, we agree to earn-out provisions and other purchase price adjustments that may require future
36
payments. For example, the CTEH acquisition agreement included an earn-out provision that provided for the payment of contingent consideration based on CTEH’s 2021 results in an aggregate amount not to exceed $30.0 million, with the earn-out payment equal to a specified multiple of CTEH’s EBITDA for 2021 in excess of a specified target. CTEH fully achieved the target in 2021 and the $30.0 million payment was paid in cash in the first quarter of 2022. We may also be required to make up to $8.7 million in aggregate earn-out payments between the years 2022 and 2025 in connection with certain of our business acquisitions. See Note 7 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”
We expect to continue to fund 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 short- and long-term. 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) |
|
2022 |
|
|
2021 |
|
||
Consolidated Statement of Cash Flows Data: |
|
|
|
|
|
|
||
Net cash used in operating activities |
|
$ |
(18,328 |
) |
|
$ |
(13,913 |
) |
Net cash used in investing activities |
|
|
(15,005 |
) |
|
|
(7,398 |
) |
Net cash used in financing activities |
|
|
(19,715 |
) |
|
|
(3,087 |
) |
Change in cash, cash equivalents and restricted cash |
|
$ |
(53,048 |
) |
|
$ |
(24,398 |
) |
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, 2022, net cash used in operating activities was $18.3 million compared to net cash used in operating activities of $13.9 million for the three months ended March 31, 2021. Cash used in operations includes payment of contingent consideration of $19.5 million and zero in the three months ended March 31, 2022 and March 31, 2021, respectively. Excluding payment of contingent consideration, cash provided by operating activities was $1.2 million, compared to cash used in operating activities of $13.9 million in the prior year, an increase of $15.1 million. The period-over-period increase excluding the impact of contingent consideration was primarily due to an increase in working capital in the current year of $12.5 million versus an increase in working capital in the prior year of $27.1 million.
Working capital increased by $12.5 million in the three months ended March 31, 2022, primarily due to a decrease in accounts payable and other accrued liabilities of $20.7 million and an increase in prepaid expenses and other current assets of $1.8 million, partially offset by a decrease in accounts receivable and contract assets of $10.0 million (as a result of higher cash collections in the three months ended March 31, 2022 when compared to the three months ended March 31, 2021). The increase in working capital of $27.1 million in the three months ended March 31, 2021, was driven by an increase in accounts receivable and contract assets of $29.0 million, partially offset by an increase in accounts payable and accrued payroll and benefits of $1.1 million.
Investing Activities
For the three months ended March 31, 2022, net cash used in investing activities was $15.0 million, primarily driven by cash paid for the acquisitions of EnvStd and IAG, net of cash acquired, of $14.3 million, as well as payment of assumed purchase price obligations of $0.6 million, and purchases of property and equipment for cash consideration of $0.3 million.
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 $0.9 million.
Financing Activities
For the three months ended March 31, 2022, net cash used in financing activities was $19.7 million. Cash used in financing activities was driven by the payment of acquisition-related contingent consideration of $10.5 million, term loan amortization payments of $4.4 million related to our 2021 Credit Facility, the payment of the quarterly dividend on the Series A-2 preferred stock of $4.1
37
million, and the repayment of finance leases of $0.9 million, partially offset by proceeds received from the exercise of stock options of $0.4 million.
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 finance 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.
Credit Facilities
2021 Credit Facility
On April 27, 2021, we entered into a Senior Secured Credit Agreement, or the 2021 Credit Facility, providing for a $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 that were scheduled to begin with the quarter ended December 31, 2021 and 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 first quarterly installment repayment, amounting to $2.2 million, was billed and charged by the lenders in January 2022. The second quarterly installment repayment amounting to $2.2 million was paid in March 2022.
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 |
|
Senior Credit Facilities |
|
|
Senior Credit Facilities |
|
|
Commitment |
|
|
Letter of Credit Fee |
|
|
||||
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 |
|
<3.25x to 1.0 but ≥ 2.50 to 1.0 |
|
|
2.00 |
|
|
|
1.00 |
|
|
|
0.20 |
|
|
|
2.00 |
|
|
4 |
|
<2.50x to 1.0 but ≥ 1.75 to 1.0 |
|
|
1.75 |
|
|
|
0.75 |
|
|
|
0.15 |
|
|
|
1.75 |
|
|
5 |
|
<1.75x to 1.0 |
|
|
1.50 |
|
|
|
0.50 |
|
|
0.15 |
|
|
|
1.50 |
|
|
On January 27, 2022, we entered into an interest rate swap transaction fixing the floating component of the interest rate on $100.0 million of borrowings to 1.39% until January 27, 2025. 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. As of March 31, 2022, the Company’s consolidated total leverage ratio (as defined in the 2021 Credit Facility) was 1.1 times. The calculation of the Company’s consolidated total leverage ratio under the 2021 Credit Facility is consistent with the calculation of the consolidated total leverage ratio under the 2020 Credit Facility.
38
The weighted average interest rate on the 2021 Credit Facility for the three months ended March 31, 2022 was 1.8%. We were in compliance with all applicable covenants under the 2021 Credit Facility as of March 31, 2022.
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 12 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”
2020 Credit Facility
On April 13, 2020, we entered into a Unitranche Credit Agreement, or the 2020 Credit Facility, providing for a $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 June 30, 2021 and each other fiscal quarter through and including September 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 3.10 times. The weighted average interest rate on the 2020 Credit Facility for the three months ended March 31, 2021 was 5.5%. We were in compliance with all applicable covenants under the 2020 Credit Facility as of March 31, 2021.
All amounts outstanding under the 2020 Credit Facility were repaid on April 27, 2021.
See Note 12 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
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 15 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”
39
Critical Accounting Policies and Estimates
Our 2021 Form 10-K includes a summary of the critical accounting policies and estimates we believe are the most important to aid in understanding our financial results. There have been no material changes to those critical accounting policies and estimates as disclosed therein, other than as described in Note 2 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”
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.
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 (loss) 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) |
|
2022 |
|
|
2021 |
|
||
Net loss |
|
$ |
(7,536 |
) |
|
$ |
(12,931 |
) |
Interest expense |
|
|
1,092 |
|
|
|
2,688 |
|
Income tax expense |
|
|
1,269 |
|
|
|
2 |
|
Depreciation and amortization |
|
|
12,144 |
|
|
|
11,796 |
|
EBITDA |
|
$ |
6,969 |
|
|
$ |
1,555 |
|
Stock-based compensation (1) |
|
|
10,425 |
|
|
|
1,805 |
|
Start-up losses and investment in new services (2) |
|
|
786 |
|
|
|
968 |
|
Acquisition costs (3) |
|
|
467 |
|
|
|
237 |
|
Fair value changes in financial instruments (4) |
|
|
(2,449 |
) |
|
|
602 |
|
Expenses related to financing transactions (5) |
|
|
7 |
|
|
|
50 |
|
Fair value changes in business acquisitions |
|
|
(21 |
) |
|
|
11,064 |
|
Other losses and expenses(7) |
|
|
267 |
|
|
|
519 |
|
Adjusted EBITDA |
|
$ |
16,451 |
|
|
$ |
16,800 |
|
Net loss margin |
|
|
(5.6 |
)% |
|
|
(9.7 |
)% |
Adjusted EBITDA margin |
|
|
12.2 |
% |
|
|
12.6 |
% |
|
|
|
|
|
|
|
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 subject to the Company’s leverage ratio and LIBOR. Based on our overall interest rate exposure to variable rate debt outstanding as of March 31, 2022, which factors in our interest rate swap on $100.0 million of debt, a 1.0% increase in interest rates on the term loan and revolver would increase annual income (loss) before income taxes by approximately $0.7 million. Due to the LIBOR rate of 0.4% in effect at March 31, 2022, any decrease in LIBOR rates would have had a de minimis benefit to annual income (loss) before income taxes.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.
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, 2022, 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, 2022, 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, 2022, 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 Chief Executive Officer and Chief 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.
41
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 2021 Form 10-K. The risks described in our 2021 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.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
42
Item 6. Exhibits.
Exhibit Number |
|
Description |
|
|
|
31.1* |
|
|
|
|
|
31.2* |
|
|
|
|
|
32.1** |
|
|
|
|
|
32.2** |
|
|
|
|
|
101.INS* |
|
Inline XBRL Instance Document |
|
|
|
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
104* |
|
Cover Page Interactive Data File – The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 is formatted in Inline XBRL (included as Exhibit 101) |
* Filed herewith.
** Exhibit is furnished and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
43
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 10, 2022 |
|
By: |
/s/ Allan Dicks |
|
|
|
Allan Dicks |
|
|
|
Chief Financial Officer |
44
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