The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except where otherwise indicated)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business—Montrose Environmental Group, Inc. (“Montrose” or the “Company”) is a corporation formed on November 2013, under the laws of the State of Delaware. The Company has approximately 70 offices across the United States, Canada and Australia and over 2,000 employees as of June 30, 2021.
Montrose is an environmental services company serving the recurring environmental needs of a diverse client base, including Fortune 500 companies and federal, state and local governments through the following three segments:
Assessment, Permitting and Response—Through its Assessment, Permitting and Response segment, Montrose provides scientific advisory and consulting services to support environmental assessments, environmental emergency response, and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. The Company’s technical advisory and consulting offerings include regulatory compliance support and planning, environmental, ecosystem and toxicological assessments and support during responses to environmental disruption. Montrose helps clients navigate regulations at the local, state, provincial and federal levels.
Measurement and Analysis—Through its Measurement and Analysis segment, Montrose’s teams test and analyze air, water and soil to determine concentrations of contaminants, including emerging contaminants such as PFAS, as well as determine the toxicological impact of contaminants on flora, fauna and human health. Montrose’s offerings include source and ambient air testing and monitoring, leak detection and repair (“LDAR”) and advanced analytical laboratory services such as air, storm water, wastewater and drinking water analysis.
Remediation and Reuse—Through its Remediation and Reuse segment, Montrose provides clients with engineering, design, implementation and operations and maintenance services, primarily to treat contaminated water, remove contaminants from soil or create biogas from waste. The Company does not own the properties or facilities at which it implements these projects or the underlying liabilities, nor does it own material amounts of the equipment used in projects; instead, the Company assists clients in designing solutions, managing projects and mitigating their environmental risks and liabilities at their locations.
Initial Public Offering—On July 27, 2020, the Company completed its initial public offering (“IPO”) of common stock, in which it sold 11,500,000 shares, including 1,500,000 shares issued pursuant to the underwriters full exercise on July 24, 2020 of the underwriters’ option to purchase additional shares, at a price to the public of $15.00 per share, resulting in net proceeds to the Company of approximately $161.3 million after deducting underwriting discounts of $11.2 million. Additionally, the Company offset $4.4 million of deferred IPO costs against IPO proceeds recorded to additional paid in capital. These deferred IPO costs were directly attributable to the IPO offering in accordance with Staff Accounting Bulletin Topic 5: Miscellaneous Accounting. The Company’s common stock began trading on the New York Stock Exchange on July 23, 2020.
Basis of Presentation—The unaudited condensed consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries. These unaudited condensed consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The unaudited condensed consolidated financial statements include all accounts of the Company and, in the opinion of management, include all recurring adjustments and normal accruals necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the dates and periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2020. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. All intercompany transactions, accounts and profits, have been eliminated in the unaudited condensed consolidated financial statements.
2. SUMMARY OF NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements—The Company qualifies as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) and therefore intends to take advantage of certain exemptions from various public company reporting requirements, including delaying adoption of new or revised accounting standards until those standards apply to private companies. The Company has elected to use this extended transition period under the JOBS Act. The effective dates shown below reflect the election to use the extended transition period. However, as June 30, 2021, the end of the
5
Company’s second fiscal quarter, the market value of the Company’s common stock held by non-affiliates exceeded $700.0 million and, as a result, the Company will no longer qualify as an emerging growth company at the end of the fiscal year ended December 31, 2021.
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standard Codification (“ASC”) 740 and clarifies and amends certain guidance to promote consistent application. The standard was adopted as of January 1, 2021 and did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting. Under the revised guidance, the accounting for awards issued to non-employees will be similar to the accounting for employee awards. The new guidance is effective for fiscal years beginning after December 15, 2019. The standard was adopted as of January 1, 2020 and did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The revised guidance eliminates Step 2 of the current goodwill impairment analysis test, which requires hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance was adopted as of January 1, 2020 and did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to improve financial reporting regarding leasing transactions. In June 2021, with an effective adoption date of January 1, 2021, the Company adopted ASU No. 2016-02, using the modified retrospective transition approach with a cumulative effect adjustment to the income statement as of the date of adoption (Note 6). As a result of electing the modified retrospective approach, the Company is not required to restate comparative periods for the effects of ASC 842. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability, regardless of lease classification. The Company elected the package of practical expedients, which allows it not to have to reassess previous conclusions about lease identification, lease classification and initial direct costs. In addition, the Company elected to not record operating lease right-of-use assets or operating lease liabilities for leases with an initial term of 12 months or less and elected the practical expedient to not separate lease and non-lease components for all of its leases. As of adoption date, the Company recognized operating lease right-of-use assets, current operating lease liabilities and operating lease liabilities, net of current portion of $24.6 million, $7.3 million and $17.3 million, respectively. The Company recognized finance lease right-of-use assets, current finance lease liabilities and finance lease liabilities, net of current portion of $7.2 million, $2.9 million and $4.6 million, respectively.
Recently Issued Accounting Pronouncements Not Yet Adopted—In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on the unaudited condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the expected transition away from reference rates that are expected to be discontinued, such as LIBOR. ASU 2020-04 was effective upon issuance. The Company may elect to apply the guidance prospectively through December 31, 2022. The Company is currently evaluating the impact of the adoption of the standard on the unaudited condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The standard introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses and will apply to trade receivables. The new guidance will be effective for the Company’s annual and interim periods beginning after December 15,
6
2022. The Company does not anticipate that the adoption of this standard will have a material impact on the unaudited condensed consolidated financial statements.
3. REVENUES AND ACCOUNTS RECEIVABLE
The Company’s main revenue sources derive from the following revenue streams:
Assessment, Permitting and Response Revenues—Assessment, Permitting and Response revenues are generated from multidisciplinary environmental consulting services. The majority of the contracts are fixed-price or time and material based.
Measurement and Analysis Revenues—Measurement and Analysis revenues are generated from emissions sampling, testing and reporting services, leak detection services, ambient air monitoring services and laboratory testing services. The majority of the contracts are fixed-price or time-and-materials based.
Remediation and Reuse Revenues—Remediation and Reuse revenues are generated from operating and maintenance (“O&M”) services (on biogas and waste water treatment facilities), as well as remediation, monitoring and environmental compliance services. Services on the majority of O&M contracts are provided under long-term fixed-fee contracts. Remediation, monitoring and environmental compliance contracts are predominantly fixed-fee and time-and-materials based.
Disaggregation of Revenue—The Company disaggregates revenue by its operating segments. The Company believes disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, and uncertainty of revenue and cash flows are affected by economic factors. Disaggregated revenue disclosures are provided in Note 20.
Contract Balances—The Company presents contract balances for unbilled receivables (contract assets), as well as customer advances, deposits and deferred revenue (contract liabilities) within contract assets and accounts payable and accrued expenses, respectively, on the unaudited condensed consolidated statements of financial position. Amounts are generally billed at periodic intervals (e.g., weekly, bi-weekly or monthly) as work progresses in accordance with agreed-upon contractual terms. The Company utilizes the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component as the period between when the Company transfers services to a customer and when the customer pays for those services is one year or less. Amounts recorded as unbilled receivables are generally for services the Company is not entitled to bill based on the passage of time. Under certain contracts, billing occurs subsequent to revenue recognition, resulting in contract assets. The Company sometimes receives advances or deposits from customers before revenue is recognized, resulting in contract liabilities.
The following table presents the Company’s contract balances:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Contract assets
|
|
$
|
55,033
|
|
|
$
|
38,576
|
|
|
Contract liabilities
|
|
|
7,292
|
|
|
|
6,114
|
|
Contract assets acquired through business acquisitions amounted to $0.4 million and $6.5 million as of June 30, 2021 and December 31, 2020, respectively. Contract liabilities acquired through business acquisitions amounted to $0.5 million and zero as of June 30, 2021 and December 31, 2020, respectively. Revenue recognized during the three and six months ended June 30, 2021, included in the contract liabilities balance at the beginning of the year was $1.3 million and $2.5 million, respectively. The revenue recognized from the contract liabilities consisted of the Company satisfying performance obligations during the normal course of business.
The amount of revenue recognized from changes in the transaction price associated with performance obligations satisfied in prior periods during the three and six months ended June 30, 2021 was not material.
Remaining Unsatisfied Performance Obligations—Remaining unsatisfied performance obligations represent the total dollar value of work to be performed on contracts awarded and in progress. The amount of remaining unsatisfied performance obligations increases with new contracts or additions to existing contracts and decreases as revenue is recognized on existing contracts. Contracts are included in the amount of remaining unsatisfied performance obligations when an enforceable agreement has been reached. As of June 30, 2021, and December 31, 2020, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied was approximately $33.7 million and $24.4 million, respectively. As of June 30, 2021, the Company expected to recognize approximately $27.0 million of this amount as revenue within the next year and $6.7 million the year after.
7
Accounts Receivable, Net—Accounts receivable, net consisted of the following:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Accounts receivable, invoiced
|
|
$
|
74,668
|
|
|
$
|
57,228
|
|
|
Accounts receivable, other
|
|
|
1,906
|
|
|
|
1,139
|
|
|
Allowance for doubtful accounts
|
|
|
(4,223
|
)
|
|
|
(4,265
|
)
|
|
Accounts receivable—net
|
|
$
|
72,351
|
|
|
$
|
54,102
|
|
The Company extends non-interest-bearing trade credit to its customers in the ordinary course of business. Accounts receivable are shown on the face of the unaudited condensed consolidated statements of financial position, net of an allowance for doubtful accounts. In determining the allowance for doubtful accounts, the Company analyzes the aging of accounts receivable, historical bad debts, customer creditworthiness and current economic trends. During the first quarter of 2020, there was a global outbreak of a new strain of coronavirus, COVID-19. The COVID-19 pandemic has added uncertainty to the collectability of certain receivables, particularly in industries hard hit by the pandemic. As a result, the Company recorded a $6.3 million bad debt reserve during the first quarter of 2020. The bad debt adjustment included a $5.5 million reserve for one customer in the Company’s Remediation and Reuse segment in which management concluded to discontinue select service lines as of June 30, 2020 (Note 20).
As of June 30, 2021 and December 31, 2020, the Company had one customer who accounted for 13.0% and 10.2%, respectively, of our gross accounts receivable. During the three and six months ended June 30, 2021, the Company had three customers who accounted for 14.1%, 14.1% and 10.2% and 13.4%, 13.2% and 11.9% of revenue, respectively. The Company did not have any customers that exceeded 10.0% of revenue during the three or six months ended June 30, 2020. The Company performs ongoing credit evaluations, and accordingly, believes that the balances from these largest customers do not represent a significant credit risk.
The allowance for doubtful accounts consisted of the following:
|
|
|
Beginning
Balance
|
|
|
Bad Debt
Expense
|
|
|
Charged to
Allowance
|
|
|
Other(1)
|
|
|
Ending
Balance
|
|
|
Six months ended June 30, 2021
|
|
$
|
4,265
|
|
|
$
|
590
|
|
|
$
|
(1,056
|
)
|
|
$
|
424
|
|
|
$
|
4,223
|
|
|
Year ended December 31, 2020
|
|
|
1,327
|
|
|
|
4,532
|
|
|
|
(2,633
|
)
|
|
|
1,039
|
|
|
|
4,265
|
|
____________________
|
(1)
|
This amount consists of additions to the allowance due to business acquisitions.
|
4. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consisted of the following:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Deposits
|
|
$
|
791
|
|
|
$
|
708
|
|
|
Prepaid expenses
|
|
|
4,568
|
|
|
|
3,510
|
|
|
Supplies
|
|
|
2,347
|
|
|
|
2,491
|
|
|
Prepaid and other current assets
|
|
$
|
7,706
|
|
|
$
|
6,709
|
|
5. PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost or estimated fair value for assets acquired through business combinations. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Leasehold
8
improvements are amortized using the straight-line method over the shorter of the remaining lease term, including options that are deemed to be reasonably assured, or the estimated useful life of the improvement.
Property and equipment, net, consisted of the following:
|
|
|
Estimated
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
Useful Life
|
|
2021
|
|
|
2020
|
|
|
Lab and test equipment
|
|
7 years
|
|
$
|
17,401
|
|
|
$
|
18,631
|
|
|
Vehicles
|
|
5 years
|
|
|
5,059
|
|
|
|
13,320
|
|
|
Equipment
|
|
3-7 years
|
|
|
33,315
|
|
|
|
32,177
|
|
|
Furniture and fixtures
|
|
7 years
|
|
|
2,998
|
|
|
|
2,938
|
|
|
Leasehold improvements
|
|
7 years
|
|
|
6,824
|
|
|
|
6,767
|
|
|
Aircraft
|
|
10 years
|
|
|
834
|
|
|
|
834
|
|
|
Building
|
|
39 years
|
|
|
2,975
|
|
|
|
2,975
|
|
|
|
|
|
|
|
69,406
|
|
|
|
77,642
|
|
|
Land
|
|
|
|
|
725
|
|
|
|
725
|
|
|
Construction in progress
|
|
|
|
|
1,292
|
|
|
|
219
|
|
|
Less accumulated depreciation
|
|
|
|
|
(41,871
|
)
|
|
|
(44,187
|
)
|
|
Total property and equipment—
net
|
|
|
|
$
|
29,552
|
|
|
$
|
34,399
|
|
Total depreciation expense included in the unaudited condensed consolidated statements of operations was $2.5 million and $4.7 million for the three and six months ended June 30, 2021, respectively, and $2.0 million and $4.0 million for the three and six months ended June 30, 2020, respectively.
Total property and equipment, net as of December 31, 2020 included $7.2 million related to financed assets, which, following the adoption of ASC 842, are presented as part of finance lease liabilities and excluded from property and equipment, net on the face of the condensed consolidated balance sheet as of June 30, 2021.
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 1 year and 15 years, and in some instances include one or more options to renew. The Company includes options to extend the lease term if the options are reasonably certain of being exercised. The Company currently considers some of its renewal options to be reasonably certain to be exercised. Some leases also include early termination options, which can be exercised under specific conditions. The Company does not have material residual value guarantees or restrictive covenants associated with its leases.
In June 2021, with an effective adoption date of January 1, 2021, the Company adopted ASU 2016-02 using the modified retrospective approach, which permits application of this new guidance at the beginning of the period of adoption, with comparative periods continuing to be reported under ASC 840.
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
9
inputs used to calculate the rate implicit in the leases are not readily determinable from the lessee’s perspective, the Company will not use the implicit interest rate.
Certain leases contain variable payments, these payments are expensed as incurred and not included in the Company’s operating lease right-of-use assets and operating lease liabilities. These amounts primarily include payments for maintenance, utilities, taxes, and insurance and are excluded from the present value of the Company’s lease obligations.
As of the adoption date, the Company recognized operating lease right-of-use assets, current operating lease liabilities and operating lease liabilities, net of current portion of $24.6 million, $7.3 million and $17.3 million, respectively. As of the adoption date, the Company recognized finance lease right-of-use assets, current finance lease liabilities and finance lease liabilities, net of current portion of $7.2 million, $2.9 million and $4.6 million, respectively.
As part of this adoption, the Company elected to not record operating lease right-of-use assets or operating lease liabilities for leases with an initial term of 12 months or less. The Company also elected to combine lease and non-lease components on all new or modified operating leases into a single lease component for all classes of assets.
Total rent expense under operating leases was $2.1 million and $4.2 million for the three and six months ended June 30, 2020, respectively.
The components of lease expense were as follows:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
Statement of Operations Location
|
June 30, 2021
|
|
|
June 30, 2021
|
|
|
Operating lease cost
|
|
|
|
|
|
|
|
|
|
Lease cost
|
Selling, general and administrative expense
|
$
|
2,236
|
|
|
$
|
4,336
|
|
|
Variable lease cost
|
Selling, general and administrative expense
|
|
114
|
|
|
|
215
|
|
|
Total operating lease cost
|
|
|
2,350
|
|
|
|
4,551
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
|
Amortization of right of use assets
|
Depreciation and amortization
|
848
|
|
|
|
1,643
|
|
|
Interest on lease liabilities
|
Interest expense—net
|
103
|
|
|
|
199
|
|
|
Total finance lease cost
|
|
951
|
|
|
|
1,842
|
|
|
Total lease cost
|
|
$
|
3,301
|
|
|
$
|
6,393
|
|
Supplemental cash flows information related to leases was as follows:
|
|
|
Six Months Ended
|
|
|
|
|
June 30, 2021
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
Operating cash flows used in operating leases
|
|
$
|
4,249
|
|
|
Operating cash flows used in finance leases
|
|
|
199
|
|
|
Financing cash flows used in finance leases
|
|
|
1,632
|
|
|
|
|
|
|
|
|
Lease liabilities arising from new ROU assets
|
|
|
|
|
|
Operating leases
|
|
|
5,305
|
|
|
Finance leases
|
|
|
1,928
|
|
Weighted average remaining lease terms and weighted average discount rates were:
|
|
|
June 30, 2021
|
|
|
|
|
Operating Leases
|
|
|
Finance Leases
|
|
|
Weighted average remaining lease term (years)
|
|
5.11
|
|
|
2.95
|
|
|
Weighted average discount rate
|
|
|
2.57
|
%
|
|
|
5.10
|
%
|
10
The following is a schedule by year of the maturities of lease liabilities with original terms in excess of one year:
|
|
|
June 30, 2021
|
|
|
|
|
Operating Leases
|
|
|
Finance Leases
|
|
|
Remainder of 2021
|
|
$
|
4,300
|
|
|
$
|
1,724
|
|
|
2022
|
|
|
6,865
|
|
|
|
2,986
|
|
|
2023
|
|
|
4,851
|
|
|
|
2,126
|
|
|
2024
|
|
|
3,344
|
|
|
|
1,116
|
|
|
2025 and thereafter
|
|
|
8,356
|
|
|
|
381
|
|
|
Total undiscounted future minimum lease payments
|
|
|
27,716
|
|
|
|
8,333
|
|
|
Less imputed interest
|
|
|
(1,805
|
)
|
|
|
(582
|
)
|
|
Total discounted future minimum lease payments
|
|
$
|
25,911
|
|
|
$
|
7,751
|
|
A schedule of the future minimum rental commitments under the Company’s capital lease agreements and non-cancelable operating lease agreements with an initial or remaining term in excess of one year as of December 31, 2020, in accordance with ASC 840, the predecessor to ASC 842, were as follows:
|
|
December 31, 2020
|
|
|
|
Operating Leases
|
|
|
Finance Leases
|
|
|
2021
|
$
|
5,946
|
|
|
$
|
2,652
|
|
|
2022
|
|
4,865
|
|
|
|
2,172
|
|
|
2023
|
|
3,146
|
|
|
|
1,444
|
|
|
2024
|
|
1,812
|
|
|
496
|
|
|
2025 and thereafter
|
|
4,954
|
|
|
69
|
|
|
Total
|
$
|
20,723
|
|
|
$
|
6,833
|
|
7. BUSINESS ACQUISITIONS
In line with the Company’s strategic growth initiatives, the Company acquired two business during the six months ended June 30, 2021 and several businesses during the year ended December 31, 2020. The results of each of those acquired businesses are included in the unaudited condensed consolidated financial statements beginning on the acquisition date. Each transaction qualified as an acquisition of a business and was accounted for as a business combination. All acquisitions resulted in the recognition of goodwill. The Company paid these premiums resulting in such goodwill for a number of reasons, including expected synergies from combining operations of the acquiree and the Company while also growing the Company’s customer base, acquiring assembled workforces, expanding its presence in certain markets and expanding and advancing its product and service offerings. The Company recorded the assets acquired and liabilities assumed at their acquisition date fair value, with the difference between the fair value of the net assets acquired and the acquisition consideration reflected as goodwill.
The identifiable intangible assets for acquisitions are valued using the excess earnings method discounted cash flow approach for customer relationships, the relief from royalty method for trade names, the patent and external proprietary software, the “with and without” method for covenants not to compete and the replacement cost method for the internal proprietary software by incorporating Level 3 inputs as described under the fair value hierarchy of ASC 820. These unobservable inputs reflect the Company’s own assumptions about which assumptions market participants would use in pricing an asset on a non-recurring basis. These assets will be amortized over their respective estimated useful lives.
Other purchase price obligations (primarily deferred purchase price liabilities and target working capital liabilities or receivables) are included on the unaudited condensed consolidated statements of financial position in accounts payable and other accrued liabilities, other non-current liabilities or accounts receivable-net in the case of working capital deficits. Contingent consideration outstanding from acquisitions are included on the unaudited condensed consolidated statements of financial position in business acquisition contingent consideration, current or in business acquisitions contingent consideration, long-term. These obligations are scheduled to be settled if certain performance thresholds are met.
The Company considers several factors when determining whether or not contingent consideration liabilities are part of the purchase price, including the following: (i) the valuation of its acquisitions is not supported solely by the initial consideration paid, (ii) the former stockholders of acquired companies that remain as key employees receive compensation other than contingent consideration payments at a reasonable level compared with the compensation of the Company’s other key employees and (iii) contingent consideration payments are not affected by employment termination. The Company reviews and assesses the estimated fair value of contingent consideration at each reporting period.
11
Transaction costs related to business combinations totaled $0.5 million and $0.7 million for the three and six months ended June 30, 2021, respectively and $2.5 million and $3.8 million for the three and six months ended June 30, 2020, respectively. These costs are expensed within selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations.
Acquisitions Completed During the Six Months Ended June 30, 2021
MSE Group—In January 2021, the Company completed the acquisition of MSE Group (“MSE”) by acquiring 100.0% of its membership interests. MSE is a provider of environmental assessment, compliance, engineering, and design services primarily to the U.S. federal government. MSE is based in Orlando, FL with additional offices in Tampa, Orlando, Jacksonville, San Antonio, TX, and Wilmington, NC, and satellite locations nationwide. The upfront cash payment made to acquire MSE was funded through cash on hand and the common stock portion of the purchase price was funded through the issuance of 71,740 shares of common stock.
Vista Analytical Laboratory, Inc. (“Vista”)—In June 2021, the Company completed the acquisition of Vista Analytical Laboratory, Inc. (“Vista”) by acquiring 100.0% of its membership interests. Vista provides specialty analytical services related to Per- and polyfluoroalkyl substances (“PFAS”) and other semi-volatile organic compounds. Vista is based in Dorado Hills, CA. The upfront cash payment made to acquire Vista was funded through cash on hand and the common stock portion of the purchase price was funded through the issuance of 9,322 shares of common stock.
The following table summarizes the elements of the purchase price of the acquisitions completed during the six months ended June 30, 2021:
|
|
|
Cash
|
|
|
Common
Stock
|
|
|
Other
Purchase
Price
Components
Current
|
|
|
Other
Purchase
Price
Components
Long Term
|
|
|
Contingent
Consideration
Current
|
|
|
Contingent
Consideration
Long Term
|
|
|
Total
Purchase
Price
|
|
|
MSE
|
|
$
|
9,082
|
|
|
$
|
2,271
|
|
|
$
|
10,146
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,804
|
|
|
$
|
23,303
|
|
|
Vista
|
|
|
9,025
|
|
|
|
475
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,000
|
|
|
|
10,500
|
|
The other purchase price components of the MSE purchase price consist of a target working capital amount, a 338 election tax liability, 2020 and 2021 purchase price true ups and contingent consideration. The 2020 and 2021 purchase price true up elements are based on MSE’s actual 2020 and 2021 results. The other purchase price components of the Vista purchase price consist of a target working capital amount.
The contingent consideration elements 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 may be required to make up to $7.2 million in aggregate true up and earn-out payments in 2022 and 2023 in connection with these two acquisitions. The Company paid the MSE target working capital amount and the 2020 purchase price true up in April 2021.
The preliminary purchase price attributable to the acquisitions was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSE
|
|
|
Vista
|
|
|
Total
|
|
|
Cash
|
|
$
|
2,810
|
|
|
$
|
420
|
|
|
$
|
3,230
|
|
|
Accounts receivable
|
|
|
2,987
|
|
|
|
1,035
|
|
|
|
4,022
|
|
|
Other current assets
|
|
|
31
|
|
|
|
344
|
|
|
|
375
|
|
|
Current assets
|
|
|
5,828
|
|
|
|
1,799
|
|
|
|
7,627
|
|
|
Property and equipment
|
|
|
513
|
|
|
|
976
|
|
|
|
1,489
|
|
|
Customer relationships
|
|
|
8,720
|
|
|
|
1,656
|
|
|
|
10,376
|
|
|
Trade names
|
|
|
521
|
|
|
|
1,284
|
|
|
|
1,805
|
|
|
Covenants not to compete
|
|
|
922
|
|
|
|
240
|
|
|
|
1,162
|
|
|
Goodwill
|
|
|
7,613
|
|
|
|
5,014
|
|
|
|
12,627
|
|
|
Total assets
|
|
|
24,117
|
|
|
|
10,969
|
|
|
|
35,086
|
|
|
Current liabilities
|
|
|
(814
|
)
|
|
|
(469
|
)
|
|
|
(1,283
|
)
|
|
Total liabilities
|
|
|
(814
|
)
|
|
|
(469
|
)
|
|
|
(1,283
|
)
|
|
Purchase price
|
|
$
|
23,303
|
|
|
$
|
10,500
|
|
|
$
|
33,803
|
|
12
For the acquisitions completed during the six months ended June 30, 2021, the results of operations since the acquisition dates have been combined with those of the Company. The Company’s unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2021 includes revenue of $3.9 million and $7.8 million, respectively, and pre-tax (loss) income of $0.1 million and $(0.2) million, respectively. MSE and Vista are included in the Company’s Remediation and Reuse and Measurement and Analysis segment, respectively.
The weighted average useful lives for the acquired customer relationships and related backlog for MSE are 7 years and 2 years, respectively. The weighted average useful lives for the acquired tradenames and covenants not to compete for MSE acquisition are 2 years and 5 years, respectively.
Goodwill associated with the MSE and Vista acquisitions is deductible for income tax purposes.
The Company has not yet completed the initial purchase price allocation for the acquisition of Vista due to the timing of the close of the transaction.
Acquisitions Completed During the Year Ended December 31, 2020
The Center for Toxicology and Environmental Health, L.L.C.—In April 2020, the Company completed the acquisition of The Center for Toxicology and Environmental Health, L.L.C. (“CTEH”) by acquiring 100.0% of its membership interests. CTEH is an environmental consulting company headquartered in Arkansas that specializes in environmental response and toxicology. The cash payment made to acquire CTEH was funded through the issuance of the Convertible and Redeemable Series A-2 Preferred Stock (Note 17) and the common stock portion of the purchase price was funded through the issuance of 791,139 shares of common stock.
Leed Environmental Inc.— In September 2020, the Company acquired certain testing assets, and operations from Leed Environmental Inc. (“LEED”). LEED provides environmental project management and coordination services. LEED expands the Company’s remediation capabilities in the Northeast region of the United States. The cash payment made to acquire LEED was funded via cash on hand.
American Environmental Testing Co.— In September 2020, the Company acquired certain assets and operations of American Environmental Testing Co. (“AETC”), a stack testing company in Utah. AETC expands the Company’s air measurement and analysis capabilities in the West Coast region. The cash payment made to acquire AETC was funded via cash on hand.
The following table summarizes the elements of purchase price of the acquisitions completed during the year ended December 31, 2020:
|
|
|
Cash
|
|
|
Common
Stock
|
|
|
Other
Purchase
Price
Components
Current
|
|
|
Other
Purchase
Price
Components
Long Term
|
|
|
Contingent
Consideration
Current
|
|
|
Contingent
Consideration
Long Term
|
|
|
Total
Purchase
Price
|
|
|
CTEH
|
|
$
|
175,000
|
|
|
$
|
25,000
|
|
|
$
|
(1,939
|
)
|
|
$
|
—
|
|
|
$
|
34,451
|
|
|
$
|
10,543
|
|
|
$
|
243,055
|
|
|
Other acquisitions
|
|
|
450
|
|
|
|
—
|
|
|
|
50
|
|
|
|
100
|
|
|
|
210
|
|
|
|
—
|
|
|
|
810
|
|
|
Total
|
|
$
|
175,450
|
|
|
$
|
25,000
|
|
|
$
|
(1,889
|
)
|
|
$
|
100
|
|
|
$
|
34,661
|
|
|
$
|
10,543
|
|
|
$
|
243,865
|
|
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 CTEH first year earn-out was calculated at twelve times CTEH’s 2020 EBITDA (as defined in the purchase agreement) in excess of $18.3 million, with a maximum first year earn-out payment of $50.0 million, which was fully achieved. The second year earn-out is to be calculated at ten times CTEH’s 2021 EBITDA in excess of actual 2020 EBITDA (with actual 2020 EBITDA subject to a minimum of $18.3 million and a maximum of $22.5 million), with a maximum second year earn-out payment of $30.0 million. The 2020 earn-out was initially payable 100.0% in common stock, but as a result of the completion of the Company’s IPO (Note 1), 50.0% was payable in cash. In April 2021, the 2020 earn-out payment was made with 50.0% paid in cash and the remaining 50.0% paid in common stock of the Company (Notes 14 and 18). The 2021 earn-out, if any, is payable 100.0% in cash.
13
The purchase price attributable to the acquisitions was allocated as follows:
|
|
|
CTEH
|
|
|
Other 2020
Acquisitions
|
|
|
Total
|
|
|
Cash
|
|
$
|
1,527
|
|
|
$
|
—
|
|
|
$
|
1,527
|
|
|
Accounts receivable
|
|
|
17,059
|
|
|
|
—
|
|
|
|
17,059
|
|
|
Other current assets
|
|
|
1,265
|
|
|
|
—
|
|
|
|
1,265
|
|
|
Current assets
|
|
|
19,851
|
|
|
|
—
|
|
|
|
19,851
|
|
|
Property and equipment
|
|
|
7,042
|
|
|
|
75
|
|
|
|
7,117
|
|
|
Customer relationships
|
|
|
56,000
|
|
|
|
—
|
|
|
|
56,000
|
|
|
Trade names
|
|
|
4,200
|
|
|
|
—
|
|
|
|
4,200
|
|
|
Covenants not to compete
|
|
|
4,000
|
|
|
|
109
|
|
|
|
4,109
|
|
|
Proprietary software
|
|
|
14,700
|
|
|
|
—
|
|
|
|
14,700
|
|
|
Goodwill
|
|
|
146,983
|
|
|
|
626
|
|
|
|
147,609
|
|
|
Total assets
|
|
|
252,776
|
|
|
|
810
|
|
|
|
253,586
|
|
|
Current liabilities
|
|
|
9,721
|
|
|
|
—
|
|
|
|
9,721
|
|
|
Total liabilities
|
|
|
9,721
|
|
|
|
—
|
|
|
|
9,721
|
|
|
Purchase price
|
|
$
|
243,055
|
|
|
$
|
810
|
|
|
$
|
243,865
|
|
CTEH, LEED and AETC are included in the Company’s Assessment, Permitting and Response, Remediation and Reuse and Measurement and Analysis segments, respectively.
The weighted average useful lives for the acquired customer relationships and internal proprietary software for the CTEH acquisition are 15 years and 3 years, respectively. The weighted average useful lives for the acquired tradenames, covenants not to compete and external proprietary software for the CTEH acquisition is 5 years. The weighted average useful lives for the acquired covenants not to compete for the other acquisitions is 4 years.
Goodwill associated with the CTEH, LEED and AETC acquisitions is deductible for income tax purposes.
Supplemental Unaudited Pro-Forma—The unaudited condensed consolidated financial information summarized in the following table gives effect to the 2021 and the 2020 acquisitions discussed above assuming they occurred on January 1, 2020. These unaudited consolidated pro forma operating results do not assume any impact from revenue, cost or other operating synergies that are expected or may have been realized as a result of the acquisitions. These unaudited consolidated pro forma operating results are presented for illustrative purposes only and are not indicative of the operating results that would have been achieved had the acquisitions occurred on January 1, 2020, nor does the information purport to reflect results for any future period.
|
|
|
For the Three Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
As reported
|
|
|
Acquisitions
Pro-Forma
(Unaudited)
|
|
|
Consolidated
Pro-Forma
(Unaudited)
|
|
|
As reported
|
|
|
Acquisitions
Pro-Forma
(Unaudited)
|
|
|
Consolidated
Pro-Forma
(Unaudited)
|
|
|
Revenues
|
|
$
|
136,224
|
|
|
$
|
1,178
|
|
|
$
|
137,402
|
|
|
$
|
73,766
|
|
|
$
|
5,569
|
|
|
$
|
79,335
|
|
|
Net (loss) income
|
|
|
(14,483
|
)
|
|
|
219
|
|
|
|
(14,264
|
)
|
|
|
13,224
|
|
|
|
841
|
|
|
|
14,065
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
As reported
|
|
|
Acquisitions
Pro-Forma
(Unaudited)
|
|
|
Consolidated
Pro-Forma
(Unaudited)
|
|
|
As reported
|
|
|
Acquisitions
Pro-Forma
(Unaudited)
|
|
|
Consolidated
Pro-Forma
(Unaudited)
|
|
|
Revenues
|
|
$
|
270,041
|
|
|
$
|
2,381
|
|
|
$
|
272,422
|
|
|
$
|
134,797
|
|
|
$
|
43,326
|
|
|
$
|
178,123
|
|
|
Net (loss) income
|
|
|
(26,079
|
)
|
|
|
166
|
|
|
|
(25,913
|
)
|
|
|
(28,024
|
)
|
|
|
12,247
|
|
|
|
(15,777
|
)
|
During the first quarter of 2020, the Company determined to reduce the footprint of its environmental lab in Berkeley, California, and to exit its non-specialized municipal water engineering service line and its food waste biogas engineering service line, (together, “the Discontinued Service Lines”). Revenues from Discontinued Service Lines included in revenues in the above table was zero for the three and six months ended June 30, 2021 and $1.3 million and $3.8 million for the three and six months ended June 30, 2020, respectively.
14
8. GOODWILL AND INTANGIBLE ASSETS
Amounts related to goodwill are as follows:
|
|
|
Assessment,
Permitting
and Response
|
|
|
Measurement
and
Analysis
|
|
|
Remediation
and
Reuse
|
|
|
Total
|
|
|
Balance as of December 31, 2020
|
|
$
|
162,156
|
|
|
$
|
69,054
|
|
|
$
|
43,457
|
|
|
$
|
274,667
|
|
|
Goodwill acquired during the period
|
|
|
—
|
|
|
|
5,013
|
|
|
|
7,613
|
|
|
|
12,626
|
|
|
Balance as of June 30, 2021
|
|
$
|
162,156
|
|
|
$
|
74,067
|
|
|
$
|
51,070
|
|
|
$
|
287,293
|
|
Amounts related to finite-lived intangible assets are as follows:
|
June 30, 2021
|
|
Estimated
Useful Life
|
|
Gross
Balance
|
|
|
Accumulated
Amortization
|
|
|
Total
Intangible
Assets—Net
|
|
|
Finite lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
2-15 years
|
|
$
|
175,158
|
|
|
$
|
63,157
|
|
|
$
|
112,001
|
|
|
Covenants not to compete
|
|
4-5 years
|
|
|
31,104
|
|
|
|
23,403
|
|
|
|
7,701
|
|
|
Trade names
|
|
1-5 years
|
|
|
18,743
|
|
|
|
13,920
|
|
|
|
4,823
|
|
|
Proprietary software
|
|
3-5 years
|
|
|
21,272
|
|
|
|
8,592
|
|
|
|
12,680
|
|
|
Patent
|
|
16 years
|
|
|
17,479
|
|
|
|
1,944
|
|
|
|
15,535
|
|
|
Total other intangible assets
—net
|
|
|
|
$
|
263,756
|
|
|
$
|
111,016
|
|
|
$
|
152,740
|
|
|
December 31, 2020
|
|
Estimated
Useful Life
|
|
Gross
Balance
|
|
|
Accumulated
Amortization
|
|
|
Total
Intangible
Assets—Net
|
|
|
Finite lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
7-15 years
|
|
$
|
164,782
|
|
|
$
|
53,446
|
|
|
$
|
111,336
|
|
|
Covenants not to compete
|
|
4-5 years
|
|
|
29,942
|
|
|
|
21,469
|
|
|
|
8,473
|
|
|
Trade names
|
|
1-5 years
|
|
|
16,938
|
|
|
|
12,849
|
|
|
|
4,089
|
|
|
Proprietary software
|
|
3-5 years
|
|
|
21,007
|
|
|
|
6,132
|
|
|
|
14,875
|
|
|
Patent
|
|
16 years
|
|
|
17,479
|
|
|
|
1,398
|
|
|
|
16,081
|
|
|
Total other intangible assets
—net
|
|
|
|
$
|
250,148
|
|
|
$
|
95,294
|
|
|
$
|
154,854
|
|
Intangible assets with finite lives are stated at cost, less accumulated amortization and impairment losses, if any. These intangible assets are amortized using the straight-line method over the estimated useful lives of the assets. Amortization expense was $8.4 million and $17.0 million for the three and six months ended June 30, 2021, respectively, and $7.8 million and $13.3 million for the three and six months ended June 30, 2020, respectively.
Future amortization expense is estimated to be as follows for each of the five following years and thereafter:
|
December 31,
|
|
|
|
|
|
2021 (remaining)
|
|
$
|
15,433
|
|
|
2022
|
|
|
27,472
|
|
|
2023
|
|
|
21,831
|
|
|
2024
|
|
|
18,381
|
|
|
2025
|
|
|
12,138
|
|
|
2026 and thereafter
|
|
|
57,485
|
|
|
Total
|
|
$
|
152,740
|
|
15
9. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Accounts payable and other accrued liabilities consisted of the following:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Accounts payable
|
|
$
|
18,097
|
|
|
$
|
15,481
|
|
|
Accrued expenses
|
|
|
14,302
|
|
|
|
11,469
|
|
|
Other business acquisitions purchase
price obligations
|
|
|
50
|
|
|
|
50
|
|
|
Contract liabilities
|
|
|
7,292
|
|
|
|
6,114
|
|
|
Other current liabilities
|
|
|
1,254
|
|
|
|
1,507
|
|
|
Income tax payable
|
|
|
—
|
|
|
|
256
|
|
|
Total accounts payable and
other accrued liabilities
|
|
$
|
40,995
|
|
|
$
|
34,877
|
|
10. ACCRUED PAYROLL AND BENEFITS
Accrued payroll and benefits consisted of the following:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Accrued bonuses
|
|
$
|
4,768
|
|
|
$
|
5,416
|
|
|
Accrued paid time off
|
|
|
2,296
|
|
|
|
2,067
|
|
|
Accrued payroll
|
|
|
7,307
|
|
|
|
9,133
|
|
|
Accrued other
|
|
|
4,908
|
|
|
|
4,565
|
|
|
Total accrued payroll and benefits
|
|
$
|
19,279
|
|
|
$
|
21,181
|
|
|
|
|
|
|
|
|
|
|
|
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 1.8% and 1.0% for the three and six months ended June 30, 2021, respectively, and (15.3%) and 14.9% for the three and six months ended June 30, 2020, respectively. Income tax expense recorded by the Company during the three and six months ended June 30, 2021 was not material. The Company recorded an income tax benefit of $1.8 million and $4.9 million during the three and six months ended June 30, 2020, respectively. The difference between the ETR and federal statutory rate of 21.0% is primarily attributable to items recorded for U.S. GAAP but permanently disallowed for U.S. federal income tax purposes, recognition of a U.S. federal and state valuation allowance, state and foreign income tax provisions and Global Intangible Low Taxed Income (“GILTI”).
A valuation allowance is recorded when it is more-likely-than-not some of the Company’s deferred tax assets may not be realized. Significant judgment is applied when assessing the need for a valuation allowance and the Company considers future taxable income, reversals of existing deferred tax assets and liabilities and ongoing prudent and feasible tax planning strategies, in making such assessment. As of June 30, 2021, the Company’s U.S. federal, state and various foreign net deferred tax assets are not more-likely-than-not to be realized and a full valuation allowance is maintained.
The Company records uncertain tax positions in accordance with ASC 740, on the basis of a two-step process in which (i) the Company determines whether it is more likely than not a tax position will be sustained on the basis of the technical merits of such position and (ii) for those tax positions meeting the more-likely-than-not recognition threshold, the Company would recognize the largest amount of tax benefit that is more than 50.0% likely to be realized upon ultimate settlement with the related tax authority. The Company has determined it has no uncertain tax positions as of June 30, 2021. The Company classifies interest and penalties recognized on uncertain tax positions as a component of income tax expense.
12. WARRANT OPTIONS
In October 2018, in connection with the issuance of the Redeemable Series A-1 Preferred Stock, the Company issued a detachable warrant to acquire 534,240 shares of common stock at a price of $0.01 per share at any given time during a period of ten years beginning on the instrument’s issuance date.
16
For the three and six months ended June 30, 2020, fair value gains/(losses) recorded in other expense on the unaudited condensed consolidated statements of operations related to the Redeemable Series A-1 warrant were not material.
In April 2020, in connection with the issuance of the Convertible and Redeemable Series A-2 Preferred Stock, the Company issued a detachable warrant to acquire 1,351,960 shares of common stock at a price of $0.01 per share at any time following the occurrence of a qualifying IPO, a sale of the Company, or a redemption in full of the Series A-2 preferred stock (each, an “Adjustment Event”), with an expiration date of ten years from the instrument’s issuance date. The number of shares underlying the warrant and issuable upon exercise was subject to adjustment based upon the price per share of common stock upon the occurrence of an Adjustment Event (Note 17) to reflect an aggregate value of $30.0 million.
As a result of the $15.00 per share public offering price in the IPO, the warrant issued in connection with the issuance of the Convertible and Redeemable Series A-2 Preferred Stock was adjusted pursuant to its terms and, upon closing of the IPO, represented a warrant to purchase 1,999,999 shares of common stock (an increase of 648,039 shares).
On July 30, 2020, the Redeemable Series A-1 Preferred Stock and the Convertible and Redeemable Series A-2 Preferred Stock warrants were exercised in full resulting in the issuance of an aggregate of 2,534,239 shares of common stock to the holder for an exercise price of $0.01 per share.
13. DEBT
Debt consisted of the following:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Term loan facility
|
|
$
|
175,000
|
|
|
$
|
173,906
|
|
|
Revolving Line of Credit
|
|
|
65,000
|
|
|
|
—
|
|
|
Capital leases
|
|
|
—
|
|
|
|
3,088
|
|
|
Equipment line of credit
|
|
|
—
|
|
|
|
3,018
|
|
|
Less deferred debt issuance costs
|
|
|
(2,503
|
)
|
|
|
(4,108
|
)
|
|
Total debt
|
|
|
237,497
|
|
|
|
175,904
|
|
|
Less current portion of long-term debt
|
|
|
(6,563
|
)
|
|
|
(5,583
|
)
|
|
Long-term debt, less current portion
|
|
$
|
230,934
|
|
|
$
|
170,321
|
|
Deferred Financing Costs—Costs relating to debt issuance have been deferred and are presented as discounted against the underlying debt instrument. These costs are amortized to interest expense over the terms of the underlying debt instruments.
2021 Credit Facility—On April 27, 2021, the Company entered into a new Senior Secured Credit Agreement providing for a new $300.0 million credit facility comprised of a $175.0 million term loan and a $125.0 million revolving line of credit (the “2021 Credit Facility”), and used a portion of the proceeds from the 2021 Credit Facility to repay all amounts outstanding under the 2020 Credit Facility (as defined below). The 2021 revolving credit facility includes a $20.0 million sublimit for the issuance of letters of credit. Subject to certain exceptions, all amounts under the 2021 Credit Facility will become due on April 27, 2026. The Company has the option to borrow incremental term loans or request an increase in the aggregate commitments under the revolving credit facility up to an aggregate amount of $150.0 million subject to the satisfaction of certain conditions.
The 2021 Credit Facility term loan must be repaid in quarterly installments and shall amortize at the following annualized rates beginning with the quarter ended December 31, 2021 with the remaining balance due and payable in full on April 27, 2026:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Table
|
|
|
Year 1
|
|
|
Year 2
|
|
|
Year 3
|
|
|
Year 4
|
|
|
Year 5
|
|
|
|
Term Loan
|
|
5.0
|
|
%
|
|
5.0
|
|
%
|
|
7.5
|
|
%
|
|
7.5
|
|
%
|
|
10.0
|
|
%
|
17
The 2021 Credit Facility term loan and the revolver bear interest subject to the Company’s leverage ratio and LIBOR as follows:
|
Pricing Tier
|
|
Net Leverage Ratio
|
|
2021 Credit Facility
|
|
|
Commitment
Fee
|
|
Letter of Credit Fee
|
|
|
|
|
|
|
|
LIBOR
|
|
|
Base Rate
|
|
|
|
|
|
|
|
|
|
1
|
|
≥ 3.75x to 1.0
|
|
|
2.50
|
|
%
|
|
1.50
|
|
%
|
0.25
|
%
|
|
2.50
|
|
%
|
|
2
|
|
<3.75x to 1.0 but ≥ 3.25 to 1.0
|
|
|
2.25
|
|
|
|
1.25
|
|
|
0.23
|
|
|
2.25
|
|
|
|
3
|
|
<3.25 to 1.0 but ≥ 2.50 to 1.0
|
|
|
2.00
|
|
|
|
1.00
|
|
|
0.20
|
|
|
2.00
|
|
|
|
4
|
|
<2.50 to 1.0 but ≥ 1.75 to 1.0
|
|
|
1.75
|
|
|
|
0.75
|
|
|
0.15
|
|
|
1.75
|
|
|
|
5
|
|
<1.75 to 1.0
|
|
|
1.50
|
|
|
|
0.50
|
|
|
0.15
|
|
|
1.50
|
|
|
Additionally, the Company may receive an interest rate adjustment of up to 0.05% under the 2021 Credit Facility based on the Company’s performance against certain defined sustainability and environmental, social and governance related objectives.
The 2021 Credit Facility includes a number of covenants imposing certain restrictions on the Company’s business, including, among other things, restrictions on the Company’s ability, subject to certain exceptions and baskets, to incur indebtedness, incur liens on its assets, agree to any additional negative pledges, pay dividends or repurchase stock, limit the ability of its subsidiaries to pay dividends or distribute assets, make investments, enter into any transaction of merger or consolidation, liquidate, wind-up or dissolve, or convey any part of its business, assets or property, or acquire the business, property or assets of another person, enter into sale and leaseback transactions, enter into certain transactions with affiliates, engage in any material line of business substantially different from those engaged on the closing date, modify the terms of indebtedness subordinated to the loans incurred under the 2021 Credit Facility and modify the terms of its organizational documents. The 2021 Credit Facility also includes financial covenants requiring the Company to remain below a maximum total net leverage ratio of 4.25 times, which steps down to 4.00 times beginning with the fiscal quarter ending December 31, 2022 through and including the fiscal quarter ending September 30, 2023 and then to 3.75 times beginning with the fiscal quarter ending December 31, 2023, and a minimum fixed charge coverage ratio of 1.25 times. As of June 30, 2021, the Company’s consolidated total leverage ratio (as defined in the 2021 Credit Facility) was 3.1 times.
The 2021 Credit Facility requires customary mandatory prepayments of the term loan and revolver and cash collateralization of letters of credit, subject to customary exceptions, including 100% of the proceeds of debt not permitted by the 2021 Credit Facility, 100% of the proceeds of certain dispositions, subject to customary reinvestment rights, where applicable, and 100% of insurance or condemnation proceeds, subject to customary reinvestment rights, where applicable. The 2021 Credit Facility also includes customary events of default and related acceleration and termination rights.
The weighted average interest rate on the 2021 Credit Facility as of June 30, 2021 was 2.1%.
The Company’s obligations under the 2021 Credit Facility are guaranteed by certain of the Company’s existing and future direct and indirect subsidiaries, and such obligations are secured by substantially all of the Company’s assets, including the capital stock or other equity interests in those subsidiaries.
2020 Credit Facility—On April 13, 2020, the Company entered into a Unitranche Credit Agreement (the “2020 Credit Facility”), which was paid in full in April 2021 via proceeds from the issuance of the 2021 Credit Facility, which consisted of a $225.0 million credit facility comprised of a $175.0 million term loan and a $50.0 million revolving credit facility. The 2020 Credit Facility maturity date was April 2025. Up until October 6, 2020, the term loan and the revolver bore interest at LIBOR plus 5.0% with a 1.0% LIBOR floor or the base rate plus 4.0% and LIBOR plus 3.5% or the base rate plus 2.5%, respectively. Effective October 6, 2020, the Company amended the 2020 Credit Facility to provide for a reduction on the applicable interest rate on the term loan from LIBOR plus 5.0% with a 1.0% LIBOR floor to LIBOR plus 4.5% with a 1.0% LIBOR floor. The revolver interest rate remained unchanged. The revolver was also subject to an unused commitment fee of 0.35%. The Term Loan had quarterly repayments that started on September 30, 2020 of $0.5 million, increasing to $1.1 million on September 30, 2021 and further increasing to $1.6 million on September 30, 2022, with the remaining outstanding principal amount due on the maturity date.
The 2020 Credit Facility contained financial covenants requiring the Company to remain below a maximum consolidated total leverage ratio of 4.25 times, which would have stepped down to 4.00 times beginning December 31, 2021 and then to 3.75 times beginning December 31, 2022, and a minimum consolidated fixed charge coverage ratio of 1.25 times. As of December 31, 2020, the Company’s consolidated total leverage ratio (as defined in the 2020 Credit Facility) was 2.7 times.
The resulting loss on extinguishment upon repayment of the 2020 Credit Facility amounted to $4.1 million, of which $1.0 million was related to fees paid and $3.1 related to unamortized debt issuance costs. Total loss on extinguishment is recorded in interest expense-net within the condensed consolidated statement of operations for the three and six months ended June 30, 2021.
18
Prior Senior Secured Credit Facility—The Company’s Senior Secured Credit Facility prior to the 2020 Credit Facility (the “Prior Senior Credit Facility”), which was paid in full in April 2020 via proceeds from the issuance of the 2020 Credit Facility, consisted of a $50.0 million term loan and a $130.0 million revolving credit facility.
Borrowings under the Prior Senior Credit Facility bore interest at either (i) LIBOR plus the applicable margin or (ii) a base rate (equal to the highest of (a) the federal funds rate plus 0.5%, (b) Lender A’s prime rate and (c) Eurodollar Rate, which is based on LIBOR, (using a one-month period plus 1.0%), plus the applicable margin, as the Company elects. The applicable margin means a percentage per annum determined in accordance with the following table:
|
Pricing Tier
|
|
Consolidated
Leverage Ratio
|
|
Commitment
Fee
|
|
|
Eurodollar
Rate Loans
and LIBOR
Letter of
Credit Fee
|
|
|
Daily
Floating
Rate Loans
|
|
|
Rate
Loans
|
|
|
1
|
|
> 3.75 to 1.0
|
|
|
0.50
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
3.00
|
%
|
|
2
|
|
≤ 3.75 to 1.0 but > 3.00 to 1.0
|
|
|
0.50
|
|
|
|
3.50
|
|
|
|
3.50
|
|
|
|
2.50
|
|
|
3
|
|
≤ 3.00 to 1.0 but > 2.25 to 1.0
|
|
|
0.40
|
|
|
|
3.00
|
|
|
|
3.00
|
|
|
|
2.00
|
|
|
4
|
|
< 2.25 to 1.0
|
|
|
0.30
|
|
|
|
2.50
|
|
|
|
2.50
|
|
|
|
1.50
|
|
Equipment Line of Credit—On March 12, 2019, the Company increased its equipment line of credit facility for the purchase of equipment and related freight, installation costs and taxes paid for an additional amount not to exceed $2.0 million. On May 16, 2019, the Company entered into a Canadian equipment line of credit facility for an amount not to exceed $1.0 million Canadian dollars. Interest on the line of credit is determined based on a three-year swap rate at the time of funding.
The following is a schedule of the aggregate annual maturities of long-term debt presented on the unaudited condensed consolidated statement of financial position, based on the terms of the 2021 Credit Facility and equipment line of credit:
|
June 30,
|
|
|
|
|
|
2022
|
|
$
|
71,563
|
|
|
2023
|
|
|
9,844
|
|
|
2024
|
|
|
13,125
|
|
|
2025
|
|
|
14,219
|
|
|
2026
|
|
|
131,249
|
|
|
Total
|
|
$
|
240,000
|
|
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following financial liabilities are measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Business acquisitions contingent consideration,
current
|
|
$
|
30,152
|
|
|
$
|
49,902
|
|
|
Business acquisitions contingent consideration,
long-term
|
|
|
1,000
|
|
|
|
4,565
|
|
|
Conversion option
|
|
|
22,006
|
|
|
|
20,886
|
|
|
Total
|
|
$
|
53,158
|
|
|
$
|
75,353
|
|
The estimated fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.
19
The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis:
|
|
Compound Embedded Option
|
|
|
Business Acquisitions Contingent Consideration, Current
|
|
|
Business Acquisitions Contingent Consideration,
Long-term
|
|
|
Conversion Option
|
|
|
Contingent
Put Option
|
|
|
Warrant
Options
|
|
|
Total Liabilities
|
|
|
Balance—at January 1, 2020
|
$
|
—
|
|
|
$
|
8,614
|
|
|
$
|
379
|
|
|
$
|
—
|
|
|
$
|
7,100
|
|
|
$
|
16,878
|
|
|
$
|
32,971
|
|
|
Series A-2 compound embedded option
|
|
9,361
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,361
|
)
|
|
Issuance of warrant option
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,099
|
|
|
|
30,099
|
|
|
Acquisitions
|
|
—
|
|
|
|
34,451
|
|
|
|
10,543
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,994
|
|
|
Changes in fair value included in earnings
|
|
(756
|
)
|
|
|
5,608
|
|
|
|
(1,625
|
)
|
|
|
—
|
|
|
|
7,025
|
|
|
|
1
|
|
|
|
11,765
|
|
|
Payment of contingent consideration
payable
|
|
—
|
|
|
|
(12,250
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,250
|
)
|
|
Foreign currency translation of contingent
consideration payment
|
|
—
|
|
|
|
(208
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(208
|
)
|
|
Reclass of long term to short term
contingent liabilities
|
|
|
|
|
|
180
|
|
|
|
(180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Balance—at June 30, 2020
|
$
|
8,605
|
|
|
$
|
36,395
|
|
|
$
|
9,117
|
|
|
$
|
—
|
|
|
$
|
14,125
|
|
|
$
|
46,978
|
|
|
$
|
98,010
|
|
|
|
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance—at January 1, 2021
|
$
|
—
|
|
|
$
|
49,902
|
|
|
$
|
4,565
|
|
|
$
|
20,886
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,353
|
|
|
Acquisitions
|
|
—
|
|
|
|
—
|
|
|
|
2,804
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,804
|
|
|
Changes in fair value included in earnings
|
|
—
|
|
|
|
13,774
|
|
|
|
10,261
|
|
|
|
1,120
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,155
|
|
|
Payment of contingent consideration
payable
|
|
—
|
|
|
|
(50,154
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(50,154
|
)
|
|
Reclass of long term to short term
contingent liabilities
|
|
|
|
|
|
16,630
|
|
|
|
(16,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Balance—at June 30, 2021
|
$
|
—
|
|
|
$
|
30,152
|
|
|
$
|
1,000
|
|
|
$
|
22,006
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
53,158
|
|
Quantitative Information about Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3):
Compound Embedded Option—Prior to the Company’s IPO, the fair value of the compound embedded option associated with the issuance of the Convertible and Redeemable Series A-2 Preferred Stock (Note 17) was estimated using a “with-and-without” method. The “with-and-without” methodology involves valuing the whole instrument on an as-is basis and then valuing the instrument without the embedded derivative feature. The difference between the entire instrument with the embedded derivative feature compared to the instrument without the embedded derivative feature is the fair value of the derivative. The unobservable inputs were based on a 100.0% probability of an IPO event and IPO date. The considerable quantifiable inputs in the compound embedded option were: (i) the future value of the compound embedded option, (ii) the fair value of the Convertible and Redeemable Series A-2 Preferred Stock, (iii) the present value of the total instrument, as well as the present value of the compound embedded feature plus the fair value of the instrument, and (iv) the risk free, discount rates, conversion date and maximum conversion amounts.
Business Acquisitions Contingent Consideration—The fair value of the contingent consideration payable associated with the acquisition of CTEH and MSE was determined using a Monte Carlo simulation of earnings in a risk-neutral Geometric Brownian Motion framework. The fair values of the contingent consideration payables for the other acquisitions were calculated based on expected target achievement amounts, which are measured quarterly and then subsequently adjusted to actuals at the target measurement date. The method used to price these liabilities is considered level 3 due to the subjective nature of the unobservable inputs used to determine the fair value. The input is the expected achievement of earn-out thresholds.
Conversion Option—Upon the Company’s IPO, the fair value of the conversion option associated with the issuance of the Convertible and Redeemable Series A-2 Preferred Stock (Note 17) was estimated using a “with-and-without” method. The “with-and-without” methodology considers the value of the security on an as-is basis and then without the embedded conversion premium. The difference between the two scenarios is the implied fair value of the embedded derivative. The unobservable input is the required rate of return on the Series A-2. The considerable quantifiable inputs in the valuation relate to the timing of conversions or redemptions.
Contingent Put Option—The fair value of the contingent put option associated with the issuance of the Redeemable Series A-1 Preferred Stock was estimated using a “with-and-without” method. The “with-and-without” methodology considers the value of the security on an as-is basis and then without the embedded contingent put option. The difference between the two scenarios is the implied fair value of the embedded derivative, recorded as the contingent put option liability. In this case the Series A-1 was redeemed
20
on the date of value so the value of the “with” scenario is known. The unobservable input is the required rate of return on the Series A-1 through to maturity in the “without” scenario. The contingent put option was redeemed in July 2020 (Note 16).
Warrant Options—The warrant options were exercised on July 30, 2020 (Note 12). The fair value of the warrant option associated with the issuance of the Redeemable Series A-1 Preferred Stock was calculated based on the Black-Sholes pricing model using the following assumptions:
|
|
|
June 30,
|
|
|
|
|
2020
|
|
|
Common stock value (per share)
|
|
$
|
31.60
|
|
|
Expected volatility
|
|
|
43.64
|
%
|
|
Risk-free interest rate
|
|
|
0.66
|
%
|
|
Expected life (years)
|
|
10
|
|
As of June 30, 2020, the fair value of the warrant option associated with the issuance of the Convertible and Redeemable Series A-2 Preferred Stock (Note 17) was calculated based on a Monte Carlo simulation analysis with assumptions for (i) stock price, (ii) volatility based on the median historical volatility of publicly listed comparable companies’ stock price returns, (iii) risk-free rates based on U.S. treasury yields and (iv) dividend yield.
The method used to price these liabilities is considered Level 3 due to the subjective nature of the unobservable inputs (common stock value and expected volatility) used to determine the fair value.
15. COMMITMENTS AND CONTINGENCIES
Leases—The Company leases office facilities over various terms expiring through 2030. Certain of these operating leases contain rent escalation clauses. The Company also has office equipment leases that expire through 2026 (Note 6).
Other Commitments—The Company has commitments under the 2021 Credit Facility, its equipment line of credit and its lease obligations (Note 13 and 6).
Contingencies—The Company is subject to purchase price contingencies related to earn-outs associated with certain acquisitions (Note 7).
Legal—In the normal course of business, the Company is at times subject to pending and threatened legal actions. In management’s opinion, any potential loss resulting from the resolution of these matters is not expected to have a material effect on the unaudited condensed consolidated results of operations, financial position or cash flows of the Company.
21
16. REDEEMABLE SERIES A-1 PREFERRED STOCK
On October 19, 2018, the Company issued 12,000 shares of Redeemable Series A-1 Preferred Stock with a par value of $0.0001 per share and a detachable warrant to purchase 534,240 shares of the Company’s common stock. Each preferred share was issued as part of a unit, which consisted of one share of the Redeemable Series A-1 Preferred Stock at $0.01 million per share.
On April 13, 2020, the Company amended and restated the certificate of designation of the Company’s Redeemable Series A-1 Preferred Stock. The most significant changes in the amendment included (i) the Redeemable Series A-1 Preferred Stock became pari passu with the Convertible and Redeemable Series A-2 Preferred Stock (Note 17), (ii) the maturity was extended to October 2024; (iii) the Company could use up to $50.0 million of indebtedness or cash on hand to redeem the Redeemable Series A-1 Preferred Stock, and (iv) upon an IPO, up to 50.0% of accumulated dividends could be paid in shares of common stock and (v) the Company could elect to reduce the three year make whole penalty to a two year make whole penalty if the warrant issued in connection with the issuance of the Redeemable Series A-1 Preferred Stock was redeemed in full at a share price of no less than $31.60. Following a partial redemption of outstanding Redeemable Series A-1 Preferred Stock, the dividend rate of the remaining Redeemable Series A-1 Preferred Stock would be reduced proportionally (between 15.0% and 9.0%) in relation to the proportion of Redeemable Series A-1 Preferred Stock redeemed, with the rate increasing by an additional 1.0% for dividends that are accrued versus paid in cash. Based on a qualitative assessment performed by the Company, the Redeemable Series A-1 Preferred Stock amendments did not represent a significant long-term change to the original terms of the instrument and, therefore, there was no change in the accounting of the instrument.
On July 27, 2020, the Company redeemed in full the Redeemable Series A-1 Preferred Stock, including the guaranteed minimum two-year dividend.
The Redeemable Series A-1 Preferred Stock contained restrictive covenants. Prior to its redemption, the Company was subject to a consolidated total leverage ratio (including the outstanding principal and accrued dividend on the Redeemable Series A-1 Preferred Stock) limit of less than 10.0 times as of the end of any fiscal quarter ending until maturity.
Before redemption, the Redeemable Series A-1 Preferred Stock accrued dividends quarterly at an annual rate of 15.0% with respect to dividends that were paid in cash and at an annual rate of 14.2% with respect to dividends that were accrued.
At issuance the Company determined that the detachable warrant (Note 12) and the contingent put option were required to be accounted for separately. The contingent put option change in value of $(22.6) million and $7.0 million for the three and six months ended June 30, 2020 was recorded to other expense.
17. CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK
On April 13, 2020, the Company entered into an agreement to issue 17,500 shares of the Convertible and Redeemable Series A-2 Preferred Stock with a par value of $0.0001 per share and a detachable warrant to purchase shares of the Company’s common stock with a 10-year life, in exchange for gross proceeds of $175.0 million, net of $1.3 million debt issuance costs. Before the Company’s IPO, each share of Convertible and Redeemable Series A-2 Preferred Stock accrued dividends at the rate of 15.0% per annum, with respect to dividends that were paid in cash, and 14.2% per annum, with respect to dividends that were accrued. The Company paid dividends on shares of the Convertible and Redeemable Series A-2 Preferred Stock of $4.1 million and $8.2 million during the three and six months ended June 30, 2021, respectively.
At issuance, the Company determined that Convertible and Redeemable Series A-2 Preferred Stock and the detachable warrant (Note 12), were required to be accounted for separately.
Upon the Company’s IPO, following which the Redeemable Series A-1 Preferred Stock was fully redeemed, the Convertible and Redeemable Series A-2 Preferred Stock terms automatically updated to the following: (i) no mandatory redemption, (ii) no stated value cash repayment obligation other than in the event of certain defined liquidation events, (iii) only redeemable at the Company’s option, (iv) the instrument became convertible into common stock beginning on the four year anniversary of issuance at a 15.0% discount to the common stock market price (with a limit of $60.0 million in stated value of Convertible and Redeemable Series A-2 Preferred Stock eligible to be converted in any 60-day period prior to the seventh anniversary of issuance and the amount of stated value of the Convertible and Redeemable Series A-2 Preferred Stock eligible for conversion limited to $60.0 million during year 5 and $120.0 million (which includes the aggregate amount of the stated value of the Convertible and Redeemable Series A-2 Preferred Stock and any accrued but unpaid dividends added to such stated value of any shares of Convertible and Redeemable Series A-2 Preferred Stock converted in year 5) during year 6), (v) the dividend rate stepped down to 9.0% per year with required quarterly cash payments, (vi) in an event of noncompliance, the dividend rate shall increase to 12.0% per annum for the first 90-day period from and including the date the noncompliance event occurred, and thereafter shall increase to 14.0% per annum, (vii) the debt incurrence test
22
ratio increased to 4.5 times, (viii) the total leverage cap covenant was removed, and (ix) minimum repayment amount dropped down from $50.0 million to $25.0 million.
The Company may, at its option on any one or more dates, redeem all or a minimum portion (the lesser of (i) $25.0 million in aggregate stated value of the Convertible and Redeemable Series A-2 Preferred Stock and (ii) all of the Convertible and Redeemable Series A-2 Preferred Stock then outstanding) of the outstanding Convertible and Redeemable Series A-2 Preferred Stock in cash.
With respect to any redemption of any share of the Convertible and Redeemable Series A-2 Preferred Stock prior to the third-year anniversary, the Company is subject to a make whole penalty in which the holders of the Convertible and Redeemable Series A-2 Preferred Stock are guaranteed a minimum repayment equal to outstanding redeemed stated value plus three years of dividends accrued or accruable thereon.
The Convertible and Redeemable Series A-2 Preferred Stock does not meet the definition of a liability pursuant to “ASC 480- Distinguishing Liabilities from Equity.” However, as (i) the instrument is redeemable upon a change of control as defined in the certificate of designations governing the terms of the Convertible and Redeemable Series A-2 Preferred Stock, and (ii) the Company cannot assert it would have sufficient authorized and unissued shares of common stock to settle all future conversion requests due to the variable conversion terms, the instrument is redeemable upon the occurrence of events that are not solely within the control of the Company, and therefore the Company classifies the Convertible and Redeemable Series A-2 Preferred Stock as mezzanine equity. Subsequent adjustment of the carrying value of the instrument is required if the instrument is probable of becoming redeemable. As of June 30, 2021, the Company has determined that a change of control is not probable. Additionally, as of June 30, 2021, the Company has determined that it is not probable that there will be a future conversion request that the Company is unable to settle with authorized and issued shares based on the Company’s current stock price and available shares as well as the Company’s monitoring efforts to ensure there are a sufficient number of shares available to settle any conversion request. Therefore, as of June 30, 2021, the Company has determined that the instrument is not probable of becoming redeemable, and does not believe subsequent adjustment of the carrying value of the instrument will be necessary. The Convertible and Redeemable Series A-2 Preferred Stock had an aggregate liquidation preference of $182.2 million as of June 30, 2021.
The Convertible and Redeemable Series A-2 Preferred Stock contains embedded features that are required to be bifurcated and are subject to separate accounting treatment from the instrument itself. At issuance, these embedded features consisted of (i) a contingent dividend feature associated with the decrease in the dividend rate upon an IPO and (ii) a conversion option of the preferred shares to shares of common stock beginning on the fourth-year anniversary of the issuance date. Upon the Company’s IPO, the embedded derivative only consisted of the conversion option. As of June 30, 2021, this conversion embedded feature had a net fair value of $22.0 million. The change in value of $0.5 million and $1.1 million for the three and six months ended June 30, 2021 was recorded to other expense. The Convertible and Redeemable Series A-2 Preferred Stock was not convertible into common stock until completion of the IPO in July 2020.
18. STOCKHOLDERS’ EQUITY (DEFICIT)
Authorized Capital Stock—The Company was authorized to issue 190,000,000 shares of common stock, with a par value of $0.000004 per share as of June 30, 2021 and December 31, 2020.
Warrants—In May 2015, the Company issued warrants to acquire 116,350 shares of Common Stock at a price of approximately $17.19 per share to the placement agent as consideration for backstopping the financing completed in May 2015. These warrants were exercised in full as a cashless transaction during the first quarter of 2021. As a result of this cashless transaction, the resulting number of shares issued was 67,713 shares.
23
Common Stock Issuances—The Company issued the following shares of common stock:
|
|
Three Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Shares
|
|
|
Average Price per Share
|
|
|
Total Consideration
(in thousands)
|
|
|
Shares
|
|
|
Average Price per Share
|
|
|
Total Consideration
(in thousands)
|
|
|
|
Acquisitions
|
|
9,322
|
|
|
$
|
50.95
|
|
|
$
|
475
|
|
|
|
791,139
|
|
|
$
|
31.60
|
|
|
$
|
25,000
|
|
|
|
Exercise of options
|
|
94,090
|
|
|
|
9.58
|
|
|
|
901
|
|
|
|
3,500
|
|
|
|
6.03
|
|
|
|
21
|
|
|
|
Restricted shares, net
|
|
2,112
|
|
|
|
56.31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Payment of earn-out liability
|
|
539,607
|
|
|
|
46.33
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Payment of purchase price true up
|
|
24,200
|
|
|
|
44.81
|
|
|
|
1,084
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Total
|
|
669,331
|
|
|
$
|
41.20
|
|
|
$
|
27,460
|
|
|
|
794,639
|
|
|
$
|
31.49
|
|
|
$
|
25,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Shares
|
|
|
Average Price per Share
|
|
|
Total Consideration
(in thousands)
|
|
|
Shares
|
|
|
Average Price per Share
|
|
|
Total Consideration
(in thousands)
|
|
|
|
Acquisitions
|
|
81,062
|
|
|
$
|
33.88
|
|
|
$
|
2,746
|
|
|
|
791,139
|
|
|
$
|
31.60
|
|
|
$
|
25,000
|
|
|
|
Exercise of warrants
|
|
67,713
|
|
|
|
17.19
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Exercise of options
|
|
424,150
|
|
|
|
7.28
|
|
|
|
3,086
|
|
|
|
3,500
|
|
|
|
6.03
|
|
|
|
21
|
|
|
|
Restricted shares, net
|
|
38,929
|
|
|
|
31.31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Payment of earn-out liability
|
|
539,607
|
|
|
|
46.33
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Payment of purchase price true up
|
|
24,200
|
|
|
|
44.81
|
|
|
|
1,084
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Total
|
|
1,175,661
|
|
|
$
|
29.17
|
|
|
$
|
31,916
|
|
|
|
794,639
|
|
|
$
|
31.49
|
|
|
$
|
25,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2021 and June 30, 2020, there was $16.4 million and $6.5 million, respectively, of total unrecognized stock compensation expense related to unvested options and restricted stock granted under the Plans. Such unrecognized expense is expected to be recognized over a weighted-average three year period. The following number of shares were authorized to be issued and available for grant:
|
|
|
June 30, 2021
|
|
|
|
|
2017 Plan
|
|
|
2013 Plan
|
|
|
Total
|
|
|
Shares authorized to be issued
|
|
|
3,944,750
|
|
|
|
2,047,269
|
|
|
|
5,992,019
|
|
|
Shares available for grant
|
|
|
1,609,687
|
|
|
|
—
|
|
|
|
1,609,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
2017 Plan
|
|
|
2013 Plan
|
|
|
Total
|
|
|
Shares authorized to be issued
|
|
|
1,066,160
|
|
|
|
2,050,244
|
|
|
|
3,116,404
|
|
|
Shares available for grant
|
|
|
20,817
|
|
|
|
—
|
|
|
|
20,817
|
|
24
Total stock compensation expense for the Plans was as follows:
|
|
|
Three Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
2017 plan
|
|
|
2013 plan
|
|
|
|
|
|
|
2017 plan
|
|
|
2013 plan
|
|
|
|
|
|
|
|
|
Options
|
|
|
Restricted Stock
|
|
|
Options
|
|
|
Total
|
|
|
Options
|
|
|
Restricted Stock
|
|
|
Options
|
|
|
Total
|
|
|
Cost of revenue
|
|
$
|
290
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
290
|
|
|
$
|
342
|
|
|
$
|
—
|
|
|
$
|
61
|
|
|
$
|
403
|
|
|
Selling, general and
administrative expense
|
|
|
1,790
|
|
|
|
330
|
|
|
|
6
|
|
|
|
2,126
|
|
|
|
299
|
|
|
|
370
|
|
|
|
68
|
|
|
|
737
|
|
|
Total
|
|
$
|
2,080
|
|
|
$
|
330
|
|
|
$
|
6
|
|
|
$
|
2,416
|
|
|
$
|
641
|
|
|
$
|
370
|
|
|
$
|
129
|
|
|
$
|
1,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
2017 plan
|
|
|
2013 plan
|
|
|
|
|
|
|
2017 plan
|
|
|
2013 plan
|
|
|
|
|
|
|
|
|
Options
|
|
|
Restricted Stock
|
|
|
Options
|
|
|
Total
|
|
|
Options
|
|
|
Restricted Stock
|
|
|
Options
|
|
|
Total
|
|
|
Cost of revenue
|
|
$
|
896
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
906
|
|
|
$
|
697
|
|
|
$
|
—
|
|
|
$
|
131
|
|
|
$
|
828
|
|
|
Selling, general and
administrative expense
|
|
|
2,794
|
|
|
|
512
|
|
|
|
9
|
|
|
|
3,315
|
|
|
|
586
|
|
|
|
740
|
|
|
|
136
|
|
|
|
1,462
|
|
|
Total
|
|
$
|
3,690
|
|
|
$
|
512
|
|
|
$
|
19
|
|
|
$
|
4,221
|
|
|
$
|
1,283
|
|
|
$
|
740
|
|
|
$
|
267
|
|
|
$
|
2,290
|
|
Montrose Amended & Restated 2017 Stock Incentive Plan
Restricted Stock—The Company issues restricted stock to certain 2017 Plan participants as Director’s compensation. These shares of restricted stock granted in the three and six months ended June 30, 2021 and June 30, 2020 vest one year from the date of grant, or, in each case, in full upon a change in control, subject to the participant’s continued service as a Director throughout such date, or upon retirement. Members of the Board of Directors that receive stock-based compensation are treated as employees for accounting purposes. Restricted stock activity was as follows:
|
|
Three Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Shares
|
|
|
Average Price per Share
|
|
|
Total
(in thousands)
|
|
|
Shares
|
|
|
Average Price per Share
|
|
|
Total
(in thousands)
|
|
|
|
Shares granted
|
|
4,534
|
|
|
$
|
56.31
|
|
|
$
|
255
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Shares
|
|
|
Average Price per Share
|
|
|
Total
(in thousands)
|
|
|
Shares
|
|
|
Average Price per Share
|
|
|
Total
(in thousands)
|
|
|
|
Shares granted
|
|
19,066
|
|
|
$
|
36.99
|
|
|
$
|
705
|
|
|
|
33,229
|
|
|
$
|
31.60
|
|
|
$
|
1,050
|
|
|
There were no forfeitures of restricted shares during the six months ended June 30, 2021 and June 30, 2020.
There were 2,112 and 38,929 shares of restricted stock that became fully vested and were released as unrestricted shares of common stock during the three and six months ended June 30, 2021, respectively. No restricted shares vested and were released as unrestricted shares of common stock during the three or six months ended June 30, 2020. There was an aggregate of 286,239 and 273,122 restricted shares outstanding as of June 30, 2021 and June 30, 2020, respectively.
25
Options—Options issued to all optionees under the 2017 Plan vest over four years from the date of issuance (or earlier vesting start date, as determined by the Board of Directors) as follows: one half on the second anniversary of date of grant and the remaining half on the fourth anniversary of the date of grant, with the exception of certain annual grants to certain executive officers, which vest annually over a 3-year and 1-year period. The following summarizes the options activity of the 2017 Plan:
|
|
|
Options to
Purchase
Common
Stock
|
|
|
Weighted-
Average
Exercise
Price per
Share
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
|
Weighted
Average
Remaining
Contract Life
(in Years)
|
|
|
Aggregate
Intrinsic
Value
of In-The-
Money
Options (in
Thousands)
|
|
|
Outstanding at January 1, 2020
|
|
|
617,852
|
|
|
$
|
24
|
|
|
$
|
12
|
|
|
|
7.82
|
|
|
$
|
4,696
|
|
|
Granted
|
|
|
160,712
|
|
|
|
32
|
|
|
|
12
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited/ cancelled
|
|
|
(5,500
|
)
|
|
|
20
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding at June 30, 2020
|
|
|
773,064
|
|
|
|
26
|
|
|
|
12
|
|
|
|
8.03
|
|
|
|
4,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2021
|
|
|
1,840,229
|
|
|
|
23
|
|
|
|
12
|
|
|
|
9.09
|
|
|
|
15,598
|
|
|
Granted
|
|
|
232,470
|
|
|
|
38
|
|
|
|
21
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited/ cancelled
|
|
|
(13,425
|
)
|
|
|
27
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
(1,250
|
)
|
|
|
18
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
(33,918
|
)
|
|
|
20
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,014
|
|
|
Outstanding at June 30, 2021
|
|
|
2,024,106
|
|
|
|
25
|
|
|
|
13
|
|
|
|
8.74
|
|
|
|
58,785
|
|
|
Exercisable at June 30, 2021
|
|
|
293,299
|
|
|
|
25
|
|
|
|
—
|
|
|
|
7.65
|
|
|
|
8,396
|
|
|
Options vested and expected to vest
|
|
|
2,024,106
|
|
|
|
25
|
|
|
|
—
|
|
|
|
8.74
|
|
|
|
58,785
|
|
The following weighted-average assumptions were used in the Black-Sholes option-pricing model calculation:
|
|
|
June 30,
|
|
June 30,
|
|
|
|
|
2021
|
|
2020
|
|
|
Common stock value (per share)
|
|
$
|
38.23
|
|
$ 31.60
|
|
|
Expected volatility
|
|
|
58.22
|
%
|
|
45.26
|
%
|
|
Risk-free interest rate
|
|
|
0.73
|
%
|
|
0.49
|
%
|
|
Expected life (years)
|
|
5.5-7.0
|
|
7.0
|
|
|
Forfeiture rate
|
|
None
|
|
None
|
|
|
Dividend rate
|
|
None
|
|
None
|
|
Montrose Amended & Restated 2013 Stock Option Plan—The following summarizes the activity of the 2013 Plan:
|
|
|
Options to
Purchase
Common
Stock
|
|
|
Weighted-
Average
Exercise
Price per
Share
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
|
Weighted
Average
Remaining
Contract Life
(in Years)
|
|
|
Aggregate
Intrinsic
Value
of In-The-
Money
Options (in
Thousands)
|
|
|
Outstanding at January 1, 2020
|
|
|
1,855,469
|
|
|
$
|
6
|
|
|
$
|
1
|
|
|
|
6.40
|
|
|
|
46,617
|
|
|
Forfeited/ cancelled
|
|
|
(1,250
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(8,550
|
)
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
(3,500
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
1,842,169
|
|
|
|
6
|
|
|
|
1
|
|
|
|
5.91
|
|
|
|
46,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2021
|
|
|
1,787,869
|
|
|
|
6
|
|
|
|
1
|
|
|
|
5.40
|
|
|
|
43,867
|
|
|
Exercised
|
|
|
(389,232
|
)
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,922
|
|
|
Outstanding at June 30, 2021
|
|
|
1,398,637
|
|
|
|
6
|
|
|
|
1
|
|
|
|
4.88
|
|
|
|
65,982
|
|
|
Exercisable at June 30, 2021
|
|
|
1,390,812
|
|
|
|
6
|
|
|
|
—
|
|
|
|
4.88
|
|
|
|
65,651
|
|
|
Options vested and expected to vest
|
|
|
1,398,637
|
|
|
|
6
|
|
|
|
—
|
|
|
|
4.88
|
|
|
|
65,982
|
|
Total shares outstanding from exercised options were 673,350 shares and 205,100 shares as of June 30, 2021 and June 30, 2020, respectively.
26
Common Stock Reserved for Future Issuances—The Company has reserved certain stock of its authorized but unissued common stock for possible future issuance in connection with the following:
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Warrants
|
|
|
—
|
|
|
|
2,002,550
|
|
|
Montrose 2013 Stock Incentive Plan
|
|
|
2,047,269
|
|
|
|
2,050,244
|
|
|
Montrose 2017 Stock Incentive Plan
|
|
|
3,944,750
|
|
|
|
1,066,160
|
|
|
Common stock reserved for future issuance
|
|
|
5,992,019
|
|
|
|
5,118,954
|
|
19. NET (LOSS) INCOME PER SHARE
Basic net (loss) income per share is computed by dividing net (loss) income attributable to common stockholders by the weighted average number of common shares outstanding during each period. The Redeemable Series A-1 Preferred Stock, which was outstanding prior to its redemption on July 27, 2020, and the Convertible and Redeemable Series A-2 Preferred Stock are considered a participating security during the applicable period. Net losses are not allocated to the Redeemable Series A-1 Preferred stockholders nor the Convertible and Redeemable Series A-2 stockholders, as they were not contractually obligated to share in the Company’s losses.
Diluted net (loss) income per share is computed by dividing net loss (income) attributable to common stockholders by the weighted average number of common and dilutive common equivalent shares outstanding for the period using the treasury-stock method or the as-converted method. During the three and six months ended June 30, 2020, shares issuable in connection with the warrant options (Note 12) were considered outstanding common shares for purposes of calculating net (loss) income per share since they did not contain any conditions that must be satisfied for the holder to exercise the warrant. Potentially dilutive shares are comprised of restricted stock and shares of common stock underlying stock options outstanding under the Plans and warrants (other than warrant options) to purchase common stock. During the three and six months ended June 30, 2021 and the six months ended June 30, 2020, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss and potentially dilutive shares being anti-dilutive.
The following table summarizes the computation of basic and diluted net (loss) income per share attributable to common stockholders of the Company:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
(In thousands, except for net loss per share)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Net (loss) income
|
|
$
|
(14,483
|
)
|
|
$
|
13,224
|
|
|
$
|
(26,079
|
)
|
|
$
|
(28,024
|
)
|
|
Accretion of redeemable series A-1 preferred stock
|
|
|
—
|
|
|
|
(5,644
|
)
|
|
|
—
|
|
|
|
(11,059
|
)
|
|
Convertible and redeemable series A-2 preferred
stock dividend
|
|
|
(4,100
|
)
|
|
|
—
|
|
|
|
(8,200
|
)
|
|
|
—
|
|
|
Net (loss) income attributable to common stockholders
–basic and diluted
|
|
|
(18,583
|
)
|
|
|
7,580
|
|
|
|
(34,279
|
)
|
|
|
(39,083
|
)
|
|
Weighted-average common shares outstanding –
basic
|
|
|
26,056
|
|
|
|
10,649
|
|
|
|
25,586
|
|
|
|
9,718
|
|
|
Net (loss) income per share attributable to common
stockholders –basic
|
|
|
-0.71
|
|
|
$
|
0.71
|
|
|
$
|
(1.34
|
)
|
|
$
|
(4.02
|
)
|
|
Weighted-average common shares outstanding –
diluted
|
|
|
26,056
|
|
|
|
19,139
|
|
|
|
25,586
|
|
|
|
9,718
|
|
|
Net (loss) income per share attributable to common
stockholders –diluted
|
|
$
|
(0.71
|
)
|
|
$
|
0.40
|
|
|
$
|
(1.34
|
)
|
|
$
|
(4.02
|
)
|
The following equity shares were excluded from the calculation of diluted net (loss) income per share attributable to common stockholders because their effect would have been anti-dilutive:
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Stock options
|
|
|
1,737,307
|
|
|
|
2,685,439
|
|
|
Restricted stock
|
|
|
28,623
|
|
|
|
24,362
|
|
|
Warrants
|
|
|
—
|
|
|
|
116,350
|
|
27
20. SEGMENT INFORMATION
The Company has three operating and reportable segments: Assessment, Permitting and Response, Measurement and Analysis and Remediation and Reuse. These segments are monitored separately by management for performance against budget and prior year and are consistent with internal financial reporting. The Company’s operating segments are organized based upon primary services provided, the nature of the production process, their type of customers, methods used to distribute the products and the nature of the regulatory environment.
Segment Adjusted EBITDA is the primary measure of operating performance for all three operating segments. Segment Adjusted EBITDA is the calculated Company’s Earnings before Interest, Tax, Depreciation and Amortization (“EBITDA”), adjusted to exclude certain transactions such as stock-based compensation, acquisition costs and fair value changes in financial instruments, amongst others. The Chief Operating Decision Maker (“CODM”) does not review segment assets as a measure of segment performance.
Corporate and Other includes costs associated with general corporate overhead (including executive, legal, finance, safety, human resources, marketing and IT related costs) that are not directly related to supporting operations. Overhead costs that are directly related to supporting operations (such as insurance, software, licenses, shared services and payroll processing costs) are allocated to the operating segments on a basis that reasonably approximates an estimate of the use of these services.
Segment revenues and Adjusted EBITDA consisted of the following:
|
|
|
Three Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
Segment
|
|
|
|
|
Segment
|
|
|
Adjusted
|
|
|
Segment
|
|
|
Adjusted
|
|
|
|
|
Revenues
|
|
|
EBITDA
|
|
|
Revenues
|
|
|
EBITDA
|
|
|
Assessment, Permitting and Response
|
|
$
|
70,705
|
|
|
$
|
14,856
|
|
|
$
|
18,631
|
|
|
$
|
4,989
|
|
|
Measurement and Analysis
|
|
|
39,117
|
|
|
|
9,491
|
|
|
|
37,036
|
|
|
|
11,615
|
|
|
Remediation and Reuse
|
|
|
26,402
|
|
|
|
4,309
|
|
|
|
18,099
|
|
|
|
2,375
|
|
|
Total Operating Segments
|
|
|
136,224
|
|
|
|
28,656
|
|
|
|
73,766
|
|
|
|
18,979
|
|
|
Corporate and Other
|
|
|
—
|
|
|
|
(7,693
|
)
|
|
|
—
|
|
|
|
(5,084
|
)
|
|
Total
|
|
$
|
136,224
|
|
|
$
|
20,963
|
|
|
$
|
73,766
|
|
|
$
|
13,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
Segment
|
|
|
|
|
Segment
|
|
|
Adjusted
|
|
|
Segment
|
|
|
Adjusted
|
|
|
|
|
Revenues
|
|
|
EBITDA
|
|
|
Revenues
|
|
|
EBITDA
|
|
|
Assessment, Permitting and Response
|
|
$
|
145,967
|
|
|
$
|
30,660
|
|
|
$
|
23,161
|
|
|
$
|
6,431
|
|
|
Measurement and Analysis
|
|
|
72,557
|
|
|
|
14,351
|
|
|
|
73,476
|
|
|
|
19,176
|
|
|
Remediation and Reuse
|
|
|
51,517
|
|
|
|
6,790
|
|
|
|
38,160
|
|
|
|
4,481
|
|
|
Total Operating Segments
|
|
|
270,041
|
|
|
|
51,801
|
|
|
|
134,797
|
|
|
|
30,088
|
|
|
Corporate and Other
|
|
|
—
|
|
|
|
(14,039
|
)
|
|
|
—
|
|
|
|
(10,640
|
)
|
|
Total
|
|
$
|
270,041
|
|
|
$
|
37,762
|
|
|
$
|
134,797
|
|
|
$
|
19,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Presented below is a reconciliation of the Company’s segment measure to (loss) income before (expense) benefit from income taxes:
|
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Total
|
|
$
|
20,963
|
|
|
$
|
13,895
|
|
|
$
|
37,762
|
|
|
$
|
19,448
|
|
|
Interest expense, net
|
|
|
(6,798
|
)
|
|
|
(5,260
|
)
|
|
|
(9,486
|
)
|
|
|
(7,853
|
)
|
|
Income tax (expense) benefit
|
|
|
256
|
|
|
|
1,759
|
|
|
|
254
|
|
|
|
4,911
|
|
|
Depreciation and amortization
|
|
|
(10,905
|
)
|
|
|
(9,784
|
)
|
|
|
(21,674
|
)
|
|
|
(17,344
|
)
|
|
Stock-based compensation
|
|
|
(2,417
|
)
|
|
|
(1,140
|
)
|
|
|
(4,222
|
)
|
|
|
(2,290
|
)
|
|
Start-up losses and investment in new services
|
|
|
(1,123
|
)
|
|
|
(296
|
)
|
|
|
(2,090
|
)
|
|
|
(675
|
)
|
|
Acquisition costs
|
|
|
(506
|
)
|
|
|
(2,454
|
)
|
|
|
(743
|
)
|
|
|
(3,761
|
)
|
|
Fair value changes in financial instruments
|
|
|
(518
|
)
|
|
|
21,842
|
|
|
|
(1,120
|
)
|
|
|
(7,783
|
)
|
|
Fair value changes in business acquisitions contingent consideration
|
|
|
(12,971
|
)
|
|
|
(3,983
|
)
|
|
|
(24,035
|
)
|
|
|
(3,983
|
)
|
|
Short term purchase accounting fair value adjustment
to deferred revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(243
|
)
|
|
Initial public offering expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(531
|
)
|
|
Discontinued services (i)
|
|
|
—
|
|
|
|
(1,078
|
)
|
|
|
—
|
|
|
|
(7,496
|
)
|
|
Expenses related to financing transactions
|
|
|
—
|
|
|
|
(277
|
)
|
|
|
(50
|
)
|
|
|
(277
|
)
|
|
Other losses or expenses
|
|
|
(464
|
)
|
|
|
—
|
|
|
|
(675
|
)
|
|
|
(147
|
)
|
|
Net (loss) income
|
|
$
|
(14,483
|
)
|
|
$
|
13,224
|
|
|
$
|
(26,079
|
)
|
|
$
|
(28,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)During the first quarter of 2020, the Company determined to reduce the footprint of its environmental lab in Berkeley, California, and to exit its non-specialized municipal water engineering service line and its food waste biogas engineering service line. As a part of discontinuing service lines, the Company made the decision to book an additional bad debt reserve related to the uncertainty around the ability to collect on receivables related to these service lines (Note 3). It was determined that the discontinuation of these service lines did not represent a strategic shift that had (or will have) a major effect on the Company’s operations and financial results therefore did not meet the requirements to be classified as discontinued operations.
21. RELATED-PARTY TRANSACTIONS
The Company engaged a related party to provide Quality of Earnings reports on acquisition targets. The Company paid this related party zero during the three and six months ended June 30, 2021 and zero and $0.1 million during the three and six months ended June 30, 2020, respectively for its services. This expense is included within selling, general and administrative expense on the unaudited condensed consolidated statements of operations. As of June 30, 2021, and December 31, 2020, the Company had no significant unpaid invoices to this related party, which would be/are included in accounts payable and other accrued liabilities on the unaudited condensed consolidated statements of financial position. The related party used by the Company is partially owned through investment vehicles controlled by certain members of the Company’s Board of Directors. The Company ceased using the services of this related party during 2020.
During the year ended December 31, 2020, the holder of the Redeemable Series A-1 Preferred Stock and Convertible and Redeemable A-2 Preferred Stock became a stockholder in the Company. On the redemption date of the Redeemable Series A-1 Preferred Stock (Note 16), the Company issued 1,786,739 shares of common stock as dividend payment. Additionally, this related party exercised its warrant options (Note 12), becoming the holder of 2,534,239 additional common shares. To the Company’s knowledge, the related party has sold all of such shares of its Company common stock.
22. DEFINED CONTRIBUTION PLAN
On January 1, 2014, the Company established the Montrose Environmental Group 401(k) Savings Plan (the “401(k) Savings Plan”). As of June 30, 2021, and December 31, 2020, plan participants may defer up to 85.0% of their eligible wages for the year, up to the Internal Revenue Service dollar limit and catch-up contribution allowed by law. Prior to May 22, 2020, the Company provided employer matching contributions equal to 100.0% of the first 3.0% of the participant’s compensation and 50.0% of the participant’s elective deferrals that exceed 3.0% but do not exceed 4.0% of the participant’s compensation. Beginning on May 22, 2020, the Company temporarily ceased making employer contributions. Employer contributions were reinstated beginning on April 23, 2021. Employer contributions under the 401(k) Savings Plan were $0.7 million and $0.7 million for the three and six months ended June 30,
29
2021, respectively, and $0.4 million and $1.2 million for the three and six months ended June 30, 2020, respectively, and are included within selling, general, and administrative expense on the unaudited condensed consolidated statements of operations.
23. SUBSEQUENT EVENTS
Business Acquisitions—On July 1, 2021, the Company completed the business acquisition of Environmental Intelligence, LLC (“EI”) by acquiring 100.0% of its membership interests. EI is an environmental consulting company recognized for its innovative work in wildlife mitigation, biological assessments, and other environmental services. EI is based in Laguna Beach, CA and enhances our ecological planning and service capabilities in California and the US West Coast.
On August 2, 2021, the Company completed the business acquisition of SensibleIoT, LLC (“Sensible”) by acquiring 100.0% of its membership interests. Sensible is a technology platform that connects sensors and sources of environment data to a central, proprietary database that enables real-time client interaction. Sensible provides Montrose with an advanced ability to integrate environmental services and enhance environmental data analytics for clients.
These transactions qualified as an acquisition of a business and will be accounted for as a business combination. The following table summarizes the elements of the purchase price of these acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Other Purchase
|
|
|
Total
|
|
|
|
|
Cash (1)
|
|
|
Common Stock (2)
|
|
|
Price Component (3)
|
|
|
Purchase Price
|
|
|
EI
|
|
$
|
20,721
|
|
|
$
|
2,274
|
|
|
$
|
-
|
|
|
$
|
22,995
|
|
|
Sensible
|
|
|
6,500
|
|
|
|
1,000
|
|
|
|
5,500
|
|
|
|
13,000
|
|
|
|
(1)
|
The cash portion of these acquisitions’ purchase price was funded through cash on hand.
|
|
|
(2)
|
The common stock component was paid through the issuance of 43,100 and 19,638 shares of common stock for EI and Sensible, respectively.
|
|
|
(3)
|
The other purchase price component for EI consists of a potential working capital target payment, which is undetermined at this time. The other purchase price components of Sensible consist of an earn out that will be paid in common stock as targets are met, as well as, a potential working capital target payment, which is undetermined at this time.
|
The Company has not yet completed the initial purchase price allocation for these acquisitions, including obtaining all of the information required for the valuation of the acquired intangible assets, goodwill, assets and liabilities assumed, due to the timing of the close of the transaction.
30
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity, capital resources and other financial and operating information. We use words such as “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “position,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements in this filing. All of our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we are expecting, including:
|
|
•
|
our limited operating history;
|
|
|
•
|
our history of losses and ability to achieve profitability;
|
|
|
•
|
general global economic, business and other conditions, the cyclical nature of our industry and the significant fluctuations in events that impact our business;
|
|
|
•
|
the impact of the COVID-19 pandemic on our business operations and on local, national and global economies;
|
|
|
•
|
the parts of our business that depend on difficult to predict natural or manmade events and the fluctuations in our revenue and customer concentration as a result thereof;
|
|
|
•
|
the highly competitive nature of our business;
|
|
|
•
|
our ability to execute on our acquisition strategy and successfully integrate and realize benefits of our acquisitions;
|
|
|
•
|
our ability to promote and develop our brands;
|
|
|
•
|
our ability to maintain and expand our client base;
|
|
|
•
|
our ability to maintain necessary accreditations and other authorizations in varying jurisdictions;
|
|
|
•
|
significant environmental governmental regulation;
|
|
|
•
|
our ability to attract and retain qualified managerial and skilled technical personnel;
|
|
|
•
|
allegations regarding compliance with professional standards, duties and statutory obligations and our ability to provide accurate results;
|
|
|
•
|
the lack of formal long-term agreements with many of our clients;
|
|
|
•
|
our ability to successfully implement our new enterprise resource planning system;
|
|
|
•
|
our ability to adapt to changing technology, industry standards or regulatory requirements;
|
|
|
•
|
government clients and contracts;
|
|
|
•
|
our ability to maintain our prices and manage costs;
|
|
|
•
|
our ability to protect our intellectual property or claims that we infringe on the intellectual property rights of others;
|
|
|
•
|
laws and regulations regarding handling of confidential information;
|
|
|
•
|
any failure in or breach of our networks and systems;
|
|
|
•
|
our international operations;
|
|
|
•
|
environmental regulations and liabilities; and
|
|
|
•
|
additional factors discussed in our filings with the Securities and Exchange Commission, or the SEC.
|
31
The forward-looking statements in this Quarterly Report on Form 10-Q are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control, as well as the other factors described in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 24, 2021, or the 2020 Form 10-K. Further, many of these factors are, and may continue to be, amplified by the COVID-19 pandemic.
Additional factors or events that could cause our actual results to differ may also emerge from time to time, and it is not possible for us to predict all of them. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by any forward-looking statement and, therefore, you should not regard any forward-looking statement as a representation or warranty by us or any other person that we will successfully achieve the expectation, plan or objective expressed in such forward-looking statement in any specified time frame, or at all. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us speaks only as of the date on which we make it. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.
32