Notes to Unaudited Consolidated Financial
Statements
NOTE 1 - DESCRIPTION OF ORGANIZATION AND BUSINESS
OPERATIONS
NRC Group Holdings Corp. (“NRCG,”
and together with its subsidiaries, the “Company”) was originally formed on January 3, 2017 as a special purpose acquisition
company (“SPAC”) under the name Hennessy Capital Acquisition Corp. III (“Hennessy Capital”). On October
17, 2018, Hennessy Capital consummated the acquisition (the “Business Combination”) of all of the issued and outstanding
membership interests of NRC Group Holdings, LLC (“NRC Group”) from JFL-NRC-SES Partners, LLC (“JFL Partners”).
Upon consummation of the Business Combination, Hennessy Capital changed its name to NRC Group Holdings Corp.
NRCG is a global provider of a wide range
of environmental, compliance and waste management services. The Company’s broad range of capabilities and global reach enable
it to meet the critical, and often non-discretionary, needs of more than 5,000 customers across diverse end markets to ensure compliance
with environmental, health and safety laws and regulations around the world.
NRCG operates in four reportable business
segments: (1) Domestic Environmental Services, (2) Sprint, (3) Domestic Standby Services and (4) International Services. The Domestic
Environmental Services segment provides environmental and industrial services across the United States. The Sprint segment provides
energy-related services and waste management and disposal services predominately to upstream energy customers concentrated in the
Eagle Ford and Permian Basin regions of the Texas Shale Oil Fields (“Eagle Ford and Permian Basin”). The Domestic Standby
Services segment provides commercial standby oil spill compliance and emergency response services in the United States and across
North America. The International Services segment provides international standby oil spill, emergency response, specialty industrial
and environmental solutions in seven countries. Through its domestic and international wholly-owned subsidiaries, the Company primarily
provides these services to oil and gas, chemical, industrial and marine transportation clients in the United States and abroad.
NRC Group
On January 6, 2012, JFL-NRC Holdings, LLC
(“NRC Holdings”) was formed under Delaware law by its sole member, JFL-NRC Partners, LLC (“NRC Partners”),
for the purpose of acquiring National Response Corporation and its affiliated businesses, including, among others, NRC Environmental
Services, SEACOR Response and SEACOR Environmental Products (collectively, “NRC”) from affiliates of SEACOR Holdings,
Inc. (“SEACOR”). On March 16, 2012, NRC Holdings completed the acquisition (the “NRC Acquisition”) of all
of the issued and outstanding stock of NRC from SEACOR. Prior to March 16, 2012, NRC Holdings did not engage in any business except
for activities related to its formation.
On May 5, 2015, SES Holdco, LLC (“SES
Holdco”), a Texas limited liability company, was formed under Delaware law by its sole member, JFL-SES Partners, LLC (“SES
Partners”), for the purpose of acquiring Sprint Energy Services, LLC (“SES”), a Texas limited liability company.
On May 5, 2015, SES Holdco completed the acquisition (the “SES Acquisition”) of all the issued and outstanding stock
of SES. Sprint Karnes County Disposal LLC (“SKCD”), a Texas limited liability company, is a wholly-owned subsidiary
of SES. SKCD received an oilfield waste disposal permit from the Railroad Commission of Texas (“RRC”) on December 31,
2015.
NRC Partners and SES Partners are ultimately
majority-owned by funds advised by J.F. Lehman and Company (“JFL”), a leading middle-market private equity firm focused
on the defense, aerospace, maritime, government and environmental sectors. In June 2018, NRC Partners and SES Partners formed JFL
Partners, a Delaware limited liability company, and contributed their respective equity interests in NRC Holdings and SES Holdco
to JFL Partners. JFL Partners formed NRC Group and contributed all of its equity interest in NRC Holdings and SES Holdco to NRC
Group. On June 11, 2018, NRC Group made a dividend payment of approximately $86.5 million to J.F. Lehman & Company, LLC (“JFLCo”)
(the “Dividend Recapitalization”). Following the Dividend Recapitalization, NRC Group became the holding company for
NRC Holdings and SES Holdco.
US Ecology Merger
On June 23, 2019, NRCG entered into an
Agreement and Plan of Merger (the “Merger Agreement”) with US Ecology, Inc., a Delaware corporation (“US Ecology”),
US Ecology Parent, Inc., a Delaware corporation and wholly-owned subsidiary of US Ecology (“Holdco”), Rooster Merger
Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Holdco (“Rooster Merger Sub”), and ECOL Merger Sub,
Inc., a Delaware corporation and a wholly-owned subsidiary of Holdco (“ECOL Merger Sub”).
The Merger Agreement provides that, subject
to the conditions set forth in the Merger Agreement, ECOL Merger Sub will merge with and into US Ecology, with US Ecology continuing
as the surviving company and as a wholly-owned subsidiary of Holdco (the “Parent Merger”). Substantially concurrently
therewith, Rooster Merger Sub will merge with and into NRCG, with NRCG continuing as the surviving company and as a wholly-owned
subsidiary of Holdco (the “Rooster Merger,” and, together with the Parent Merger, the “Mergers”). The parties
to the Merger Agreement intend that (1) each of the Mergers will qualify as a “reorganization” within the meaning of
Section 368(a) of the Internal Revenue Code of 1986 (the “Code”) or, alternatively, (2) the Mergers together will be
treated as an “exchange” described in Section 351 of the Code.
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
In the Rooster Merger, each share of common
stock, par value $0.0001 per share, of NRCG (“Company Common Stock”) issued and outstanding immediately prior to the
applicable Effective Time (other than cancelled shares) will be converted into the right to receive, and become exchangeable for:
(1) 0.196 of a share (the “NRCG Exchange Ratio”) of common stock, par value $0.01 per share, of Holdco (“Holdco
Common Stock”); (2)any cash in lieu of fractional shares of Holdco Common Stock payable pursuant to the Merger Agreement;
and (3) any dividends or other distributions to which the holder thereof becomes entitled to upon the surrender of such shares
of Company Common Stock in accordance with the Merger Agreement. Outstanding shares of NRCG’s equity awards will be converted
into equity awards of Holdco pursuant to the mechanics set forth in the Merger Agreement. In the Rooster Merger, each share of
Company Common Stock that is held by NRCG as treasury stock or that is owned by NRCG, Rooster Merger Sub or any other subsidiary
of US Ecology or NRCG immediately prior to the applicable Effective Time will cease to be outstanding and will automatically be
cancelled and will cease to exist, without any conversion thereof, and no consideration will be delivered in exchange therefor.
In addition, in the Rooster Merger, each
share of 7.00% Series A Convertible Cumulative Preferred Stock, par value $0.0001 per share, of NRCG (the “Series A Preferred
Stock”) will be converted into, and become exchangeable for, (1) a whole number of shares of Holdco Common Stock equal to
the product of (a) the number of shares of Company Common Stock that such share of Series A Preferred Stock could be converted
into at the applicable Effective Time (including Fundamental Change Additional Shares and Accumulated Dividends (each, as defined
in the Certificate of Designations, Preferences, Rights and Limitations of NRCG Series A Preferred Stock, dated as of October 17,
2018 and corrected on October 23, 2018 (the “Series A Certificate of Designations”), establishing the rights of the
NRCG Series A Preferred Stock)) multiplied by (b) the NRCG Exchange Ratio, (2) any cash in lieu of fractional shares of Holdco
Common Stock payable pursuant to the Merger Agreement and (3) any dividends or other distributions to which the holder thereof
becomes entitled to upon the surrender of such shares of NRCG Series A Preferred Stock in accordance with the Merger Agreement.
At the closing of the Rooster Merger, in
respect of each outstanding warrant to purchase Company Common Stock (each, a “NRCG Warrant”) issued pursuant to that
certain Warrant Agreement, dated as of June 22, 2017, between Continental Stock Transfer & Trust Company and NRCG, Holdco will
issue a replacement warrant (each, a “Replacement Warrant”) to each holder providing that such Replacement Warrant
will be exercisable for a number of shares of Holdco Common Stock equal to the product (rounded to the nearest whole number) of
(1) the number of shares of Company Common Stock that would have been issuable upon the exercise of the NRCG Warrant immediately
prior to the effective time of the Rooster Merger and (2) the NRCG Exchange Ratio, at an exercise price equal to the quotient obtained
by dividing (a) the pre-Rooster Merger exercise price ($11.50 per share) by (b) the NRCG Exchange Ratio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America
(“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X
of the Exchange Act. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, which
include only normal recurring adjustments necessary for the fair statement of the balances and results for the periods presented.
They may not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these
financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year
ended December 31, 2018, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2018 filed with the Securities and Exchange Commission (the “SEC”) on March 25, 2019 (the “2018 Annual Report”).
The results of operations for any interim periods are not necessarily indicative of the results that may be expected for the entire
fiscal year or any other interim period. Certain prior period financial information has been recast to reflect the current year’s
presentation.
Use of Estimates
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions, which are evaluated on an ongoing basis, that affect
the amounts reported in the Company’s consolidated financial statements and accompanying notes. Management bases its estimates
on historical experience and on various other assumptions it believes to be reasonable at the time under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
Significant Accounting Policies
There have been no material changes in
the Company’s significant accounting policies to those previously disclosed in the 2018 Annual Report.
Fair Value
The fair value of an asset or liability
is the price that would be received to sell an asset or transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes
a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring
fair value and defines three levels of inputs that may be used to measure fair value
.
|
●
|
Level 1 - uses quoted prices in active markets for
identical assets or liabilities.
|
|
●
|
Level 2 - uses observable inputs other than quoted
prices in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or
similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data.
|
|
●
|
Level 3 - uses one or more significant inputs that
are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment.
|
The Company’s only financial instruments
carried at fair value, with changes in fair value flowing through current earnings, consist of contingent consideration liabilities
recorded in conjunction with business combinations, as follows (in thousands):
|
|
|
|
|
Fair Value Measurement at
Reporting Date
Using
|
|
|
|
Balance as of
June 30,
2019
|
|
|
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - current
|
|
$
|
6,509
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,509
|
|
Contingent consideration - long-term
|
|
|
4,886
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,886
|
|
Total liabilities measured at fair value
|
|
$
|
11,395
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,395
|
|
|
|
Balance as of
December 31,
2018
|
|
|
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - current
|
|
$
|
2,470
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,470
|
|
Contingent consideration - long-term
|
|
|
3,846
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,846
|
|
Total liabilities measured at fair value
|
|
$
|
6,316
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,316
|
|
There were no transfers made among the
three levels in the fair value hierarchy for the three and six months ended June 30, 2019 and 2018.
The following table presents additional
information about Level 3 liabilities measured at fair value. Both observable and unobservable inputs may be used to determine
the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains and
losses for liabilities within the Level 3 category may include changes in fair value that were attributable to both observable
(e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
Changes in Level 3 liabilities measured at
fair value for the three and six months ended June 30, 2019 and 2018 are as follows (in thousands):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Contingent consideration - beginning of period
|
|
|
8,367
|
|
|
|
4,639
|
|
|
$
|
6,316
|
|
|
$
|
4,132
|
|
Acquisition of Clean Line (March 28, 2018)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
507
|
|
Acquisition of OIT (April 26, 2019)
|
|
|
4,023
|
|
|
|
-
|
|
|
|
4,023
|
|
|
|
-
|
|
Change in fair value of contingent consideration (recognized in earnings)
|
|
|
2,026
|
|
|
|
-
|
|
|
|
4,077
|
|
|
|
-
|
|
Contingent consideration paid
|
|
|
(3,021
|
)
|
|
|
-
|
|
|
|
(3,021
|
)
|
|
|
-
|
|
Contingent consideration - end of period
|
|
$
|
11,395
|
|
|
$
|
4,639
|
|
|
$
|
11,395
|
|
|
$
|
4,639
|
|
The fair value of the Company’s contingent
consideration liabilities recorded as part of the acquisitions of Enpro Holdings Group (“Enpro”) in April 2016, Clean
Line Waste Water Solutions Limited (“Clean Line”) in March 2018, Quail Run Services, LLC (“Quail Run”)
in October 2018 and OIT Inc. (“OIT”) in April 2019, has been classified within Level 3 in the fair value hierarchy.
The contingent consideration represents the estimated fair value of future payments due to the sellers of Enpro, Clean Line, Quail
Run and OIT based on each company’s achievement of annual earnings targets in certain years and other events considered in
certain transaction documents. The initial fair values of the contingent consideration were calculated through the use of either
Monte Carlo simulation or modified Black-Scholes analyses based on earnings projections for the respective earn-out periods, corresponding
earnings thresholds, and approximate timing of payments as outlined in the purchase agreements. The analyses utilized the following
assumptions: (i) expected term; (ii) risk-adjusted net sales or earnings; (iii) risk-free interest rate; and (iv) expected volatility
of earnings. Estimated payments, as determined through the respective models, were further discounted by a credit spread assumption
to account for credit risk. The contingent consideration is adjusted to fair value each period, and any increase or decrease
is recorded in operating income (loss). The fair value of the contingent consideration may be impacted by certain unobservable
inputs, most significantly with regard to discount rates, expected volatility and historical and projected performance. Significant
changes to these inputs in isolation could result in a significantly different fair value measurement.
The carrying value of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities approximates fair value because of the short-term nature of these
instruments. The carrying value of the Company’s term loans and revolving credit facilities, including the current portion,
approximate fair value as the terms and conditions of these loans are consistent with comparable market debt issuances. The carrying
value of the equipment loans approximate fair value as the underlying interest rates approximate current market rates for all periods
presented.
The Company measures certain assets at
fair value on a non-recurring basis, generally annually or when events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. These assets include goodwill and other intangible assets. See Note 5.
A financial instrument’s categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Trade Receivables and Allowance for
Doubtful Accounts
Customers are domestic and international
shippers, major oil companies, independent exploration and production companies, pipeline and transportation companies, power generating
operators, industrial companies, airports and state and local government agencies. All customers are granted credit on a short-term
basis and related credit risks are considered minimal. The Company routinely reviews its trade receivables and makes provisions
for probable doubtful accounts based on the credit worthiness of the parties involved, historical collection information and economic
conditions. However, those provisions are estimates and actual results could differ from those estimates and those differences
may be material. Trade receivables that are deemed uncollectible are removed from accounts receivable and from the allowance for
doubtful accounts when collection efforts have been exhausted.
The Company records allowances for doubtful
accounts receivable based upon expected collectability. The reserve is generally established based upon an analysis of its aged
receivables. Additionally, if necessary, a specific reserve for individual accounts is recorded when the Company becomes aware
of a customer’s inability to meet its financial obligations, such as in the case of a bankruptcy filing or deterioration
in the customer’s operating results or financial position. The Company also regularly reviews the allowance by considering
factors such as historical collections experience, credit quality, age of the accounts receivable balance and current economic
conditions that may affect a customer’s ability to pay. If actual bad debts differ from the reserves calculated, the Company
records an adjustment to bad debt expense in the period in which the difference occurs.
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
The following table provides a roll forward
of the allowance for doubtful accounts for the six months ended June 30, 2019 and 2018 (in thousands):
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Allowance for doubtful accounts, beginning of period
|
|
$
|
627
|
|
|
$
|
895
|
|
Bad debt expense
|
|
|
2,212
|
|
|
|
271
|
|
Write-offs, net of recoveries, for bad debt
|
|
|
(314
|
)
|
|
|
(39
|
)
|
Allowance for doubtful accounts, end of period
|
|
$
|
2,525
|
|
|
$
|
1,127
|
|
Asset Retirement Obligations
Under the terms of its oilfield waste disposal
permit for the SKCD facility, the Company is required to perform certain necessary closure activities as required by the RRC. The
SKCD facility consists of multiple active and planned disposal pits within the facility, each of which must be closed once they
have reached their permitted capacity for waste. Closure of the disposal pit entails capping the pit with a high-density polyethylene
liner and topsoil amongst other environmental remediation procedures. The Company records an asset retirement obligation (“ARO”)
for disposal pits in the year they become active and begin receiving oilfield waste, the balance of which represents the estimated
amount the Company will incur to close each disposal pit in the landfill. The liability is initially recorded at fair value with
the corresponding cost capitalized as a component of property and equipment within the Consolidated Balance Sheet. The liability
is accreted to its present value each period, and the capitalized costs are amortized on a straight-line basis over the expected
period of operation of the respective disposal pit.
The Company determines the ARO by calculating
the present value of estimated future cash flows related to the liability. Estimating the future ARO requires management to make
estimates and judgments regarding timing and existence of a liability, as well as the necessary cost to achieve adequate closure
of each pit. Inherent in the fair value calculation are numerous assumptions and judgments including the ultimate costs, inflation
factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political
environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding
adjustment is made to the related asset.
In each of December 2017 and April 2018,
the Company established an ARO liability and associated asset in the amount of $0.65 million and $0.65 million, respectively. The
Company recorded accretion expense of $27,000 and $54,000 during the three and six months ended June 30, 2019, respectively, and
made payments of $87,000 during the three and six months ended June 30, 2019. The Company recorded accretion expense of $13,000
and $26,000 during the three and six months ended June 30, 2018, respectively. As of June 30, 2019 and December 31, 2018, the ARO
liability was $1.3 million and $1.4 million, respectively. These ARO liabilities relate to the future closure costs associated
with Disposal Pit #1 and Disposal Pit #2, respectively. Disposal Pit #1 and Disposal Pit #2 are the Company’s only active
cells in the SKCD facility. This obligation represents the net present value of the estimated future payout of approximately $1.6
million, which is expected to be incurred by the Company upon closure of Disposal Pit #1 in 2020 and Disposal Pit # 2 in 2020.
Recent Accounting Pronouncements
Standards implemented
In August 2018, the SEC adopted the final rule
under SEC Release No. 33-10532,
Disclosure Update and Simplification
, amending certain disclosure requirements
that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements
on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in
each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The
analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of
comprehensive income is required to be filed. The final rule is effective on November 5, 2018, however the SEC staff announced
that it would not object if the filer’s first presentation of the changes in stockholders’ equity is included in its
Form 10-Q for the quarter that begins after the effective date of the amendments. The Company has included the presentation of
changes in stockholders’ equity as required.
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
Standards to be implemented
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which requires entities to recognize revenue in a way that depicts the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount,
timing and uncertainty of revenue and cash flows arising from customer contracts. The FASB subsequently issued ASU 2016-10,
Revenue
from Contracts with Customers: (Topic 606) Identifying Performance Obligations and Licensing
, to address issues arising from
implementation of the new revenue recognition standard. The effective date is the Company’s annual fiscal year 2019 and interim
periods thereafter, using one of two retrospective application methods: the full retrospective method or the modified retrospective
method. The Company plans to adopt the standard using the modified retrospective method. The Company completed its preliminary
assessment of the financial statement impact of the standard and does not expect it to have a material impact on its financial
position or results of operations. The Company will continue to finalize its assessment of the impact of the new guidance and will
review and update its internal controls over financial reporting to ensure that information required to implement the new standard
is appropriately captured and recorded. In addition, the Company continues to monitor additional changes, modifications, clarifications
or interpretations undertaken by the FASB or others, which may impact its current expectations.
In February 2016 the FASB issued ASU No.
2016-02
, Leases (Topic 842)
and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10 and ASU 2018-11
(collectively, Topic 842). Topic 842 requires companies to generally recognize on the balance sheet operating and financing lease
liabilities and corresponding right-of-use assets. Topic 842 is effective for annual periods beginning after December 15, 2019
for emerging growth companies, with early adoption permitted. The Company completed its preliminary assessment of the financial
statement impact of the adoption of Topic 842 and expects that most of its operating lease commitments will be subject to the new
standard which will result in the recognition of a material operating lease liability and corresponding right-of use asset upon
adoption.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. ASU 2016-03 changes
the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities
will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition
of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in
a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized
cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality
indicators and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings upon
adoption. The new standard will be effective on January 1, 2020 and may be adopted earlier. The Company is currently evaluating
the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820), - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
, which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst,
or hierarchy associated with, Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of
the update. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
3. BUSINESS ACQUISITIONS
OIT
On March 15, 2019 the Company entered
into a definitive asset purchase agreement with OIT, an environmental services provider including services related to thermal
treatment of non-hazardous petroleum contaminated soils, absorbent pads and sludges, and the treatment of Per- and Polyfluoroalkyl
substances. The transaction closed on April 26, 2019. The Company purchased the assets and business of OIT for an initial adjusted
cash purchase price of $5.8 million paid at closing, plus an additional $2.0 million deferred consideration payable in cash, Company
Common Stock or a combination of the two, and up to an additional $5.0 million in earn-out payments payable in cash, Company Common
Stock or a combination of the two over the next three years based on certain financial milestones. The fair value of this earn
out consideration is included in Contingent Consideration, net of current portion in the Consolidated Balance Sheets. Goodwill
related to OIT is expected to be deductible for tax purposes.
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
The following table summarizes the preliminary
allocation of the purchase price to the assets acquired and liabilities assumed for the OIT acquisition (in thousands):
Accounts receivable
|
|
$
|
110
|
|
Property, plant and equipment
|
|
|
1,145
|
|
Intangible assets
|
|
|
9,623
|
|
Goodwill
|
|
|
1,045
|
|
Accounts payable and accrued expenses
|
|
|
(180
|
)
|
Deferred consideration
|
|
|
(1,915
|
)
|
Contingent consideration
|
|
|
(4,023
|
)
|
Cash purchase price, net of cash acquired
|
|
$
|
5,805
|
|
For the three and six months ended June
30, 2019, the Company recorded $0.5 million in transaction costs related to the acquisition of OIT, which are recorded in Acquisition
Expense in the Consolidated Statements of Operations and Comprehensive Income (Loss).
Clean Line
On March 28, 2018, the Company and Clean
Line entered into an agreement for the sale and purchase of the entire issued share capital of Clean Line for approximately $5.0
million, net of cash acquired, and exclusive of deferred consideration and a potential $3.9 million (£3.0 million) in earn
out consideration, discussed below. Clean Line is a leading provider of environmental, industrial and emergency response services
in the United Kingdom. Clean Line is headquartered in Liverpool, England. Goodwill related to Clean Line is not deductible for
tax purposes.
The following table summarizes the final
allocation of the purchase price to the assets acquired and liabilities assumed for the Clean Line acquisition (in thousands):
Trade receivable
|
|
$
|
1,590
|
|
Other current assets
|
|
|
188
|
|
Property and equipment
|
|
|
1,908
|
|
Intangible assets
|
|
|
1,104
|
|
Goodwill
|
|
|
1,865
|
|
Accounts payable and accrued expenses
|
|
|
(1,147
|
)
|
Contingent liability
|
|
|
(507
|
)
|
Cash purchase price, net of cash acquired
|
|
$
|
5,001
|
|
For the three and six months ended June
30, 2018, the Company recorded $1.1 million in transaction costs related to the acquisition of Clean Line, which are recorded in
Acquisition Expense in the Consolidated Statements of Operations and Comprehensive Income (Loss).
SWS Acquisition
On May 14, 2018, the Company acquired Progressive
Environmental Services, Inc. (“SWS”) in exchange for approximately $21.8 million, net of cash acquired. SWS, headquartered
in Fort Worth, Texas, expands the Company’s environmental services geographic coverage to 20 locations in eight states throughout
the Southeast, Gulf Coast and Midwest of the United States.
In connection with the SWS acquisition,
the Company recognized a $1.2 million deferred tax benefit during the three months ended June 30, 2018. As a result of the Company’s
acquisition of SWS, a temporary difference between the book fair value and tax basis for the assets acquired was created, resulting
in a deferred tax liability and additional goodwill. With the increase in deferred tax liability, the Company reduced the deferred
tax asset valuation account and recognized a deferred tax benefit.
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
The following table summarizes the final
allocation of the purchase price to the assets acquired and liabilities assumed for the SWS acquisition (in thousands):
Accounts receivable
|
|
$
|
12,942
|
|
Other current assets
|
|
|
545
|
|
Property, plant and equipment
|
|
|
7,037
|
|
Deposits
|
|
|
362
|
|
Bid bonds
|
|
|
565
|
|
Intangible assets
|
|
|
2,879
|
|
Goodwill
|
|
|
4,899
|
|
Accounts payable and accrued expenses
|
|
|
(6,176
|
)
|
Deferred tax liability
|
|
|
(1,237
|
)
|
Cash purchase price, net of cash acquired
|
|
$
|
21,816
|
|
For the three and six months ended June
30, 2018, the Company recorded $1.5 million in transaction costs related to the acquisition of SWS, which are recorded in Acquisition
Expense in the Consolidated Statements of Operations and Comprehensive Income (Loss).
4. PROPERTY AND EQUIPMENT
Property and equipment, net consists of
the following as of June 30, 2019 and December 31, 2018 (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Vessels and equipment
|
|
$
|
36,353
|
|
|
$
|
35,553
|
|
Vehicles and trailers
|
|
|
67,712
|
|
|
|
50,458
|
|
Machinery and equipment
|
|
|
113,585
|
|
|
|
109,961
|
|
Office equipment and fixtures
|
|
|
8,752
|
|
|
|
8,549
|
|
Landfill
|
|
|
19,025
|
|
|
|
18,525
|
|
Leasehold improvements
|
|
|
10,115
|
|
|
|
6,490
|
|
Computer systems/license fees
|
|
|
3,796
|
|
|
|
3,527
|
|
Construction in progress
|
|
|
27,298
|
|
|
|
7,697
|
|
|
|
|
286,636
|
|
|
|
240,760
|
|
Less: Accumulated depreciation
|
|
|
(130,102
|
)
|
|
|
(118,195
|
)
|
Property and equipment, net
|
|
$
|
156,534
|
|
|
$
|
122,565
|
|
For the three and six months ended June
30, 2019, the Company recognized depreciation expense of $7.7 million and $14.8 million, respectively. For the three and six months
ended June 30, 2018, the Company recognized depreciation expense of $4.1 million and $9.0 million, respectively.
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
5. GOODWILL AND INTANGIBLE ASSETS
The table below summarizes the Company’s
finite-lived intangible assets and indefinite-lived trademarks as of June 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
June 30, 2019
|
|
|
|
Useful Lives
|
|
Weighted
average
remaining life
|
|
Intangible
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
(Years)
|
|
(Years)
|
|
Assets
|
|
|
Amortization
|
|
|
Balance
|
|
Customer Relationships
|
|
8 - 20
|
|
9.7
|
|
|
70,896
|
|
|
|
(21,643
|
)
|
|
$
|
49,253
|
|
Tradenames/Trademarks
|
|
2 - 25
|
|
10.8
|
|
|
13,148
|
|
|
|
(6,994
|
)
|
|
|
6,154
|
|
Trademarks
|
|
Indefinite
|
|
N/A
|
|
|
837
|
|
|
|
-
|
|
|
|
837
|
|
Permits/License
|
|
3 - 10
|
|
9.4
|
|
|
23,560
|
|
|
|
(8,997
|
)
|
|
|
14,563
|
|
Non-compete Agreements
|
|
5 - 6
|
|
0.4
|
|
|
856
|
|
|
|
(830
|
)
|
|
|
26
|
|
|
|
|
|
|
|
$
|
109,297
|
|
|
$
|
(38,464
|
)
|
|
$
|
70,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
Useful Lives
|
|
Weighted
average
remaining life
|
|
Intangible
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
(Years)
|
|
(Years)
|
|
Assets
|
|
|
Amortization
|
|
|
Balance
|
|
Customer Relationships
|
|
8 - 20
|
|
10.1
|
|
$
|
70,896
|
|
|
$
|
(18,939
|
)
|
|
$
|
51,957
|
|
Tradenames/Trademarks
|
|
2 - 25
|
|
10.7
|
|
|
13,148
|
|
|
|
(6,378
|
)
|
|
|
6,770
|
|
Trademarks
|
|
Indefinite
|
|
N/A
|
|
|
837
|
|
|
|
-
|
|
|
|
837
|
|
Permits/License
|
|
3 - 10
|
|
9.1
|
|
|
13,458
|
|
|
|
(8,491
|
)
|
|
|
4,967
|
|
Non-compete Agreements
|
|
5 - 6
|
|
0.8
|
|
|
856
|
|
|
|
(773
|
)
|
|
|
83
|
|
|
|
|
|
|
|
$
|
99,195
|
|
|
$
|
(34,581
|
)
|
|
$
|
64,614
|
|
The intangible assets are being amortized
over their respective original useful lives, which range from 2 to 25 years. The Company recorded approximately $2.0 million and
$3.9 million of amortization expense related to the above intangible assets for the three and six months ended June 30, 2019, respectively.
The Company recorded approximately $1.2 million and $2.8 million of amortization expense related to the above intangible assets
for the three and six months ended June 30, 2018, respectively. There were no impairment charges recorded during the six months
ended June 30, 2019 and 2018.
The following table shows the remaining
amortization expense associated with amortizable intangible assets as of June 30, 2019 (in thousands):
Year ended December 31, 2019 (excluding the six months ended June 30, 2019)
|
|
$
|
4,391
|
|
Year ended December 31, 2020
|
|
|
8,208
|
|
Year ended December 31, 2021
|
|
|
7,782
|
|
Year ended December 31, 2022
|
|
|
7,607
|
|
Year ended December 31, 2023
|
|
|
7,292
|
|
Thereafter
|
|
|
34,716
|
|
|
|
$
|
69,996
|
|
The table below summarizes goodwill activity
during the six months ended June 30, 2019 (in thousands):
Ending balance at December 31, 2018
|
|
$
|
51,417
|
|
Addition- OIT acquisition
|
|
|
1,045
|
|
Change in SWS acquisition allocation
|
|
|
402
|
|
Ending balance at June 30, 2019
|
|
$
|
52,864
|
|
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
The table below summarizes goodwill by
reportable segment at June 30, 2019 and December 31, 2018 (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Domestic Environmental Services
|
|
$
|
32,014
|
|
|
$
|
30,567
|
|
International Services
|
|
|
1,865
|
|
|
|
1,865
|
|
Sprint Segment
|
|
|
18,985
|
|
|
|
18,985
|
|
Total Goodwill
|
|
$
|
52,864
|
|
|
$
|
51,417
|
|
Domestic Environmental Services, International
Services and Sprint Segment Goodwill
The Company performed a quantitative test of
goodwill at year end for the year ended December 31, 2018. The Company evaluated goodwill at the segment level for the International
Services segment as it does not have components below the segment level that meet the definition of a reporting unit. Goodwill
for the Domestic Environmental Services segment is evaluated at the segment level as the reporting units are economically similar.
The Sprint Segment is evaluated at the reporting unit level. The Company estimates the fair value of its reporting units using
an income approach based on the present value of expected future cash flows, including terminal value, utilizing a market-based
weighted average cost of capital (“WACC”) determined separately for each reporting unit. The determination of fair
value involves the use of significant estimates and assumptions, including revenue growth rates driven by future commodity prices
and volume expectations, operating margins, capital expenditures, working capital requirements, tax rates, terminal growth rates,
discount rates and synergistic benefits available to market participants. No events or conditions indicated the carrying value
of the Company’s reporting units may not be recoverable in the six months ended June 30, 2019, and therefore the Company
did not perform an interim period impairment assessment. Company did not record impairment charges related to goodwill in the six
months ended June 30, 2019 and 2018.
6. LONG-TERM DEBT
As of June 30, 2019 and December 31, 2018 short-term and long-term
debt consisted of the following (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Term Loan principal
|
|
$
|
339,657
|
|
|
$
|
341,372
|
|
Less: Unamortized deferred financing fees
|
|
|
(7,081
|
)
|
|
|
(7,837
|
)
|
Less: Current portion
|
|
|
(3,431
|
)
|
|
|
(3,431
|
)
|
Term loans, net of current portion and deferred financing costs
|
|
|
329,145
|
|
|
|
330,104
|
|
|
|
|
|
|
|
|
|
|
Revolver (current )
|
|
|
43,000
|
|
|
|
10,000
|
|
Term loans, net of current portion and deferred financing costs, and Revolver
|
|
$
|
372,145
|
|
|
$
|
340,104
|
|
NRC US Holding Company, LLC (a wholly owned
subsidiary of NRC) and SES (collectively, the “Borrowers”), NRC Group, as parent, and the other guarantors party thereto
entered into a credit facility (the “Credit Facility”) on June 11, 2018, which included a $308.0 million term loan
(the “Original Term Loan”) and a $40.0 million revolving credit facility (the “Revolver”). The Borrowers
and the other guarantors (including NRC Group) entered into a joinder agreement (the “Joinder Agreement”) on October
2, 2018, pursuant to which the Borrowers increased the Original Term Loan in the amount of $35.0 million (the “Incremental
Term Loan,” and together with the Original Term Loan, the “Term Loan”) and the amount available under the Revolver
was reduced by $5 million to $35.0 million. On March 15 and May 10, 2019 the Company entered into incremental revolving credit
commitments of $10.0 million and $15.0 million, respectively, under the Credit Facility, bringing its total revolving credit commitments
under the Revolver up to $60.0 million. During the six months ended June 30, 2019, the Company borrowed $33.0 million under this
commitment. The Revolver matures on June 11, 2023 and the Term Loan matures on June 11, 2024, in each case unless otherwise extended
in accordance with the terms of the Credit Facility. The Borrowers may also incur incremental revolving and term loan commitments
pursuant to and in accordance with the terms of the Credit Facility.
During the six months ended June 30, 2019,
the Company made principal payments on the Term Loan of $1.7 million.
Outstanding loans under the Credit Facility
will bear interest at the Borrowers’ option at either the Eurodollar rate plus 5.25% or the base rate plus 4.25% per year.
In addition, the Borrowers will be charged (1) a commitment fee in an amount equal to 0.50% per annum times the average daily undrawn
portion of the Revolver, (2) a letter of credit fee in an amount equal to the applicable margin then in effect for revolving loans
bearing interest at the Eurodollar Rate times the average aggregate daily maximum amount available to be drawn under all outstanding
letters of credit, (3) a letter of credit fronting fee in an amount equal to 0.125% times the average aggregate daily maximum amount
available to be drawn under all letters of credit and (4) certain other fees as agreed between the parties. The weighted average
interest rate applicable to the Term Loan and Revolver under the Credit Facility at June 30, 2019 is approximately 7.84%.
As of June 30, 2019 and December 31, 2018,
the Company was in compliance with the covenants of all of its debt agreements.
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
Equipment Loans and Capital Leases
During the six months ended June 30, 2019,
the Company entered into new equipment loans of $1.7 million, with terms of 24 to 60 months. As of June 30, 2019, $0.7 million
of the remaining balance is included in Current Portion of Equipment Loan and $1.0 million is included in Equipment Loan, Net
of Current Portion in the Consolidated Balance Sheets. The Company makes monthly payments of principal and interest on the equipment
loan. Principal payments for the three and six months ended June 30, 2019 were $0.6 million and $0.8 million, respectively.
Additionally, the Company enters into equipment
loans that are treated as capital leases. The loans require payments over 6 to 84 months and amounts due under capital leases are
included in total liabilities (either current or non-current) in the Consolidated Balance Sheets. The equipment under the capital
leases are included in property and equipment, net, and depreciation related to capital lease assets is included in depreciation
expense in the Consolidated Statements of Operations and Comprehensive Income (Loss). Certain of the loans are collateralized by
the associated equipment it was issued to finance.
7. INCOME TAXES
The Company’s effective income tax rate
for the three and six months ended June 30, 2019 was a benefit rate of 7.9% and a provision rate of 3.8%, respectively, as compared
to effective income tax benefit rates of 84.6% and 64.2% for the three and six months ended June 30, 2018, respectively. The effective
tax rates for the 2019 periods reflect a discrete charge to adjust income taxes payable associated with certain of the Company’s
subsidiaries to reflect the Company’s consolidated income tax liability.
The Company has evaluated its income tax positions
and determined that no material uncertain tax positions existed at June 30, 2019. The Company does not expect a significant change
in its unrecognized tax benefits within the next twelve months.
The Company files income tax returns in the
U.S. Federal and various state, local and foreign jurisdictions. For Federal income tax purposes, the 2015 through 2017 tax years
remain open for examination by the tax authorities under the normal three-year statute of limitations. For state tax purposes,
the 2014 through 2017 tax years remain open for examination by the tax authorities under a four-year statute of limitations. For
foreign income tax purposes, the tax years 2013 through 2017 remain open for examination by the tax authorities under the various
statute of limitation requirements of specific local country’s tax laws.
8. RELATED PARTY TRANSACTIONS
Related Party Transactions
During the three months ended June 30,
2019 and 2018, the Company derived approximately $24,000 in revenues, in both periods, from related entities. During the six months
ended June 30, 2019 and 2018, the Company derived approximately $32,000 and $51,000 in revenues from related entities, respectively.
The Company paid approximately $6,000 and
$0 for waste hauling services to the same related entities in the three months ended June 30, 2019 and 2018, respectively. The
Company paid approximately $13,000 and $3,000 for waste hauling services in the six months ended June 30, 2019 and 2018, respectively.
Prior to the Business Combination, the
Company had a management agreement with JFLCo whereby JFLCo provided services, including, among other things, cash flow planning/forecasting
and merger/acquisition target identification. The Company incurred approximately $0.4 million and $0.8 million in management
fees for the three and six months ended June 30, 2018, respectively. No management fees were incurred for the three and six months
ended June 30, 2019. These expenses are reflected as Management Fees on the Company’s Consolidated Statements of Operations
and Comprehensive Income (Loss).
Pursuant to the Purchase Agreement, dated
as of June 25, 2018, as amended on July 12, 2018 (the “Purchase Agreement”), between JFL Partners and Hennessy Capital
(now known as NRC Group Holdings Corp.), the closing of the OIT transaction triggered a payment obligation by the Company of $10.0
million to JFL Partners, which payment could be made, at the election of the Company’s board of directors, in cash, Company
Common Stock or a combination of the two. Following the OIT acquisition, on May 10, 2019, the Company’s board of directors
authorized the payment to be made entirely in Company Common Stock. Accordingly, in accordance with the formula set forth in the
Purchase Agreement, 1,147,841 shares were issued to JFL Partners and the Company recorded $10.0 million of OIT transaction related
expenses in Acquisition Expense in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and
six months ended June 30, 2019.
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
Pursuant to the terms of the Purchase Agreement,
the Company may also be obligated to pay to JFL Partners additional consideration of up to $25.0 million (payable in cash, shares
of Company Common Stock or any combination thereof, at the Company’s option) to the extent certain financial performance
metrics are achieved by the OIT business during calendar years 2019 and 2020. The full $25.0 million would be payable if
the OIT business’s normalized earnings before interest, taxes, depreciation and amortization exceeded $10.0 million in either
calendar year, and no payment would be due unless the OIT business achieved normalized earnings before interest, taxes, depreciation
and amortization of more than $6.0 million in either calendar year. In connection with the execution of the Merger Agreement, US
Ecology entered into an Investor Agreement (the “Investor Agreement”) with Holdco, JFL-NRC-SES Partners, LLC, JFL-NRCG
Holdings III, LLC and JFL-NRCG Holdings IV, LLC (collectively, “the JFL Entities”) and, solely with respect to Section
4 thereof, NRCG. Pursuant to Section 4 of the Investor Agreement and subject to the closing of the Mergers, each of the JFL entities
agreed to, among other things, waive its right to the additional consideration.
9. COMMITMENTS AND CONTINGENCIES
Letters of Credit and Guarantees
Under the terms of the Company’s
oilfield waste disposal permit for the SKCD facility, financial security must be provided to the RRC in an amount necessary to
close the facility. The Company has secured letters of credit from third-party financial institutions in the amount of $3.3 million
as required by the terms of the permit, which have been pledged to the RRC to cover potential closure costs. In addition, the Company
has secured letters of credit from third-party financial institutions in the amount of $1.6 million as required by the terms of
the permit, which have been pledged to cover potential closure costs of the Company’s two transfer storage and disposal facilities
in Vermont and Maine, as well as other corporate matters. The letters of credit are renewed annually.
Litigation
In the normal course of business, the Company
and its subsidiaries are involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet
to be determined, the Company does not believe that any unfavorable outcomes will have a material adverse effect on the Company’s
consolidated financial position or results of operations. At June 30, 2019 and December 31, 2018, the Company had no reserves recorded
for any outstanding litigation, claim or assessment.
Leases
Total rent expense for the Company’s
operating leases for the three and six months ended June 30, 2019 was $3.8 million and $7.3 million, respectively. Total rent expense
for the Company’s operating leases for the three and six months ended June 30, 2018 was $3.0 million and $5.9 million, respectively.
As of June 30, 2019, future minimum lease
payments in the following years ended December 31 that have a remaining term in excess of one year are as follows (in thousands):
|
|
Capital Leases
|
|
|
Operating Leases
|
|
2019 (excluding the six months ended June 30, 2019)
|
|
$
|
1,672
|
|
|
$
|
7,307
|
|
2020
|
|
|
3,344
|
|
|
|
13,333
|
|
2021
|
|
|
3,474
|
|
|
|
8,991
|
|
2022
|
|
|
3,226
|
|
|
|
7,008
|
|
2023
|
|
|
3,206
|
|
|
|
5,301
|
|
Thereafter
|
|
|
4,109
|
|
|
|
3,865
|
|
Total minimum payments
|
|
$
|
19,031
|
|
|
$
|
45,805
|
|
Less: imputed interest
|
|
|
2,750
|
|
|
|
|
|
Present value of minimum capital lease payments
|
|
$
|
16,281
|
|
|
|
|
|
The present value of minimum capital lease
payments is included in Other current liabilities and Other long-term liabilities in the Consolidated Balance Sheets.
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
10. SEGMENT DATA AND GEOGRAPHICAL DATA
The Company’s operations are managed
within four operating segments: Domestic Standby Services, Domestic Environmental Services, International Services and Sprint.
Costs not managed through the Company’s operating segments described above are recorded as “Corporate Items.”
Corporate Items represents certain central services that are not allocated to the Company’s operating segments for internal
reporting purposes and include selling, general and administrative expenses such as legal, accounting and other items of a general
corporate nature that are not allocated to the Company’s operating segments. These segments have been selected based on the
Company’s Chief Operating Decision Maker (“CODM”) assessment of resources allocation and performance. The Company
considers its Chief Executive Officer to be its CODM. The CODM evaluates the performance of our segments based on revenue and income
measures which include operating profit (exclusive of depreciation, amortization and certain other charges). Operating profit (exclusive
of depreciation, amortization and certain other charges) is defined as Operating revenue, less Operating expenses, including cost
of revenue, and General and administrative expenses. The classification of certain prior period Operating expenses, including costs
of revenue (excluding depreciation and amortization) and certain prior period General and administrative expenses have been recast
to reflect the current period presentation.
The following table provides segment data
for the three and six months ended June 30, 2019 and 2018 (in thousands):
|
|
Domestic
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby
|
|
|
Environmental
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
International
|
|
|
Sprint
|
|
|
Items
|
|
|
Total
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
9,671
|
|
|
$
|
82,071
|
|
|
$
|
9,314
|
|
|
$
|
20,785
|
|
|
$
|
-
|
|
|
$
|
121,841
|
|
Operating expenses, including cost of revenue (excluding depreciation, amortization and certain other expenses)
|
|
|
5,196
|
|
|
|
62,843
|
|
|
|
6,696
|
|
|
|
8,943
|
|
|
|
-
|
|
|
|
83,678
|
|
General and administrative expenses
|
|
|
991
|
|
|
|
7,163
|
|
|
|
958
|
|
|
|
4,105
|
|
|
|
3,971
|
|
|
|
17,188
|
|
Operating profit (exclusive of depreciation, amortization and certain other expenses)
|
|
|
3,484
|
|
|
|
12,065
|
|
|
|
1,660
|
|
|
|
7,737
|
|
|
|
(3,971
|
)
|
|
|
20,975
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
9,119
|
|
|
$
|
48,561
|
|
|
$
|
5,651
|
|
|
$
|
18,361
|
|
|
$
|
-
|
|
|
$
|
81,692
|
|
Operating expenses, including cost of revenue (excluding depreciation, amortization and certain other expenses)
|
|
|
4,467
|
|
|
|
38,346
|
|
|
|
3,721
|
|
|
|
7,948
|
|
|
|
-
|
|
|
|
54,482
|
|
General and administrative expenses
|
|
|
830
|
|
|
|
5,792
|
|
|
|
1,008
|
|
|
|
2,859
|
|
|
|
2,251
|
|
|
|
12,740
|
|
Operating profit (exclusive of depreciation, amortization and certain other expenses)
|
|
|
3,822
|
|
|
|
4,423
|
|
|
|
922
|
|
|
|
7,554
|
|
|
|
(2,251
|
)
|
|
|
14,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
20,064
|
|
|
$
|
142,937
|
|
|
$
|
17,461
|
|
|
$
|
41,873
|
|
|
$
|
-
|
|
|
$
|
222,335
|
|
Operating expenses, including cost of revenue (excluding depreciation, amortization and certain other expenses)
|
|
|
10,419
|
|
|
|
114,102
|
|
|
|
12,642
|
|
|
|
17,770
|
|
|
|
-
|
|
|
|
154,933
|
|
General and administrative expenses
|
|
|
1,940
|
|
|
|
14,362
|
|
|
|
1,855
|
|
|
|
7,856
|
|
|
|
8,068
|
|
|
|
34,081
|
|
Operating profit (exclusive of depreciation, amortization and certain other expenses)
|
|
|
7,705
|
|
|
|
14,473
|
|
|
|
2,964
|
|
|
|
16,247
|
|
|
|
(8,068
|
)
|
|
|
33,321
|
|
Goodwill
|
|
|
-
|
|
|
|
32,014
|
|
|
|
1,865
|
|
|
|
18,985
|
|
|
|
-
|
|
|
|
52,864
|
|
Assets
|
|
|
77,576
|
|
|
|
182,438
|
|
|
|
19,677
|
|
|
|
150,823
|
|
|
|
(9,248
|
)
|
|
|
421,266
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
18,091
|
|
|
$
|
89,418
|
|
|
$
|
10,444
|
|
|
$
|
34,971
|
|
|
$
|
-
|
|
|
$
|
152,924
|
|
Operating expenses, including cost of revenue (excluding depreciation, amortization and certain other expenses)
|
|
|
8,156
|
|
|
|
72,152
|
|
|
|
7,065
|
|
|
|
15,475
|
|
|
|
-
|
|
|
|
102,848
|
|
General and administrative expenses
|
|
|
1,619
|
|
|
|
10,372
|
|
|
|
1,710
|
|
|
|
5,470
|
|
|
|
3,964
|
|
|
|
23,135
|
|
Operating profit (exclusive of depreciation, amortization and certain other expenses)
|
|
|
8,316
|
|
|
|
6,894
|
|
|
|
1,669
|
|
|
|
14,026
|
|
|
|
(3,964
|
)
|
|
|
26,941
|
|
Goodwill
|
|
|
-
|
|
|
|
31,008
|
|
|
|
2,620
|
|
|
|
10,935
|
|
|
|
-
|
|
|
|
44,563
|
|
Assets
|
|
|
76,245
|
|
|
|
159,054
|
|
|
|
20,092
|
|
|
|
92,772
|
|
|
|
(18,935
|
)
|
|
|
329,228
|
|
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
The following table presents a reconciliation
of Operating profit (exclusive of depreciation, amortization and certain other charges) to net loss (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Operating profit (exclusive of depreciation and amortization):
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Standby Services
|
|
$
|
3,484
|
|
|
$
|
3,822
|
|
|
$
|
7,705
|
|
|
$
|
8,316
|
|
Domestic Environmental Services
|
|
|
12,065
|
|
|
|
4,423
|
|
|
|
14,473
|
|
|
|
6,894
|
|
International
|
|
|
1,660
|
|
|
|
922
|
|
|
|
2,964
|
|
|
|
1,669
|
|
Sprint
|
|
|
7,737
|
|
|
|
7,554
|
|
|
|
16,247
|
|
|
|
14,026
|
|
Corporate
|
|
|
(3,971
|
)
|
|
|
(2,251
|
)
|
|
|
(8,068
|
)
|
|
|
(3,964
|
)
|
Total Operating profit (exclusive of depreciation, amortization and certain other charges)
|
|
|
20,975
|
|
|
|
14,470
|
|
|
|
33,321
|
|
|
|
26,941
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,678
|
|
|
|
5,325
|
|
|
|
18,690
|
|
|
|
11,784
|
|
Management fees
|
|
|
-
|
|
|
|
357
|
|
|
|
-
|
|
|
|
800
|
|
Acquisition expenses
|
|
|
10,715
|
|
|
|
2,064
|
|
|
|
11,162
|
|
|
|
3,286
|
|
Share-based compensation
|
|
|
1,268
|
|
|
|
-
|
|
|
|
1,268
|
|
|
|
-
|
|
Change in fair value of contingent consideration
|
|
|
2,026
|
|
|
|
-
|
|
|
|
4,077
|
|
|
|
-
|
|
Other expense, net
|
|
|
413
|
|
|
|
1,443
|
|
|
|
1,813
|
|
|
|
2,340
|
|
Operating (loss) income
|
|
|
(3,125
|
)
|
|
|
5,281
|
|
|
|
(3,689
|
)
|
|
|
8,731
|
|
Total other expenses, net
|
|
|
(7,857
|
)
|
|
|
(6,628
|
)
|
|
|
(14,199
|
)
|
|
|
(10,320
|
)
|
Loss before income taxes
|
|
|
(10,982
|
)
|
|
|
(1,347
|
)
|
|
|
(17,888
|
)
|
|
|
(1,589
|
)
|
Income tax (benefit) expense
|
|
|
(867
|
)
|
|
|
(1,139
|
)
|
|
|
687
|
|
|
|
(1,020
|
)
|
Net loss
|
|
$
|
(10,115
|
)
|
|
$
|
(208
|
)
|
|
$
|
(18,575
|
)
|
|
$
|
(569
|
)
|
The following tables provides revenue by
geographic location for each segment for the three and six months ended June 30, 2019 and 2018 (in thousands):
|
|
For the Three Months Ended June 30, 2019
|
|
|
|
|
|
|
Domestic
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby
|
|
|
Environmental
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Services
|
|
|
Services
|
|
|
International
|
|
|
Sprint
|
|
|
Total
|
|
|
Total
|
|
North America
|
|
$
|
9,669
|
|
|
$
|
82,071
|
|
|
$
|
-
|
|
|
$
|
20,785
|
|
|
$
|
112,525
|
|
|
|
92
|
%
|
Latin America and Caribbean
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
0
|
%
|
EMEA
|
|
|
-
|
|
|
|
-
|
|
|
|
9,308
|
|
|
|
-
|
|
|
|
9,308
|
|
|
|
8
|
%
|
Asia Pacific
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
0
|
%
|
Total operating revenue
|
|
$
|
9,671
|
|
|
$
|
82,071
|
|
|
$
|
9,314
|
|
|
$
|
20,785
|
|
|
$
|
121,841
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
8
|
%
|
|
|
67
|
%
|
|
|
8
|
%
|
|
|
17
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
|
|
|
|
Domestic
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby
|
|
|
Environmental
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Services
|
|
|
Services
|
|
|
International
|
|
|
Sprint
|
|
|
Total
|
|
|
Total
|
|
North America
|
|
$
|
8,938
|
|
|
$
|
48,561
|
|
|
$
|
-
|
|
|
$
|
18,361
|
|
|
$
|
75,860
|
|
|
|
93
|
%
|
Latin America and Caribbean
|
|
|
181
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
181
|
|
|
|
0
|
%
|
Europe, Middle East and Africa (“EMEA”)
|
|
|
-
|
|
|
|
-
|
|
|
|
5,647
|
|
|
|
-
|
|
|
|
5,647
|
|
|
|
7
|
%
|
Asia Pacific
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
|
|
0
|
%
|
Total operating revenue
|
|
$
|
9,119
|
|
|
$
|
48,561
|
|
|
$
|
5,651
|
|
|
$
|
18,361
|
|
|
$
|
81,692
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
11
|
%
|
|
|
59
|
%
|
|
|
7
|
%
|
|
|
23
|
%
|
|
|
100
|
%
|
|
|
|
|
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
|
|
For the Six Months Ended June 30, 2019
|
|
|
|
|
|
|
Domestic
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby
|
|
|
Environmental
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Services
|
|
|
Services
|
|
|
International
|
|
|
Sprint
|
|
|
Total
|
|
|
Total
|
|
North America
|
|
$
|
19,603
|
|
|
$
|
142,937
|
|
|
$
|
-
|
|
|
$
|
41,873
|
|
|
$
|
204,413
|
|
|
|
92
|
%
|
Latin America and Caribbean
|
|
|
461
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
461
|
|
|
|
0
|
%
|
EMEA
|
|
|
-
|
|
|
|
-
|
|
|
|
17,448
|
|
|
|
-
|
|
|
|
17,448
|
|
|
|
8
|
%
|
Asia Pacific
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
13
|
|
|
|
0
|
%
|
Total operating revenue
|
|
$
|
20,064
|
|
|
$
|
142,937
|
|
|
$
|
17,461
|
|
|
$
|
41,873
|
|
|
$
|
222,335
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
9
|
%
|
|
|
64
|
%
|
|
|
8
|
%
|
|
|
19
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2018
|
|
|
|
|
|
|
Domestic
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby
|
|
|
Environmental
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Services
|
|
|
Services
|
|
|
International
|
|
|
Sprint
|
|
|
Total
|
|
|
Total
|
|
North America
|
|
$
|
17,198
|
|
|
$
|
89,418
|
|
|
$
|
-
|
|
|
$
|
34,971
|
|
|
$
|
141,587
|
|
|
|
93
|
%
|
Latin America and Caribbean
|
|
|
893
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
893
|
|
|
|
1
|
%
|
Europe, Middle East and Africa (“EMEA”)
|
|
|
-
|
|
|
|
-
|
|
|
|
10,434
|
|
|
|
-
|
|
|
|
10,434
|
|
|
|
7
|
%
|
Asia Pacific
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
10
|
|
|
|
0
|
%
|
Total operating revenue
|
|
$
|
18,091
|
|
|
$
|
89,418
|
|
|
$
|
10,444
|
|
|
$
|
34,971
|
|
|
$
|
152,924
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
12
|
%
|
|
|
58
|
%
|
|
|
7
|
%
|
|
|
23
|
%
|
|
|
100
|
%
|
|
|
|
|
One customer in the Domestic Environmental
Services segment represents $22.8 million and $26.6 million of the Company’s consolidated operating revenue for the three
and six months ended June 30, 2019, respectively. No single customer accounted for more than 10% of the Company’s consolidated
operating revenue for the three and six months ended June 30, 2018.
11. STOCKHOLDERS’ EQUITY (DEFICIT)
Common Stock
The Company is authorized to issue up to
200,000,000 shares of Company Common Stock. Company Common Stock has voting rights of one vote for each share of Company Common
Stock. As described in Note 9, during the six months ended June 30, 2019, the Company issued 1,147,841 shares of Company Common
Stock pursuant to the terms of the Purchase Agreement.
Series A Convertible Cumulative Preferred
Stock
The Company is authorized to issue up
to 5,000,000 shares of preferred stock, par value $0.0001 per share, 1,050,000 shares of which have been designated as Series
A Preferred Stock and the remaining 3,950,000 shares of which are undesignated.
In accordance with the terms and conditions
of the Series A Certificate of Designations, dividend activity during the six months ended June 30, 2019 is as follows:
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Dividend per Share
|
|
|
Total Cash Payment
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 20, 2019
|
|
July 1, 2019
|
|
July 15, 2019
|
|
$
|
1.75
|
|
|
$
|
1,838
|
|
March 29, 2019
|
|
April 1, 2019
|
|
April 15, 2019
|
|
|
1.75
|
|
|
|
1,838
|
|
December 20, 2018
|
|
January 1, 2019
|
|
January 15, 2019
|
|
|
1.44
|
|
|
|
1,511
|
|
As of June 30, 2019, $1.8 million of dividends
were accrued.
Equity and Incentive Compensation
Plan
During fiscal year 2018, the Company adopted
the NRC Group Holdings Corp. 2018 Equity and Incentive Compensation Plan (the “Plan”). The Plan is administered by
the Compensation Committee of the Company’s Board of Directors. Under the Plan, the Committee may grant an aggregate of 3,000,000 shares
of Company Common Stock in the form of non-qualified stock options, incentive stock options, stock appreciation rights, restricted
stock awards (“RSAs”), restricted stock units (“RSUs”), performance compensation awards and stock bonus
awards. Stock-based payments, including the grant of stock options and RSUs, are subject to service-based vesting requirements,
and expense is recognized over the vesting period. Forfeitures are accounted for as they occur. During the six months ended June
30, 2019, 908,778 RSUs and 150,000 stock option awards were granted under the Plan. As of June 30, 2019, 1,941,222 shares
are available for issuance under the Plan.
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
Restricted Stock Units
The following table summarizes the Company’s
RSU award activity for the six months ended June 30, 2019:
|
|
Units
|
|
|
Weighted Average
Grant date
Fair value
|
|
Outstanding as of January 1, 2019
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
908,778
|
|
|
$
|
8.75
|
|
Outstanding as of June 30, 2019
|
|
|
908,778
|
|
|
$
|
8.75
|
|
|
|
|
|
|
|
|
|
|
Total unrecognized expense remaining
|
|
$
|
6,728,500
|
|
|
|
|
|
Weighted-average years expected to be recognized over
|
|
|
1.5
|
|
|
|
|
|
No restricted stock units vested during
the six months ended June 30, 2019.
Stock Options
The following table summarizes the Company’s
stock option activity for the six months ended June 30, 2019.
|
|
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of January 1, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
150,000
|
|
|
|
10.25
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2019
|
|
|
150,000
|
|
|
|
10.25
|
|
|
|
9.8
|
|
|
$
|
131,500
|
|
Exercisable as of June 30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The weighted average grant date fair value
of stock options granted during the six months ended June 30, 2019 was $1.94. At June 30, 2019, unrecognized compensation cost
related to the Company’s stock options totaled $247,000 and is expected to be recognized over a weighted-average period of
1.5 years.
The fair value of each stock option award
on the grant date is estimated using the Black-Scholes option-pricing model with the following assumptions:
Expected volatility
|
|
|
24.3
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
2.4
|
%
|
Expected term (in years)
|
|
|
5.8
|
|
The volatility assumption used in the Black-Scholes
option-pricing model is based on peer group volatility as the Company does not have a sufficient trading history as a public company.
Additionally, due to an insufficient history with respect to stock option activity and post-vesting cancellations, the expected
term assumption is based on the simplified method under GAAP, which is based on the vesting period and contractual term for each
tranche of awards. The mid-point between the weighted-average vesting term and the expiration date is used as the expected term
under this method. The risk-free interest rate used in the Black-Scholes model is based on the implied US Treasury bill yield curve
at the date of grant with a remaining term equal to the Company’s expected term assumption. The Company has never declared
or paid a cash dividend on common shares.
Share-based compensation expense
Stock-based compensation granted to employees
include stock options and RSUs, which are recognized in the financial statements based on their fair value. RSUs are valued based
on the intrinsic value of the difference between the exercise price, if any, of the award and the fair market value of our Company
Common Stock on the grant date. RSUs and stock options vest in tranches over a period of approximately three years and expire ten
years from the grant date.
NRC GROUP HOLDINGS CORP. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements
The components of pre-tax share-based compensation
expense are as follows (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
$
|
45
|
|
|
$
|
-
|
|
|
$
|
45
|
|
|
|
|
|
Restricted stock units
|
|
|
1,223
|
|
|
|
-
|
|
|
|
1,223
|
|
|
|
|
|
Total share-based compensation
|
|
$
|
1,268
|
|
|
$
|
-
|
|
|
$
|
1,268
|
|
|
$
|
-
|
|
12. NET INCOME (LOSS) PER SHARE
In calculating earnings (loss) per share,
the Company retrospectively applied the effects of the Business Combination.
Basic net income (loss) per common share
(“EPS”) is calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted
net income (loss) per common share is computed similar to basic net income (loss) per common share except that it reflects the
potential dilution that could occur if dilutive securities or other obligations to issue Company Common Stock were exercised or
converted into Company Common Stock.
The following securities were not included
in the diluted net loss per share calculation because their effect was anti-dilutive as of the periods presented (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Series A convertible preferred stock
|
|
|
1,050
|
|
|
|
-
|
|
|
|
1,050
|
|
|
|
-
|
|
Common stock warrants - equity treatment
|
|
|
19,249
|
|
|
|
-
|
|
|
|
19,249
|
|
|
|
-
|
|
Stock options
|
|
|
150
|
|
|
|
-
|
|
|
|
150
|
|
|
|
-
|
|
Restricted stock units
|
|
|
909
|
|
|
|
-
|
|
|
|
909
|
|
|
|
-
|
|
Potentially dilutive securities
|
|
|
21,358
|
|
|
|
-
|
|
|
|
21,358
|
|
|
|
-
|
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis
of the Company’s financial condition and results of operations should be read in conjunction with the financial statements
and the notes thereto contained elsewhere in this report.
Unless the context otherwise requires,
“we,” “us,” “our” and the “Company” refer to NRC Group Holdings Corp. and its subsidiaries.
Special Note Regarding Forward-Looking
Statements
This Quarterly Report on Form 10-Q (this
“Report”) contains “forward-looking statements” within the meaning of the federal securities laws, including
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). We have made these forward-looking statements in reliance on the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by
forward-looking words such as “may,” “might,” “will,” “should,” “expects,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential”
or “continue,” the negative of these terms and other comparable terminology. Forward-looking statements address matters
that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to
differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the
following:
|
●
|
Risks and uncertainties related to the proposed Mergers (as defined herein) with US Ecology, Inc., a Delaware corporation (“US Ecology”), including the satisfaction of certain closing conditions, litigation relating to the proposed Mergers, unexpected costs, charges or expenses, certain restrictions during the pendency of the Proposed Mergers, as well as other risks associated with the proposed Mergers more fully described in the Registration Statement on Form S-4, dated July 31, 2019 that was filed by US Ecology Parent, Inc. with the SEC;
|
|
●
|
market conditions, commodity prices and economic factors
beyond our control;
|
|
●
|
changes in demand within a number of key industry
end-markets and geographic regions;
|
|
●
|
our obligations under, unexpected changes in, and
other risks relating to, various laws, rules and regulations, including environmental law, securities law, maritime law and the
U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”);
|
|
●
|
the effect of litigation, judgments, orders or regulatory
proceedings and the potential inadequacy of our insurance;
|
|
●
|
natural disasters, operational and safety risks and
other business disruptions;
|
|
●
|
our ability to acquire and successfully integrate
new operations and new acquisitions;
|
|
●
|
our ability to obtain or maintain various certifications,
classifications, permits and other qualifications that can affect the cost, manner or feasibility of doing business;
|
|
●
|
our ability to fulfill our obligations regarding our
outstanding indebtedness;
|
|
●
|
any failure or breach of our information technology
systems;
|
|
●
|
our ability to design, implement and maintain effective
internal controls, including disclosure controls and controls over financial reporting;
|
|
●
|
failure to retain key personnel;
|
|
●
|
recently enacted comprehensive U.S. tax reform legislation;
|
|
●
|
foreign currency exchange rate exposure;
|
|
●
|
the effect of impairment charges on our operating
results;
|
|
●
|
our ability to maintain the listing of our Company
Common Stock and warrants on the NYSE American and fulfill other public company obligations; and
|
|
●
|
other risks and uncertainties described in the 2018
Annual Report under the heading “Risk Factors.”
|
The forward-looking statements contained
in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on
us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number
of risks, uncertainties (some of which are beyond our control) and other assumptions that may cause actual results or performance
to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include,
but are not limited to, those factors described under the heading “Risk Factors” in Part I, Item 1A of our 2018 Annual
Report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual
results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update
or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be
required under applicable securities laws.
By their nature, forward-looking statements
involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future.
We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations,
financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in
or suggested by the forward-looking statements contained in this Report. In addition, even if our results or operations, financial
condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements
contained in this Report, those results or developments may not be indicative of results or developments in subsequent periods.
Overview
We are a global provider of a wide range
of environmental, compliance and waste management services. Our broad range of capabilities and global reach enable us to meet
the critical, and often non-discretionary, needs of more than 5,000 customers across diverse end markets to ensure compliance with
environmental, health and safety (“EH&S”) laws and regulations around the world. Our diverse service offerings
and broad geographic footprint enable us to reach customers around the world to:
|
●
|
ensure compliance with international and domestic
EH&S laws and regulations;
|
|
●
|
maximize operating efficiency and longevity of critical
operating assets;
|
|
●
|
ensure adherence with their EH&S policies;
|
|
●
|
reduce risk and liability;
|
|
●
|
maximize profitability and manage costs;
|
|
●
|
reduce downtime of critical operations; and
|
|
●
|
protect people and the environment from potentially
dangerous materials and waste streams.
|
We have broad global reach, with approximately
75 locations in the United States and approximately 20 additional locations internationally across eight countries, including the
United Kingdom, Mexico, Turkey, the Republic of Georgia, United Arab Emirates, Angola, Thailand and Trinidad and Tobago. We operate
in four reportable segments: (1) Domestic Environmental Services, (2) Sprint, (3) Domestic Standby Services and (4) International
Services.
Trends and Factors Impacting Results
of Operations
There are many factors that have impacted
and continue to impact our revenues. These factors include, but are not limited to: overall industrial activity, federal regulations,
the effect of oil and gas commodity prices on business activity in the industry, international and domestic EH&S policies,
the level of emergency response events, competitive industry pricing, execution of operations, safety of operations and acquisitions.
We believe that our ability to manage operating costs is important to remaining price competitive. We continue to evolve to a national
platform in order to derive benefits from economies of scale for sourcing. We will also focus on other cost reduction initiatives
in an effort to optimize operating margins. We are focusing on managing selling, general and administrative costs by centralizing
back office operations and consolidating vendors in order to leverage economies of scale and remain competitive in the marketplace.
Domestic Environmental Services.
Domestic Environmental Services segment results are primarily driven by the following factors:
|
●
|
High-Frequency, Low-Cost Services.
The Domestic Environmental Services segment
provides our customers with services to meet stringent federal regulations and EH&S policies. The Domestic Environmental
Services are impacted by market activity, oil and gas commodity prices and business activity in the industry. An increase in
activity creates a demand for increased maintenance and spending on discretionary compliance.
|
|
●
|
Seasonality.
Domestic Environmental Services activity is impacted by seasonality in
business and weather conditions, market conditions and overall levels of industrial activity.
|
|
●
|
Acquisitions, Integration and Restructuring.
The Domestic Environmental Services
segment has expanded through organic growth as well as acquisitions. The Domestic Environmental Services segment underwent an
internal restructuring of management to target more recurring and predictable higher volume customers. Customers were
selected by a newly established sales team. The internal restructuring also placed an increased focus on a full integration
of legacy acquisitions and cross-selling. The Domestic Environmental Services segment may not be able to properly integrate
past or future acquisitions.
|
Sprint.
Sprint segment results
are primarily driven by oil prices. Lower oil prices lead producers to slow down or halt activity, resulting in fewer revenue generating
opportunities for Sprint segment services. We anticipate that the addition of new waste disposal facilities will diversify our
Sprint segment offerings and will likely make it more resistant to future crude oil price downturns.
Domestic Standby Services.
Demand for Domestic Standby Services is less impacted by macroeconomic conditions than our other reportable segments. Domestic
Standby Services segment results are primarily driven by the following factors:
|
●
|
Unplanned Incidents
. Increases or decreases
in the number of unplanned incidents will have a direct impact on demand for Domestic Standby Services.
|
|
●
|
Increased Ship Activity
. Domestic Standby Services
revenues are positively impacted as ship activity increases. An increase in ship activity often results in an increase in tolling
fees paid.
|
|
●
|
Retainer Fees
. Domestic Standby Services customers
are under long-term or evergreen contracts that pay annual retainer fees to access required certifications, specialized assets
and trained personnel.
|
|
●
|
Subcontractor Usage
. The Domestic Standby Services
segment utilizes subcontractors to supplement our internal capabilities when an emergency response event occurs. The Domestic
Standby Services segment must navigate labor prices and demand in order to effectively manage costs and maximize profitability.
|
International Services.
International Services segment results are primarily driven by commodity prices and market activity. Demand is driven by corporate
compliance and not regulatory compliance. Volatility in the price of oil or a decline in the global energy markets results in
less corporate spending and lower demand for our International Services. Currently a large portion of our International Services
activity is located in the North Sea, which is known for its challenging weather conditions.
Results of Operations—Three and Six Months Ended June
30, 2019 and 2018
Our total Operating Revenues for the three-month
period ended June 30, 2019 increased $40.1 million to $121.8 million, compared with $81.7 million in the three months ended June
30, 2018. Operating Revenues increased across all segments. Operating Revenues in our Domestic Standby Services segment increased
$0.6 million in the three months ended June 30, 2019 as compared to the comparable period in 2018 due to an increase in equipment
leasing and emergency response activity, partially offset by a decrease of $0.6 million in retainer revenue. Operating Revenues
in our Domestic Environmental Services segment increased $33.5 million in the three months ended June 30, 2019 as compared to the
comparable period in 2018 primarily due to a $23.7 million increase in emergency response activity from an event in the gulf coast
region. Industrial services and remediation revenue increased $3.4 million and $4.3 million, respectively due in part to the contributions
from Progressive Environmental Services, Inc. (“SWS”), which was acquired in May 2018. Operating Revenues in our International
segment increased $3.7 million in the three months ended June 30, 2019 as compared to the comparable period in 2018 due an increase
in remediation revenue. Operating Revenues in our Sprint segment increased $2.4 million in the three months ended June 30, 2019
as compared to the comparable period in 2018 primarily attributable to an increase of $2.3 million due to the acquisition of Quail
Run Services, LLC (“Quail Run”) in October 2018.
Our total Operating Revenues for the six-month
period ended June 30, 2019 increased $69.4 million to $222.3 million, compared with $152.9 million in the six months ended June
30, 2018. Operating Revenues increased across all segments. Operating Revenues in our Domestic Standby Services segment increased
$2.0 million in the six months ended June 30, 2019 as compared to the comparable period in 2018 due to an increase in equipment
leasing and emergency response activity, partially offset by a decrease in one-time remediation work and retainer revenue of $0.8
million and $0.4 million, respectively. Operating Revenues in our Domestic Environmental Services segment increased $53.5 million
in the six months ended June 30, 2019 as compared to the comparable period in 2018 primarily due to the acquisition of SWS in
May 2018, which contributed revenue of $47.8 million during the six months ended June 30, 2019. Excluding SWS, our Domestic Environmental
Services segment increased $9.4 million due to an increase of $3.5 million in remediation revenue and a $5.1 million increase
due to an increase in emergency response activity. Operating Revenues in our International segment increased $7.0 million in the
six months ended June 30, 2019 as compared to the comparable period in 2018 due an increase in remediation revenue and an increase
of $3.5 million due to the acquisition of Clean Line Waste Water Solutions Limited (“Clean Line”) in March 2018. Operating
Revenues in our Sprint segment increased $6.9 million in the six months ended June 30, 2019 as compared to the comparable period
in 2018 primarily attributable to an increase of $2.2 million in environmental services as well as a $4.6 million increase due
to the acquisition of Quail Run in October 2018.
Segment Performance
The following table sets forth certain
financial information associated with results of operations for the three and six months ended June 30, 2019 and 2018. The classification
of certain prior period Operating expenses, including costs of revenue (excluding depreciation and amortization) and certain prior
period General and administrative expenses have been recast to reflect the current period presentation.
|
|
Summary of Operations
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Standby Services
|
|
$
|
9,671
|
|
|
$
|
9,119
|
|
|
$
|
552
|
|
|
|
6.1
|
%
|
|
$
|
20,064
|
|
|
$
|
18,091
|
|
|
$
|
1,973
|
|
|
|
10.9
|
%
|
Domestic Environmental Services
|
|
|
82,071
|
|
|
|
48,561
|
|
|
|
33,510
|
|
|
|
69.0
|
%
|
|
|
142,937
|
|
|
|
89,418
|
|
|
|
53,519
|
|
|
|
59.9
|
%
|
International
|
|
|
9,314
|
|
|
|
5,651
|
|
|
|
3,663
|
|
|
|
64.8
|
%
|
|
|
17,461
|
|
|
|
10,444
|
|
|
|
7,017
|
|
|
|
67.2
|
%
|
Sprint
|
|
|
20,785
|
|
|
|
18,361
|
|
|
|
2,424
|
|
|
|
13.2
|
%
|
|
|
41,873
|
|
|
|
34,971
|
|
|
|
6,902
|
|
|
|
19.7
|
%
|
Corporate Items
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
121,841
|
|
|
$
|
81,692
|
|
|
$
|
40,149
|
|
|
|
49.1
|
%
|
|
$
|
222,335
|
|
|
$
|
152,924
|
|
|
$
|
69,411
|
|
|
|
45.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses, Including Cost of Revenue (excluding depreciation and amortization):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Standby Services
|
|
$
|
5,196
|
|
|
$
|
4,467
|
|
|
$
|
729
|
|
|
|
16.3
|
%
|
|
$
|
10,419
|
|
|
$
|
8,156
|
|
|
$
|
2,263
|
|
|
|
27.7
|
%
|
Domestic Environmental Services
|
|
|
62,843
|
|
|
|
38,346
|
|
|
|
24,497
|
|
|
|
63.9
|
%
|
|
|
114,102
|
|
|
|
72,152
|
|
|
|
41,950
|
|
|
|
58.1
|
%
|
International
|
|
|
6,696
|
|
|
|
3,721
|
|
|
|
2,975
|
|
|
|
80.0
|
%
|
|
|
12,642
|
|
|
|
7,065
|
|
|
|
5,577
|
|
|
|
78.9
|
%
|
Sprint
|
|
|
8,943
|
|
|
|
7,948
|
|
|
|
995
|
|
|
|
12.5
|
%
|
|
|
17,770
|
|
|
|
15,475
|
|
|
|
2,295
|
|
|
|
14.8
|
%
|
Corporate Items
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
83,678
|
|
|
$
|
54,482
|
|
|
$
|
29,196
|
|
|
|
53.6
|
%
|
|
$
|
154,933
|
|
|
$
|
102,848
|
|
|
$
|
52,085
|
|
|
|
50.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Standby Services
|
|
$
|
991
|
|
|
$
|
830
|
|
|
$
|
161
|
|
|
|
19.4
|
%
|
|
$
|
1,940
|
|
|
$
|
1,619
|
|
|
$
|
321
|
|
|
|
19.8
|
%
|
Domestic Environmental Services
|
|
|
7,163
|
|
|
|
5,792
|
|
|
|
1,371
|
|
|
|
23.7
|
%
|
|
|
14,362
|
|
|
|
10,372
|
|
|
|
3,990
|
|
|
|
38.5
|
%
|
International
|
|
|
958
|
|
|
|
1,008
|
|
|
|
(50
|
)
|
|
|
-5.0
|
%
|
|
|
1,855
|
|
|
|
1,710
|
|
|
|
145
|
|
|
|
8.5
|
%
|
Sprint
|
|
|
4,105
|
|
|
|
2,859
|
|
|
|
1,246
|
|
|
|
43.6
|
%
|
|
|
7,856
|
|
|
|
5,470
|
|
|
|
2,386
|
|
|
|
43.6
|
%
|
Corporate Items
|
|
|
3,971
|
|
|
|
2,251
|
|
|
|
1,720
|
|
|
|
76.4
|
%
|
|
|
8,068
|
|
|
|
3,964
|
|
|
|
4,104
|
|
|
|
103.5
|
%
|
Total
|
|
$
|
17,188
|
|
|
$
|
12,740
|
|
|
$
|
4,448
|
|
|
|
34.9
|
%
|
|
$
|
34,081
|
|
|
$
|
23,135
|
|
|
$
|
10,946
|
|
|
|
47.3
|
%
|
Operating Revenues
There are many factors that have impacted
and continue to impact our Operating Revenues. These factors include, but are not limited to: overall industrial activity, federal
regulations, the effect of oil and gas commodity prices on business activity in the industry, international and domestic EH&S
policies, the level of emergency response events and acquisitions.
Domestic Standby Services
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
9,671
|
|
|
$
|
9,119
|
|
|
$
|
552
|
|
|
|
6.1
|
%
|
|
$
|
20,064
|
|
|
$
|
18,091
|
|
|
$
|
1,973
|
|
|
|
10.9
|
%
|
Domestic Standby Services Operating Revenues
for the three months ended June 30, 2019 increased $0.6 million, or 6.1% from $9.1 million in the comparable period in 2018. This
increase was primarily attributable to an increase in equipment leasing and emergency response activity, partially offset by a
decrease in retainer revenue.
Domestic Standby Services Operating Revenues
for the six months ended June 30, 2019 increased $2.0 million, or 10.9% from $18.1 million in the comparable period in 2018. This
increase was primarily attributable to increases in equipment leasing and emergency response activity of $1.0 million and $2.0
million, partially offset by decreases in retainer revenue and one-time remediation work that did not occur in the current period.
The six months ended June 30, 2018 included $0.8 million of remediation work related to an oil pipeline spill.
Domestic Environmental Services
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
82,071
|
|
|
$
|
48,561
|
|
|
$
|
33,510
|
|
|
|
69.0
|
%
|
|
$
|
142,937
|
|
|
$
|
89,418
|
|
|
$
|
53,519
|
|
|
|
59.9
|
%
|
Domestic Environmental Services Operating
Revenues for the three months ended June 30, 2019 increased $33.5 million, or 69.0%, from $48.6 million in the comparable period
in 2018. Approximately $24.5 million of this increase was attributable to contributions from SWS’s emergency response activity
in the gulf coast. Remediation revenue increased approximately $4.3 million due to increased activity, which was partially offset
by a decline in Alaska and New England.
Domestic Environmental Services Operating
Revenues for the six months ended June 30, 2019 increased $53.5 million, or 59.9%, from $89.4 million in the comparable period
in 2018. Approximately $43.9 million of this increase was attributable to the acquisition of SWS, which includes $32.7 million
in emergency response activity. Legacy emergency response and remediation activity increased $5.1 million and $3.5 million, respectively,
as compared to the comparable period in 2018. These increases were partially offset by a decrease in waste management revenue.
International Services
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
9,314
|
|
|
$
|
5,651
|
|
|
$
|
3,663
|
|
|
|
64.8
|
%
|
|
$
|
17,461
|
|
|
$
|
10,444
|
|
|
$
|
7,017
|
|
|
|
67.2
|
%
|
International Services Operating Revenues
for the three months ended June 30, 2019 increased $3.7 million, or 64.8%, from $5.7 million in the comparable period in 2018.
This increase was attributable to a $1.8 million increase in remediation revenue in Turkey and an increase in revenue from Clean
Line, which was acquired in March 2018.
International Services Operating Revenues
for the six months ended June 30, 2019 increased $7.0 million, or 67.2%, from $10.4 million in the comparable period in 2018. This
increase was attributable to a $3.5 million increase due to the acquisition of Clean Line and a $3.2 million increase generated
by remediation revenue in Turkey. These increases were partially offset by lower revenue generated by the North Sea operations.
Sprint
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
20,785
|
|
|
$
|
18,361
|
|
|
$
|
2,424
|
|
|
|
13.2
|
%
|
|
$
|
41,873
|
|
|
$
|
34,971
|
|
|
$
|
6,902
|
|
|
|
19.7
|
%
|
Sprint Operating Revenues for the three
months ended June 30, 2019 increased $2.4 million, or 13.2%, from $18.4 million in the comparable period in 2018. Approximately
$2.3 million of the increase was due to the acquisition of Quail Run in October 2018.
Sprint Operating Revenues for the six months
ended June 30, 2019 increased $6.9 million, or 19.7%, from $35.0 million in the comparable period in 2018. Approximately $4.6 million
of the increase was due to the acquisition of Quail Run in October 2018. Approximately $2.2 million of this increase was attributable
to the Sprint segment’s energy service operations from Kenedy and Carrizo Springs, Texas as well as expansion of the North
East services location. These increases were offset by a decline due to certain customers’ reduced operations.
Operating Expenses, Including Cost
of Revenue Exclusive of Depreciation and Amortization
We believe that our ability to manage operating
costs is important to remaining price competitive. We continue to evolve to a national platform in order to derive benefits from
economies of scale for sourcing. We will also focus on other cost reduction initiatives in an effort to optimize operating margins.
Domestic Standby Services
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses, Including Cost of Revenue Exclusive of Depreciation and Amortization
|
|
$
|
5,196
|
|
|
$
|
4,467
|
|
|
$
|
729
|
|
|
|
16.3
|
%
|
|
$
|
10,419
|
|
|
$
|
8,156
|
|
|
$
|
2,263
|
|
|
|
27.7
|
%
|
As a % of Operating Revenues
|
|
|
54
|
%
|
|
|
49
|
%
|
|
|
|
|
|
|
5
|
%
|
|
|
52
|
%
|
|
|
45
|
%
|
|
|
|
|
|
|
7
|
%
|
Generally, the Domestic Standby Services
segment has a fixed price cost structure, which allows it to leverage margin expansion with increased retainer revenue. Operating
Expenses, Including Cost of Revenue Exclusive of Depreciation and Amortization related to emergency response are primarily variable
as we utilize subcontractors when an emergency response event occurs.
Domestic Standby Services Operating Expenses,
Including Cost of Revenue Exclusive of Depreciation and Amortization for the three months ended June 30, 2019 increased $0.7 million,
or 16.3%, from $4.5 million in the comparable period in 2018. This increase is related to an increase in emergency response activity.
Domestic Standby Services Operating Expenses,
Including Cost of Revenue Exclusive of Depreciation and Amortization for the six months ended June 30, 2019 increased $2.3 million,
or 27.7%, from $8.2 million in the comparable period in 2018. This increase is related to an increase in emergency response activity.
Domestic Environmental Services
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses, Including Cost of Revenue Exclusive of Depreciation and Amortization
|
|
$
|
62,843
|
|
|
$
|
38,346
|
|
|
$
|
24,497
|
|
|
|
63.9
|
%
|
|
$
|
114,102
|
|
|
$
|
72,152
|
|
|
$
|
41,950
|
|
|
|
58.1
|
%
|
As a % of Operating Revenues
|
|
|
77
|
%
|
|
|
79
|
%
|
|
|
|
|
|
|
-2
|
%
|
|
|
80
|
%
|
|
|
81
|
%
|
|
|
|
|
|
|
-1
|
%
|
Domestic Environmental Services Operating
Expenses, Including Cost of Revenue Exclusive of Depreciation and Amortization for the three months ended June 30, 2019 increased
$24.5 million, or 63.9%, from $38.3 million in the comparable period in 2018. Approximately $19.2 million of this increase was
attributable to the acquisition of SWS. The increase excluding the acquisition of SWS is consistent with the increase in remediation
revenue. As a percentage of Operating Revenues, the costs decreased 2% for the three months ended June 30, 2019, as compared to
the comparable period in 2018.
Domestic Environmental Services Operating
Expenses, Including Cost of Revenue Exclusive of Depreciation and Amortization for the six months ended June 30, 2019 increased
$42.0 million, or 58.1%, from $72.2 million in the comparable period in 2018. Approximately $31.4 million of this increase was
attributable to the acquisition of SWS. The increase excluding the acquisition of SWS is consistent with the increase in remediation
and emergency response revenue. As a percentage of Operating Revenues, the costs decreased 1% for the three months ended June 30,
2019, as compared to the comparable period in 2018.
International Services
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses, Including Cost of Revenue Exclusive of Depreciation and Amortization
|
|
$
|
6,696
|
|
|
$
|
3,721
|
|
|
$
|
2,975
|
|
|
|
80.0
|
%
|
|
$
|
12,642
|
|
|
$
|
7,065
|
|
|
$
|
5,577
|
|
|
|
78.9
|
%
|
As a % of Operating Revenues
|
|
|
72
|
%
|
|
|
66
|
%
|
|
|
|
|
|
|
6
|
%
|
|
|
72
|
%
|
|
|
68
|
%
|
|
|
|
|
|
|
4
|
%
|
International Services Operating Expenses,
Including Cost of Revenue Exclusive of Depreciation and Amortization for the three months ended June 30, 2019 increased $3.0 million,
or 80.0%, from $3.7 million in the comparable period in 2018. Approximately $0.6 million of this increase was attributable to the
acquisition of Clean Line and approximately $2.4 million of this increase was attributable to the remediation activity in Turkey.
As a percentage of Operating Revenues, the costs increased 6% in the three months ended June 30, 2019 as compared to the comparable
period in 2018.
International Services Operating Expenses,
Including Cost of Revenue Exclusive of Depreciation and Amortization for the six months ended June 30, 2019 increased $5.6 million,
or 78.9%, from $7.1 million in the comparable period in 2018. Approximately $2.4 million of this increase was attributable to the
acquisition of Clean Line and approximately $3.6 million of this increase was attributable to the remediation activity in Turkey.
As a percentage of Operating Revenues, the costs increased 4% in the six months ended June 30, 2019 as compared to the comparable
period in 2018.
Sprint
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses, Including Cost of Revenue Exclusive of Depreciation and Amortization
|
|
$
|
8,943
|
|
|
$
|
7,948
|
|
|
$
|
995
|
|
|
|
12.5
|
%
|
|
$
|
17,770
|
|
|
$
|
15,475
|
|
|
$
|
2,295
|
|
|
|
14.8
|
%
|
As a % of Operating Revenues
|
|
|
43
|
%
|
|
|
43
|
%
|
|
|
|
|
|
|
0
|
%
|
|
|
42
|
%
|
|
|
44
|
%
|
|
|
|
|
|
|
-2
|
%
|
Sprint Operating Expenses, Including Cost
of Revenue Exclusive of Depreciation and Amortization for the three months ended June 30, 2019 increased $1.0 million, or 12.5%,
from $7.9 million in the comparable period in 2018. Approximately $0.6 million of this increase was attributable to landfill operations
expanding and approximately $0.5 million of this increase was attributable to the acquisition of Quail Run. The costs as a percentage
of Operating Revenues remained consistent.
Sprint Operating Expenses, Including Cost
of Revenue Exclusive of Depreciation and Amortization for the six months ended June 30, 2019 increased $2.3 million, or 14.8%,
from $15.5 million in the comparable period in 2018. Approximately $0.9 million of this increase was attributable to landfill operations
expanding. Approximately $1.0 million of this increase was attributable to the acquisition of Quail Run. The costs as a percentage
of Operating Revenues decreased 2% as compared to the comparable period in 2018 due to higher margins resulting from a price increase
and efficiencies gained as the Sprint segment’s landfill operations become fully operational.
General and Administrative Expenses
General and Administrative Expenses represent
costs incurred for back office administration and support. This includes, but is not limited to, senior management, accounting,
finance, treasury, collections, accounts payable, invoicing, and analysis. We are focusing on managing such costs by centralizing
back office operations and consolidating vendors in order to leverage economies of scale and remain competitive in the marketplace.
Domestic Standby Services
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A
|
|
$
|
991
|
|
|
$
|
830
|
|
|
$
|
161
|
|
|
|
19.4
|
%
|
|
$
|
1,940
|
|
|
$
|
1,619
|
|
|
$
|
321
|
|
|
|
19.8
|
%
|
As a % of Operating Revenues
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
1
|
%
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
1
|
%
|
Domestic Standby Services General and Administrative
Expenses for the three months ended June 30, 2019 increased $0.2 million, or 19.4%, compared to $0.8 million for the comparable
period in 2018. As a percentage of Operating Revenues, costs remained relatively consistent for the three months ended June 30,
2019 as compared to the comparable period in 2018.
Domestic Standby Services General and Administrative
Expenses for the six months ended June 30, 2019 increased $0.3 million, or 19.8%, compared to $1.6 million for the comparable period
in 2018. As a percentage of Operating Revenues, costs remained relatively consistent for the six months ended June 30, 2019 as
compared to the comparable period in 2018.
Domestic Environmental Services
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A
|
|
$
|
7,163
|
|
|
$
|
5,792
|
|
|
$
|
1,371
|
|
|
|
23.7
|
%
|
|
$
|
14,362
|
|
|
$
|
10,372
|
|
|
$
|
3,990
|
|
|
|
38.5
|
%
|
As a % of Operating Revenues
|
|
|
9
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
-3
|
%
|
|
|
10
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
-2
|
%
|
Domestic Environmental Services General
and Administrative Expenses for the three months ended June 30, 2019 increased $1.4 million, or 23.7%, from $5.8 million in the
comparable period in 2018. The increase is primarily attributable to the acquisition of SWS. As a percentage of Operating Revenues,
the costs decreased 3% for the three months ended June 30, 2019 as compared to the comparable period in 2018 primarily due to higher
revenue.
Domestic Environmental Services General
and Administrative Expenses for the six months ended June 30, 2019 increased $4.0 million, or 38.5%, from $10.4 million in the
comparable period in 2018. Approximately $3.6 million of the increase was attributable to the acquisition of SWS. As a percentage
of Operating Revenues, the costs decreased 2% for the six months ended June 30, 2019 as compared to the comparable period in 2018
primarily due to higher revenue.
International Services
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A
|
|
$
|
958
|
|
|
$
|
1,008
|
|
|
$
|
(50
|
)
|
|
|
-5.0
|
%
|
|
$
|
1,855
|
|
|
$
|
1,710
|
|
|
$
|
145
|
|
|
|
8.5
|
%
|
As a % of Operating Revenues
|
|
|
10
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
-8
|
%
|
|
|
11
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
-5
|
%
|
International Services General and Administrative
Expenses for the three months ended June 30, 2019 decreased $0.1 million from $1.0 million, or 5%, in the comparable period in
2018. As a percentage of Operating Revenues, the costs decreased 8% for the three months ended June 30, 2019, as compared to the
comparable period in 2018, because General and Administrative Expenses are primarily fixed costs and thus decrease as a percentage
of revenue as Operating Revenues increase.
International Services General and Administrative
Expenses for the six months ended June 30, 2019 increased $0.1 million from $1.7 million, or 8.5%, in the comparable period in
2018. Approximately $0.3 million of the General and Administrative Expenses was attributable to the acquisition of Clean Line.
Excluding the impact of Clean Line, the International segment reduced General and Administrative Expenses by $0.2 million to be
aligned with revenue levels. As a percentage of Operating Revenues, the costs decreased 5% for the six months ended June 30, 2019,
as compared to the comparable period in 2018, because General and Administrative Expenses are primarily fixed costs and thus decrease
as a percentage of revenue as Operating Revenues increase.
Sprint
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A
|
|
$
|
4,105
|
|
|
$
|
2,859
|
|
|
$
|
1,246
|
|
|
|
43.6
|
%
|
|
$
|
7,856
|
|
|
$
|
5,470
|
|
|
$
|
2,386
|
|
|
|
43.6
|
%
|
As a % of Operating Revenues
|
|
|
20
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
4
|
%
|
|
|
19
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
3
|
%
|
Sprint General and Administrative Expenses
for the three months ended June 30, 2019 increased $1.2 million, or 43.6%, from $2.9 million in the comparable period in 2018.
This increase was primarily attributable to an increase of approximately $0.6 million from expanding the Sprint segment’s
energy services operations and an increase of approximately $0.4 million due to the acquisition of Quail Run in October 2018. As
a percentage of Operating Revenues, the costs increased 4% for the three months ended June 30, 2019 as compared to the comparable
period in 2018.
Sprint General and Administrative Expenses
for the six months ended June 30, 2019 increased $2.4 million, or 43.6%, from $5.5 million in the comparable period in 2018. This
increase was primarily attributable to an increase of approximately $1.1 million from expanding the Sprint segment’s energy
service operations and an increase of approximately $0.7 million due to the acquisition of Quail Run in October 2018. As a percentage
of Operating Revenues, the costs increased 3% for the six months ended June 30, 2019 as compared to the comparable period in 2018.
Corporate Items
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A
|
|
$
|
3,971
|
|
|
$
|
2,251
|
|
|
$
|
1,720
|
|
|
|
76.4
|
%
|
|
$
|
8,068
|
|
|
$
|
3,964
|
|
|
$
|
4,104
|
|
|
|
103.5
|
%
|
Corporate Items General and Administrative
Expenses for the three months ended June 30, 2019 increased $1.7 million, or 76.4%, from $2.3 million in the comparable period
in 2018 to support the growth of the business including the support of the various acquisitions. Approximately $1.2 million of
the increase was due to an increase in corporate compensation expense and an approximately $0.2 million was due to an increase
in technology expense.
Corporate Items General and Administrative
Expenses for the six months ended June 30, 2019 increased $4.1 million, or 103.5%, from $4.0 million in the comparable period in
2018 to support the growth of the business including the support of the various acquisitions. Approximately $1.8 million of the
increase was bad debt expense, approximately $1.1 million of the increase was due to an increase in professional fees, $0.4 million
of the increase was due to the timing of incentive compensation and $0.3 million of the increase was due to an increase in technology
expense.
Depreciation and Amortization
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
7,658
|
|
|
$
|
4,111
|
|
|
$
|
3,547
|
|
|
|
86.3
|
%
|
|
$
|
14,806
|
|
|
$
|
9,017
|
|
|
$
|
5,789
|
|
|
|
64.2
|
%
|
Intangible Amortization
|
|
|
2,019
|
|
|
|
1,214
|
|
|
|
805
|
|
|
|
66.3
|
%
|
|
|
3,883
|
|
|
|
2,767
|
|
|
|
1,116
|
|
|
|
40.3
|
%
|
Depreciation and Amortization
|
|
$
|
9,677
|
|
|
$
|
5,325
|
|
|
$
|
4,352
|
|
|
|
81.7
|
%
|
|
$
|
18,689
|
|
|
$
|
11,784
|
|
|
$
|
6,905
|
|
|
|
58.6
|
%
|
Depreciation and amortization for the
three months ended June 30, 2019 increased $4.4 million, or 81.7%, from the comparable period in 2018 primarily attributable to
an increase in capitalized equipment in the Domestic Environmental Services segment, as well as $0.6 million of depreciation expense
for SWS and Clean Line which were acquired during fiscal year 2018. The increase is also due to $0.6 million of intangible amortization
expense for Quail Run, which was also acquired during fiscal year 2018.
Depreciation and amortization for the six
months ended June 30, 2019 increased $6.9 million, or 58.6%, from the comparable period in 2018 primarily attributable to an increase
in capital equipment in the Domestic Environmental Services segment. Depreciation expense increased $1.0 million in the Sprint
segment due to increased capital expenditures and the acquisition of Quail Run. The acquisitions of SWS and Clean Line during fiscal
year 2018 increased depreciation expense by $1.1 million and $0.2 million, respectively during the six months ended June 30, 2019.
The increase is also due to $0.9 million of intangible amortization expense for SWS, Clean Line and Quail Run.
Other Operating Expenses
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees
|
|
$
|
-
|
|
|
$
|
357
|
|
|
$
|
(357
|
)
|
|
|
-100.0
|
%
|
|
$
|
-
|
|
|
$
|
800
|
|
|
$
|
(800
|
)
|
|
|
-100.0
|
%
|
Acquisition expenses
|
|
|
10,715
|
|
|
|
2,064
|
|
|
|
8,651
|
|
|
|
419.1
|
%
|
|
|
11,162
|
|
|
|
3,286
|
|
|
|
7,876
|
|
|
|
239.7
|
%
|
Change in fair value of contingent consideration
|
|
|
2,026
|
|
|
|
-
|
|
|
|
2,026
|
|
|
|
100.0
|
%
|
|
|
4,077
|
|
|
|
-
|
|
|
|
4,077
|
|
|
|
100.0
|
%
|
Share-based compensation
|
|
|
1,268
|
|
|
|
-
|
|
|
|
1,268
|
|
|
|
100
|
%
|
|
|
1,268
|
|
|
|
-
|
|
|
|
1,268
|
|
|
|
100
|
%
|
Other, net
|
|
|
413
|
|
|
|
1,443
|
|
|
|
(1,030
|
)
|
|
|
-71.4
|
%
|
|
|
1,813
|
|
|
|
2,340
|
|
|
|
(527
|
)
|
|
|
-22.5
|
%
|
Management fees for the three months ended
June 30, 2019 decreased $0.4 million from the comparable period in 2018 as we no longer paid management fees to JFL Partners after
the Business Combination in October 2018. Acquisition expenses for the three months ended June 30, 2019 increased $8.7 million
from the comparable period in 2018, which is primarily attributable to the $10.0 million payment due to JFL Partners, which was
triggered by the closing of the OIT acquisition in the second quarter of 2019. Acquisition expenses for the three months ended
June 30, 2019 also includes $2.3 million of professional fees incurred in connection with the Company entering into the US Ecology
Merger Agreement. During the three months ended June 30, 2019, the fair value of contingent consideration increased $2.0 million,
primarily resulting from an increase of $2.0 million for the fair value of the contingent consideration relating to the Enpro acquisition
due to an increase in the probability of payment. During the three months ended June 30, 2019 the Company recognized $1.3 million
of share-based compensation expense as a result of equity-based awards granted to employees and the Company’s Board of Directors.
Other expense decreased $1.0 million for the three months ended June 30, 2019 as compared to the comparable period in 2018 due
to a decrease in professional fees and severance costs.
Management fees for the six months ended
June 30, 2019 decreased $0.8 million from the comparable period in 2018 as we no longer paid management fees to JFL Partners after
the Business Combination in October 2018. Acquisition expenses for the six months ended June 30, 2019 increased $7.9 million from
the comparable period in 2018, which is primarily attributable to the $10.0 million payment due to JFL Partners, which was triggered
by the closing of the OIT acquisition in the second quarter of 2019. Acquisition expenses for the six months ended June 30, 2019
also includes $2.3 million of professional fees incurred in connection with the Company entering into the US Ecology Merger Agreement.
During the six months ended June 30, 2019, the fair value of contingent consideration increased $4.1 million, resulting from an
increase of $2.2 million for the fair value of the contingent consideration relating to the Enpro acquisition and an increase
of $1.7 million for the fair value of the contingent consideration relating to the Clean Line acquisition. During the six months
ended June 30, 2019 the Company recognized $1.3 million of share-based compensation expense as a result of equity-based awards
granted to employees and the Company’s Board of Directors. Other expense decreased $0.5 million for the six months ended
June 30, 2019 as compared to the comparable period in 2018 due to a decrease in professional fees and severance costs.
Total Other (Income) Expenses, Net
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
7,730
|
|
|
$
|
3,963
|
|
|
|
3,767
|
|
|
|
95
|
%
|
|
|
14,339
|
|
|
|
7,633
|
|
|
|
6,706
|
|
|
|
88
|
%
|
Foreign currency translation (gains) losses
|
|
|
40
|
|
|
|
(78
|
)
|
|
|
118
|
|
|
|
-151
|
%
|
|
|
(51
|
)
|
|
|
(41
|
)
|
|
|
(10
|
)
|
|
|
24
|
%
|
Loss on debt extinguishment
|
|
|
-
|
|
|
|
2,720
|
|
|
|
(2,720
|
)
|
|
|
-100
|
%
|
|
|
-
|
|
|
|
2,720
|
|
|
|
(2,720
|
)
|
|
|
-100
|
%
|
Other (income) expense, net
|
|
|
87
|
|
|
|
23
|
|
|
|
64
|
|
|
|
278
|
%
|
|
|
(89
|
)
|
|
|
8
|
|
|
|
(97
|
)
|
|
|
-1213
|
%
|
Total other expenses
|
|
$
|
7,857
|
|
|
$
|
6,628
|
|
|
$
|
1,229
|
|
|
|
18.5
|
%
|
|
$
|
14,199
|
|
|
$
|
10,320
|
|
|
$
|
3,879
|
|
|
|
37.6
|
%
|
Total Other Expenses for the three months
ended June 30, 2019 increased $1.2 million, or 18.5%, as compared to the comparable period in 2018. Interest expense increased
$3.8 million due to higher debt balances. In June 2018, in connection with entering into the Credit Facility (as defined below),
the Company wrote off $2.7 million in debt issuance costs. This expense did not repeat in the three months ended June 30, 2019.
Total Other Expenses for the six months
ended June 30, 2019 increased $3.9 million, or 37.6%, as compared to the comparable period in 2018. Interest expense increased
$6.7 million due to higher debt balances. These increases were partially offset by a decrease in loss on debt extinguishment. The
increase in borrowings were used to fund the 2018 dividend payment to investment affiliates of JFL and the acquisitions of Clean
Line, SWS and Quail Run.
Income Tax (Benefit) Expense
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
$
|
(867
|
)
|
|
$
|
(1,139
|
)
|
|
$
|
272
|
|
|
|
-23.9
|
%
|
|
$
|
687
|
|
|
$
|
(1,020
|
)
|
|
$
|
1,707
|
|
|
|
-167.4
|
%
|
Income tax benefit for the three months
ended June 30, 2019 was $0.9 million as compared to Income tax benefit of $1.1 million for the three months ended June 30, 2018.
As a result of the Company’s acquisition of SWS a temporary difference between the book fair value and tax basis for the
assets acquired was created resulting in a deferred tax liability and additional goodwill. With the increase in deferred tax liability
the Company reduced the deferred tax asset valuation account and recognized a deferred tax benefit in the three months ended June
30, 2018.
Income tax expense for the six months ended
June 30, 2019 was $0.7 million as compared to Income tax benefit of $1.0 million for the six months ended June 30, 2018. Income
tax expense for the six months ended June 30, 2019 reflects a discrete charge to adjust income taxes payable associated with certain
of the Company’s subsidiaries to reflect the Company’s consolidated income tax liability. Income tax benefit for the
six months ended June 30, 2018 reflects a deferred tax benefit associated with the Company’s acquisition of SWS.
Liquidity and Capital Resources
At June 30, 2019 and December 31, 2018, cash
and cash equivalents totaled $22.6 million and $18.4 million, respectively. At June 30, 2019 and December 31, 2018, the net working
capital balance was $23.1 million and $63.1 million, respectively. The decrease is primarily attributable to an increase in borrowings
under the Revolver. Our principal capital requirements are to fund capital expenditures, make interest and principal payments on
indebtedness, make dividend payments on the Series A Preferred Stock, make investments in line with our business strategy, and
fund working capital needs. We calculate working capital as current assets less current liabilities. Our principal sources of liquidity
are existing cash and cash equivalents, cash flows from operations and financing activities, including borrowings under our Credit
Facility. In addition, as a public company, we may from time to time access the capital markets through the offering and sale of
our securities. We believe that future operating cash flows, together with cash on hand and availability of borrowings under our
Credit Facility, will be sufficient to meet our future operating and capital expenditure cash requirements for the next twelve
months and the foreseeable future.
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
2019 over 2018
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
5,845
|
|
|
$
|
6,451
|
|
|
$
|
(606
|
)
|
|
|
-9.4
|
%
|
Net cash used in investing activities
|
|
|
(27,354
|
)
|
|
|
(35,414
|
)
|
|
|
8,060
|
|
|
|
-22.8
|
%
|
Net cash provided by financing activities
|
|
|
25,781
|
|
|
|
28,190
|
|
|
|
(2,409
|
)
|
|
|
-8.5
|
%
|
Net cash provided by operating activities
Net cash provided by operating activities
for the six months ended June 30, 2019 was $5.8 million, a decrease of $0.6 million, or 9.4% compared to $6.5 million for the
six months ended June 30, 2018. Net cash provided by operating activities changed based on our operating performance as described
earlier and an increase in interest expense payments. Net cash provided by operating activities for the six months ended June
30, 2019 also reflects a change in the timing of collection of receivables due to emergency response and remediation activities.
The decrease in collection of receivables was partially offset by an increase in accounts payables primarily due to an increase
in payables related to emergency response activities.
Net cash used in investing activities
Net cash used in investing activities for
the six months ended June 30, 2019 was $27.4 million, a decrease of $8.1 million, or 22.8% compared to $35.4 million for the comparable
period in 2018. Cash used in investing activities during the six months ended June 30, 2019 consists of capital expenditures of
$21.5 million as compared to capital expenditures of $7.4 million in the prior period. The six months ended June 30, 2019 included
the acquisition of OIT, which closed in April 2019 for $5.8 million. The six months ended June 30, 2018 included the acquisition
of Clean Line, which closed in March 2018 for $5.0 million and SWS, which closed in May 2018 for $22.0 million.
Net cash provided by financing activities
Net cash provided by financing activities for
the six months ended June 30, 2019 was $25.8 million, a decrease of $2.4 million, or 8.5%, from the comparable period in 2018.
Net cash provided by financing activities for the six months ended June 30, 2019 reflects an increase in borrowings under our revolving
credit facilities, partially offset by a cash dividend paid on all issued and outstanding shares of the Series A Preferred Stock
and payment of contingent consideration to the sellers of Quail Run and Clean Line. Net cash provided by financing activities for
the six months ended June 30, 2018 is attributable to a net increase in borrowings, net of deferred financing costs, due to the
Credit Facility and an increase in capital contributions of $22.8 million. These borrowings and increases in capital were to fund
the dividend payment of $86.5 million paid to investment affiliates of JFLCo.
Working Capital
At June 30, 2019 and December 31, 2018,
cash and cash equivalents totaled $22.6 million and $18.4 million, respectively. At June 30, 2019 and December 31, 2018, the net
working capital balance was $23.1 million and $63.1 million, respectively.
Additionally, as of June 30, 2019 and December
31, 2018 we had $60.0 million and $35.0 million, respectively, in revolving credit facilities, of which approximately $17.0 million
and $25.0 million was available to borrow at June 30, 2019 and December 31, 2018, respectively. Based on the above and current
plans, we believe that our operations have adequate financial resources to satisfy current liquidity needs.
We assess liquidity in terms of the ability
to generate cash to fund operating, investing and financing activities. Our primary ongoing cash requirements will be to fund operations,
capital expenditures, interest payments and investments in line with our business strategy. We believe that future operating cash
flows will be sufficient to meet future operating and internal investing cash needs. Furthermore, existing cash balances and availability
of additional borrowings under revolving credit facilities provide additional potential sources of liquidity should they be required.
Financing Arrangements
Credit Facility
In connection with the combination of NRC
and SES, NRC US Holding Company, LLC (a wholly owned subsidiary of NRC) and SES (collectively, the “Borrowers”), NRC
Group, as parent, and the other guarantors party thereto entered into a credit facility (the “Credit Facility”) on
June 11, 2018, which included a $308.0 million term loan (the “Original Term Loan”) and a $40.0 million revolving credit
facility (the “Revolver”). The Borrowers and the other guarantors (including NRC Group) entered into a joinder agreement
(the “Joinder Agreement”) on October 2, 2018, pursuant to which the Borrowers increased the Original Term Loan in the
amount of $35.0 million (the “Incremental Term Loan,” and together with the Original Term Loan, the “Term Loan”)
and the amount available under the Revolver was reduced by $5 million to $35.0 million. The proceeds of the Term Loan have been
used for, among other things, the funding of a dividend paid to investment affiliates of JFL as part of the combination of NRC
and SES, and the acquisitions of Clean Line, SWS, and Quail Run. On March 15, 2019 and May 10, 2019, the Company entered into incremental
revolving credit commitments of $10.0 million and $15.0 million, respectively, under the Credit Facility, bringing its total revolving
credit commitments under the Revolver up to $60.0 million.
During the six months ended June 30, 2019,
the Company made principal payments on the Term Loan of $1.7 million. As of June 30, 2019, there was $339.7 million outstanding
on the Term Loan and $43.0 million outstanding on the Revolver. The Revolver matures on June 11, 2023 and the Term Loan matures
on June 11, 2024, in each case unless otherwise extended in accordance with the terms of the Credit Facility. The Borrowers may
also incur incremental revolving and term loan commitments pursuant to and in accordance with the terms of the Credit Facility.
As of June 30, 2019 and December 31, 2018,
we were in compliance with the covenants of all of our debt agreements.
Capital Expenditures
In the six months ended June 30, 2019,
our capital expenditures were $21.5 million. We anticipate that 2019 capital spending will increase primarily driven by the expansion
of the Sprint segment’s landfill operations services.
Off-Balance Sheet Arrangements
Except for obligations under operating
leases and letters of credit described in our 2018 Annual Report under “Contractual Obligations” and performance obligations
incurred in the ordinary course of business, we are not party to any off-balance sheet arrangements involving guarantee, contingency
or similar obligations to entities whose financial statements are not consolidated with our results, and that have or are reasonably
likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures or capital resources that would be material to investors in our securities.
Critical Accounting Policies and Estimates
The preparation of our financial statements
requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses,
and related disclosures of contingent liabilities. The following are the areas that we believe require the greatest amount of judgments
or estimates in the preparation of the financial statements: allowance for doubtful accounts, testing of goodwill for impairment,
estimated lives of intangible assets, self-insurance liabilities, contingent consideration liability and income tax expense (benefit).
Management reviews critical accounting estimates on an ongoing basis and as needed prior to the release of annual financial statements.
Our critical accounting policies and significant
estimates are detailed in our 2018 Annual Report. Our critical accounting policies and significant estimates have not changed from
those previously disclosed in our 2018 Annual Report.
Recent Accounting Pronouncements
For a discussion of recently issued financial
accounting standards, see Note 2 to our consolidated financial statements included elsewhere in this Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
There have been no material changes in
the Company’s market risk since December 31, 2018. For further information on the Company’s market risk, refer to “Item
7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2018 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are
controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted
under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15
under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures as of June 30, 2019. Based upon their evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) were not effective as of the end of the period covered by this Report due to the existence
of a previously reported material weakness in our internal control over financial reporting.
Changes in Internal Control over Financial
Reporting
Other than discussed below, during the
three months ended June 30, 2019, there has been no change in our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting. As discussed elsewhere in
this Report, we completed the Business Combination on October 17, 2018. We are engaged in the process of designing and implementing
our internal control over financial reporting in a manner commensurate with the scale of our operations post-Business Combination.
Notwithstanding the material weaknesses
described below, we have concluded that the financial statements and other financial information included in this Report fairly
present in all material respects our financial condition, results of operations and cash flows for the periods presented in conformity
with accounting principles generally accepted in the United States.
Material Weakness and Remediation
Under standards established by the Public
Company Accounting Oversight Board, a material weakness is a control deficiency, or a combination of control deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual and interim
financial statements will not be prevented or detected and corrected on a timely basis. Material weaknesses in our internal control
over financial reporting with respect to the Company’s financial statement close process, information technology general
controls and journal entries existed as of December 31, 2018. Specifically, it was identified that the global IT director, as well
as certain finance and information technology third party contractors have administrator and super user access rights and/or maintain
access to develop changes to certain applications. Further, it was identified that we did not maintain adequate controls over the
financial statement close process, including controls to identify and assess whether financial statement account balances are in
accordance with accounting principles generally accepted in the United States, nor did we maintain adequate segregation of duties
over the review and approval of journal entries.
To remediate these material weaknesses,
our management has dedicated significant time and resources to implement changes to our processes. Specifically, we implemented
the following changes and improvements: (1) adopted formal information security policies and procedures, (2) reorganized our information
technology team, (3) redesigned and enhanced controls relating to segregation of duties over the review and approval of journal
entries, and (4) hired additional financial accounting and reporting personnel and have provided additional training. We will continue
to take actions that are appropriate to timely and effectively remediate these material weaknesses.
Limitations on Controls
Because of its inherent limitations, our
disclosure controls and procedures and our internal controls over financial reporting may not prevent or detect all misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
There have been no material changes to
the risk factors disclosed in our 2018 Annual Report other than the risks described below related to the pending Mergers.
Completion of the Mergers is subject
to certain conditions, including certain conditions that may not be satisfied or completed on a timely basis, if at all. Failure
to complete the Mergers could have a material and adverse effect on us and, even if completed, the Mergers may not achieve some
or all of the anticipated benefits.
On June 23, 2019, we entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with US Ecology, US Ecology Parent, Inc., a Delaware corporation and wholly-owned
subsidiary of US Ecology (“Holdco”), Rooster Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary
of Holdco (“Rooster Merger Sub”), and ECOL Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of
Holdco (“ECOL Merger Sub”).
The Merger Agreement provides that, subject
to the conditions set forth in the Merger Agreement, ECOL Merger Sub will merge with and into US Ecology, with US Ecology continuing
as the surviving company and as a wholly-owned subsidiary of Holdco (the “Parent Merger”). Substantially concurrently
therewith, Rooster Merger Sub will merge with and into NRCG, with NRCG continuing as the surviving company and as a wholly-owned
subsidiary of Holdco (the “Rooster Merger,” and, together with the Parent Merger, the “Mergers”).
Completion of the Mergers is not assured
and is subject to risks, including, but not limited to, (1) certain litigation that was filed by SBTS, LLC on July 23, 2019 in
the Court of Chancery of the State of Delaware against NRCG and US Ecology regarding the treatment of the NRCG Series A Preferred
Stock, (2) the risks that approval of the transactions by US Ecology stockholders and our common stockholders will not be obtained
or (3) certain other closing conditions will not be satisfied. If the Mergers are not completed, the ongoing businesses and financial
results of US Ecology and/or the Company may be adversely affected and US Ecology and/or the Company will be subject to several
risks, including the following:
|
●
|
having to pay certain significant costs relating to
the Mergers without receiving the benefits of the Mergers, including, in certain circumstances, a termination fee of $35,000,000
payable by the Company, a termination fee of $60,000,000 payable by US Ecology, or up to $10,000,000 in expense reimbursement
payable to the Company by US Ecology;
|
|
●
|
the potential loss of key personnel during the pendency of the Mergers as employees may experience
uncertainty about their future roles with the combined company;
|
|
●
|
US Ecology and the Company will have been subject to certain restrictions on the conduct of their
businesses which may have prevented them from making certain acquisitions or dispositions or pursuing certain business opportunities
while the Mergers were pending; and
|
|
●
|
having had the focus of each companies’ management on the Mergers instead of on pursuing
other opportunities that could have been beneficial to the companies.
|
If the Mergers are not
completed, we cannot assure our stockholders that these risks will not materialize and will not materially adversely affect the
businesses, financial results and stock prices of the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit
Number
|
|
Description
|
|
|
|
2.1
|
|
Agreement and Plan of Merger, dated as of June 23, 2019, by and among US Ecology, Inc., US Ecology Parent, Inc., Rooster Merger Sub, Inc., ECOL Merger Sub, Inc., and NRC Group Holdings Corp., incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K (File No. 001-38119) filed with the SEC on June 24, 2019.
|
|
|
|
10.1
|
|
Joinder Agreement, dated as of May 10, 2019, by and among NRC US Holding Company, LLC, Sprint Energy Services, LLC, HSBC Bank USA, N.A., BNP Paribas and the Guarantors party thereto, incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K (File No. 001-38119) filed with the SEC on May 14, 2019.
|
|
|
|
31.1
|
|
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed herewith)
.
|
|
|
|
31.2
|
|
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed herewith).
|
|
|
|
32.1*
|
|
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
|
|
|
|
101.INS
|
|
XBRL Instance Document
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 6, 2019
|
/s/ Joseph Peterson
|
|
Name:
|
Joseph Peterson
|
|
Title:
|
Chief Financial Officer
|
|
|
(Principal Financial and Accounting Officer)
|
38