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 |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
|
|
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.
|
☒ |
|
Accelerated filer |
|
☐ |
|
|
|
|
|
|||
Non-accelerated filer |
|
☐ |
|
Smaller reporting company |
|
|
|
|
|
|
|
|
|
Emerging growth company |
|
|
|
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of May 3, 2024, the registrant had
Table of Contents
|
|
Page |
PART I. |
|
|
Item 1. |
1 |
|
|
Unaudited Condensed Consolidated Statements of Financial Position |
1 |
|
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss |
2 |
|
3 |
|
|
4 |
|
|
Notes to Unaudited Condensed Consolidated Financial Statements |
5 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
28 |
Item 3. |
37 |
|
Item 4. |
37 |
|
|
|
|
PART II. |
|
|
Item 1. |
38 |
|
Item 1A. |
38 |
|
Item 2. |
38 |
|
Item 3. |
38 |
|
Item 4. |
38 |
|
Item 5. |
38 |
|
Item 6. |
39 |
|
40 |
||
i
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
MONTROSE ENVIRONMENTAL GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands, except share data)
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Assets |
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash |
|
$ |
|
|
$ |
|
||
Accounts receivable, net |
|
|
|
|
|
|
||
Contract assets |
|
|
|
|
|
|
||
Prepaid and other current assets |
|
|
|
|
|
|
||
Total current assets |
|
|
|
|
|
|
||
Non-current assets: |
|
|
|
|
|
|
||
Property and equipment, net |
|
|
|
|
|
|
||
Operating lease right-of-use asset, net |
|
|
|
|
|
|
||
Finance lease right-of-use asset, net |
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
|
||
Other intangible assets, net |
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
Liabilities, Convertible and Redeemable Series A-2 Preferred Stock and Stockholders’ Equity |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable and other accrued liabilities |
|
$ |
|
|
$ |
|
||
Accrued payroll and benefits |
|
|
|
|
|
|
||
Business acquisitions contingent consideration, current |
|
|
|
|
|
|
||
Current portion of operating lease liabilities |
|
|
|
|
|
|
||
Current portion of finance lease liabilities |
|
|
|
|
|
|
||
Current portion of long-term debt |
|
|
|
|
|
|
||
Total current liabilities |
|
|
|
|
|
|
||
Non-current liabilities: |
|
|
|
|
|
|
||
Business acquisitions contingent consideration, long-term |
|
|
|
|
|
|
||
Other non-current liabilities |
|
|
|
|
|
|
||
Deferred tax liabilities, net |
|
|
|
|
|
|
||
Conversion option |
|
|
|
|
|
|
||
Operating lease liability, net of current portion |
|
|
|
|
|
|
||
Finance lease liability, net of current portion |
|
|
|
|
|
|
||
Long-term debt, net of deferred financing fees |
|
|
|
|
|
|
||
Total liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|||
Convertible and redeemable series A-2 preferred stock $ |
|
|
|
|
|
|
||
Authorized, issued and outstanding shares: |
|
|
|
|
|
|
||
Stockholders’ equity: |
|
|
|
|
|
|
||
Common stock, $ |
|
|
— |
|
|
|
— |
|
Additional paid-in-capital |
|
|
|
|
|
|
||
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
Accumulated other comprehensive (loss) income |
|
|
( |
) |
|
|
( |
) |
Total stockholders’ equity |
|
|
|
|
|
|
||
Total liabilities, convertible and redeemable series A-2 preferred stock and stockholders’ equity |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
MONTROSE ENVIRONMENTAL GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(In thousands, except per share data)
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Revenues |
|
$ |
|
|
$ |
|
||
Cost of revenues (exclusive of depreciation and amortization shown below) |
|
|
|
|
|
|
||
Selling, general and administrative expense |
|
|
|
|
|
|
||
Fair value changes in business acquisition contingencies |
|
|
|
|
|
( |
) |
|
Depreciation and amortization |
|
|
|
|
|
|
||
Loss from operations |
|
|
( |
) |
|
|
( |
) |
Other expense |
|
|
|
|
|
|
||
Other income (expense), net |
|
|
|
|
|
( |
) |
|
Interest expense, net |
|
|
( |
) |
|
|
( |
) |
Total other income (expense), net |
|
|
( |
) |
|
|
( |
) |
Loss before expense from income taxes |
|
|
( |
) |
|
|
( |
) |
Income tax expense |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
||
Equity adjustment from foreign currency translation |
|
|
( |
) |
|
|
|
|
Comprehensive loss |
|
|
( |
) |
|
|
( |
) |
Convertible and redeemable series A-2 preferred stock dividend |
|
|
( |
) |
|
|
( |
) |
Net loss attributable to common stockholders |
|
|
( |
) |
|
|
( |
) |
Weighted average common shares outstanding— basic and diluted |
|
|
|
|
|
|
||
Net loss per share attributable to common stockholders— basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
||||||||
|
|
Convertible and Redeemable |
|
|
|
|
|
Additional |
|
|
|
Other |
|
Total |
|
||||||||||
|
|
Series A-2 Preferred Stock |
|
Common Stock |
|
Paid-In |
|
Accumulated |
|
Comprehensive |
|
Stockholders' |
|
||||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
Income (Loss) |
|
Equity |
|
||||||||
Balance at December 31, 2022 |
|
|
|
$ |
|
|
|
$ |
— |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
|
||||||
Net loss |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
( |
) |
Stock-based compensation |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
||
Dividend payment to the Series A-2 preferred stockholders |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
( |
) |
Common stock issued |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
|||
Accumulated other comprehensive income |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
||
Balance at March 31, 2023 |
|
|
|
$ |
|
|
|
$ |
— |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
||||||||
|
|
Convertible and Redeemable |
|
|
|
|
|
Additional |
|
|
|
Other |
|
Total |
|
||||||||||
|
|
Series A-2 Preferred Stock |
|
Common Stock |
|
Paid-In |
|
Accumulated |
|
Comprehensive |
|
Stockholders' |
|
||||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
Income (Loss) |
|
Equity |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Balance at December 31, 2023 |
|
|
|
$ |
|
|
|
$ |
— |
|
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
|||||
Net loss |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
( |
) |
Stock-based compensation |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
||
Redemption of Series A-2 preferred stock |
|
|
( |
) |
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Dividend payment to the Series A-2 preferred stockholders |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
( |
) |
Common stock issued |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
|||
Accumulated other comprehensive income |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
Balance at March 31, 2024 |
|
|
|
$ |
|
|
|
$ |
— |
|
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
|||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
MONTROSE ENVIRONMENTAL GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
||
(Recovery) provision for credit loss |
|
|
( |
) |
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
||
Amortization of right-of-use asset |
|
|
|
|
|
|
||
Stock-based compensation expense |
|
|
|
|
|
|
||
Fair value changes in financial instruments |
|
|
( |
) |
|
|
|
|
Fair value changes in business acquisition contingencies |
|
|
|
|
|
( |
) |
|
Deferred income taxes |
|
|
( |
) |
|
|
|
|
Other |
|
|
( |
) |
|
|
|
|
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
||
Accounts receivable and contract assets |
|
|
( |
) |
|
|
|
|
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
( |
) |
Accounts payable and other accrued liabilities |
|
|
( |
) |
|
|
( |
) |
Accrued payroll and benefits |
|
|
( |
) |
|
|
( |
) |
Change in operating leases |
|
|
( |
) |
|
|
( |
) |
Net cash (used in) provided by operating activities |
|
|
( |
) |
|
|
|
|
Investing activities: |
|
|
|
|
|
|
||
Proceeds from corporate owned and property insurance |
|
|
|
|
|
|
||
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
Proprietary software development and other software costs |
|
|
( |
) |
|
|
( |
) |
Purchase price true ups |
|
|
|
|
|
( |
) |
|
Cash paid for acquisitions, net of cash acquired |
|
|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Financing activities: |
|
|
|
|
|
|
||
Proceeds from line of credit |
|
|
|
|
|
— |
|
|
Repayment of the line of credit |
|
|
( |
) |
|
|
— |
|
Repayment of aircraft loan |
|
|
( |
) |
|
|
— |
|
Proceeds from term loan |
|
|
|
|
|
— |
|
|
Repayment of term loan |
|
|
( |
) |
|
|
( |
) |
Payment of contingent consideration and other purchase price true ups |
|
|
( |
) |
|
|
( |
) |
Repayment of finance leases |
|
|
( |
) |
|
|
( |
) |
Payments of deferred financing costs |
|
|
( |
) |
|
|
— |
|
Proceeds from issuance of common stock for exercised stock options |
|
|
|
|
|
|
||
Dividend payment to the series A-2 stockholders |
|
|
— |
|
|
|
( |
) |
Repayment to the series A-2 stockholders |
|
|
( |
) |
|
|
— |
|
Net cash provided by (used in) financing activities |
|
|
|
|
|
( |
) |
|
Change in cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
( |
) |
Foreign exchange impact on cash balance |
|
|
( |
) |
|
|
|
|
Cash, cash equivalents and restricted cash: |
|
|
|
|
|
|
||
Beginning of year |
|
|
|
|
|
|
||
End of period |
|
$ |
|
|
$ |
|
||
Supplemental disclosures of cash flows information: |
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
|
|
$ |
|
||
Cash paid for income tax |
|
$ |
|
|
$ |
|
||
Supplemental disclosures of non-cash investing and financing activities: |
|
|
|
|
|
|
||
Accrued purchases of property and equipment |
|
$ |
|
|
$ |
|
||
Property and equipment purchased under finance leases |
|
$ |
|
|
$ |
|
||
Common stock issued to acquire new businesses |
|
$ |
|
|
$ |
— |
|
|
Acquisitions unpaid contingent consideration |
|
$ |
|
|
$ |
|
||
Acquisitions contingent consideration paid in common stock |
|
$ |
|
|
$ |
— |
|
|
Accrued dividend payment |
|
$ |
|
|
$ |
— |
|
|
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 segment provides scientific advisory and consulting services to support environmental assessments, environmental emergency response and recovery, toxicology consulting and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. The Company works closely with clients to navigate the regulatory process at the local, state, provincial and federal levels, identify the potential environmental and political impacts of their decisions and develop practical mitigation approaches, as needed. In addition to environmental toxicology, and given the Company's expertise in helping businesses plan for and respond to disruptions, the Company's scientists and response teams have helped clients navigate their preparation for and response to emergency response situations.
Measurement and Analysis segment is one of the largest providers of environmental testing and laboratory services in North America. The Company's 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. The Company's offerings include source and ambient air testing and monitoring, leak detection, and advanced multi-media laboratory services, including air, soil, stormwater, wastewater and drinking water analysis.
Remediation and Reuse segment provides clients with engineering, design, and implementation services, primarily to treat contaminated water, remove contaminants from soil or create biogas from waste. The Company's team, including engineers, scientists and consultants, provides these services to assist clients in designing solutions, managing products and mitigating environmental risks and liabilities at their locations. The Company does not own the properties or facilities at which it implements these projects or the underlying liabilities, nor does the Company own material amounts of the equipment used in projects.
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, 2023. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. All intercompany transactions, accounts and profits, have been eliminated in the unaudited condensed consolidated financial statements.
2. SUMMARY OF NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2023-07, Improvements to Reportable Segment Disclosures. The amendments improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The purpose of the amendments is to enable investors to better understand an entity’s overall performance and assess potential future cash flows. ASU 2023-07 is effective for the Company's fiscal year beginning January 1, 2024 and requires the use of a retrospective approach to all prior periods presented. The Company
5
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2023, the FASB issued ASU 2023-05, under which an entity that qualifies as either a joint venture or a corporate joint venture is required to apply a new basis of accounting upon the formation of the joint venture. Specifically, the ASU provides that a joint venture or a corporate joint venture must initially measure its assets and liabilities at fair value on the formation date. The amendments in ASU 2023-05 are effective for all joint ventures within the ASU’s scope that are formed on or after January 1, 2025. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. ASU 2023-09 is effective for the Company beginning January 1, 2025 and allows the use of a prospective or retrospective approach. The Company is currently evaluating the impact of the adoption of the standard on its 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 engineering, design, implementation and operating and maintenance (“O&M”) services primarily to treat contaminated water, remove contaminants from soil or create biogas from waste. Engineering, design and implementation contracts are predominantly fixed-fee and time-and-materials based. Services on the majority of O&M contracts are provided under long-term fixed-fee contracts.
Disaggregation of Revenue—The Company disaggregates revenue by its operating segments and geographic location. 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 - Segment Information and Geographic Location Information.
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 other 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, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Contract assets |
|
$ |
|
|
$ |
|
||
Contract liabilities |
|
|
|
|
|
|
||
Contract assets acquired through business acquisitions were $
Revenue recognized during the three months ended March 31, 2024, included in the contract liabilities balance at the beginning of the year was $
6
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, 2024 and December 31, 2023, the estimated revenue expected to be recognized in the future related to unsatisfied performance obligations was approximately $
|
|
|
|
|
|
|
||
|
|
March 31, |
|
|
December 31, |
|
||
Accounts receivable, invoiced |
|
$ |
|
|
$ |
|
||
Accounts receivable, other |
|
|
|
|
|
|
||
Allowance for doubtful accounts |
|
|
( |
) |
|
|
( |
) |
Accounts receivable, net |
|
$ |
|
|
$ |
|
||
The Company did
The allowance for doubtful accounts consisted of the following:
|
|
Beginning Balance |
|
|
Bad Debt (Recovery) Expense |
|
|
Charged to Allowance |
|
|
Ending Balance |
|
||||
Three months ended March 31, 2024 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
Year ended December 31, 2023 |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
4. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Deposits |
|
$ |
|
|
$ |
|
||
Prepaid expenses |
|
|
|
|
|
|
||
Supplies |
|
|
|
|
|
|
||
Prepaid and other current assets |
|
$ |
|
|
$ |
|
||
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.
7
Property and equipment, net, consisted of the following:
|
|
Estimated |
|
March 31, |
|
|
December 31, |
|
||
|
|
Useful Life |
|
2024 |
|
|
2023 |
|
||
Lab and test equipment |
|
|
$ |
|
|
$ |
|
|||
Vehicles |
|
|
|
|
|
|
|
|||
Equipment |
|
|
|
|
|
|
|
|||
Furniture and fixtures |
|
|
|
|
|
|
|
|||
Leasehold improvements |
|
|
|
|
|
|
|
|||
Aircraft |
|
|
|
|
|
|
|
|||
Building |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
||
Land |
|
|
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
|
|
||
Less accumulated depreciation |
|
|
|
|
( |
) |
|
|
( |
) |
Total property and equipment, net |
|
|
|
$ |
|
|
$ |
|
||
Total depreciation expense included in the unaudited condensed consolidated statements of operations was $
6. LEASES
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 does 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 ("ROU") 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.
The Company does not record operating lease ROU 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.
When a lease is terminated before the expiration of the lease term, irrespective of whether the lease is classified as a finance lease or an operating lease, the lessee would derecognize the ROU asset and corresponding lease liability. Any difference would be recognized as a gain or loss related to the termination of the lease. Similarly, if a lessee is required to make any payments or receives any consideration when terminating the lease, it would include such amounts in the determination of the gain or loss upon termination.
8
The components of lease expense were as follows:
|
|
For the Three Months Ended March 31, |
|
|||||
|
Statement of Operations Location |
2024 |
|
|
2023 |
|
||
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 ROU assets |
Depreciation and amortization |
|
|
|
|
|
||
Interest on lease liabilities |
Interest expense—net |
|
|
|
|
|
||
Total finance lease cost |
|
|
|
|
|
|
||
Total lease cost |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental cash flow information related to leases was as follows:
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
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:
|
|
March 31, 2024 |
|
|||||
|
|
Operating Leases |
|
|
Finance Leases |
|
||
Weighted average remaining lease term (years) |
|
|
|
|
|
|||
Weighted average discount rate |
|
|
% |
|
|
% |
||
|
|
|
|
|
|
|
||
|
|
March 31, 2023 |
|
|||||
|
|
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 2024 |
|
$ |
|
|
$ |
|
||
2025 |
|
|
|
|
|
|
||
2026 |
|
|
|
|
|
|
||
2027 |
|
|
|
|
|
|
||
2028 |
|
|
|
|
|
|
||
2029 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, 2024 and during the year ended December 31, 2023. The results of each of those acquired businesses are included in the unaudited condensed consolidated financial statements beginning on the respective 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 and developed technology, 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 $
Acquisitions Completed During the Three Months Ended March 31, 2024
Epic Environmental Pty LTD (“EPIC”) —In January 2024, the Company completed the acquisition of EPIC by acquiring
Two Dot Consulting, LLC. (“2DOT”)—In February 2024, the Company completed the acquisition of 2DOT by acquiring
10
The following table summarizes the elements of the purchase price of the acquisitions completed during the three months ended March 31, 2024:
|
|
Cash |
|
|
Common |
|
|
Other |
|
|
Contingent |
|
|
Total |
|
|||||
EPIC |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
2DOT |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
The upfront cash payment made to acquire the acquisitions completed during the three months ended March 31, 2024 was funded through our revolving line of credit. The other purchase price components mainly consist of deferred purchase price liabilities and working capital amounts.
The preliminary purchase price attributable to the acquisitions was allocated as follows:
|
|
EPIC |
|
|
2DOT |
|
|
Total(1) |
|
|||
Cash |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Accounts receivable and contract assets |
|
|
|
|
|
|
|
|
|
|||
Other current assets |
|
|
|
|
|
|
|
|
|
|||
Current assets |
|
|
|
|
|
|
|
|
|
|||
Property and equipment |
|
|
|
|
|
|
|
|
|
|||
Operating lease right-of-use asset |
|
|
|
|
|
|
|
|
|
|||
Goodwill |
|
|
|
|
|
|
|
|
|
|||
Total assets |
|
|
|
|
|
|
|
|
|
|||
Current liabilities |
|
|
|
|
|
|
|
|
|
|||
Operating lease liability—net of current portion |
|
|
— |
|
|
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
|
|
|
|
|||
Purchase price |
|
$ |
|
|
$ |
|
|
$ |
|
|||
___________________________________
(1)
EPIC and 2DOT are included in the Company’s Remediation and Reuse segment.
For the acquisitions completed during the three months ended March 31, 2024, 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, 2024 includes revenue of $
Acquisitions Completed During the Year Ended December 31, 2023
Frontier Analytical Laboratories (“Frontier”) —In January 2023, the Company completed the acquisition of Frontier by acquiring certain of its assets and operations. Frontier is a specialized environmental laboratory based in El Dorado Hills, CA.
Environmental Alliance, Inc. (“EAI”)—In February 2023, the Company completed the acquisition of EAI by acquiring
GreenPath Energy LTD (“GreenPath”) —In May 2023, the Company completed the acquisition of GreenPath by acquiring
Matrix Solutions, Inc. ("Matrix") —In June 2023, the Company completed the acquisition of Matrix by acquiring
Vandrensning ApS. ("Vandrensning") —In July 2023, the Company completed the acquisition of Vandrensning by acquiring
Goodwill associated with the Frontier acquisition is deductible for income tax purposes.
11
Frontier and GreenPath are included in the Company’s Measurement and Analysis segment. EAI, Matrix and Vandrensning are included in the Company’s Remediation and Reuse segment.
For the acquisitions completed during the three months ended March 31, 2023, 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, 2023 includes revenue of $
During the three months ended March 31, 2024, measurement period adjustments of $
Supplemental Unaudited Pro-Forma—
|
|
For the Three Months Ended March 31, |
|
|||||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
||||||||||||||||||
|
|
As |
|
|
Acquisitions |
|
|
Consolidated |
|
|
As |
|
|
Acquisitions |
|
|
Consolidated |
|
||||||
Revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Net (loss) income |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
8. GOODWILL AND INTANGIBLE ASSETS
Amounts related to goodwill are as follows:
|
|
Assessment, |
|
|
Measurement |
|
|
Remediation |
|
|
Total |
|
||||
Balance as of December 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Goodwill acquired during the period |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Prior year acquisitions measurement period adjustments |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Foreign currency translation impact |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balance as of March 31, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Amounts related to finite-lived intangible assets are as follows:
March 31, 2024 |
|
Estimated |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|||
Finite lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|||
Customer relationships |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Covenants not to compete |
|
|
|
|
|
|
|
|
|
|
||||
Trade names |
|
|
|
|
|
|
|
|
|
|
||||
Proprietary software |
|
|
|
|
|
|
|
|
|
|
||||
Patent |
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
12
December 31, 2023 |
|
Estimated |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|||
Finite lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|||
Customer relationships |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Covenants not to compete |
|
|
|
|
|
|
|
|
|
|
||||
Trade names |
|
|
|
|
|
|
|
|
|
|
||||
Proprietary software |
|
|
|
|
|
|
|
|
|
|
||||
Patent |
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
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, |
|
|
|
|
2024 (remaining) |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
9. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Accounts payable and other accrued liabilities consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Accrued expenses |
|
|
|
|
|
|
||
Other business acquisitions purchase price obligations |
|
|
|
|
|
|
||
Contract liabilities |
|
|
|
|
|
|
||
Other current liabilities |
|
|
|
|
|
|
||
Total accounts payable and other accrued liabilities |
|
$ |
|
|
$ |
|
||
10. ACCRUED PAYROLL AND BENEFITS
Accrued payroll and benefits consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
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 (
13
and March 31, 2023, respectively. Income tax expense recorded by the Company during the three months ended March 31, 2024 and March 31, 2023 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, 2024, 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
12. DEBT
Debt consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Term loan facility |
|
$ |
|
|
$ |
|
||
Revolving line of credit |
|
|
|
|
— |
|
||
Aircraft loan |
|
|
|
|
|
|
||
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 $
In January 2024, the Company partially exercised its option to request an increase in the aggregate commitments to provide an additional $
The 2021 Credit Facility term loan must be repaid in quarterly installments and shall amortize at the following future quarterly rates:
14
|
Quarterly Installment Rate |
|
Date |
2021 Credit Facility Term Loan |
Additional Term Loan |
June 30, 2024 |
||
September 30, 2024 |
||
December 31, 2024 |
||
March 31, 2025 |
||
June 30, 2025 |
||
September 30, 2025 |
||
December 31, 2025 |
||
March 31, 2026 |
||
April 27, 2026 |
||
Quarterly installment repayments for the three months ended March 31, 2024 and March 31, 2023 were $
On May 31, 2023, the Company amended its 2021 Credit Facility agreement to transition the reference rate from LIBOR to SOFR plus
The 2021 Credit Facility term loan and the revolving line of credit bear interest subject to the applicable spread based on Company’s leverage ratio and SOFR plus 0.10% as follows:
Pricing Tier |
|
Consolidated Leverage Ratio |
|
Senior Credit Facilities SOFR Spread |
|
|
Senior Credit Facilities Base Rate Spread |
|
|
Commitment Fee |
|
|
Letter of Credit Fee |
|
|
||||
1 |
|
≥ |
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
2 |
|
< |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
3 |
|
< |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
4 |
|
< |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
5 |
|
< |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
On May 30, 2023, the Company amended the interest rate swap transaction it entered into on January 27, 2022 (the "2022 Interest Rate Swap"), to convert the floating component of the interest rate on $
Further, on May 30, 2023, the Company entered into a second interest rate swap transaction fixing the floating component of the interest rate on an additional $
Additionally, effective September 1, 2022, the Company received an interest rate reduction of
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 which required the Company to remain below a maximum total net leverage ratio of
15
applies through and including the fiscal quarter ending September 30, 2023 and then further steps down to
As of March 31, 2024 and December 31, 2023, the Company’s consolidated total leverage ratio (as defined in the 2021 Credit Facility) was
The 2021 Credit Facility requires customary mandatory prepayments of the term loan and revolving line of credit 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, 2024 and March 31, 2023, before giving effect to the impact of the interest rate swaps, 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.
Loan and Aircraft Security Agreement—On May 18, 2023, the Company entered into a Loan and Aircraft Security Agreement to finance $
Equipment Line of Credit—The Company has a $
The following is a schedule of the aggregate annual maturities of long-term debt presented on the unaudited condensed consolidated statement of financial position, gross of deferred debt issuance cost of $
|
|
2021 Credit Facility |
|
|
|
|
|
||||||
March 31, |
|
Term Loan |
|
Revolver |
|
Aircraft Loan |
|
Total |
|
||||
2025 |
|
$ |
|
|
— |
|
$ |
|
$ |
|
|||
2026 |
|
|
|
|
|
|
|
|
|
||||
2027 |
|
|
|
|
— |
|
|
|
|
|
|||
2028 |
|
|
— |
|
|
— |
|
|
|
|
|
||
2029 |
|
|
— |
|
|
— |
|
|
|
|
|
||
Total |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||
16
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, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Interest rate swap(1) |
|
$ |
|
|
$ |
|
||
Total assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Business acquisitions contingent consideration, current |
|
$ |
|
|
$ |
|
||
Business acquisitions contingent consideration, long-term |
|
|
|
|
|
|
||
Conversion option |
|
|
|
|
|
|
||
Total liabilities |
|
$ |
|
|
$ |
|
||
_____________________________
(1)
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 Rate Swap |
|
|
Total Assets |
|
|
Business Acquisitions Contingent Consideration, Current |
|
|
Business Acquisitions Contingent Consideration, Long-term |
|
|
Conversion Option |
|
|
Total Liabilities |
|
||||||
Balance at December 31, 2022 |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Acquisitions |
— |
|
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
|
|
|||||
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||
Payment of contingent consideration payable |
— |
|
|
|
— |
|
|
|
( |
) |
|
— |
|
|
— |
|
|
|
( |
) |
|||
Reclass of long term to short term contingent liabilities |
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
— |
|
|
|
— |
|
|||
Balance at March 31, 2023 |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance at December 31, 2023 |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Acquisitions |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Payment of contingent consideration payable |
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Balance at March 31, 2024 |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Quantitative Information about Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3):
Interest Rate Swaps—The interest rate swaps fair value is estimated based on a mid-market price for the swaps 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 as other (expense) income in each reporting period.
Business Acquisitions Contingent Consideration— 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. Prior to the second quarter of 2023, the fair value of the contingent consideration payable associated with the acquisition of Sensible was determined using a Monte Carlo simulation of earnings in a risk-neutral Geometric Brownian Motion framework. 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.
17
Conversion Option—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” 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 Aircraft Loan, 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, the 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
The Convertible and Redeemable Series A-2 Preferred Stock terms include 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) convertible into common stock beginning in April 2024 at a
The Convertible and Redeemable Series A-2 Preferred Stock does not meet the definition of a liability pursuant to “ASC 480- Distinguishing Liabilities from Equity.” However, as (i) the instrument is redeemable upon a change of control as defined in the certificate of designations governing the terms of the Convertible and Redeemable Series A-2 Preferred Stock, and (ii) the Company cannot assert it would have sufficient authorized and unissued shares of common stock to settle all future conversion requests due to the variable conversion terms, the instrument is redeemable upon the occurrence of events that are not solely within the control of the Company, and therefore the Company classifies the Convertible and Redeemable Series A-2 Preferred Stock as mezzanine equity. Subsequent adjustment of the carrying value of the instrument is required if the instrument is probable of becoming redeemable. As of March 31, 2024, the Company has determined that a change of control is not probable. Additionally, as of March 31, 2024, 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,
18
2024, 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 contains a conversion option of the preferred shares to shares of common stock beginning in April 2024. As of March 31, 2024 and December 31, 2023, this conversion embedded feature had a net fair value of $
16. STOCKHOLDERS’ EQUITY
Authorized Capital Stock—The Company was authorized to issue
Common Stock Issuances—
|
Three Months Ended March 31, |
|
|||||||||||||||||||||
|
2024 |
|
|
2023 |
|
||||||||||||||||||
|
Shares |
|
|
Average Price per Share |
|
|
Total |
|
|
Shares |
|
|
Average Price per Share |
|
|
Total |
|
||||||
Acquisitions |
|
|
|
$ |
|
|
$ |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|||
Exercise of options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Restricted shares, net (1) |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|||||
Payment of earn-out liability |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|||
Total |
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
(1)
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, 2024 and March 31, 2023, there was $
|
|
March 31, 2024 |
|
|||||||||
|
|
2017 Plan |
|
|
2013 Plan |
|
|
Total |
|
|||
Shares authorized to be issued |
|
|
|
|
|
|
|
|
|
|||
Shares available for grant(1) |
|
|
|
|
— |
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
March 31, 2023 |
|
|||||||||
|
|
2017 Plan |
|
|
2013 Plan |
|
|
Total |
|
|||
Shares authorized to be issued |
|
|
|
|
|
|
|
|
|
|||
Shares available for grant(1) |
|
|
|
|
— |
|
|
|
|
|||
(1)
19
There were
|
|
Three Months Ended March 31, |
|
|||||||||||||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
||||||||||||||||||||||||||
|
|
Options |
|
|
RSUs |
|
|
SARs |
|
|
Total |
|
|
Options |
|
|
RSUs |
|
|
SARs |
|
|
Total |
|
||||||||
Cost of revenue |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||||||
Selling, general and administrative expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Montrose Amended & Restated 2017 Stock Incentive Plan
Restricted Stock Awards and Restricted Stock Units—The Company issues restricted stock awards ("RSAs") to certain 2017 Plan participants as Director’s compensation. There were
The Board of Directors approved the grant of RSUs under certain supplemental incentive plans ("SI Plans"). There were
RSAs and RSUs activity was as follows:
|
Three Months Ended March 31, |
|
|||||||||||||||||||||
|
2024 |
|
|
2023 |
|
||||||||||||||||||
|
Shares |
|
|
Average Price per Share |
|
|
Fair Value |
|
|
Shares |
|
|
Average Price per Share |
|
|
Fair Value |
|
||||||
Awards granted |
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
||||||
Awards forfeited |
|
( |
) |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
There were an aggregate of
Stock Appreciation Rights— As of March 31, 2024, there were
SARs Stock Price Performance Hurdle |
|
Portion of SARs Subject to Performance Hurdle |
|
$ |
|
||
$ |
|
||
$ |
|
||
20
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. None of the market conditions have been achieved as of March 31, 2024.
The SARs expire
Options—Options issued to all optionees under the 2017 Plan vest over
|
|
Options to Purchase Common Stock |
|
|
Weighted-Average Exercise Price per Share |
|
|
Weighted Average Grant Date Fair Value per Share |
|
|
Weighted Average Remaining Contract Life (in Years) |
|
|
Aggregate Intrinsic Value of In-The-Money Options (in |
|
|||||
Outstanding as of December 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|||||
Granted |
|
|
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|||||
Forfeited/ cancelled |
|
|
( |
) |
|
|
|
|
— |
|
|
— |
|
|
— |
|
||||
Exercised |
|
|
( |
) |
|
|
|
|
— |
|
|
— |
|
|
|
|
||||
Outstanding as of March 31, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Outstanding as of December 31, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|||||
Forfeited/ cancelled |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Expired |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Exercised |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Outstanding as of March 31, 2024 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|||||
Exercisable at March 31, 2024 |
|
|
|
|
$ |
|
|
$ |
— |
|
|
|
|
|
$ |
|
||||
The following weighted-average assumptions were used in the Black-Scholes option-pricing model calculation:
|
|
March 31, |
|
|
|
|
2023 |
|
|
Common stock value (per share) |
|
$ |
|
|
Expected volatility |
|
|
% |
|
Risk-free interest rate |
|
|
% |
|
Expected life (years) |
|
|
|
|
Forfeiture rate |
|
|
||
Dividend rate |
|
|
||
21
Montrose Amended & Restated 2013 Stock Option Plan—
|
|
Options to |
|
|
Weighted- |
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate |
|
|||||
Outstanding as of December 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|||||
Exercised |
|
|
( |
) |
|
|
|
|
— |
|
|
— |
|
|
|
|
||||
Outstanding as of March 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Outstanding as of December 31, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|||||
Exercised |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Outstanding as of March 31, 2024 |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|||||
Exercisable at March 31, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total shares outstanding from exercised options were
Common Stock Reserved for Future Issuances—
|
|
March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Montrose 2013 Stock Incentive Plan |
|
|
|
|
|
|
||
Montrose 2017 Stock Incentive Plan(1) |
|
|
|
|
|
|
||
Total |
|
|
|
|
|
|
||
(1)
17. NET LOSS PER SHARE
Basic net loss per share is computed by dividing the 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 periods. 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 as-converted method. Potentially dilutive shares are comprised of RSAs, RSUs, SARs, and shares of common stock underlying stock options outstanding under the Plans. During the three months ended March 31, 2024 and March 31, 2023, there is no difference in the number of shares used to calculate basic and diluted shares outstanding during the applicable period due to the Company’s net loss attributable to common stockholders and potentially dilutive shares being anti-dilutive.
22
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, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Convertible and redeemable series A-2 preferred stock dividend |
|
|
( |
) |
|
|
( |
) |
Net loss attributable to common stockholders – basic and diluted |
|
|
( |
) |
|
|
( |
) |
Weighted-average common shares outstanding – basic and diluted |
|
|
|
|
|
|
||
Net loss per share attributable to common stockholders – basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
The following common stock equivalents 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, |
|
|||||
|
|
2024(1) |
|
|
2023(1) |
|
||
Stock options |
|
|
|
|
|
|
||
Restricted stock |
|
|
|
|
|
|
||
Series A-2 |
|
|
|
|
|
|
||
SARs |
|
|
|
|
|
|
||
_____________________________
(1)
18. SEGMENT AND GEOGRAPHIC LOCATION INFORMATION
The Company has
Our Chief Executive Officer who serves as the Chief Operating Decision Maker (“CODM”), reviews segment Adjusted EBITDA as the primary measure of operating performance for all
During the first quarter of 2023, the Company determined to discontinue one of its specialty service lines within the lab testing business (the "Discontinued Specialty Lab"). On December 29, 2023, the Company sold the assets of the Discontinued Specialty Lab for a total sales price of $
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.
23
Segment revenues and Adjusted EBITDA consisted of the following:
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2024 |
|
|
2023 |
|
||||||||||
|
|
|
|
|
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 of profit and loss to net loss:
|
|
For the Three Months |
|
|
|||||
|
|
2024 |
|
|
2023 |
|
|
||
Total |
|
$ |
|
|
$ |
|
|
||
Interest expense, net |
|
|
( |
) |
|
|
( |
) |
|
Income tax expense |
|
|
( |
) |
|
|
( |
) |
|
Depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
|
Stock-based compensation |
|
|
( |
) |
|
|
( |
) |
|
Acquisition costs |
|
|
( |
) |
|
|
( |
) |
|
Fair value changes in financial instruments |
|
|
|
|
|
( |
) |
|
|
Fair value changes in business acquisition contingencies |
|
|
( |
) |
|
|
|
|
|
Expenses related to financing transactions |
|
|
( |
) |
|
|
( |
) |
|
Discontinued Specialty Lab |
|
|
(596 |
) |
(1) |
|
( |
) |
(1) |
Other losses and expenses |
|
|
( |
) |
(2) |
|
( |
) |
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
_______________________________
(1)
(2)
The following table presents revenues by geographic location:
|
|
For the Three Months |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
United States |
|
$ |
|
|
$ |
|
||
Canada |
|
|
|
|
|
|
||
Other international |
|
|
|
|
|
|
||
Total revenue |
|
$ |
|
|
$ |
|
||
19. RELATED-PARTY TRANSACTIONS
The Company did
20. DEFINED CONTRIBUTION PLAN
On January 1, 2014, the Company established the Montrose Environmental Group
24
March 31, 2024 and March 31, 2023, respectively, and are included within selling, general, and administrative expense on the unaudited condensed consolidated statements of operations.
21. SUBSEQUENT EVENTS
On April 22, 2024, the Company issued an aggregate of
On
25
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity, capital resources and other financial and operating information. We use words such as “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “position,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements in this filing. All of our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we are expecting, including:
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, 2023 filed with the SEC on February 29, 2024, or the 2023 Form 10-K.
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
26
should not regard any forward-looking statement as a representation or warranty by us or any other person that we will successfully achieve the expectation, plan or objective expressed in such forward-looking statement in any specified time frame, or at all. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us speaks only as of the date on which we make it. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical audited and unaudited consolidated financial statements and related notes and other information included elsewhere in this filing and our other filings with the SEC, including our unaudited condensed consolidated financial statements and the accompanying notes as of and for the three months ended March 31, 2024 and March 31, 2023 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 2023 Form 10-K.
Overview
Since our inception in 2012, our mission has been to help clients and communities meet their environmental goals and needs. According to data derived from a 2023 Environmental Industry Study prepared by Environmental Business International, Inc., or EBI, which we commissioned, the global environmental industry is estimated to be approximately $1.44 trillion, with $494.0 billion concentrated in the United States.
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 2023 Form 10-K.
Assessment, Permitting and Response
Assessment, Permitting and Response segment provides scientific advisory and consulting services to support environmental assessments, environmental emergency response and recovery, toxicology consulting and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. We work closely with clients to navigate the regulatory process at the local, state, provincial and federal levels, identify the potential environmental and political impacts of their decisions and develop practical mitigation approaches, as needed. 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 emergency response situations.
Measurement and Analysis
Measurement and Analysis segment is one of the largest providers of environmental testing and laboratory services in North America. 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 multi-media laboratory services, including air, soil, stormwater, wastewater and drinking water analysis.
Remediation and Reuse
Remediation and Reuse segment provides clients with engineering, design, and implementation services, primarily to treat contaminated water, remove contaminants from soil or create biogas from waste. Our employees, including engineers, scientists and consultants, provide these services to assist our clients in designing solutions, managing products and mitigating environmental risks and liabilities at their locations. 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.
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.
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.
28
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, Europe 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, 2024 and March 31, 2023:
|
|
Three Months Ended March 31, |
|
|||||
(Revenues in thousands) |
|
2024 |
|
|
2023 |
|
||
Acquisitions completed |
|
|
2 |
|
|
|
2 |
|
Revenues attributable to acquisitions completed in the relevant period |
|
$ |
3,863 |
|
|
$ |
967 |
|
Percentage of revenues |
|
|
2.5 |
% |
|
|
0.7 |
% |
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. See Note 7 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”
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 business acquisition contingencies such as earn-outs could be significant. The amount of each for the three months ended March 31, 2024 and March 31, 2023, was:
|
|
Three Months Ended March 31, |
|
|
|||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
||
Amortization expense |
|
$ |
7,429 |
|
|
$ |
7,240 |
|
|
Acquisition-related costs |
|
|
2,525 |
|
|
|
775 |
|
|
Fair value changes in business acquisition contingencies |
|
|
106 |
|
|
|
(398 |
) |
|
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 an earn-out payment of $1.5 million in March 2024 in connection with our acquisition of Huco Consulting, Inc. ("Huco"), of which, $0.4 million was paid in cash, and the remaining $1.1 million in the Company's common stock. In connection with certain of our acquisitions, we may make up to $40.4 million in aggregate earn-out payments between the years 2025 and 2026, of which up to $14.2 million may be paid only in cash, up to $13.1 million may be paid only in common stock and up to $13.1 million may be paid, at our option, in cash or common stock. 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 i) our environmental emergency response business, ii) acquisitions for the first twelve months following the date of acquisition, and iii) businesses held for sale, disposed of or discontinued. 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 over the long term and expect to continue to do so.
Discontinued Service Lines and Contracts
Periodically, or when circumstances warrant, we evaluate the performance of our business services to ensure that performance and outlook are consistent with expectations, and that the services offered are consistent with the Company’s mission.
As part of this evaluation, during the first quarter of 2023, we determined to sell one of our specialty lab testing businesses, the Discontinued Specialty Lab, whose service offering was non-core to the Company’s business. On December 29, 2023, we sold the assets of the Discontinued Specialty Lab for a total sales price of $4.8 million. The discontinuation of this specialty service line did not represent a strategic shift that had a major effect on our operations and financial results, therefore it did not meet the requirements to be classified as discontinued operations.
29
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, segment adjusted EBITDA and segment 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
On April 27, 2021, we entered into the 2021 Credit Facility and repaid all amounts outstanding under our prior credit facility. The 2021 Credit Facility consists of a $175.0 million term loan and a $125.0 million revolving credit facility. The revolving credit facility includes a $20.0 million sublimit for the issuance of letters of credit. Prior to May 31, 2023, the interest rate on the 2021 Credit Facility varied depending on leverage, with a minimum of LIBOR plus 1.5% and a maximum of LIBOR plus 2.5%. On May 31, 2023, we amended our 2021 Credit Facility to transition the reference rate from LIBOR to SOFR plus 0.10%. The transition to SOFR did not materially impact the interest rate we pay or change any material terms of the 2021 Credit Facility.
On May 30, 2023, we amended the interest rate swap transaction we entered into on January 27, 2022, to convert the floating component of the interest rate on $100.0 million of borrowings to 1-Month Term SOFR and a new coupon of 1.319% until January 27, 2025. Prior to the amendment, the floating component of the interest rate was 1.39%. Further, on May 30, 2023, we entered into a second interest rate swap transaction fixing the floating component of the interest rate on an additional $70.0 million of borrowings to 1-Month Term SOFR and a coupon of 3.88% until April 27, 2026.
In January 2024, the Company partially exercised its option to request an increase in the aggregate commitments to provide an additional $100.0 million credit availability under the 2021 Credit Facility, comprised of an additional $50.0 million term loan and an additional $50.0 million in capacity under our revolving credit facility. Furthermore, the Company exercised its credit facility covenant holiday, increasing its leverage capacity from 3.75 times to 4.25 times for four quarters beginning with the first quarter of 2024.
Interest expense, net was $3.3 million and $1.5 million in the three months ended March 31, 2024 and March 31, 2023, respectively. 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 development, finance and information technology and other areas enable us to support continued growth. These investments should allow us to improve our margins over time.
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 and, following the acquisition of Matrix in Canada, the Remediation and Reuse 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 and Remediation and Reuse segments may deviate from historical trends.
Earnings Volatility
In addition to the impact of seasonality on earnings, our emergency response business 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 or more broad scale events such as the COVID-19 pandemic. We also saw significant emergency response revenue in 2023 from a single event. Demand for environmental emergency response services remains difficult to predict and as a result, we may have experienced revenues and earnings in prior years that are not indicative of future results, making those periods particularly difficult comparisons for future periods. 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
30
is better assessed based on yearly results.
Results of Operations
Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023
|
|
Three Months Ended March 31, |
|
|||||
(in thousands, except per share data) |
|
2024 |
|
|
2023 |
|
||
Statements of operations data: |
|
|
|
|
|
|
||
Revenues |
|
$ |
155,325 |
|
|
$ |
131,428 |
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
96,557 |
|
|
|
81,633 |
|
Selling, general and administrative expense |
|
|
57,074 |
|
|
|
49,613 |
|
Fair value changes in business acquisition contingencies |
|
|
106 |
|
|
|
(398 |
) |
Depreciation and amortization |
|
|
11,653 |
|
|
|
10,555 |
|
Loss from operations |
|
$ |
(10,065 |
) |
|
$ |
(9,975 |
) |
Other income (expense), net |
|
|
507 |
|
|
|
(1,836 |
) |
Interest expense, net |
|
|
(3,306 |
) |
|
|
(1,541 |
) |
Loss before income taxes |
|
|
(12,864 |
) |
|
|
(13,352 |
) |
Income tax expense |
|
|
493 |
|
|
|
1,367 |
|
Net loss |
|
$ |
(13,357 |
) |
|
$ |
(14,719 |
) |
Series A-2 dividend payment |
|
|
(2,814 |
) |
|
|
(4,100 |
) |
Net loss attributable to common stockholders |
|
$ |
(16,171 |
) |
|
$ |
(18,819 |
) |
Weighted average number of shares — basic and diluted |
|
|
30,381 |
|
|
|
29,857 |
|
Loss per share — basic and diluted |
|
$ |
(0.53 |
) |
|
$ |
(0.63 |
) |
Revenues
For the three months ended March 31, 2024, we generated revenues of $155.3 million, an increase of $23.9 million, or 18.2% over the three months ended March 31, 2023. The period over period increase in revenues was primarily driven by acquisitions completed subsequent to the quarter ended March 31, 2023, which contributed revenues of $22.5 million, and strong organic growth in both our Measurement and Analysis and Assessment, Permitting and Response segments. These increases were partially offset by $7.5 million lower environmental emergency response service revenues, the exiting of the Discontinued Specialty Lab in December 2023, which generated revenues of $1.4 million in the three months ended March 31, 2023, and the shift away from lower margin revenue in our biogas business. Environmental emergency response revenues were $15.7 million in the three months ended March 31, 2024, compared to $23.2 million in the three months ended March 31, 2023.
Revenue by segment and as a percentage of total revenues was as follows:
|
|
Three Months Ended March 31, |
||||||||||||||||||
|
|
2024 |
|
2023 |
||||||||||||||||
(Revenues in thousands) |
|
Revenues |
|
|
% of Total Revenues |
|
Revenues |
|
|
% of Total Revenues |
||||||||||
Assessment, Permitting and Response |
|
$ |
|
58,580 |
|
|
|
37.7 |
|
% |
|
$ |
|
52,214 |
|
|
|
39.7 |
|
% |
Measurement and Analysis |
|
|
|
45,494 |
|
|
|
29.3 |
|
|
|
|
|
42,527 |
|
|
|
32.4 |
|
|
Remediation and Reuse |
|
|
|
51,251 |
|
|
|
33.0 |
|
|
|
|
|
36,687 |
|
|
|
27.9 |
|
|
Total |
|
$ |
|
155,325 |
|
|
|
|
|
|
$ |
|
131,428 |
|
|
|
|
|
||
31
Cost of Revenues
Cost of revenues consists of all direct costs required to provide services, including fixed and variable direct labor costs, equipment purchases and 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, 2024, cost of revenues was $96.6 million or 62.2% of revenues, and was comprised of direct labor of $53.6 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $21.0 million, field supplies, testing supplies and equipment rental costs of $12.1 million, project-related travel expenses of $6.3 million and other direct costs of $2.7 million.
For the three months ended March 31, 2023, cost of revenues was $81.6 million or 62.1% of revenues, and was comprised of direct labor of $42.6 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $16.0 million, field supplies, testing supplies and equipment rental costs of $13.5 million, project-related travel expenses of $4.8 million and other direct costs of $4.7 million.
Cost of revenues for the three months ended March 31, 2024 increased $15.0 million when compared to the three months ended March 31, 2023, driven by higher revenues, including the impact of acquisitions completed subsequent to the first quarter of 2023. These acquisitions contributed $16.4 million to the increase in cost of revenues. For the three months ended March 31, 2024, cost of revenues as a percentage of revenue decreased 0.1% from the three months ended March 31, 2023, primarily due to a decline in the percentage of total revenue from certain large Remediation and Reuse projects, which tend to have higher cost of sales as a percentage of revenue.
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, 2024, selling, general and administrative expense of $57.1 million was comprised of indirect labor of $30.0 million, stock-based compensation of $10.4 million, facilities costs of $5.8 million, acquisition-related costs of $2.5 million, and other costs (including software, travel, insurance, legal, consulting and audit services and bad debt) of $11.9 million.
For the three months ended March 31, 2023, selling, general and administrative expense of $49.6 million was comprised of indirect labor of $24.7 million, stock-based compensation of $12.1 million, facilities costs of $4.9 million, and other costs (including software, travel, insurance, legal, consulting, audit services, bad debt and acquisition-related costs) of $7.9 million.
Selling, general and administrative expense for the three months ended March 31, 2024 increased $7.5 million or 15.0% when compared to the three months ended March 31, 2023. This increase was primarily driven by an increase of approximately $6.0 million from selling, general and administrative expense pertaining to companies we acquired subsequent to the first quarter of 2023, and an increase in acquisition-related costs of $1.7 million.
Fair Value Changes in Business Acquisition Contingencies
For the three months ended March 31, 2024 and March 31, 2023, fair value changes in business acquisition contingencies resulted in an expense of $0.1 million and a gain of $0.4 million, respectively.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March 31, 2024, was $11.7 million and was comprised of amortization of finite lived intangibles of $7.4 million, arising as a result of our acquisition activity, depreciation of property and equipment of $2.9 million and finance leases right-of-use asset amortization of $1.3 million.
Depreciation and amortization expense for the three months ended March 31, 2023, was $10.6 million and was comprised of amortization of finite lived intangibles of $7.2 million, arising as a result of our acquisition activity, depreciation of property and equipment of $2.2 million and finance leases right-of-use asset amortization of $1.2 million.
32
The increases in depreciation of property and equipment and the amortization of finance leases were primarily a result of higher property and equipment and right of use assets outstanding during the three months ended March 31, 2024 when compared to the three months ended March 31, 2023.
Other (Expense) Income, Net
Other income for the three months ended March 31, 2024 of $0.5 million was driven by a benefit of $0.3 million from the fair value adjustment on our interest rate swap.
Other expense for the three months ended March 31, 2023 of $1.8 million was driven by a fair value adjustment on our interest rate swap of $1.0 million and by a fair value adjustment to the Series A-2 preferred stock conversion option of $0.9 million.
Interest Expense, Net
Interest expense, net incurred in the three months ended March 31, 2024, was $3.3 million, compared to $1.5 million for the three months ended March 31, 2023. The increase in interest expense was primarily due to higher average debt balances, higher interest rates and lower interest income as a result of lower average cash balances.
Income Tax Expense
Income tax expense was $0.5 million and $1.4 million during the three months ended March 31, 2024 and March 31, 2023, respectively.
Segment Results of Operations
Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023
|
|
Three Months Ended March 31, |
|
|
|||||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
|
||||||||||||||||||
(in thousands, except percentages) |
|
Segment Revenues |
|
|
Segment Adjusted EBITDA (1) |
|
|
Segment Adjusted EBITDA Margin(2) |
|
|
Segment Revenues |
|
|
Segment Adjusted EBITDA (1) |
|
|
Segment Adjusted EBITDA Margin(2) |
|
|
||||||
Assessment, Permitting and Response |
|
$ |
58,580 |
|
|
$ |
16,280 |
|
|
|
27.8 |
|
% |
$ |
52,214 |
|
|
$ |
14,266 |
|
|
|
27.3 |
|
% |
Measurement and Analysis |
|
|
45,494 |
|
|
|
6,504 |
|
|
|
14.3 |
|
|
|
42,527 |
|
|
|
6,387 |
|
|
|
15.0 |
|
|
Remediation and Reuse |
|
|
51,251 |
|
|
|
5,012 |
|
|
|
9.8 |
|
|
|
36,687 |
|
|
|
5,278 |
|
|
|
14.4 |
|
|
Total Operating Segments |
|
$ |
155,325 |
|
|
$ |
27,795 |
|
|
|
17.9 |
|
% |
$ |
131,428 |
|
|
$ |
25,931 |
|
|
|
19.7 |
|
% |
Corporate and Other |
|
|
— |
|
|
|
(10,873 |
) |
|
n/a |
|
|
|
— |
|
|
|
(9,328 |
) |
|
n/a |
|
|
||
Revenues
Assessment, Permitting and Response segment revenues for the three months ended March 31, 2024 were $58.6 million, an increase of $6.4 million or 12.2% compared to $52.2 million for the three months ended March 31, 2023. The increase was driven by strong organic growth, partially offset by a decline in revenues from environmental emergency response services of $7.5 million.
Measurement and Analysis segment revenues for the three months ended March 31, 2024 were $45.5 million, an increase of $3.0 million or 7.0% compared to revenues for the three months ended March 31, 2023 of $42.5 million. The increase was driven primarily by organic growth.
Remediation and Reuse segment revenues for the three months ended March 31, 2024 were $51.3 million, an increase of $14.6 million or 39.7% compared to revenues for the three months ended March 31, 2023 of $36.7 million. The increase was driven primarily by acquisitions completed subsequent to the first quarter of 2023, which contributed revenues of $22.5 million, partially offset by the shift in our biogas business to focus on higher margin, lower revenue projects, and lower water treatment revenues.
33
Segment Adjusted EBITDA
Assessment, Permitting and Response Segment Adjusted EBITDA was $16.3 million for the three months ended March 31, 2024, compared to $14.3 million for the three months ended March 31, 2023 and Segment Adjusted EBITDA margin was 27.8% and 27.3%, respectively. The increase in Segment Adjusted EBITDA and the 0.5% increase in Segment Adjusted EBITDA margin was primarily due to higher revenues and favorable revenue mix during the three months ended March 31, 2024 when compared to the three months ended March 31, 2023.
Measurement and Analysis Segment Adjusted EBITDA was $6.5 million for the three months ended March 31, 2024, an increase of $0.1 million compared to Segment Adjusted EBITDA of $6.4 million for the three months ended March 31, 2023. The increase in Segment Adjusted EBITDA was due to higher revenues. For the three months ended March 31, 2024 and March 31, 2023, Segment Adjusted EBITDA margin was 14.3% and 15.0%, respectively. The decline in segment margins was a result of unfavorable revenue mix.
Remediation and Reuse Segment Adjusted EBITDA for the three months ended March 31, 2024 was $5.0 million, a decrease of $0.3 million compared to Segment Adjusted EBITDA for the three months ended March 31, 2023 of $5.3 million, and Segment Adjusted EBITDA margin was 9.8% and 14.4%, respectively. The decrease in Segment Adjusted EBITDA was a result of lower revenues from certain biogas and water projects when compared to the 2023 period. Segment Adjusted EBITDA margins were impacted by the acquisition of Matrix in June 2023, which had margins of 0.3% in the current year.
Corporate and other costs were $10.9 million for the three months ended March 31, 2024 compared to $9.3 million for the three months ended March 31, 2023. Corporate costs as a percentage of revenues were 7.0% for the three months ended March 31, 2024 compared to 7.1% in the three months ended March 31, 2023.
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 cash generated by operating activities, borrowings under our credit facilities, other borrowing arrangements, and proceeds from the issuance of common and preferred stock. Historically, we have financed our operations and acquisitions from a combination of cash generated from operations, periodic borrowings under senior secured credit facilities, and proceeds from the issuance of common and preferred stock. Our primary cash needs are for day to day operations, to fund working capital requirements, to fund our acquisition strategy and any related cash earn-out obligations, to pay interest and principal on our indebtedness and dividends on our Series A-2 preferred stock, and to make capital expenditures. Additionally, in connection with certain acquisitions, we agree to earn-out provisions and other purchase price adjustments that may require future payments. For example, an acquisition agreement might include an earn-out provision that provided for the payment of contingent consideration based on results in excess of a specified target. If the acquiree achieves the target within a specified timeline, the earn-out is (fully or partially) earned and paid in accordance with the agreement. In certain instances, as was the case with our acquisition of CTEH, the amount of earn-out payments can be significant. In connection with certain of our acquisitions, we may make up to $40.4 million in aggregate earn-out payments between the years 2025 and 2026, of which up to $14.2 million may be paid only in cash, up to $13.1 million may be paid only in common stock and up to $13.1 million may be paid, at our option, in cash or common stock. See Note 7 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”
We expect to continue to finance our liquidity requirements, including any cash earn-out payments that may be required in connection with acquisitions, through cash generated from operations and borrowings under our credit facility. We believe these sources will be sufficient to fund our cash needs for the short- and long-term.
34
Cash Flows
The following table summarizes our cash flows for the periods presented:
|
|
Three Months Ended March 31, |
|
|||||
(in thousands) |
|
2024 |
|
|
2023 |
|
||
Consolidated Statement of Cash Flows Data: |
|
|
|
|
|
|
||
Net cash (used in) provided by operating activities |
|
$ |
(22,021 |
) |
|
$ |
3,029 |
|
Net cash used in investing activities |
|
|
(65,038 |
) |
|
|
(11,727 |
) |
Net cash provided by (used in) financing activities |
|
|
73,347 |
|
|
|
(4,654 |
) |
Change in cash, cash equivalents and restricted cash |
|
$ |
(13,712 |
) |
|
$ |
(13,352 |
) |
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, 2024, net cash used in operating activities was $22.0 million compared to net cash provided by operating activities of $3.0 million for the three months ended March 31, 2023. The period-over-period decrease of $25.0 million, was primarily due to a higher increase in working capital in the current period of $30.0 million versus an increase in working capital in the prior year period of $9.7 million, as well as lower earnings before non-cash items of $8.0 million.
Working capital increased by $30.0 million in the three months ended March 31, 2024, primarily due to a decrease in accrued payroll and benefits of $10.0 million due primarily to the payment of bonuses in the first quarter, an increase in accounts receivable and contract assets of $9.1 million, a decrease in accounts payable and other accrued liabilities of $7.8 million, and an increase in prepaid expenses and other current assets of $2.5 million.
Investing Activities
For the three months ended March 31, 2024, net cash used in investing activities was $65.0 million, driven by cash paid for the acquisitions of EPIC and 2DOT, net of cash acquired, of $58.1 million, as well as $6.0 million in cash consideration for purchases of property and equipment, $1.3 million in proprietary software development costs, partially offset by proceeds of assumed purchase price obligations of $0.3 million.
For the three months ended March 31, 2023, net cash used in investing activities was $11.7 million, primarily driven by cash paid for the acquisitions of Frontier and EAI, net of cash acquired, of $6.5 million, purchases of property and equipment for cash consideration of $4.1 million, purchases of proprietary software development of $0.7 million and payment of assumed purchase price obligations of $0.5 million.
Financing Activities
For the three months ended March 31, 2024, net cash provided by financing activities was $73.3 million. Cash provided in financing activities was driven by net borrowing of the 2021 Credit Facility of $134.7 million partially offset by the repayment on the Series A-2 preferred stock of $60.0 million.
For the three months ended March 31, 2023, net cash used in financing activities was $4.7 million. Cash used in financing activities was driven by the quarterly dividends on the Series A-2 preferred stock of $4.1 million, the term loan amortization payments of $2.2 million related to our 2021 Credit Facility, and the repayment of finance leases of $1.0 million, partially offset by proceeds received from the exercise of stock options of $2.7 million.
Credit Facilities
See Note 12 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.” for details on our credit facilities.
Series A-2 Preferred Stock
See Note 15 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.” for details on our Series A-2 Preferred Stock.
35
Critical Accounting Policies and Estimates
Our 2023 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.”
36
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 SOFR. Based on our overall interest rate exposure to variable rate debt outstanding as of March 31, 2024, which factors in our interest rate swaps on $170.0 million of debt, a 1.0% increase or decrease in interest rates on the term loan, aircraft loan, and revolver would impact our annual income (loss) before income taxes by $1.2 million.
Inflation Risk
We experienced higher labor and significantly higher travel and other direct costs in the fiscal year ended December 31, 2022 and December 31, 2023 as a result of inflation, particularly in our Measurement and Analysis and Remediation and Reuse segments. In the three months ended March 31, 2024, we also experienced, and continue to experience, higher labor costs as a result of inflation. We believe we have successfully raised prices in businesses with short term contracts to offset these inflationary effects. We also have and are continuing to raise prices on medium term (one to four quarter) contracts as these contracts are renewed or new contracts are won, and as a result have been able to offset much of the impact of inflation to date. We expect to continue to raise prices if direct costs continue to increase, and although inflation has increased our Selling, general and administrative expense in the three months ended March 31, 2024, we do not believe over a longer period of time that inflation will have a material effect on our business, financial condition or results of operations. If our costs were to become subject to additional and unanticipated significant sustained 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.
Foreign Exchange Risk
Foreign exchange risk exposure arises because we sell our services throughout the United States, Canada, Australia and Europe. Our exposure to this risk has increased significantly due to our acquisition of Matrix in Canada, EPIC in Australia, and to a lesser extent, Vandrensning in Europe. Revenues in certain foreign countries as well as certain expenses related to those revenues are transacted in currencies other than the U.S. dollar. As such, our future operating results are exposed to changes in exchange rates. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously invoiced amounts can be positively or negatively affected by changes in exchange rates in the course of collection.
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, 2024, 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, 2024, 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, 2024, 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.
37
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 2023 Form 10-K. The risks described in our 2023 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.
On January 31, 2024, we issued an aggregate of 161,342 shares of common stock to the former owners of EPIC as purchase price consideration. The issuance of common stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof as a transaction by an issuer not involving any public offering.
On February 29, 2024, we issued an aggregate of 59,392 shares of common stock to the former owners of 2DOT as purchase price consideration. The issuance of common stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof as a transaction by an issuer not involving any public offering.
On March 15, 2024, we issued an aggregate of 35,250 shares of common stock to the former owners of Huco as earnout consideration. The issuance of common stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof as a transaction by an issuer not involving any public offering.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
38
Item 6. Exhibits.
Exhibit Number |
|
Description |
|
|
|
10.1 |
|
|
|
|
|
31.1* |
|
|
|
|
|
31.2* |
|
|
|
|
|
32.1** |
|
|
|
|
|
32.2** |
|
|
|
|
|
101.INS* |
|
Inline XBRL Instance Document |
|
|
|
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents |
|
|
|
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, 2024 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.
(a) Previously filed on February 20, 2024 as an exhibit to the Company’s Current Report on Form 8-K and incorporated herein by reference.
39
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 8, 2024 |
|
By: |
/s/ Allan Dicks |
|
|
|
Allan Dicks |
|
|
|
Chief Financial Officer |
40