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As filed with the Securities and Exchange Commission on July 14, 2020

Registration No. 333-239542

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Montrose Environmental Group, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   8999   46-4195044

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

1 Park Plaza, Suite 1000

Irvine, CA 92614

(949) 988-3500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Vijay Manthripragada

President and Chief Executive Officer

Montrose Environmental Group, Inc.

1 Park Plaza, Suite 1000

Irvine, CA 92614

(949) 988-3500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Peter W. Wardle

Gibson, Dunn & Crutcher LLP

333 South Grand Avenue

Los Angeles, CA 90071

(213) 229-7242

 

Nasym Afsari

General Counsel

Montrose Environmental Group, Inc.

1 Park Plaza, Suite 1000

Irvine, CA 92614

(949) 988-3500

 

Rezwan D. Pavri
Michael E. Coke

Katherine H. Ku
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

Title of Each Class of

Securities to be Registered

 

Amount

to be

Registered(1)

 

Proposed Maximum
Aggregate Offering Price

Per Unit(2)

  Proposed Maximum
Aggregate Offering Price(1)(2)
 

Amount of

Registration Fee(3)

Common Stock, $0.000004 par value per share

  11,500,000   $17.00   $195,500,000   $25,376

 

 

 

(1)

Includes 1,500,000 shares of common stock that the underwriters have the option to purchase. See “Underwriting.”

 

(2)

Estimated solely for the purpose of calculating the registration fee under Rule 457(a) of the Securities Act of 1933, as amended.

 

(3)

$20,768 previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion,

Preliminary Prospectus dated July 14, 2020

P R O S P E C T U S

10,000,000 Shares

 

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Montrose Environmental Group, Inc.

Common Stock

 

 

This is Montrose Environmental Group, Inc.’s initial public offering. We are selling 10,000,000 shares of our common stock.

We expect the public offering price will be between $15.00 and $17.00 per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on the NYSE under the symbol “MEG.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for this filing and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 19 of this prospectus.

 

 

 

     Per Share        Total  

Public offering price

   $          $    

Underwriting discount(1)

   $          $    

Proceeds, before expenses, to us

   $          $    

 

(1)

See “Underwriting” for a description of all underwriting compensation payable in connection with this offering.

The underwriters may also exercise their option to purchase up to an additional 1,500,000 shares from us, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                     , 2020.

 

 

 

BofA Securities   William Blair

 

BNP PARIBAS     Capital One Securities       Stifel  

 

Needham & Company

 

 

The date of this prospectus is                     , 2020.


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LOGO

The Future of Environmental Solutions


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MONTROSE ENVIRONMENTAL At Montrose, we're not just determined to think about a better way forward for environmnetal services today and down the road -- we're committed to making it a reality.


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TABLE OF CONTENTS

 

 

 

    

Page

 

General Information

     ii  

Prospectus Summary

     1  

Risk Factors

     19  

Forward-Looking Statements

     49  

Use of Proceeds

     52  

Dividend Policy

     53  

Capitalization

     54  

Dilution

     57  

Selected Historical Consolidated Financial Information

     59  

Unaudited Pro Forma Financial Information

     61  

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

     70  

Non-GAAP Financial Information

     93  

Business

     95  

Management and the Board of Directors

     112  

Executive Compensation

     120  

Principal Stockholders

     134  

Certain Relationships and Related Party Transactions

     137  

Description of Capital Stock

     140  

Description of Certain Indebtedness

     148  

Shares Eligible for Future Sale

     150  

Certain Material U.S. Federal Tax Considerations

     153  

Underwriting

     158  

Legal Matters

     166  

Experts

     166  

Where You Can Find Additional Information

     166  

Index to Financial Statements

     F-1  

 

 

Neither we nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we nor any of the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sale of our common stock.

 

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GENERAL INFORMATION

Industry and Market Data

The data included in this prospectus and, in particular, in the sections entitled “Prospectus Summary” and “Business,” regarding markets and the industry in which we operate, including the size of certain markets and our position and the position of our competitors within these markets, are based on publicly available information, reports of government agencies, published industry sources and the Environmental Industry Study prepared by Environmental Business International, Inc., or EBI, in October 2019, which study we commissioned. Additional sources of industry and market data included in this prospectus are as follows: World Bank and Institute for Health Metrics and Evaluation, The Cost of Air Pollution: Strengthening the Economic Case for Action (2016).

In presenting this information, we have also made certain estimates and assumptions that we believe to be reasonable based on the information referred to above and similar sources, as well as our internal research, calculations and assumptions based on our analysis of such information and our knowledge of, and our experience to date in, our industries and markets. Market share data is subject to change and may be limited by the availability of raw data, the voluntary nature of the data gathering process and other limitations inherent in any statistical survey of market share data. In addition, customer preferences are subject to change. Accordingly, you are cautioned not to place undue reliance on such market share data or any other such estimates. While we believe such information is reliable, neither we nor the underwriters can guarantee the accuracy or completeness of this information, and neither we nor the underwriters have independently verified any third-party information and data from our internal research has not been verified by any independent source. While we believe the estimated market and industry data included in this prospectus are generally reliable, such information, which is derived in part from management’s estimates and beliefs, is inherently uncertain and imprecise.

Projections, assumptions, expectations and estimates of our future performance and the future performance of the industries and markets in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the sections entitled “Risk Factors” and “Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

Trademarks

We own or have the rights to use various trademarks, service marks and trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and does not, imply a relationship with, or endorsement or sponsorship by or of, us. Solely for convenience, the trademarks, service marks and trade names presented in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks, service marks and trade names.

 

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PROSPECTUS SUMMARY

The following is a summary of material information discussed in this prospectus. The summary is not complete and does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes thereto, each included elsewhere in this prospectus, before making an investment decision to purchase shares of our common stock. Some of the statements in this summary constitute forward-looking statements. See the section entitled “Forward-Looking Statements.” References to “we,” “our,” “us,” “Montrose,” “Montrose Environmental” and “the Company” refer to Montrose Environmental Group, Inc., together with its consolidated subsidiaries.

Company Overview

The Environment is Our Business.

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

We service complex, recurring and often non-discretionary environmental needs of our diverse clients across our three business segments: Assessment, Permitting and Response; Measurement and Analysis; and Remediation and Reuse. Examples of our services include:

 

 

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Environmental Media Treating water contaminated with Per- and polyfluoroalkyl substances (PFAS) Removing contaminants from soil, such as lead and arsenic Mitigating environmental impact and lowering costs by reducing the carbon intensity of client operations Helping clients manage risk and compliance objectives by permitting infrastructure projects or managing the impacts of climate change Creating value and revenue streams for clients by converting waste to renewable energy Managing air quality through the analysis of air and greenhouse gas emissions MONTROSE ENVIRONMENTAL Value Creation



 

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Our industry is highly fragmented with no single market leader. By focusing on environmental solutions, we believe we are uniquely positioned to become a leading platform in the industry. We provide a diverse range of environmental services to our private and public sector clients across the life cycle of their needs —whether they are launching new projects, maintaining operations, decommissioning operations, rehabilitating assets, managing the impacts of climate change or responding to unexpected environmental disruption. Our integrated platform has been a catalyst for our organic growth and we have built on this platform through strategic acquisitions.

Innovation is core to our strategy. The world’s environmental challenges continue to grow in number, scope and complexity, and mounting public pressure and regulatory changes continue to drive demand for better information and solutions. We focus on innovation in order to improve the quality of information we can provide to clients (such as identifying variations of Per- and polyfluoroalkyl substances, or PFAS, in water) and provide better solutions to their environmental needs (such as the efficient removal of PFAS from contaminated water). We intend to continue innovating by investing in research, development and technology (directly and through strategic partnerships) to develop better solutions for our clients. We believe these investments—together with our investments in geographic expansion, sales and marketing initiatives, environmental service offerings and strategic acquisitions—will continue to distinguish us in the marketplace.

Our revenue and earnings are highly resilient. We are not dependent upon any single service, product, political approach or regulatory framework. We also serve a diverse set of more than 4,500 clients across a wide variety of end markets and geographies within the private and public sectors. Funding for our services is typically non-discretionary given regulatory drivers and public health concerns. As a result, our business is positioned to be less susceptible to political and economic cycles. A breakdown of the end markets that we serve is provided below, based on our 2019 revenues:

 

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Our financial success is driven by both strong organic and acquisition-driven growth. Our organic revenue growth has averaged 17% per year since 2016 when combining our results with those of our recent and substantial acquisition of The Center for Toxicology and Environmental Health, L.L.C., or CTEH, since 2016. If we exclude CTEH’s revenues generated from major environmental events resulting in one or more projects contributing more than $4.0 million of revenue in any year, which at times has represented a significant percentage of CTEH’s revenue, our combined annual organic growth rate since 2016 is approximately 9%. Montrose alone, without CTEH, has averaged 7% organic revenue growth per year since 2016. Our organic revenue growth demonstrates our growing reputation and ability to capture market share in a large and growing industry. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of



 

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Operations—Key Factors that Affect Our Business and Our Results—Organic Growth.” In addition, our acquisitions of selected environmental services firms have expanded our geographic reach and service offerings.

Our environmental focus and reputation have enabled us to attract and retain some of the most highly sought-after employees in our industry. These employees have contributed to our organic growth, differentiated brand, reputation and culture.

We have experienced strong growth over the past few years. Our revenue increased from $114.8 million in 2016 to $233.9 million in 2019, representing a 26.8% compounded annual growth rate, or CAGR. Over the same period, we had a net loss of $8.9 million and $23.6 million in 2016 and 2019, respectively, and our adjusted EBITDA increased from $7.3 million in 2016 to $31.2 million in 2019, representing a CAGR of 62.1%. See the section entitled “Non-GAAP Financial Information” for a discussion of non-GAAP measures, and a reconciliation thereof to the most directly comparable GAAP measure.

Our approach has allowed us to successfully scale our business, and we believe we are well positioned to continue our trajectory and market leadership as we address the growing environmental needs of our clients and communities.

Our Segments

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

Assessment, Permitting and Response

Through our Assessment, Permitting and Response segment, we provide scientific advisory and consulting services to support environmental assessments, environmental emergency response and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. Our technical advisory and consulting offerings include regulatory compliance support and planning, environmental, ecosystem and toxicological assessments and support during responses to environmental disruptions. We help clients navigate regulations at the local, state, provincial and federal levels. In addition to environmental toxicology, our scientists and response teams have helped over 70 clients address COVID-19 related needs and continue to help clients navigate their preparation for and response to COVID-19 infections.

Measurement and Analysis

Through our Measurement and Analysis segment, our highly credentialed teams test and analyze air, water and soil to determine concentrations of contaminants as well as the toxicological impact of contaminants on flora, fauna and human health. Our offerings include source and ambient air testing and monitoring, leak detection and advanced analytical laboratory services such as air, storm water, wastewater and drinking water analysis. We are a market leader in environmental testing and laboratory services based on 2018 annual revenue according to EBI.

Remediation and Reuse

Through our Remediation and Reuse segment, we provide clients with engineering, design, implementation and operations and maintenance services, primarily to treat contaminated water, remove



 

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contaminants from soil or create biogas from agricultural waste. We do not own the properties or facilities at which we implement these projects or the underlying liabilities, nor do we own material amounts of the equipment used in projects; instead, we assist our clients in designing solutions, managing projects and mitigating their environmental risks and liabilities.

The Industry

The environmental industry is large, growing, highly fragmented and subject to complex regulatory frameworks. Federal, state, provincial and local environmental regulations dictate compliance requirements that create demand for environmental services. Increasingly, public and stockholder interest in environmental sustainability is also driving prudent management of our shared and finite environmental resources.

Global Environmental Industry is Large and Growing

According to EBI, the global environmental industry is estimated to be approximately $1.25 trillion, with over 60% of such industry being concentrated in North America and Western Europe. The services within the industry which we currently offer represent a global market size of approximately $395 billion, which can be segmented as follows:

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Water Treatment Works 13% Water Equipment & Chemicals 8% Consulting & Engineering 6% Remediation/Ind'l Services 4% Analytical Services 1% 68%



 

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According to EBI, our approximately $395 billion addressable global market is expected to grow 3.4% per year from 2018 through 2024. Positive growth is expected across all environmental sectors in the global market with high growth rates in Remediation & Industrial Services and Consulting & Engineering Services, and more moderate growth in Wastewater Treatment Services and Analytical Services. A summary of estimated growth in some of the markets in which we operate (as grouped by EBI) is presented below:

 

 

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Public Demands, Industrial Activity, Aging Infrastructure, Climate Change and Regulations Each Increase Need for Environmental Services

Heightened public awareness and increasing stockholder demand for environmental sustainability has increased the need and demand for environmental services. Many companies around the world have implemented initiatives on Sustainability and Corporate Social Responsibility, or CSR, and Environmental, Social and Governance, or ESG, making environmental impact a core factor in many business decisions. These initiatives are often focused on managing potential future risks, as opposed to past emphasis on compliance.

Steady increases in industrial activity and infrastructure investment, and the regulations underpinning these activities, are also driving demand for environmental services. In addition, environmental disruptions caused by climate change or aging infrastructure drive demand for environmental services. Infrastructure investments and environmental emergency responses often require substantial assessments, planning and/or permitting services in addition to environmental testing or remediation services. Industrial operations, including oil, gas and chemical production, require testing and monitoring throughout the manufacturing process to ensure continuous regulatory compliance. Testing and monitoring are typically recurring processes throughout the industrial production process.

In addition to current regulations, future regulatory changes may also drive demand for additional or different environmental services. In the United States, Canada and Australia, the federal, state, provincial and local regulations targeting air and water quality management, waste and contaminated soil management or reductions in greenhouse gas emissions, each of which drives portions of our business, have been implemented over many decades, and are subject to change and challenge.



 

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As a result of the COVID-19 pandemic, there is a heightened focus on air quality. The World Bank ranked air pollution as the fourth-highest risk factor in 2013 in terms of attributable deaths and estimated that it costs the global economy approximately $5 trillion per year in welfare losses. We expect the World Health Organization, or the WHO, to update its air quality guidelines in 2020 and current projections forecast air pollution increasing over time. We expect the WHO’s guidelines coupled with increasing pollution to catalyze local air quality regulations and therefore, demand for environmental services, particularly air quality services.

Independent of the COVID-19 pandemic, we expect these trends to continue and to spur growth in the environmental services industry.

The Environmental Services Industry is Highly Fragmented and Complex

According to EBI, thousands of firms operate in the markets in which we operate. Several larger firms provide environmental services as a small part of their broader product portfolio. However, much of the industry is served by small firms that provide limited service offerings addressing specific regulations and geographies. It is difficult for firms to expand given the technical expertise, accreditations and licenses necessary to serve a broad array of clients and industries across geographies and service lines. These dynamics create significant barriers to entry in our industry.

As clients increasingly seek effective, customized and streamlined solutions to address their impact on the environment, they will increasingly value environmental solutions providers with scale. Providers able to address the full lifecycle of environmental concerns and needs, particularly for companies and organizations with multi-jurisdictional footprints, and subject to complex regulatory frameworks, will continue to enjoy competitive advantages.

Competitive Strengths

We are a leading global brand focused on environmental services with a resilient and recurring revenue base anchored on long-term client relationships. Our focus on innovation, our ability to acquire and integrate leading companies, our highly accredited businesses and our experienced and credentialed team provide our clients with quality solutions and create significant barriers to entry. Our competitive strengths include:

Resilient and Recurring Revenue Across Political and Economic Cycles

Our revenues are resilient over political cycles primarily because our business is not dependent on any one regulatory framework. We have a diversified geographic footprint, and we often help clients comply with multiple regulatory frameworks. As a result, we are often insulated from major shifts in individual federal, state, provincial and local regulations. While federal governments set certain minimum standards, many state, provincial or local policies are more stringent. In addition, state, provincial and local governments often define how environmental standards will be met or implemented. These different levels of government often serve as counterweights to each other and minimize the risk and impact of sudden shifts in policy.

We believe our diverse portfolio of services and end markets position us to be resilient across economic cycles. For example, clients use our services when launching development projects, while maintaining ongoing operations, when decommissioning operations and when remediating the release of contaminants into air, water or soil. These client activities can occur at different times for different industries, regardless of economic cycles. In addition, many of our service offerings are typically non-discretionary and our projects often create significant economic value for our clients (in the form of reduced liability, cost savings or revenue streams), further incentivizing the continued use of our services. Furthermore, community demands, such as those for PFAS-free water, continue regardless of political or economic cycles. As another example, during the COVID-19 shelter-in-



 

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place orders, most of our services were deemed essential and continued to be requested by clients. Though there were some delays in the scheduling of certain services due to travel restrictions or social distancing requirements, the environmental and/or regulatory implications of not completing environmental projects has resulted in a resilient demand for our services. Clients generating over 90% of our revenue in the fiscal year ended December 31, 2017 repeated in the fiscal year ended December 31, 2018. Similarly, clients generating over 90% of our revenue in the fiscal year ended December 31, 2018 repeated in the fiscal year ended December 31, 2019.

As a result of these factors, combining our results with those of CTEH, our combined organic revenue has grown at an annual rate of 9% excluding CTEH revenues generated from major environmental events resulting in one or more projects contributing more than $4.0 million of revenue in any year, or at a rate of 7% per year since 2016 for Montrose alone. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors that Affect Our Business and Results—Organic Growth.”

Long-term Relationships Across a Large and Diversified Client Base

We currently serve over 4,500 clients. We have long-standing relationships with a number of Fortune 1000 companies and government entities, and our legacy businesses have been operating for as long as a century.

We provide services to our largest clients across multiple projects and/or multiple locations, and the number of services we provide to these clients varies from one project per year to several dozen projects per year. Our revenues are not, however, dependent on any one single client. In fiscal year ended December 31, 2019, our largest client represented approximately 7% of revenue, with these revenues derived from four separate projects. Our top twenty clients represented less than 35% of our revenue in the fiscal year ended December 31, 2019.

We also address a wide variety of end markets within the private and public sectors. We serve clients in nearly 30 end industries and no single private sector industry comprised more than 13% of our revenue for the fiscal year ended December 31, 2019. Over the same period approximately 80% of our revenues were derived from the private sector and 20% from the public sector.

Differentiated Technology, Processes and Applications

Our focus on innovation and on accessing and developing proprietary technologies, processes and applications is a key competitive advantage and differentiator of our brand and services. These innovative tools complement our professionals’ years of experience, technical expertise and industry knowledge and bolster the solutions we provide our clients. We have consistently used technology and process advancements across geographies, to accelerate growth and to address our clients’ environmental concerns.

Recent examples of our use of innovative solutions include:

 

   

Advanced Air Quality Monitoring—we identify sources of emissions in real time, with proprietary sensors and software, and/or at ultratrace levels, to produce data accepted by regulatory bodies.

 

   

Removal of PFAS from water—we remove PFAS from water using patented technology and processes with almost no waste generation, with a smaller carbon footprint and at a lower cost than conventional alternatives.

Significant Scale with Global Reach

Clients value our ability to provide coordinated, diversified services across many geographies, including domestic and international geographies that reach beyond our approximately 70 locations. Through our strategic



 

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acquisitions and targeted recruiting, we have achieved a scale that combines knowledge of local environments and regulations with global reach, which positions us to win and execute our projects globally. As a result, we expect to continue to capture market share.

Our global footprint supports our ability to gain market share by attracting new clients and by expanding offerings to our existing clients. As clients seek environmental solutions providers able to address the life cycle of their environmental concerns and needs across jurisdictions, we believe our footprint and diversified portfolio of services position us well to attract and retain clients, and expand our relationships with those clients over time.

Our scale has enabled us to leverage our investments in technology, innovation and process resources in a way that we believe will continue to support our industry leadership position.

Proven Ability to Identify, Execute and Integrate Acquisitions

We have acquired and integrated over 50 businesses over the last eight years, and we intend to continue selectively acquiring companies in our industry. Key characteristics of past and expected acquisition targets include quality management teams, complementary services, access to differentiated technologies and extension of our geographic reach.

We believe we add value to the businesses we acquire by introducing a culture focused on teamwork and innovation, and by providing superior operating discipline. The majority of owners and key personnel of our acquired businesses have remained with us, in large part due to our ability to effectively integrate them into our existing team. As a result of our focus on integration, our acquired businesses typically begin contributing to our organic growth after the first year following acquisition. Post-acquisition performance is driven by revenue synergies and operating leverage through corporate cost allocation over a larger base, as demonstrated by our consistent organic revenue growth and improving margin profile.

We maintain a robust acquisition pipeline primarily driven by word of mouth and existing relationships. As we have to-date, we intend to continue acquiring businesses at disciplined valuation levels. We believe our approach to acquisitions will enable us to continue creating substantial value.

Experienced Management Team Coupled With a Team-Centric Culture

Our leadership and culture define who we are. Our senior leadership team includes industry pioneers who have led a number of industry organizations and are considered among the foremost experts in the environmental services industry. The average tenure of our operational leadership in the environmental industry is 25 years. Our key executives and board members also have extensive experience in growing businesses both organically and through acquisitions.

Our management and employees share a passion for the environment and a compassion for each other. We received the U.S. National Safety Council Award for each of 2017 and 2018 in recognition of our excellence in safety across our business. In addition, our employees’ dedication to supporting each other has led to the establishment of The Montrose Community Foundation, a non-profit organization formed and operated by our employees for the benefit of our employees. Through its volunteer board, The Montrose Community Foundation uses employee donations to provide resources to our employees in times of need. Our employees’ dedication of personal time and resources solely for the benefit of their colleagues exemplifies our team-oriented culture.

We believe it is our strong management team and our culture that enables us to attract and retain our exceptional talent.



 

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Growth Strategies

Our goal is to become a global leader in the growing environmental services industry. We expect to continue growing organically by expanding existing client relationships, developing new client relationships and investing in sales and marketing infrastructure. We also expect to continue growing by strategically acquiring companies in our highly fragmented industry. Our proven ability to recruit and retain industry leaders and innovators will further contribute to our growth. We believe these growth strategies position us well to capture market share from competitors and benefit from industry growth.

Continue Organic Growth

 

   

Expand existing local relationships into national and international relationships: Many of our clients have a broad national and international presence. Historically, these clients have often managed their environmental programs locally by using regional service providers. However, these clients often have a desire to standardize their programs across geographies, which requires their environmental services providers to have the scale, reach and capabilities to match their footprint. Meeting this need is challenging for many in our industry given their regional focus and limited service offerings. Our geographic reach, strong relationships and reputation for quality enable us to address our clients’ ever-growing and diverse needs in a way most of our regional competitors cannot. As a result, we have generated many intra-client referrals and won new business with existing clients in geographies historically served by competitors. We intend to continue to expand into new geographies where our existing clients operate.

 

   

Sell additional environmental services to existing clients: Many of our clients have historically hired us for a specific environmental service such as environmental audits or tests. As we have diversified our service offerings, and as clients have grown accustomed to the quality and consistency that our teams provide, clients have increasingly engaged us to perform additional environmental services. As a result, we have won new business historically served by competitors that are typically single service-line focused. We expect to continue cross-selling additional environmental services to existing clients with multidimensional needs, including where we can replace services provided in-house.

 

   

Deploy innovative technologies, processes and applications to address unmet client needs: Newly identified contaminants, public health concerns and changes to regulations have created, and are expected to continue to create, unmet environmental service needs for many of our current and prospective clients. Our investments in innovation – both stand-alone and through partnerships – as well as integrating ESG into our operations and corporate strategy, have better equipped us to address these client needs in a manner that differentiates us from our competitors. We have won and expect to continue winning business from both existing and new clients because of the innovative solutions we offer. Internally, we are also establishing carbon footprint reduction goals and committing to minimizing our own impact on the environment.

 

   

Provide sales training and build a targeted sales team to drive growth and acquire new clients: We have historically operated with very limited sales resources. Increased demand for our services has primarily been driven by word of mouth. More recently, we have started investing in our dedicated sales capabilities and intend to continue these efforts. We are providing sales training to our technical practitioners, investing in customer relationship management systems and building a targeted sales force to help identify new clients and capture market share from competitors. Sales training and a targeted sales force will also enable us to accelerate growth initiatives with existing clients, including through geographic expansion and cross-selling of additional services.

 

   

Build Montrose brand awareness and marketing capabilities: We believe we are uniquely positioned to capitalize on the growing demand for environmental services. Even though we have



 

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not historically invested in marketing our brand, our business has expanded both geographically and in our service offerings in response to client needs. For example, consumer demand for clean water continues to generate demand for our water treatment technology and service both in the United States and internationally, including in Europe where we anticipate expanding into over the upcoming years. Client demand for renewable energy sources has also resulted in us creating and building out our Waste-to-Energy (biogas) service line. We intend to build brand awareness, expand field marketing efforts and create relevant content to showcase our ability to address environmental needs for clients and communities. We believe our brand development efforts will be very additive to our sales and organic growth initiatives.

 

   

Capture environmental service opportunities arising from federal, state or provincial stimulus measures: As a result of the COVID-19 pandemic, governments have enacted or are in the process of enacting economic stimulus packages to bolster economic recovery from shelter in place and other similar orders. These stimulus packages may include incentives and guidelines to target improved water treatment and water infrastructure, soil remediation and land development, air quality improvement, and infrastructure development initiatives (which often require environmental assessments). If enacted, these initiatives are expected to directly or indirectly increase demand for our environmental services and would be additive to our organic growth opportunities.

 

   

Utilize our expertise in environmental toxicology and emergency response to support COVID-19-related preparation and response plans: Through the acquisition of CTEH we have expanded our toxicology and environmental response capabilities. Though these capabilities are typically used during environmental emergencies that often arise from aging infrastructure or from the impacts of climate change, they are also utilized in response to chemical and biological incidents such as the COVID-19 pandemic. As a result, we have been engaged by more than 70 clients to help them prepare for, respond to and/or address issues resulting from exposure to COVID-19. Though our business strategy is not focused on pandemic response, we believe CTEH’s COVID-19 related response opportunities will accelerate our growth for the short term and provide cross-selling opportunities with new and existing clients.

Pursue Strategic Acquisitions

The environmental services industry is highly fragmented and has no single leading brand. Through strategic acquisitions, we can continue to accelerate our growth, brand development and market leadership. Over the last eight years, we have acquired and integrated over 50 businesses that have provided us with talent, complementary services, access to differentiated technologies and geographic reach. Many of our acquisitions were initiated with personal introductions given our favorable reputation in the market. We believe our ability to identify, execute and integrate acquisitions and retain talent has been and remains a key driver of our operational and financial success.

Our pipeline of potential future acquisitions is robust, and we plan to continue pursuing acquisitions to enhance our strategic and competitive positions in existing and new markets.

Recruit and Retain Industry Leaders

Given the highly technical nature of many of our services, our ability to recruit and retain talent enhances our ability to capture market share. We believe our mission and focus on the environment, our emphasis on ownership opportunities for our employees and our team of renowned industry leaders creates a competitive advantage when competing for talent.



 

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Recent Developments

Preliminary Estimated Unaudited Financial Results for the Three Months Ended June 30, 2020

The information set forth below represents our preliminary estimated unaudited financial results for certain items for the three months ended and as of June 30, 2020. We have provided ranges, rather than specific amounts, primarily because our financial and other closing procedures for the three months ended June 30, 2020 are not yet complete.

For the three months ended June 30, 2020, we expect revenues to be between $70.0 million and $75.0 million, an increase of between 14.8% and 23.0% compared to revenues of $61.0 million for the three months ended March 31, 2020. Results for the period were driven by strong performance within our Measurement and Analysis segment and our Remediation and Reuse segment, and also benefitted from the acquisition of CTEH in April 2020. The improvements for the second quarter were partially offset by temporary delays in the start of certain projects across all three reporting segments due to the COVID-19 pandemic.

For the three months ended June 30, 2020, we expect cost of revenues to be higher when compared to the quarter ended March 31, 2020 as a result of increased revenue; however, we expect cost of revenues as a percentage of revenues to be lower in the second quarter as a result of lower variable costs and cost containment measures adopted in April 2020 in response to the COVID-19 pandemic. For the three months ended June 30, 2020, we expect selling, general and administrative expense to be lower when compared to the quarter ended March 31, 2020, primarily as a result of lower bad debt expense, partially offset by higher selling, general and administrative expenses from the acquisition of CTEH. For the three months ended June 30, 2020, we expect depreciation and amortization to increase as compared to the quarter ended March 31, 2020 as a result of amortization of intangibles from the CTEH acquisition. We do not expect to report any related-party expense for the second quarter of 2020.

We expect Adjusted EBITDA to be between $12.0 million and $14.0 million (or 17.9% of revenues based on the midpoint of the ranges), compared to Adjusted EBITDA of $5.6 million (or 9.1% of revenues) for the three months ended March 31, 2020.

At June 30, 2020, we expect our cash and restricted cash balance to be between $43.0 million and $45.0 million and total debt to be between $207.0 million and $209.0 million, including approximately $200.0 million of outstanding principal amount of borrowings under our credit facility, which consisted of $175.0 million under the term loan and $25.0 million under the revolver. In July 2020, we repaid the $25.0 million outstanding under our revolving credit facility.

We have provided an estimated range regarding Adjusted EBITDA, which is presented on a non-GAAP basis. Our estimated range of Adjusted EBITDA adjusts for the impact of interest, depreciation and amortization, acquisition-related expenses and IPO preparation costs. However, we cannot reconcile our estimated range of Adjusted EBITDA to net income (loss), the most directly comparable GAAP measure, without unreasonable efforts because of the unpredictable or unknown nature of certain significant items excluded from Adjusted EBITDA and the resulting difficulty in quantifying the amounts thereof that are necessary to estimate net income (loss). Specifically, we are unable to estimate the impact of certain items, including stock-based compensation expense, the change in fair value of derivatives, including the embedded derivative related to the contingent put option attached to the Series A-1 preferred stock, and the accounting for the issuance of the Series A-2 preferred stock. We are also unable to estimate our income tax (expense) benefit for the period because we have not completed our evaluation of the impact of discrete events during the period on income tax (expense) benefit for the period, including the acquisition of CTEH. We expect the variability of these items could have a significant impact on our reported GAAP financial results. See the section entitled “Non-GAAP Financial Information” for a discussion of Adjusted EBITDA, why we believe this measure is important and certain limitations regarding this measure.



 

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The estimated preliminary financial information set forth above has been prepared by, and is the responsibility of, our management. Deloitte & Touche LLP has not audited, reviewed or performed any procedures with respect to such preliminary financial information. Accordingly, Deloitte & Touche LLP does not express an opinion or any other form of assurance with respect thereto. These estimates are not a comprehensive statement of our financial results as of and for the three months ended June 30, 2020, and should not be viewed as a substitute for full financial statements prepared in accordance with GAAP. In addition, these preliminary estimates as of and for the three months ended June 30, 2020 are not necessarily indicative of the results to be achieved in any future period.

The estimated preliminary financial information described above constitute forward-looking statements. Our estimates of results are based solely on information available to us as of the date of this prospectus and are inherently uncertain. We believe that such information and estimates are based on reasonable assumptions and reasonable judgment. Factors that could cause the actual results to differ include the discovery of new information that affects accounting estimates, management judgment or impacts valuation methodologies underlying these estimated results; the completion of our financial and other closing procedures and the preparation of our unaudited consolidated financial statements; the ongoing COVID-19 pandemic; and a variety of business, economic and competitive risks and uncertainties, many of which are not within our control, and we undertake no obligation to update this information, except as required by law. Accordingly, you should not place undue reliance on these preliminary estimated unaudited financial results. Our actual unaudited consolidated financial statements and related notes as of and for the three months ended June 30, 2020 are not expected to be filed with the SEC until after this offering is completed. See the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Forward-Looking Statements” and “Non-GAAP Financial Information.”

COVID-19 Update

Through the end of the second quarter, we continued to experience some postponement of on-site environmental compliance testing, some delays in project start dates, and some postponement of scientific presentations and sales visits. The institution of cost mitigation measures at the beginning of the quarter has not materially disrupted operations, nor our ability to service clients. CTEH also continues to benefit from COVID-19 given client demand for its toxicology and response services. Although certain project postponement and delays have continued into the third quarter, we have begun to see the rescheduling of testing that was delayed in the second quarter. In addition, although the possibility exists, to date we have not seen any increased business disruption as a result of the resurgence in COVID-19 cases in many states where we have a significant business presence, including Florida, Texas and California.

Risks Affecting Our Business

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

   

our limited operating history;

 

   

our history of losses and ability to achieve profitability;

 

   

general global economic, business and other conditions and the cyclical nature of some of our end markets;

 

   

the impact of the COVID-19 pandemic;



 

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the parts of our business that depend on difficult to predict natural or manmade events;

 

   

the highly competitive nature of our business;

 

   

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

 

   

our ability to promote and develop our brands;

 

   

our ability to expand our client base;

 

   

our ability to maintain necessary accreditations and other authorizations;

 

   

significant environmental governmental regulation; and

 

   

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

You should carefully consider all of the information set forth in this prospectus and, in particular, the information in the section entitled “Risk Factors” beginning on page 16 of this prospectus prior to making an investment in our common stock. These risks could, among other things, prevent us from successfully executing our strategies and could have a material adverse effect on our business, financial condition and results of operations.

Principal Executive Offices

We were incorporated in Delaware in November 2013. Our principal executive offices are located at 1 Park Plaza, Suite 1000, Irvine, CA 92614 and our telephone number is (949) 988-3500. Our website address is www.montrose-environmental.com. Information contained on our website or linked therein or otherwise connected thereto does not constitute part of nor is it incorporated by reference into this prospectus or the registration statement of which this prospectus forms a part, and the inclusion of our website address in this prospectus is an inactive textual reference only.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenue during our most recently completed fiscal year, we qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies that are not emerging growth companies. These provisions include:

 

   

reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements;

 

   

reduced obligations with respect to financial data, including presenting only two years of audited consolidated financial statements and only two years of selected financial data;

 

   

exemption from non-binding stockholder advisory votes on executive compensation or golden parachute arrangements; and



 

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exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of this offering; (ii) the last day of the fiscal year during which our annual gross revenues are $1.07 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700.0 million as of the end of the second quarter of that fiscal year.

We have elected to take advantage of certain reduced disclosure obligations in this prospectus, and we may elect to take advantage of other reduced disclosure obligations in future filings with the Securities and Exchange Commission, or SEC, while we remain an emerging growth company. If we do, the information that we provide stockholders may be different than what you might receive from other public reporting companies in which you may have equity interests.

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have chosen to “opt in” to this extended transition period for complying with new or revised accounting standards and, as a result, we will not be subject to the same new or revised accounting standards as other public companies that comply with such new or revised standards on a non-delayed basis.



 

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THE OFFERING

 

Common stock offered by us

10,000,000 shares (or 11,500,000 shares if the underwriters exercise in full their option to purchase additional shares).

 

Common stock to be outstanding immediately after this offering

20,332,001 shares (or 21,832,001 shares if the underwriters exercise in full their option to purchase additional shares).

 

Use of proceeds

We estimate our proceeds from this offering will be approximately

$148.1 million (or approximately $170.7 million if the underwriters exercise in full their option to purchase additional shares), based on the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use approximately $139.3 million of the net proceeds from this offering in connection with the redemption of all outstanding shares of our Series A-1 preferred stock and the remainder for general corporate purposes, including future investments in innovation and acquisitions in our highly fragmented industry.

 

  See the sections entitled “Use of Proceeds” and “Underwriting.”

 

Reserved Share Program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale to certain individuals to be designated by us. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. Fidelity Capital Markets, a division of National Financial Services LLC, will administer this program. See the section entitled “Underwriting—Reserved Shares.”

 

NYSE Trading Symbol

“MEG”

The number of shares of our common stock to be outstanding immediately after this offering as set forth above is based on the number of shares outstanding as of March 31, 2020 and excludes:

 

   

2,632,058 shares of common stock issuable as of March 31, 2020, upon the exercise of options outstanding under the Montrose Environmental Group, Inc. Amended and Restated 2013 Stock Option Plan as amended, or our 2013 Stock Plan, and the Montrose Environmental Group, Inc. Amended and Restated 2017 Stock Incentive Plan, or the 2017 Stock Plan, at a weighted average exercise price of approximately $12.11 per share, in each case exclusive of the IPO Awards described immediately below;

 

   

741,187 shares of common stock subject to awards issued to eligible participants under the 2017 Stock Plan authorized as of March 31, 2020, subject to the consummation of this offering, collectively, the IPO Awards, including 480,768 shares subject to such awards granted to our



 

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named executive officers (based on the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus);

 

   

1,155,938 shares of common stock reserved for future issuance under the 2017 Stock Plan as of July 13, 2020 (after giving effect to the grant of the IPO Awards);

 

   

1,875,000 shares of common stock issuable upon the exercise of the stock purchase warrant issued in connection with the issuance of our Series A-2 preferred stock with an exercise price of $0.01 per share, or the Series A-2 Warrant, based on the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus;

 

   

650,590 shares of common stock issuable as of March 31, 2020, upon the exercise of outstanding stock purchase warrants (other than the Series A-2 Warrant) at a weighted average exercise price of approximately $3.08 per share; and

 

   

up to 1,562,500 shares of common stock that may be issued as contingent earn-out consideration over the next two years in connection with our acquisition of CTEH, based on the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus.

Further, unless otherwise indicated, this prospectus:

 

   

assumes the redemption of all outstanding shares of our Series A-1 preferred stock in connection with this offering, including the payment by us of 1,206,318 shares of common stock, the maximum portion of the per-share redemption price payable in common stock based on the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, as permitted under the related certificate of designation;

 

   

gives effect to our amended and restated certificate of incorporation and our amended and restated bylaws, which were effective on July 14, 2020 and July 10, 2020, respectively;

 

   

assumes an initial public offering price of $16.00 per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus; and

 

   

assumes no exercise of the underwriters’ option to purchase up to an additional 1,500,000 shares of our common stock.

See the sections entitled “Capitalization,” ”Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Capital Stock.”



 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables summarize certain summary historical consolidated financial and other data as of and for the periods indicated. Our summary consolidated balance sheet data presented below as of December 31, 2019 and December 31, 2018, and our summary consolidated statements of operations and cash flow data presented below for the period then ended have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations and cash flow data presented below for the three months ended March 31, 2020 and 2019, and the consolidated balance sheet data as of March 31, 2020, are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and, in the opinion of management, include all adjustments of a normal, recurring nature that are necessary for the fair presentation of the financial statements. Except where otherwise noted, our summary consolidated balance sheet data presented below as of December 31, 2017 and December 31, 2016, and our summary consolidated statements of operations and cash flow data presented below for the periods then ended, have been derived from our financial statements not included in this prospectus. Our historical results presented below are not necessarily indicative of the results to be expected for any future period.



 

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The information presented below should be read in conjunction with “Use of Proceeds,” “Capitalization,” “Unaudited Pro Forma Financial Information,” “Selected Historical Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Non-GAAP Financial Information,” “Related Party Transactions,” “Description of Certain Indebtedness” and our audited consolidated financial statements and related notes included elsewhere in this prospectus.

 

   

For the Years Ended December 31,

   

For the Three
Months Ended
March 31,

 
    2016     2017     2018     2019     2019     2020  
    (in thousands except per share and percentage data)  

Consolidated Statement of Operations Data:

           

Revenues

  $ 114,780     $ 137,647     $ 188,805     $ 233,854     $ 50,954     $ 61,031  

Cost of revenues (exclusive of depreciation and amortization)

    74,605       86,324       134,734       163,983       37,095       44,398  

Selling, general and administrative expense

    34,985       42,539       38,615       50,663       10,447       20,931  

Related-party expense

    1,162       1,619       2,180       448       159       119  

Depreciation and amortization

    15,023       18,828       23,915       27,705       6,449       7,560  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (10,995     (11,663     (10,639     (8,945     (3,196     (11,977
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (8,946   $ (10,549   $ (16,491   $ (23,557   $ (5,242   $ (41,248
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding—basic and diluted

    6,373       7,116       7,533       8,789       8,672       8,904  

Net loss per shares attributable to common stockholders—basic and diluted

  $ (1.40   $ (3.93   $ (2.79   $ (4.91   $ (1.13   $ (5.24

Other financial data (unaudited)

           

Operating margin(1)

    (9.6 )%      (8.5 )%      (5.6 )%      (3.8 )%      (6.3 )%      (19.6 )% 

Adjusted EBITDA(2)

  $ 7,329     $ 13,833     $ 19,313     $ 31,242     $ 4,674     $ 5,553  

Adjusted EBITDA margin(2)(3)

    6.4     10.0     10.2     13.4     9.2     9.1

Consolidated Statement of Cash Flows Data:

           

Net cash provided by (used in) operating activities

  $ 4,287     $ 7,553     $ (2,845   $ 17,042     $ 100     $ (8,978

Net cash used in investing activities

    (7,182     (37,740     (50,283     (86,983     (1,573     (1,660

Net cash provided by financing activities

    3,621       33,745       50,850       74,452       676       5,238  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash, cash equivalents and restricted cash

  $ 726     $ 3,558     $ (2,278   $ 4,511     $ (797   $ (5,400
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Statement of Financial Position Data:

           

Current assets

  $ 28,226     $ 38,910     $ 53,999     $ 73,239     $ 55,493     $ 64,561  

Non-current assets

    105,186       139,652       180,372       258,599       177,728       255,386  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 133,412     $ 178,562     $ 234,371     $ 331,838     $ 233,221     $ 319,947  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

  $ 27,409     $ 25,866     $ 42,365     $ 73,252     $ 43,281     $ 62,414  

Non-current liabilities

    58,109       102,078       75,900       156,055       77,842       195,063  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    85,518       127,944       118,265       229,307       121,123       257,477  

Redeemable Series A-1 preferred stock

        109,206       128,822       113,740       134,237  

Convertible preferred stock

    27,582       45,017          

Total stockholders’ equity (deficit)

    20,312       5,601       6,900       (26,291     (1,642     (71,767
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, Redeemable Series A-1 preferred stock, convertible preferred stock and stockholders' equity (deficit)

  $ 133,412     $ 178,562     $ 234,371     $ 331,838     $ 233,221     $ 319,947  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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

 

(2)

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

 

(3)

Represents Adjusted EBITDA as a percentage of revenues.



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the financial statements and the related notes appearing elsewhere in this prospectus, before making an investment decision. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected and the trading price of our common stock could decline, causing you to lose all or part of your investment in our common stock.

Additionally, the COVID-19 pandemic may amplify many of the risks discussed below to which we are subject and, given the unpredictable, unprecedented and fluid nature of the pandemic, it may materially and adversely affect us in ways that are not anticipated by or known to us or that we do not consider to present significant risk. Therefore, we are unable to estimate the extent to which the pandemic and its related impacts will adversely affect our business, financial condition and results of operations as well as our stock price following completion of this offering.

Risks Related to Our Business and Industry

Our limited operating history may make it difficult to evaluate our business, which may be unsuccessful.

We have a limited operating history since our inception in 2012. As such, there is limited information on which to base an evaluation of our business and prospects. Our operations are subject to all of the risks inherent in the establishment of a recently formed business. Our success may be limited by expenses, difficulties, complications, problems and delays, including the need for additional financing, uncertainty surrounding our research and development efforts, challenges with the successful commercialization of our services, market and client acceptance of our services, unexpected issues with federal or state regulatory authorities, competition from larger organizations, uncertain intellectual property protection, fluctuations in expenses and dependence on corporate partners and collaborators. Any failure to successfully address these and other risks and uncertainties commonly associated with early stage companies could seriously harm our business and prospects, and we may not succeed given the technological, marketing, strategic and competitive challenges we will face in the sectors in which we operate or may choose to operate in the future. Any evaluation of our business and our prospects must be considered in light of these factors and the other risks and uncertainties frequently encountered by companies in our stage of development. No assurance can be given that we will successfully navigate these issues or implement any of our plans for future growth in a timely or effective manner, including our acquisition strategy, which would negatively impact our business, financial condition and results of operations.

We have a history of losses and may not be able to achieve or sustain profitability in the future.

While we have been able to generate revenues, we may not be able to increase the amount of revenues we generate, and we might incur net losses for some time as we continue to grow. We experienced net losses in each year since inception, including net losses of $23.6 million and $16.5 million for the fiscal years ended December 31, 2019 and December 31, 2018, respectively, and we may incur net losses in the future. As of December 31, 2019, we had an accumulated deficit of $64.4 million. It is difficult for us to predict our future results of operations, and we expect our operating expenses to increase significantly over the next several years as we continue to hire additional personnel, expand our operations and infrastructure, integrate completed acquisitions, make and integrate future acquisitions and invest in research and development. In addition to the expected costs to grow our business, we also expect to incur significant additional legal, accounting and other expenses as a newly public company. If we fail to increase our revenue to offset the increases in our operating expenses, we may not achieve or sustain profitability in the future.

 

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General global economic, business and other conditions and our vulnerability to the cyclical nature of the sectors and industries in which our clients operate, may adversely affect our business.

We compete in various end markets and geographic regions domestically and around the world. We provide environmental services to clients operating in a number of sectors and industries, including the financial, oil & gas, utilities, construction, automotive, real-estate, midstream energy, manufacturing, commodities, petrochemical, tobacco, food and beverage, telecommunications and engineering industries, as well as local, state, provincial and federal government entities. These sectors and industries and the resulting demand for our services have been, and we expect will continue to be, cyclical and subject to significant fluctuations due to a variety of factors beyond our control, including economic conditions, regulatory requirements, appropriation levels and changes in client capital spending, particularly during periods of economic or political uncertainty. Important factors for our business and the businesses of our clients include macroeconomic conditions, the overall strength of, and our clients’ confidence in, the economy, industrial and governmental capital spending, governmental fiscal and trading policies, environmental and regulatory policies the strength of the residential and commercial real estate markets, unemployment rates, consumer spending, availability of financing, interest rates, tax rates and changes in tax laws, political conditions, energy and commodity prices and programs such as renewable fuel standard programs and low-carbon fuel standard programs.

While we attempt to minimize our exposure to economic or market fluctuations by serving a balanced mix of end markets and geographic regions, any of the above factors, individually or in the aggregate, or a significant or sustained downturn in a specific end market or geographic region, can impact our business and that of our clients. These factors may make it difficult for our clients and us to accurately forecast and plan future business activities; neither we nor our clients can predict the timing, strength or duration of any economic downturn or subsequent recovery. Furthermore, if a significant portion of our clients or projects are concentrated in a specific geographic area or industry, our business may be disproportionately affected by negative trends or economic downturns in those specific geographic areas or industries. These factors may also cause our clients to reduce their capital expenditures, alter the mix of services purchased, seek more favorable price and other contract terms and otherwise slow their spending on our services. In addition, due to these conditions, many of our competitors may be more inclined to take greater or unusual risks or accept terms and conditions in contracts that we might not deem acceptable. These conditions and factors may reduce the demand for our services and solutions, and more generally may adversely affect our business, financial condition and results of operations.

The COVID-19 pandemic has adversely affected our business and may continue to do so.

On March 11, 2020, the World Health Organization designated the global outbreak of a new strain of coronavirus, COVID-19, a pandemic. The global and domestic response to the COVID-19 pandemic by both governments and businesses has been unprecedented and continues to rapidly evolve. Responsive measures have included mandates from federal, state, provincial and/or local authorities that restrict movement and travel, such as quarantines and shelter-in-place requirements, and restrict or require closure of some or all commercial and business activity. These measures, though currently temporary in nature and in some cases being lessened or lifted entirely in many geographies, may become more severe and may continue indefinitely depending on the evolution of the outbreak.

Our business has been adversely, and may be materially adversely affected, by the COVID-19 pandemic and the global response. We provide important services to the public’s health, safety, and welfare through a range of services, including air and water quality testing, water treatment, soil remediation, renewable energy generation, environmental response, and COVID-19 response support and therefore most of our business requiring on-site or in-office or laboratory work has been classified as “essential” in most jurisdictions in which we operate. As such, most of our business has remained open and operational thus far. However, there is no guarantee that this classification will not change in the future or that we will not voluntarily limit or cease operations in one or more markets if we believe doing so is necessary or otherwise in our best interests, including for the health and safety of our employees. We have experienced some postponements and cancellations of

 

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projects in our Measurement and Analysis segment as a result of the COVID-19 pandemic. These delays and cancellations are expected to adversely affect our results of operations, particularly in the second quarter of, and, if pandemic conditions persist, further into, 2020. The closure of client sites, limitations on our ability to travel to client sites and other disruptions to our operations and the availability of the resources we need to provide our services could also adversely impact our ability to provide our services. If any of the third parties with whom we work, including our customers and suppliers, are adversely affected by the pandemic, we could similarly be negatively impacted, even if the pandemic is not directly impacting our operations.

The COVID-19 pandemic has adversely affected many industries as well as the economies and financial markets of many countries, causing a significant deceleration of economic activity. This slowdown has reduced production, decreased demand for a broad variety of goods and services, diminished trade levels and led to widespread corporate downsizing, causing a sharp increase in unemployment. We have also seen significant disruption of and extreme volatility in the global capital markets, which could increase the cost of, or entirely restrict access to, capital. The impact of this outbreak on the United States and world economies is uncertain and, unless the pandemic is contained, these adverse impacts could worsen, impacting all segments of the global economy, and could result in a significant recession or worse, any of which could impact our business.

Considerable uncertainty still surrounds the COVID-19 virus as well as the extent and effectiveness of any potential treatments or vaccines in addition to responses taken on a local, national and global level. The pandemic may become more widespread and that could accelerate or magnify one or more of the risks described above or elsewhere in this prospectus. While we expect the pandemic and related events will have a negative effect on our business, the full extent and scope of the impact on our business and industry as well as on national, regional and global markets and economies is highly uncertain and cannot be predicted. Accordingly, our ability to conduct our business in the manner and on the timelines previously done or presently planned could be adversely affected. Any of the foregoing risks, or other direct or indirect effects of the COVID-19 pandemic that are not currently foreseeable, could materially and adversely affect our business, financial condition and results of operations.

Parts of our business may depend on certain natural or manmade events which are impossible to predict, and our revenue and customer concentration resulting from these businesses may fluctuate significantly based on the frequency and scale of these events.

Certain of our businesses depend on specific environmental circumstances, including both naturally occurring and manmade events. Our Assessment, Permitting and Response segment, in particular, which includes the operations of CTEH, our most recent acquisition, engages in response activities following an environmental incident or a natural disaster. There is no way for us to predict the occurrence of these events, nor the significance, duration or outcome of the events. As a result, this segment may experience revenues one year that are not indicative of future results due to the occurrence of an incident that was neither typical nor predictable. The volatile nature of our environmental emergency response business, and its dependency on factors beyond our control, makes it difficult to predict its potential profitability or success. Any extended period without these types of events or other downturn in activity for these business lines may negatively impact our business, financial condition and results of operations.

In addition, as a result of the nature of these services, our Assessment, Permitting and Response segment may at times experience higher customer concentration levels based on the severity, duration and outcome of environmental emergencies (e.g. those caused by natural disasters and industrial accidents) for which we provide response services. For example, for the fiscal year ended December 31, 2019, 54% of CTEH’s revenues were attributable to just two customers, each of whom engaged CTEH in connection with significant environmental accidents. We cannot predict from period to period whether we will experience risks associated with high customer concentration, including the inability of such customers to pay for our services, and such concentration could have a material adverse effect on our business, financial condition and results of operations.

 

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We engage in a highly competitive business and any failure to effectively compete could have a material adverse effect on us.

The assessment, permitting and response, measurement and analysis and remediation and reuse industries are highly fragmented and competitive. Our primary competitors in these industries include companies that specialize in one or more services similar to those offered by us on a local or regional basis. We also compete with global, national, regional and local firms specializing in testing, environmental engineering and consulting services, remediation services and other services we provide. Some of our primary competitors include, in our Assessment, Permitting and Response segment, the environmental divisions of Exponent, Trinity Consultants and other small businesses, in our Measurement and Analysis segment, the environmental divisions of SGS, Bureau Veritas and Eurofins, Pace Analytical and environmental divisions of large testing companies and other small businesses, and in our Remediation and Reuse segment, the environmental divisions or remediation segments of NV5, Tetratech, AECOM, other large engineering companies and other small businesses. It is also possible that our clients may establish in-house capabilities to perform certain services that we currently provide.

We operate in markets that are characterized by client demand that is often broad in scope but localized in delivery. We compete with companies that may be better positioned to capitalize on highly localized relationships and knowledge that are difficult for us to replicate. Our potential clients may prefer local providers, whether because of existing relationships or local legal restrictions or incentives that favor local businesses. Smaller regional companies may also have lower cost structures with fewer fixed costs. As a result, efforts to expand, whether organically or through acquisition, or support our service network may not improve our ability to penetrate new local markets or expand our footprint in existing markets. New entrants to our key markets could cause us to lose clients and otherwise harm our competitive position.

Competition in our industry is based on many factors, but we believe the principal points of competition in our markets are the quality, range, pricing, technology and availability of services. Maintaining and improving our competitive position will require successful management of these factors, including continued investment by us in research and development, sales, marketing, technology, customer service and support, personnel and our professional networks. Our future growth rate depends upon our ability to compete successfully, which is impacted by a number of factors, including our ability to identify emerging technological trends in our target end markets, develop and maintain a wide range of competitive and appropriately priced services and solutions, defend our market share against competitors, including new and non-traditional competitors, expand into new markets and attract, develop and retain individuals with the requisite technical expertise and understanding of clients’ needs to develop and sell new services.

We may not be successful in maintaining or growing our competitive position for a number of reasons. Some of our competitors may have access to greater financial or other resources than we do, which may afford them greater power, efficiency, financial flexibility, geographical reach or capital resources for growth. In addition, some of our competitors are vertically integrated and can leverage this structure to their advantage. We may fail to identify optimal service or geographic markets, focus our attention in suboptimal service or geographic markets or fail to execute an appropriate business model in certain service or geographic markets. Our competitors may develop new services or technologies that are superior to ours, develop more efficient or effective methods of providing services or adapt more quickly, efficiently or effectively than we do to new technologies. Our competitors may be positioned to provide better service or influence client requirements, or more quickly respond to changing client requirements, and thereby establish stronger relationships with clients. Our competitors may offer their services at lower prices because, among other things, they possess the ability to provide similar services more efficiently, as part of a bundle with other services or generally at a lower cost. These pricing pressures could cause us to lower the price for any one or more of our services to at or below our costs, requiring us to sacrifice margins or incur losses. Alternatively, we may choose to forgo entering certain markets or exit others, which would limit our growth and competitive reach.

Any failure by us to compete or to generally maintain and improve our competitive position could have a material adverse effect on our business, financial condition and results of operations.

 

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The success of our business depends, in part, on our ability to execute on our acquisition strategy.

A significant portion of our historical growth has occurred through acquisitions, and we anticipate continued growth through acquisitions in the future. Our growth strategy is primarily dependent on acquiring and integrating the operations of companies in the environmental services industry. In each of fiscal year 2018 and 2019, we acquired seven companies, including Emerging Compounds Treatment Technologies, Inc., or ECT2, and thus far in 2020, we have acquired one company, CTEH, our largest acquisition to date. We are presently evaluating, and we expect to continue to evaluate on an ongoing basis, a variety of possible acquisition transactions. We cannot predict the timing of any contemplated transactions, and there can be no assurances that we will identify suitable acquisition opportunities or, if we do identify such opportunities, that any transaction can be consummated on terms acceptable to us. We also compete for acquisitions with other potential acquirers, some of which may have greater financial or operational resources than we do. A significant change in our business or the economy, an unexpected decrease in our cash flows or any restrictions imposed by our debt may limit our ability to obtain the necessary capital for acquisitions or otherwise impede our ability to complete an acquisition. Certain proposed acquisitions or dispositions may also trigger a review by the U.S. Department of Justice, or DOJ, and the U.S. Federal Trade Commission, or FTC, under their respective regulatory authority, focusing on the effects on competition, including the size or structure of the relevant markets and the pro-competitive benefits of the transaction. Any delay, prohibition or modification required by regulatory authorities could adversely affect the terms of a proposed acquisition or could require us to modify or abandon an otherwise attractive acquisition opportunity. The failure to identify suitable transaction partners and to consummate transactions on acceptable terms could have a material adverse effect on our business, financial condition and results of operations.

Our acquisition strategy exposes us to significant risks and additional costs.

Acquisitions involve risks that the businesses acquired will not perform as expected and that judgments concerning the value, strengths and weaknesses of acquired businesses will prove wrong. We may not accurately assess the value, strengths, weaknesses or potential profitability of an acquisition target, and our acquisition strategy for a particular business may prove to be unsuccessful or expose us to additional risks. For example, because we will soon be implementing a new enterprise resource planning, or ERP, system, we have determined to delay integration of our recent CTEH acquisition, which could lead to duplicative and increased costs and inefficiencies or other problems, including issues with our controls and other accounting systems. We may become liable for certain unforeseen pre-acquisition liabilities of an acquired business, including, among others, tax liabilities, environmental liabilities, contingent liabilities and liabilities for employment practices, and these liabilities could be significant. In addition, an acquisition could result in the impairment of client relationships and other acquired assets such as goodwill. We may also incur costs and experience inefficiencies to the extent an acquisition expands the industries, products, markets or geographies in which we operate due to our limited exposure to and experience in a given industry, market or region. Acquisitions may require that we incur additional debt to finance the transaction, which could be substantial and limit our operating flexibility or, alternatively, acquisitions may require that we issue stock as consideration, which could dilute share ownership. Acquisitions can also involve post-transaction disputes regarding a number of matters, including a purchase price or working capital adjustment, earn-out or other contingent payments, environmental liabilities or other obligations. Our recent growth and our acquisition strategy have placed, and will continue to place, significant demands on our management’s time, which may divert their attention from our day-to-day business operations, and may lead to significant due diligence and other expenses regardless of whether we pursue or consummate any acquisition. We may also not be able to manage our growth through acquisitions due to the number and the diversity of the businesses we have acquired or for other reasons. If any of these risks were to occur, our business, financial condition and results of operations may be adversely affected.

 

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Any inability to successfully integrate our recent or future acquisitions, or realize their anticipated benefits, could have a material adverse effect on us.

Acquisitions have required, and in the future will require, that we integrate into our existing operations separate companies that historically operated independently or as part of another, larger organization, and had different systems, processes and cultures. Acquisitions may require integration of finance and administrative organizations and involve exposure to different legal and regulatory regimes in jurisdictions in which we have not previously operated.

We may not be able to successfully integrate any business we have acquired or may acquire, or may not be able to do so in a timely, efficient or cost-effective manner. Our inability to effectively complete the integration of new businesses on schedule and in an orderly manner could increase costs and lower profits. Risks involved with the successful integration of an acquired business include, but are not limited to:

 

   

diverting the attention of our management and that of the acquired business;

 

   

merging or linking different accounting and financial reporting systems and systems of internal controls and, in some instances, implementing new controls and procedures;

 

   

merging computer, technology and other information networks and systems, including enterprise resource planning systems;

 

   

assimilating personnel, human resources and other administrative departments and potentially contrasting corporate cultures;

 

   

integrating our governmental contracting work with similar services provided by acquired companies;

 

   

incurring or guaranteeing additional indebtedness;

 

   

disrupting relationships with or losses of key clients and suppliers of our business or the acquired business;

 

   

interfering with, or loss of momentum in, our ongoing business or that of the acquired company;

 

   

failure to retain our key personnel or that of the acquired company; and

 

   

delays or cost-overruns in the integration process.

Our inability to manage our growth through acquisitions, including the integration process, and to realize the anticipated benefits of an acquisition could have a material adverse effect on our business, financial condition and results of operations.

We may not be successful in promoting and further developing our brands, which could adversely affect our business.

We have a limited operating history as a company and, as a result, the Montrose Environmental brand is not fully established, although many of the brands we use, including those acquired through our acquisition activity, have a longer and more well-established history. Our industry is highly fragmented and we believe that our future success depends in part on our ability to maintain and further strengthen the Montrose Environmental brand across the diverse range of environmental services that we provide. Strengthening our brand will require significant time, expense and the attention of management, and any success will depend largely on our marketing

 

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efforts and ability to provide our clients with high-quality services. If a client is not satisfied with our services, including those of our technical employees, it may be more damaging to our brand and business as compared to that of larger, more established companies. Additionally, to the extent our clients draw regulatory or media scrutiny regarding their environmental impact or other areas where we may provide services to them, we may as a consequence also draw scrutiny. If we fail to successfully maintain and continue to grow the Montrose Environmental brand and our other brands through promotion and other efforts, incur excessive unanticipated expenses in attempting to promote and maintain our brands, or lose clients as a result, our business, financial condition and results of operations may be adversely affected.

We may work on high profile projects, and any negative publicity or perceived failures of those projects, or litigation resulting from such projects, could damage our reputation and harm our operating results.

We may be engaged on high profile projects that garner public attention and scrutiny, particularly with respect to the emergency response division of the CTEH business. This division of the CTEH business conducts environmental sampling, among other services, in emergency situations and natural disasters, many of which are widely covered by the press and in the public eye, such as implementing a disinfection plan and overseeing the implementation of the plan for a contaminated international cruise ship in the early stages of the COVID-19 outbreak, the Intercontinental Terminals Co, or ITC, fires in 2019 and Hurricane Harvey in 2017. Any mishandling of these situations, even if not our own, could lead to negative publicity. The negative publicity may be attributed to our business and services at no fault of our own other than our association with the project. Our involvement with these high profile projects exposes us to the risk of reputational damage which may have a material adverse effect on our business, financial condition and results of operations. In addition, such high profile projects often lead to an enhanced risk of litigation, and we may be brought into such litigation regardless of our role in the project. Any such litigation proceedings are inherently costly and uncertain, and could have a material adverse effect on our business, financial condition and results of operations.

We may not be successful in expanding our client base or the services we provide to existing clients, which could adversely affect our business.

Our success and the planned growth and expansion of our business depends on our ability to expand into new markets and further penetrate existing markets. Our ability to expand is to a large extent contingent on our services and solutions achieving greater and broader acceptance, resulting in a larger client base, a broader array of prospective clients and expanded services provided to existing clients. However, demand for our services is uncertain, and there can be no assurance that clients will purchase our offerings, or that we will be able to continually expand our client base within existing geographies or into new geographies, whether we expand organically or through acquisition. Expanding our client base is also subject to external factors, many of which are beyond our control, including the overall demand for the services we offer, the actions of our competitors and the finite number of prospective clients in a given market. We cannot provide any assurances regarding our immediate or long-term growth rates in any geographic market or segment, or if we will grow at all. If we are unable to effectively market or expand our offerings to new clients or cross-market our services to existing clients, we may be unable to grow our business or implement our business strategy. Any of the above could materially impair our ability to increase sales and revenue and have a material adverse effect on our business, financial condition and results of operations.

We may not be able to maintain or expand our accreditation and other authorizations, which may adversely affect our ability to provide our services.

A significant part of our business is subject to obtaining and maintaining accreditations, approvals, licensing permits, delegated authority, official recognition and general authorizations at the federal, state, provincial and local level, including in some instances accreditations and licenses for individual professionals. A major risk inherent in our operations is the need to obtain and renew these authorizations. Our operations are also subject to inspection and regulation by various governmental agencies, including the Occupational Safety and

 

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Health Administration and equivalent state, provincial and local agencies, as well as their counterparts in the various foreign jurisdictions in which we operate. These authorizations are issued by public authorities or professional organizations following application processes, reviews and investigations which are often long and complex, at times resulting in delays in our ability to bid on and execute certain projects. These authorization requirements can also be costly or difficult to meet, and often vary from jurisdiction to jurisdiction, meaning our capacity to obtain such authorizations could affect our ability to provide services in certain regions, states, provinces or localities. Certain authorizations are granted for limited periods of time and are subject to periodic renewal, requiring us to go through similar processes on multiple occasions, which necessitates that we utilize additional financial and operational resources. Authorizations or the requirements to obtain an authorization may also change without notice and we may not be able to comply with the revised or new requirements to maintain one or more of these authorizations.

Although we closely monitor the quality of services performed under our various authorizations, as well as the need to obtain any new authorizations and the renewal and maintenance of our existing portfolio of authorizations, any failure to meet the applicable requirements, whether actual or perceived, could cause us to lose, either temporarily or permanently, one or more of our authorizations. A public authority or professional organization that has granted us one or more authorizations may also decide unilaterally to withdraw such authorizations. Further, we may not be able to obtain or renew the required authorizations for businesses we acquire in the future, or for an organic expansion we wish to pursue, and the failure to obtain these authorizations could limit the opportunity to expand our business.

If we fail to secure or maintain any such authorizations, or if the relevant bodies place burdensome restrictions or limitations on our ability to obtain or maintain the necessary authorizations, we may not be able to operate in one or more jurisdictions and our business, financial condition and results of operations may be materially adversely affected as a result.

Our clients are subject to significant governmental regulation with respect to the environment and any changes to these laws and regulations could have a material adverse effect on our business.

As a company involved in the provision of environmental services, our clients operate in a heavily regulated environment. Our clients are subject to federal, state, provincial and local laws and regulations, including laws and regulations relating to, among other things, air emissions, the release or discharge of materials into the environment and the management, use, generation, treatment, processing, handling, storage, transport or disposal of hazardous wastes and materials. In addition, because of the site-specific nature of our services, the laws and regulations to which we are subject may vary from one state, province or region to another, sometimes substantially. We and our clients are also required to obtain various government approvals, certificates, permits and licenses in order to conduct our respective businesses, which may require making significant capital, operating and maintenance expenditures to comply with applicable laws and regulations.

Any future changes to laws and regulations, including changes to permit requirements, applicable to our clients could have a material impact on their businesses and their service needs. If the needs of our clients change, we may be required to incur significant capital and operating expenditures to shift the environmental services we provide in order to address such needs. If we are unable to address the changing needs of our clients in a timely manner, or at all, demand for our services may decrease, which would have a material adverse effect on our financial condition, results of operations and liquidity.

Our future growth and performance are dependent in part on the impact and timing of potential new laws and regulations, as well as potential changes to existing laws and regulations, including the potential impact of environmental policies of the current presidential administration in the United States or other executives in the foreign countries in which we operate. If stricter laws or regulations are delayed or are not enacted, are enacted with prolonged phase-in periods, or not enforced, if existing laws and regulations are repealed or amended to be less strict or if a generally less restrictive regulatory framework develops, demand for our services may be

 

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reduced. Conversely, the strengthening or enforcement of regulations may also create operating conditions that limit our business areas or more generally slow our development. In extreme cases, such changes in the regulatory environment could lead us to exit certain markets.

Rapid and/or important changes in current regulations may in the future have a significant adverse effect on our business, financial position and results of operations. Federal and state, provincial legislatures may review and consider legislation that could impact our business and our industry. For example, in response to Presidential Executive Order 13777, calling on each federal agency to establish a regulatory reform task force to evaluate existing rules and recommend repeal, replacement or modification to reduce regulatory burdens, the U.S. Environmental Protection Agency, or the EPA, established a task force and initiated reviews in several program areas. Any repeal of regulations or lack of enforcement of existing regulations stemming from these task forces could impact our future growth. Such legislation or enforcement policies may intensify competition in the markets that we serve, impact demand for some or all of our services or require us to develop new or modified services in order to meet the needs of and compete effectively in the marketplace. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

If we fail to attract and retain qualified management and skilled technical personnel, our business may be adversely affected.

Our long-term success depends, in significant part, upon the continued service and performance of our senior management and other key personnel. We rely on knowledgeable, experienced and skilled technical personnel, particularly engineers, analysts, technicians, scientists, policy experts and service personnel to provide environmental services in stringent regulatory markets. Certain of our employees, including our senior management and the key employees of the various businesses we have acquired, have exceptionally strong knowledge of our businesses, sectors and clients. Their departure could lead to the loss of know-how and information of value to us, and their departure could pose a risk to key client relationships. Our continued growth will also depend upon our ability to attract and retain additional skilled management and other key employees, including skilled technical personnel in new markets, whether organically or through acquisitions. For certain of our businesses, there may be a limited number of qualified people to fulfill roles in such businesses. The loss of the services of one or more members of our management team or of qualified employees and other key personnel, or the inability to identify, hire and retain the key personnel that may be necessary to grow our business, could have a material adverse effect on our business, financial condition and results of operations.

Safety-related issues could adversely impact our business.

We often work on complex projects, sometimes in geographically remote locations and in challenging environments. These sites often put our employees and others in close proximity with chemical, manufacturing, construction and other dangerous processes and highly regulated materials. In addition, our employees sometimes handle hazardous materials, including pressurized gases or concentrated toxins and other highly regulated materials, which, if improperly handled, could subject us to civil and/or criminal liabilities. If we fail to implement proper safety procedures or if the procedures we implement are ineffective, or if others working at the site fail to implement and follow appropriate safety procedures, our employees and others may become injured, disabled or even lose their lives, the completion or commencement of our projects may be delayed and we may be exposed to litigation or investigations. Unsafe work sites also have the potential to increase employee turnover, increase project costs, damage our reputation and brand and raise our operating and insurance costs. Any of the foregoing could result in, among other things, financial losses or reputational harm, which could have a material adverse effect on our business, financial condition and results of operations.

We are responsible for the training and safety of our employees at work, and, on occasion, we take on expanded site safety responsibilities, which subjects us to regulations dealing with occupational health and safety. Although we implement what we believe to be appropriate health, safety and environmental work procedures throughout our organization, including hazardous sites, we cannot guarantee the safety of our

 

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personnel and others for whom we may be responsible. If our employees or others become injured, if we fail to implement appropriate training and health and safety procedures, or if we fail to comply with applicable regulations, among other things, we may be subject to claims, investigations or litigation or required to pay penalties or fines, and our business, financial condition and results of operations could be harmed.

Our safety record is critical to our reputation. Many of our clients require that we meet certain safety criteria to be eligible to bid for contracts or perform on-site services. If our safety record is not within the levels required by our clients, or compares unfavorably to our competitors, we could lose business, incur significant costs or reputational damage, be prevented from working at certain facilities or suffer other adverse consequences. Additionally, we may incur costs to defend our position even if we do not believe we have any liability for a release of or exposure to a hazardous substance or waste or other environmental damage. Any of the foregoing could, among other things, negatively affect our profitability or cause us to lose one or more projects or clients, or otherwise could have a material adverse impact on our business, financial condition and results of operations.

The business of CTEH places its employees in dangerous situations which may present serious and enhanced safety issues that could adversely affect our business.

The CTEH business is focused on assisting companies, governments and communities with responses to and recovery from environmental emergencies and in response to the COVID-19 pandemic. A significant portion of CTEH’s employees work in emergency situations that pose threats to the environment and surrounding communities. Danger of injury or death is inherent in this role, despite safety precautions, training and compliance with federal, state and local health and safety regulations. These employees and any subcontractors we use for such projects are at an enhanced risk of workplace-related injuries given the dangers of their workplace environment. Oftentimes, the risks of the emergency situations are not yet known, and there is no way to predict the magnitude of the danger. While we have insurance coverage in place that we believe is reasonable in addition to policies and procedures designed to minimize these risks, including stringent training, we may nonetheless be unable to avoid material liabilities for an injury or death arising out of these emergency-related hazards. In light of the potential cost and uncertainty involved in litigation, we may settle matters even when we believe we have a meritorious defense. Litigation and its related costs, as well as the damage to our reputation should any employee or subcontractor injury or death occur during these emergency situations, could have a material adverse effect on our business, financial condition and results of operations.

Allegations regarding whether we have complied with professional standards, duties and statutory obligations or our failure to provide accurate results may have an adverse effect on our business.

Our services typically involve difficult analytical assignments and carry risks of professional and other similar liabilities, both directly and through the actions of our testing personnel. In delivering our measurement and analytics services, we provide reports regarding emissions and other testing results to our clients who rely on the accuracy of the data that we gather or analyze on their behalf. Similarly, in delivering our remediation and reuse services, we provide environmental engineering solutions which our clients rely on to design and implement major projects. We take our professional responsibilities very seriously in light of this reliance and the fact that many of our engagements involve matters that could have a significant impact on a client’s business, create substantial financial obligations for the client or prevent the client from pursuing desirable business opportunities. Notwithstanding the fact that our professionals maintain credentials and we perform our services based on our professional expertise and these professional credentials, we face exposure to a variety of claims, ranging from alleged or actual breaches of applicable professional standards, duties and statutory obligations to allegedly inaccurate data and/or faulty analysis.

In certain instances, in performing our services, we may rely on our interpretation of reports or data prepared or gathered by third parties. If such information is not properly prepared or gathered, or is not accurate or complete, we may become subject to claims or litigation, regardless of whether we had any responsibility for

 

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the error. The CTEH business is often responsible for the presentation of plans and advice in emergency situations, including natural disasters and manmade accidents. While the CTEH employees are not responsible for the ultimate approval of such plans, the failure or minimized success of a plan could expose us to potential litigation and damage to our reputation. Further, claims that we performed negligently, disclosed client confidential information, infringed on intellectual property, falsified data, are required to withdraw due to an apparent or actual conflict, or otherwise breached our obligations to a client, including as a result of actions of our employees, could expose us to significant liabilities to our clients and other third parties and tarnish our brand and reputation.

A client who is dissatisfied with our performance could threaten or bring litigation on the basis of our failure to perform our professional duties in order to recover damages or to contest its obligation to pay our fees, even if our results were accurate or our services were otherwise performed without issue. If the results or design we provided do turn out to be errant or we otherwise fail to meet our contractual obligations, because some of the agreements that we have in place with clients require us to indemnify them for losses that they suffer as a result of errors and omissions or negligence by us, we may be subject to legal liability or required to pay significant damages, and the client relationship could be harmed. Our contracts typically include provisions to limit our exposure to legal claims relating to our services, but these provisions may not protect us or may not be enforceable in all cases. Further, we maintain professional liability insurance and such other coverage as we believe appropriate based on our experience to date, this coverage may prove insufficient. Regardless of any contractual provision or insurance, any client claims could have an adverse effect on our business, financial condition and results of operations.

We generally do not have formal long-term agreements with our clients and attempts by clients to change the terms of or terminate their relationships with us may have a negative impact on our business.

Our operations depend upon our relationships with our clients. Our clients are companies operating in a number of sectors and industries, including the financial, oil & gas, utilities, construction, automotive, real-estate, midstream energy, manufacturing, commodities, petrochemical, tobacco, food and beverage, telecommunications and engineering industries, as well as local, state, provincial and federal government entities. As is customary in our industry, we do not always enter into formal written agreements with our clients, and to the extent we do, such agreements do not generally restrict our clients from altering the terms of the relationship. These arrangements allow clients to attempt to seek concessions, introduce unfavorable terms or limit the services and solutions that we provide to them before a project is finished or as a condition to continued or increased business. The arrangements also generally allow a client to terminate or to decide not to renew their contracts or purchase orders with little or no advanced notice to us. A loss of one or more clients, a meaningful reduction in their purchases from us or an adverse change in the terms on which we provide our services and solutions could have a material adverse effect on our business, financial condition and results of operations.

The failure to successfully implement our new enterprise resource planning system could adversely impact our business and results of operations.

We are currently in the process of implementing a new ERP system to handle the business and financial processes within our operations and corporate functions. The ERP system is a system of integrated applications used to manage our business and automate many functions related to financial reporting, human resources and other services. We expect the implementation to be completed in fiscal year 2020. ERP implementations are complex and time-consuming projects that require transformations of business and finance processes, and any such transformations involve risks inherent in conversion to a new system. These risks include loss of information, the compromise of data integrity and control systems and the potential disruption to our normal business operations and financial reporting processes. The implementation process may be disruptive if the ERP system does not work as planned or if we experience issues relating to the implementation. We also may need to hire consultants or additional personnel for the implementation and post-implementation activities, which can continue for multiple years.

 

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Following implementation of the ERP, we may experience periodic or prolonged disruption to our financial functions arising out of the system conversion, general use of the system, other periodic upgrades or updates, or other external factors that are outside of our control. Additionally, if the ERP does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected and our ability to assess those controls adequately could be delayed. If we experience interruptions in service or operational difficulties as a result of the implementation, and are unable to effectively manage our business during or following the implementation of the ERP system, our business, financial condition and results of operations could be harmed.

If we are unable to develop successful new services or adapt to rapidly changing technology and industry standards or changes to regulatory requirements, our business could be harmed.

The market for our services is characterized by rapid technological change and evolving industry standards and, to a lesser extent, changing regulatory requirements. This constant evolution may reduce the effectiveness of or demand for our services or render them noncompetitive or obsolete. Our continued success and growth depend upon our ability to anticipate these challenges and to innovate by enhancing our existing services and developing and successfully implementing new services to keep pace with the ever-changing and increasingly sophisticated needs of our clients.

New service introductions that are responsive to new technologies and changing industry and regulatory standards can be complex and expensive as they require significant planning, design, development and testing. We may find it difficult or costly to update our services and to develop new services quickly enough to work effectively with new or changed technologies, to keep the pace with evolving industry standards or to meet our clients’ needs. In addition, our industry may be slow to accept new technologies that we develop because of, among other things, existing regulations or standards written specifically for older technologies and general unfamiliarity of clients with new technologies. As a result, any new services that we may develop may not be successful for a number of years, if at all. If we are unable to successfully enhance or update existing services or develop new services to meet these challenges, our business, financial condition and results of operations may be adversely affected.

Public clients involve unique policy, contract and performance risks, and we may face challenges to our government contracts or our eligibility to serve government clients, any of which could materially adversely impact our business.

We derive, and expect to continue to derive in the future, revenues from federal, state, provincial or local government clients, which accounted for approximately 20% of our revenues for the fiscal year ended December 31, 2019. Sales to governments and related entities present risks in addition to those involved in sales to many of our other clients, including policy-related risks such as potential disruption due to appropriation and spending patterns, delays in the adoption of new technologies due to political, fiscal or bureaucratic processes, delays in approving budgets and the government’s right to cancel contracts and purchase orders for its convenience. General political and economic conditions, which we cannot accurately predict, also directly and indirectly affect policies relating to the quantity and allocation of expenditures by government clients. In addition, government contracts may involve long purchase and payment cycles, competitive bidding requirements, qualification requirements, delays or changes in agreed-to funding, budgetary constraints, political agendas, extensive specification development and price negotiations, milestone requirements and the potential unenforceability of limitations on liability or other contractual provisions, any of which may create price pressure and reduce our margins. As a result, we could experience a material adverse effect on our business, financial condition and results of operations.

Each government entity also maintains its own rules and regulations with which we must comply and which can vary significantly among clients. We face risks associated with the failure to comply with such rules and regulations such as bid protests, in which our competitors could challenge the contracts we have obtained, or

 

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suspension, debarment or similar ineligibility from serving government clients. Challenges to our current or future government contracts or to our eligibility to serve government clients could result in a loss of government sales and have a material adverse effect on our business, financial condition and results of operations.

Our contracts with federal, state, provincial and local governments may be terminated or adversely modified prior to completion, which could adversely affect our business.

Government contracts generally contain provisions, and are subject to laws and regulations, that give the government rights and remedies not typically found in commercial contracts, including provisions permitting the government to:

 

   

terminate our existing contracts;

 

   

reduce potential future revenues from our existing contracts;

 

   

modify some of the terms and conditions in our existing contracts;

 

   

suspend or permanently prohibit us from doing business with the government or with any specific government agency;

 

   

impose fines and penalties;

 

   

subject us to criminal prosecution or debarment;

 

   

subject the award of some contracts to protest or challenge by competitors, which may require the contracting agency or department to suspend our performance pending the outcome of the protest or challenge and which may also require the government to solicit new bids for the contract or result in the termination, reduction or modification of the awarded contract;

 

   

suspend work under existing multiple year contracts and related task orders if the necessary funds are not appropriated by the relevant governmental authority; and

 

   

decline to exercise an option to extend an existing multiple year contract.

Governmental authorities may terminate contracts with us either for convenience (for instance, due to a change in perceived needs or a desire to consolidate work under another contract) or if we default by failing to perform under the contract. Upon a termination for convenience, we are generally able to recover the purchase price for delivered items and reimbursement of allowable work-in-process costs. If a governmental authority terminates a contract with us based upon our default, we generally would be denied any recovery for undelivered work, and instead may be liable for excess costs incurred by the government in procuring undelivered work. The exercise by any governmental entity of one or more of these rights under its agreements with us could have a material adverse effect on our business, financial condition and results of operations.

Our profitability will suffer if we are not able to maintain our prices or control our costs.

Our margins, and therefore our profitability, is largely a function of the rates we are able to charge for our services and the costs incurred to provide such services. Accordingly, if we are not able to maintain the rates we charge for our services, or we cannot reduce costs proportionate to any rate reduction, we will not be able to sustain our margins and our profitability will suffer.

The rates we are able to charge for our services are affected by a number of factors, including:

 

   

our clients’ perception of our ability to add value through our services;

 

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general competition;

 

   

introduction of new services or solutions by us or our competitors;

 

   

pricing policies of our competitors; and

 

   

general economic conditions.

Our costs are affected by a number of factors, including:

 

   

our cost of labor and our ability to transition our technical personnel from completed projects to new engagements;

 

   

our ability to effectively and efficiently staff projects;

 

   

our ability to forecast demand for our services;

 

   

our ability to manage the costs of indirect expenses; and

 

   

our overhead costs necessary to support the successful delivery of services.

Our profitability is a function of our ability to control our costs and improve our efficiency. As we increase the number of our technical personnel and execute both our strategy for growth, we may not be able to manage a significantly larger workforce, control our costs or improve our efficiency.

Any inability to develop or maintain and protect our intellectual property could have a material adverse effect on us.

We rely on a combination of patents, trademarks, trade names, confidentiality and nondisclosure clauses and agreements and other unregistered rights to define and protect our rights to our brand and the intellectual property used in our business. We also rely on industry and market “know-how” that cannot be registered and may not be subject to any confidentiality or nondisclosure clauses or agreements. Our recent acquisition of ECT2 further expanded our IP portfolio. These intellectual property rights or others we develop, obtain or acquire may not, however, provide us with a significant competitive advantage because our rights may not be sufficiently broad or may be challenged, invalidated or subject to government march-in or sovereign rights or compulsory licensing, sunshine laws or be subject to freedom of information requests or court-ordered public disclosure. Further, our use of contractual provisions, confidentiality procedures and agreements and other registrations may not be sufficient to protect our intellectual property rights, these protective measures may be circumvented or our rights may be misappropriated, disparaged, diluted or stolen, particularly in countries where intellectual property rights laws are not highly developed, protected or enforced. Others may independently develop similar intellectual property or designed-around ours. Our intellectual property may also be replaced by new technologies to which we have no right of use or can only acquire such use at unreasonable or unsustainable costs. Any inability to develop or acquire and maintain the necessary intellectual property rights for our business or to protect our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

Claims that we infringe on the intellectual property rights of others could have a material adverse effect on us.

Technology is an important part of our business and, as a result, from time to time others may claim that we have infringed upon, misappropriated, misused or otherwise violated their intellectual property rights. Regardless of the merit of such claims, responding to these types of claims can be expensive, time consuming

 

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and may divert a substantial portion of management’s time and attention away from running our business. If any aspect of our business is found to infringe the intellectual property rights of others, we could lose critical rights, we may be required to pay substantial damages or on-going licensing or royalty fees or we may be required to redesign, rework, replace or entirely discontinue aspects of our operations, any of which could come at substantial cost and significantly restrict or prohibit our future operations. Further, we may not be able to take any required actions on commercially reasonable terms or at all. Any infringement may also require us to enter into a settlement agreement and could also trigger indemnification obligations to our clients or under other contractual provisions. Any claim that we have misappropriated the intellectual property of others, whether or not valid, could have a material adverse effect on our business, financial condition and results of operations.

Laws and regulations regarding the handling of client confidential data and information may have a negative impact on our business.

Certain aspects of our business rely on the processing of our clients’ confidential data in a number of jurisdictions and the movement of data across borders. Legal requirements relating to the collection, storage, handling, use, disclosure, transfer and security of this information continue to evolve, and regulatory scrutiny in this area is increasing. Significant uncertainty exists as privacy and data protection laws may be interpreted and applied differently in different jurisdictions and may create inconsistent or conflicting requirements. Although we have procedures and systems in place to address applicable legal and regulatory requirements for those aspects of our business impacted by these laws, enforcement actions and investigations by regulatory authorities related to data security incidents and privacy violations continue to increase, and we could be subject to such activity. The enactment of more restrictive laws, rules, regulations or future enforcement actions or investigations could increase costs or restrictions on certain of our businesses, and noncompliance with existing or future laws could have a material adverse effect on our business, financial condition and results of operations.

A failure in or breach of our networks or systems, including as a result of cyber-attacks, could have a material adverse effect on our business.

Our cybersecurity and processing systems, as well as those of our third-party service providers, newly acquired companies that have not yet been integrated and those of our clients which we periodically manage may experience damage or disruption from a number of causes, including power outages, computer and telecommunication failures, internal design, manual or usage errors, workplace violence or wrongdoing, catastrophic events, natural disasters and severe weather conditions. These systems may also be damaged, disrupted or fail entirely as a result of computer viruses or other malicious codes, social-engineering schemes, unauthorized access attempts and cyber-attacks that include phishing-attacks, denial-of-service attacks, ransomware, malware and hacking. While our systems and those of third parties with whom we do business have been, and will likely continue to be, subject to these types of malicious attacks, to our knowledge, to date there has not been a material breach of our systems and no attack on our systems has had a direct, material impact on us or our business. We cannot, however, predict the extent and severity of any future attacks that may occur.

Any of these numerous and evolving cybersecurity threats, particularly on internet applications, could compromise the confidentiality, availability and integrity of data in our systems or that on the systems of our clients which we are periodically responsible for managing. We believe our possession of confidential client information may put us at a greater risk of being targeted. In addition, we manage and operate supervisory control and data acquisition systems at a number of operations and maintenance, or O&M, client facilities, including water and biogas facilities, and a cyber-attack or other system failure could cause the facility to be shutdown, which could create regulatory compliance issues, cause a contamination event or have other adverse consequences for which we could have liability. The security measures and procedures we, our clients and third-party service providers have in place to protect sensitive data and other information may not be successful or sufficient to counter all data breaches, cyber-attacks or system failures. Although we devote what we believe to be appropriate resources to our cybersecurity programs and have implemented security measures to protect our systems and data, and to prevent, detect and respond to data security incidents, there can be no assurance that our efforts will prevent these threats.

 

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Because the techniques used to obtain unauthorized access, or to disable or degrade systems change frequently, have become increasingly more complex and sophisticated, and may be difficult to detect for periods of time, we may not anticipate these acts or respond adequately or timely. As these threats continue to evolve and increase, we may be required to devote significant additional resources in order to modify and enhance our security controls and to identify and remediate any security vulnerabilities.

We own an aircraft used to transport employees to project sites which could expose us to risks associated with air travel and aircraft ownership and maintenance.

Through our acquisition of CTEH, we acquired an airplane that we use for transportation of employees. There are inherent risks associated with air travel, including aviation accidents due to weather, technical malfunctions or human error. While we will strive to comply with all safety regulations and ensure the aircraft undergoes necessary and adequate maintenance, accidents or incidents may occur while the aircraft is transporting employees. An accident or incident involving our aircraft could result in significant claims of injured employees and others, as well as repair or replacement of the damaged aircraft and its consequential loss from service. In the event of an accident, our liability insurance may not be adequate to offset our exposure to potential claims and we may be forced to bear losses from the accident. Additionally, the success of the CTEH business depends on its employees, and an aviation accident or incident that results in the serious injury or death of those employees could have a material adverse effect on the business.

Our global operations subject us to additional risks that could adversely affect our business.

We have activities outside of the United States. Our operations, as well as those of our clients, are therefore subject to regulatory, economic, political and other events and uncertainties in countries where these operations are located. Further, our growth strategy includes expansion into additional international markets. In addition to the risks discussed elsewhere herein that are common to both our domestic and international operations, we face risks specific to our foreign activities, including but not limited to:

 

   

political, social, economic and financial instability, including wars, civil unrest, acts of terrorism and other conflicts;

 

   

difficulties and increased costs in developing, staffing and simultaneously managing a large number of varying foreign operations as a result of distance, language and cultural differences;

 

   

restrictions and limitations on the transfer or repatriation of funds and fluctuations in currency exchange rates;

 

   

complying with varying legal and regulatory environments in multiple foreign jurisdictions, including privacy laws such as the E.U. General Data Protection Regulation;

 

   

laws and business practices that favor local competitors or prohibit foreign ownership of certain businesses;

 

   

potential for privatization and other confiscatory actions; and

 

   

other dynamics in international jurisdictions, any of which could result in substantial additional legal or compliance costs, liabilities or obligations for us or could require us to significantly modify our current business practices or even exit a given market.

Foreign operations bring increased complexity and the costs of managing or overseeing foreign operations, including adapting and localizing services or systems to specific regions and countries, can be material. Further, international operations carry inherent uncertainties regarding the effect of local or domestic

 

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actions, such as the unpredictable impact of the referendum vote in the United Kingdom to leave the European Union (Brexit) and the uncertainty regarding when it will exit and on what terms, any of which could be material. These and other risks related to our foreign operations, or the associated costs or liabilities, could have a material adverse effect on our business, financial condition and results of operations.

Product offerings subject us to risks that could adversely affect our business.

Certain of our environmental solutions include product offerings, including those offered by our recent acquisition, ECT2. We have a limited history in offering products as compared to services, and this expansion subjects us to new and different risks generally associated with offering products manufactured by third parties, including but not limited to:

 

   

production difficulties of third-party manufacturers, including problems involving changes in their production capacity and yields, quality control and assurance, component supply and shortages of qualified personnel;

 

   

failure to establish or maintain supplier relationships;

 

   

supply chain issues of third-party manufacturers and the failure of suppliers to produce components to specification or supply us with a sufficient amount or adequate quality of materials;

 

   

increases in the cost of raw materials, components or the overall cost of production passed to us;

 

   

failure to adequately design new or improved products or respond to changing regulatory requirements;

 

   

use of defective materials or workmanship in the manufacturing process;

 

   

improper use of our products;

 

   

failure to satisfy any warranty or performance guarantee;

 

   

product liability claims; and

 

   

lack of market acceptance, delays in product development and failure of products to operate properly.

Under any of these circumstances, demand may suffer, we may incur substantial expense to remedy the problem and may be required to obtain replacement products. If we fail to remedy any such problem in a timely manner, we risk the loss of revenue resulting from the inability to sell those products and related increased costs. If product defects or other issues are not discovered until after such products are purchased by our clients, our clients could lose confidence in our products and our brand and reputation may be negatively impacted. Any failure to successfully respond to the foregoing risks or any others that we may not appreciate as a result of our limited history of production could have material adverse effect on our business, financial condition and results of operations.

Our operations are subject to environmental laws and regulations and any liabilities may have a material adverse effect on our business.

We are in regular contact with waste, biogas, chemicals and other hazardous materials in the ordinary course of providing services to our clients. We also operate a number of O&M client sites. As a result, our business is subject to numerous U.S. and international laws and regulations relating to the protection of the environment. For example, we must comply with a number of U.S. federal and state laws that strictly regulate the handling, removal, treatment, transportation and disposal of toxic and hazardous substances. As an operator of

 

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client O&M facilities, if there is a spill of a hazardous substance or other contamination event at one of these sites, under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, or CERCLA, and comparable state, provincial and local laws, we may be required to investigate, mitigate and remediate any contamination, including addressing natural resource damage, compensating for human exposure or property damage and installing costly pollution control equipment. CERCLA and comparable state, provincial and local laws typically impose strict, joint and several liabilities without regard to whether an entity knew of or caused the release of hazardous substances. Other environmental laws affecting our business include, but are not limited to, the Federal Water Pollution Control Act of 1972, as amended, also known as the Clean Water Act, Resource Conversation and Recovery Act, National Environmental Policy Act, the Clean Air Act, the Occupational Safety and Health Act, the Federal Mine Safety and Health Act of 1977, the Toxic Substances Control Act and the Superfund Amendments and Reauthorization Act. Our business operations may also be subject to similar international laws relating to environmental protection. Liabilities related to contamination or violations of these laws and regulations could result in material costs to us, including clean-up costs, fines, civil or criminal sanctions and third-party claims for property damage or personal injury, any of which could have a material adverse effect on our business, financial condition and results of operations.

Legal and regulatory claims and proceedings could have a material adverse effect on us.

We and our clients are subject to claims, litigation and regulatory proceedings in the normal course of business and could become subject to additional claims in the future, some of which could be material. In addition to those claims discussed in greater detail elsewhere in the section entitled “—Risks Related to Our Business and Industry,” we have been, and may in the future be, subject to claims involving labor and employment, anti-discrimination, commercial disputes and other matters. We may also be exposed to potential claims arising from the conduct of our employees for which we may be liable. In addition, in the normal course of our business, we are required to make professional judgments and recommendations about environmental conditions of project sites for our clients, and we may be subject to claims that we are responsible for these judgments and recommendations if they are later found to be inaccurate.

Claims and proceedings, whether or not they have merit and regardless of the outcome, are typically expensive and can divert the attention of management and other personnel and require the commitment of significant resources for extended periods of time. Additionally, claims and proceedings can impact client confidence and the general public’s perception of our company and services and solutions, even if the underlying assertions are proven to be false. The outcomes of litigation and similar disputes are often difficult to reliably predict and may result in decisions or settlements that are contrary to or in excess of our expectations and losses may exceed our reserves. Any claims or proceedings, particularly those in which we are unsuccessful or for which we did not establish adequate reserves, could have a material adverse effect on our business, financial condition and results of operations.

If our research and development activities are unsuccessful, our business could be harmed.

The success of our research and development activity is highly uncertain. Research and development efforts can require substantial technical, financial and human resources. We may focus our efforts and resources on potential technologies that ultimately prove to be unsuccessful and technologies that first appear promising may be delayed or fail to reach later stages of development. Decisions regarding the further advancement must sometimes be made with limited and incomplete data, which makes it difficult to ensure or even accurately predict the outcomes. Because we have limited resources, we may forego pursuing one opportunity that later is proven to have greater commercial potential. Even if our efforts do yield new technologies, we may not be able to convert those technologies into commercially viable offerings in the long term. If our research and development activities are unsuccessful, our technologies and offerings may not keep pace with the market, and we may lose clients and one or more competitive advantages, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

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Failure to comply with anti-corruption and similar laws could subject us to penalties and other adverse consequences.

We are required to comply with the U.S. Foreign Corrupt Practices Act, or FCPA, and similar laws in other countries that prohibit improper payments or offers of payment to foreign officials and political parties for the purpose of obtaining or retaining business as well as require companies to maintain accurate books and records. Bribery, corruption and trade laws and regulations, and the enforcement thereof, are increasing in frequency, complexity and severity on a global basis. In many foreign countries it may be a local custom that businesses operating in such countries engage in practices that are prohibited by the FCPA or other similar laws and regulations. Although we have implemented policies and procedures requiring our employees, consultants and other third parties with whom we do business to comply with the FCPA and similar laws and regulations, we have limited experience in these areas and there can be no assurance that our policies will be adequate or prevent and deter violations of these types of laws. If our employees, consultants or other third parties with whom we do business do violate these laws or our policies, we may be ultimately held responsible, and any violation could result in severe criminal or civil sanctions, fines and penalties and suspension or debarment from U.S. government contracting, any of which could have a material and adverse effect on our business, financial condition and results of operations.

We are subject to taxation in multiple jurisdictions. Any adverse development in the tax laws of any of these jurisdictions, any disagreement with our tax positions or any changes in effective tax rates could have a material adverse effect on our business, financial condition or results of operations.

We are subject to taxation in, and to the tax laws and regulations of, multiple jurisdictions, including non-U.S. jurisdictions as a result of the expansion of our international operations and our corporate entity structure. We are also subject to transfer pricing laws with respect to our intercompany transactions. Adverse developments in tax laws or regulations, or any change in position regarding the application, administration or interpretation thereof, in any applicable jurisdiction, could have a material adverse effect on our business, financial condition or results of operations. In addition, the tax authorities in any applicable jurisdiction may disagree with the positions we have taken or intend to take regarding the tax treatment or characterization of any of our transactions. If any applicable tax authorities were to successfully challenge the tax treatment or characterization of any of our transactions, it could have a material adverse effect on our business, financial condition or results of operations.

In addition, our tax obligations and effective tax rates could be adversely affected by recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, varying tax rates in the different jurisdictions in which we operate, changes in foreign currency exchange rates or changes in the valuation of our deferred tax assets and liabilities.

Insufficient insurance coverage could have a material adverse effect on us.

We maintain property, business interruption, counterparty and liability insurance coverage that we believe is consistent with industry practice. However, our insurance program does not cover, or may not adequately cover, every potential risk associated with our business and the consequences thereof. In addition, market conditions or any significant claim or a number of claims made by or against us could cause our premiums and deductibles to increase substantially and, in some instances, our coverage may be reduced or become entirely unavailable. In the future, we may not be able to obtain meaningful coverage at reasonable rates for a variety of risks. If our insurance coverage is insufficient, if we are not able to obtain sufficient coverage in the future, or if we are exposed to significant losses as a result of any risks for which we may self-insure, any resulting costs or liabilities could have a material adverse effect on our business, financial condition and results of operations.

 

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Seasonality of demand for certain of our services and weather conditions and other factors outside our control may adversely affect, or cause volatility in, our financial results.

We experience seasonal demand with respect to certain of the services we provide, as demand for those services can follow weather trends. Seasonal effects may vary from year to year and are impacted by weather patterns, particularly by temperatures, rainfall and droughts. In addition, we may experience earnings volatility as a result of the timing of large contract wins and the timing of large emergency response projects following an incident or natural disaster due to the unpredictable nature thereof. Our business, financial condition and results of operations could be materially and adversely affected by severe weather, natural disasters or environmental factors. Furthermore, our ability to deliver services on time to our clients can be significantly impeded by such conditions and events.

Our business could be disrupted by catastrophic events.

Occurrence of any catastrophic event, including earthquake, fire, flood, tsunami or other weather event, power loss, telecommunications failure, software or hardware malfunctions, cyber-attack, war or terrorist attack, could result in lengthy interruptions in our services. Our insurance coverage may not compensate us for losses that may occur in the wake of such events. In addition, acts of terrorism could cause disruptions to the internet or the economy as a whole. Even with our disaster recovery arrangements, our services could be interrupted. If our systems were to fail or be negatively impacted as a result of a natural disaster or other event, our ability to deliver services to our clients would be impaired or we could lose critical data. If we are unable to develop or, in the event of a disaster or emergency, successfully execute on, adequate plans to ensure that our business functions continue to operate during and after a disaster, our business, results of operations, financial condition and reputation would be harmed.

We cannot assure you that any unaudited financial data related to our acquisitions presented herein would not be materially different if audited or reviewed.

Many of the businesses that we have acquired and will acquire have unaudited financial statements that have been prepared by the management of such companies and have not been independently reviewed or audited. Certain of our acquisitions were divisions or operating units and had no separately prepared financial statements at all, instead relying on more limited financial information. We present some unaudited financial information in this prospectus for certain acquisitions that is derived from such unaudited financial statements or financial information prepared by the management of such acquired businesses. We cannot assure you that the financial statements and other financial information of companies we have acquired or will acquire would not be materially different if such businesses were independently reviewed or audited. In addition, our results of operations from these acquisitions could, in the future, result in impairment charges for any of our intangible assets, including goodwill, or other long-lived assets, particularly if economic conditions worsen unexpectedly. These changes could materially negatively affect our business, financial condition and results of operations.

Risks Related to Our Indebtedness

Our current indebtedness, and any future indebtedness we may incur, may limit our operational and financing flexibility and negatively impact our business.

On April 13, 2020, the Company entered into a Unitranche Credit Agreement providing for a new $225.0 million credit facility comprised of a $175.0 million term loan and $50.0 million revolving credit facility. As of July 13, 2020, the aggregate principal amount of our debt under the credit facility was approximately $175.0 million, all of which was outstanding under the term loan. Additionally, we may borrow additional funds under this credit facility and increase the borrowing capacity of the term loan thereunder by up to $100.0 million, each as described in greater detail in the section entitled “Description of Certain Indebtedness,” or enter into new borrowing arrangements. We also may incur significant indebtedness in the future to continue to support our organic and acquisition-related growth.

 

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Our existing and any future indebtedness could have important consequences, including:

 

   

making it more difficult for us to make payments on our existing indebtedness;

 

   

increasing our vulnerability to general economic and industry conditions;

 

   

requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

 

   

exposing us to the risk of increased interest rates on our borrowings under our credit facility, which is at variable rates of interest;

 

   

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

   

limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; and

 

   

limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.

Our ability to make payments on debt, to repay existing or future indebtedness when due, to fund operations and significant planned capital expenditures and to support our acquisition strategy will depend on our ability to generate cash in the future. Our ability to produce cash from operations is, and will be, subject to a number of risks, including those described in the section entitled “Risk Factors—Risks Related to Our Business and Industry” and elsewhere in this prospectus. Our financial condition, including our ability to make payments on our debt, is also subject to external factors such as interest rates, the level of lending activity in the credit markets and other external industry-specific and more general external factors, including those described in the section entitled “Risk Factors—Risks Related to Our Business and Industry” and elsewhere in this prospectus.

We may not be able to borrow additional financing or to refinance our credit facility or other indebtedness we may incur in the future, if required, on commercially reasonable terms, if at all. In addition, our ability to borrow under our credit facility is subject to significant conditions, as described in the section entitled “Description of Certain Indebtedness.”

Despite our current level of indebtedness, we may incur more debt.

We may be able to incur significant additional indebtedness in the future. For example, we may incur additional indebtedness in connection with future acquisitions. Although our credit facility and our outstanding preferred stock contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us from incurring obligations that do not constitute indebtedness. Further, as of July 13, 2020, our credit facility provided for an aggregate unused commitment of $50.0 million (without giving effect to any outstanding letters of credit, and subject to borrowing base limitations). The credit facility also allows us to increase the aggregate borrowings thereunder by up to $100.0 million. See the section entitled “Description of Certain Indebtedness.”

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on, or to refinance our respective obligations under, our indebtedness, and to fund planned capital expenditures, future acquisitions and other corporate expenses will

 

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depend on our future operating performance and on economic, financial, competitive, legislative, regulatory and other factors and any legal and regulatory restrictions on the payment of distributions and dividends to which we may be subject. Many of these factors are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized or that future borrowings will be available to us in an amount sufficient to enable us to satisfy our obligations under our indebtedness or to fund our other needs. In order for us to satisfy our obligations under our indebtedness and fund planned capital expenditures and future acquisitions, we must continue to execute on our business strategy. If we are unable to do so, we may need to reduce or delay our planned capital expenditures or execution of our acquisition strategy, seek additional capital, sell assets or refinance all or a portion of our indebtedness on or before maturity, any of which could materially and adversely affect our future revenue prospects.

Our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our existing or future debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. Our credit facility and our outstanding preferred stock restrict our ability to consummate or use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair. Any proceeds that we receive may not be adequate to meet any debt service obligations then due. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. See the section entitled “Description of Certain Indebtedness.”

Our credit facility restricts our ability to engage in some business and financial transactions.

Our credit facility contains a number of covenants that among other things, limit our ability to:

 

   

incur additional indebtedness or guarantees;

 

   

create liens on assets;

 

   

enter into sale and leaseback transactions;

 

   

engage in mergers or consolidations;

 

   

pay dividends and make distributions and other restricted payments;

 

   

make certain investments, loans or advances;

 

   

repay subordinated indebtedness;

 

   

make certain acquisitions;

 

   

engage in certain transactions with affiliates;

 

   

change our lines of business;

 

   

restrict distributions by our restricted subsidiaries;

 

   

amend or otherwise modify organizational documents or certain debt agreements; and

 

   

manage cash and other assets in our deposit accounts and securities accounts.

 

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In addition, our credit facility contains certain financial covenants that, among other things, require us not to exceed specified total debt leverage ratios and to maintain a fixed charge coverage ratio. Among other things, we may not be able to borrow money under our credit facility if we are unable to comply with the financial and other covenants included therein. Our credit facility also contains certain customary representations and warranties, affirmative covenants and events of default (including, among other things, an event of default upon a change of control). If an event of default occurs, our lenders will be entitled to take various actions, including the acceleration of amounts due under our credit facility and all actions permitted to be taken by a secured creditor.

Any future debt that we incur may contain additional and more restrictive negative covenants and financial maintenance covenants. These restrictions could limit our ability to obtain debt financing, repurchase stock, pay dividends, refinance or pay principal on our outstanding debt, complete acquisitions for cash or debt or react to changes in our operating environment or the economy.

Our failure to comply with obligations under our credit facility or the agreements governing any future indebtedness may result in an event of default under the applicable agreement. A default, if not cured or waived, may permit acceleration of some or all of our other indebtedness and trigger other termination and similar rights under other contracts. We cannot be certain that we will be able to remedy any defaults and, if our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all, any of which could have a material adverse effect on our business, financial condition and results of operations.

See the section entitled “Description of Certain Indebtedness.”

Risks Related to the Offering and Ownership of Our Common Stock

There is currently no public market for shares of our common stock and an active trading market for our common stock may never develop or be sustained following this offering.

Prior to this offering, there has been no market for shares of our common stock. Although we have applied to list our common stock on the New York Stock Exchange, or the NYSE, under the symbol “MEG,” an active trading market for our common stock may never develop or, if one develops, it may not be sustained following this offering. Accordingly, no assurance can be given as to the following:

 

   

the likelihood that an active trading market for our common stock will develop or be sustained;

 

   

the liquidity of any such market;

 

   

the ability of our stockholders to sell their shares of common stock; or

 

   

the price that our stockholders may obtain for their common stock.

If an active market for our common stock with meaningful trading volume does not develop or is not maintained, the market price of our common stock may decline materially below the offering price and you may not be able to sell your shares. The initial public offering price for our shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid in this offering.

 

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The trading price of our common stock may be volatile and could decline substantially following this offering.

The market price of our common stock following this offering may be highly volatile and subject to wide fluctuations. Some of the factors that could negatively affect the market price of our common stock or result in significant fluctuations in price, regardless of our actual operating performance, include:

 

   

actual or anticipated variations in our quarterly operating results;

 

   

changes in market valuations of similar companies;

 

   

changes in the markets in which we operate;

 

   

additions or departures of key personnel;

 

   

actions by stockholders, including sales of large blocks of our common stock;

 

   

speculation in the press or investment community;

 

   

short selling of our common stock or related derivative securities or hedging activities;

 

   

general market, economic and political conditions, including an economic slowdown;

 

   

changes in interest rates;

 

   

our operating performance and the performance of other similar companies;

 

   

our ability to accurately project future results and our ability to achieve those or meet the expectations of other industry and analyst forecasts; and

 

   

new legislation or other regulatory developments that adversely affect us, our markets or our industry.

Furthermore, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry, and often occurs without regard to the operating performance of the affected companies. Therefore, factors that have little or nothing to do with us could cause the price of our common stock to fluctuate, and these fluctuations or any fluctuations related to our company could cause the market price of our common stock to decline materially below the public offering price.

The coverage of our business or our common stock by securities or industry analysts or the absence thereof could adversely affect our stock price and trading volume.

The trading market for our common stock will be influenced in part by the research and other reports that industry or securities analysts may publish about us or our business or industry. We do not currently have, and may never obtain, research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price and volume of our stock would likely be negatively impacted. If analysts do cover us and one or more of them downgrade our stock, or if they issue other unfavorable commentary about us or our industry or inaccurate research, our stock price would likely decline. Furthermore, if one or more of these analysts cease coverage or fail to regularly publish reports on us, we could lose visibility in the financial markets. Any of the foregoing would likely cause our stock price and trading volume to decline.

 

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We are an emerging growth company, and any decision on our part to comply with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we currently intend to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our registration statements, periodic reports and proxy statements, the inclusion of only two years of audited financial statements in this prospectus and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have chosen to “opt in” to this extended transition period for complying with new or revised accounting standards and, as a result, we will not be subject to the same new or revised accounting standards as other public companies that comply with such new or revised standards on a non-delayed basis. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of this offering; (ii) the last day of the fiscal year during which our total annual gross revenues are $1.07 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700.0 million as of the end of the second quarter of that fiscal year. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

Our internal control over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.

As a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal control over financial reporting. As an emerging growth company, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event that it is not satisfied with the level at which our controls are documented, designed or operating.

To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal controls can divert our management’s attention from other matters that are important to the operation of our business. If we identify material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 or assert that our internal control over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.

 

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Our significant stockholders may have conflicts of interest with other stockholders and may limit your ability to influence corporate matters.

Following completion of this offering, Messrs. Richard E. Perlman and James K. Price, two of our directors, will beneficially own approximately 9.4% and 7.2%, respectively, of our outstanding shares of common stock (or 8.8% and 6.7%, respectively, if the underwriters exercise their option to purchase additional shares in full). See the section entitled “Principal Stockholders” for more information on the beneficial ownership of our common stock. As a result of their respective ownership, Messrs. Perlman and Price will have sufficient voting power to significantly influence all matters submitted to our stockholders for approval, including director elections and proposed amendments to our bylaws or certificate of incorporation. In addition, this concentration of ownership may delay or prevent a merger, consolidation or other business combination or change in control of our company and make some transactions that might otherwise give you the opportunity to realize a premium over the then-prevailing market price of our common stock more difficult without their support. After the lock-up period discussed in the section entitled “Underwriting” expires, Messrs. Perlman and Price will be able to transfer significant voting blocks of our common stock to a third-party by transferring their common stock, which would not require the approval of our board of directors or other stockholders. The interests of Messrs. Perlman and Price may not always coincide with our interests as a company or the interests of other stockholders. This concentration of ownership may also adversely affect our share price.

Additionally, immediately after this offering, we expect one or more affiliates of Oaktree Capital Management, L.P., or Oaktree, will beneficially own approximately 15.9% (or 14.9% if the underwriters exercise in full their option to purchase additional shares) of our outstanding common stock. See the section entitled “Principal Stockholders” for more information on the beneficial ownership of our common stock. Notwithstanding this stock ownership and that, following completion of this offering, one member of our board of directors will be a representative of Oaktree, Oaktree is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Oaktree may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. In recognition that representatives of Oaktree and its affiliated entities and funds may serve as members of our board of directors, our amended and restated certificate of incorporation that will be in effect upon consummation of this offering provides, among other things, that none of Oaktree, its affiliates or any of its representatives (including a representative who may serve on our board of directors) has any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business that we do. In the event that any of these persons or entities acquires knowledge of a potential transaction or matter which may be a corporate opportunity for itself and us, we will not have any expectancy in such corporate opportunity, and these persons and entities will not have any duty to communicate or offer such corporate opportunity to us and may pursue or acquire such corporate opportunity for themselves or direct such opportunity to another person. Affiliates of Oaktree who are holders of our common stock will also retain a right of first offer with respect to their respective pro rata portion of any new securities we may issue following completion of this offering, excluding any shares to be issued by us in certain specified circumstances. These potential conflicts of interest could have a material adverse effect on our business, financial condition and results of operations if, among other things, attractive corporate opportunities are allocated by Oaktree to itself or one of its other affiliates. See the sections entitled “Certain Relationships and Related Party Transactions—Investor Rights Agreement” and “Description of Capital Stock—Corporate Opportunities.”

Future sales of our common stock in the public market could cause our stock price to fall.

Following completion of this offering, Messrs. Richard E. Perlman and James K. Price, two of our directors, will beneficially own 1,909,036 shares and 1,458,505 shares, respectively, or approximately 9.4% and 7.2%, respectively, of our outstanding shares of common stock (8.8% and 6.7%, respectively, if the underwriters exercise their option to purchase additional shares in full). We, our executive officers, directors and substantially all of our other existing security holders have entered into or will enter into lock-up agreements with the underwriters that will, subject to certain exceptions, restrict the sale of shares of our common stock held by them

 

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for 180 days following the date of this prospectus. The underwriters may, without notice except in certain limited circumstances, release all or any portion of the shares of common stock subject to lock-up agreements. See the section entitled “Underwriting” for a description of these lock-up agreements. The market price of our common stock may decline materially when these restrictions on resale by our other affiliates lapse or if they are waived.

Upon the expiration of the lock-up agreements, all shares held by our affiliates will be eligible for resale in the public market, subject to applicable securities laws, including the Securities Act. Therefore, unless shares owned by any of our affiliates are registered under the Securities Act, these shares may only be resold into the public markets in accordance with the requirements of an exemption from registration or safe harbor, including Rule 144 and the volume limitations, manner of sale requirements and notice requirements thereof. See the section entitled “Shares Eligible for Future Sale.” However, pursuant to the terms of an Investor Rights Agreement, Messrs. Perlman and Price, OCM Montrose Holdings, L.P., OCM Montrose II Holdings, L.P., or, together with OCM Montrose Holdings, L.P., the Oaktree Holder, and certain stockholders will have the right to demand that we register its shares under the Securities Act as well as the right to include their shares in any registration statement that we file with the SEC, subject to certain exceptions. See the section entitled “Shares Eligible for Future Sale.” Any registration of these or other shares would enable those shares to be sold in the public market, subject to certain restrictions in the Investor Rights Agreement and the restrictions under the lock-up agreements referred to above. Any sale by Messrs. Perlman and Price, the Oaktree Holder or other affiliates or any perception in the public markets that such a transaction may occur could cause the market price of our common stock to decline materially.

Following this offering, we intend to file a registration statement on Form S-8 under the Securities Act registering shares under our stock incentive plan. Subject to the terms of the awards pursuant to which these shares may be granted and except for shares held by affiliates who will be subject to the resale restrictions described above, the shares issuable pursuant to our stock incentive plan will be available for sale in the public market immediately after the registration statement is filed. See the section entitled “Shares Eligible for Future Sale.”

If you purchase shares of common stock sold in this offering, you will experience immediate and substantial dilution and you may suffer additional dilution in the future.

If you purchase shares our common stock in this offering, the value of your shares based on our actual book value will immediately be less than the price you paid. This reduction in the value of your equity is known as dilution. If you purchase shares in this offering, you will suffer, as of March 31, 2020, immediate dilution of $32.36 per share in the net tangible book value after giving effect to the sale of common stock in this offering, less underwriting discounts and commissions and the estimated expenses payable by us, and the application of the net proceeds as described in the section entitled “Use of Proceeds.” We also expect to grant stock options, restricted stock units and other forms of stock-based compensation to our directors, officers and employees, and may, from time to time, issue equity securities in connection with acquisitions or strategic transactions, and you will experience additional dilution in the future when these equity awards are exercised or vest, as applicable. If we raise funds in the future by issuing additional securities, any newly issued shares or shares issued upon conversion or exercise of such securities will further dilute your ownership. You will also experience dilution upon any conversion of our shares of Series A-2 preferred stock into shares of common stock at a discount, or upon the exercise of outstanding warrants to purchase shares of our common stock. See the sections entitled “Description of Capital Stock — Preferred Stock” and “Description of Capital Stock—Warrants.”

We have no present intention to pay dividends on our common stock.

We have no present intention to pay dividends on our common stock. Any determination to pay dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of operations, projections, liquidity, earnings, legal requirements, restrictions in our credit facility, the terms of our Series A-2 preferred stock, agreements governing any other indebtedness we may enter into and other factors that our board of directors deems relevant. See the section entitled “Dividend Policy.” Accordingly, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them.

 

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Our ability to raise capital in the future may be limited. We may not be able to secure additional financing on terms that are acceptable to us, or at all.

In order for us to grow and successfully execute our business plan, we will require additional financing. Additionally, our business and operations may consume resources faster than we anticipate. Therefore, in the future, we expect we will raise additional funds through various financings that may include the issuance of new equity securities, debt or a combination of both. However, the lapse or waiver of the lock-up restrictions discussed above or any sale or perception of a possible sale by the Oaktree Holder or our other affiliates, and any related decline in the market price of our common stock, could impair our ability to raise capital.

Further, additional financing, whether debt or equity, may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities, existing stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.

Provisions of our amended and restated governing documents, Delaware law and other documents could discourage, delay or prevent a merger or acquisition at a premium price.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws that we intend to adopt prior to the consummation of this offering may have the effect of delaying or preventing a change of control or changes in our management. For example, our amended and restated certificate of incorporation and amended and restated bylaws will include provisions that:

 

   

permit us to issue, without stockholder approval, preferred stock in one or more series and, with respect to each series, fix the number of shares constituting the series and the designation of the series, the voting powers, if any, of the shares of the series and the preferences and other special rights, if any, and any qualifications, limitations or restrictions, of the shares of the series;

 

   

prevent stockholders from acting by written consent;

 

   

limit the ability of stockholders to amend our certificate of incorporation and bylaws;

 

   

require advance notice for nominations for election to the board of directors and for stockholder proposals;

 

   

do not permit cumulative voting in the election of our directors, which means that the holders of a majority of our common stock may elect all of the directors standing for election; and

 

   

establish a classified board of directors with staggered three-year terms.

These provisions may discourage, delay or prevent a merger or acquisition of our company, including a transaction in which the acquirer may offer a premium price for our common stock.

We are also subject to Section 203 of the Delaware General Corporation Law, or the DGCL, which, subject to certain exceptions, prohibits us from engaging in any business combination with any interested stockholder, as defined in that section, for a period of three years following the date on which that stockholder became an interested stockholder. In addition, our equity incentive plan will permit accelerated vesting of stock

 

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options and restricted stock, and payments to be made to the employees thereunder in certain circumstances, in connection with a change of control of our company, which could discourage, delay or prevent a merger or acquisition at a premium price. In addition, our credit facility includes, and other debt instruments we may enter into in the future may include, provisions entitling the lenders to demand immediate repayment of all borrowings upon the occurrence of certain change of control events relating to our company, which also could discourage, delay or prevent a business combination transaction. See “Description of Capital Stock—Provisions of Our Certificate of Incorporation and Bylaws to be Adopted and Delaware Law That May Have an Anti-Takeover Effect.”

Our amended and restated certificate of incorporation will include an exclusive forum clause, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Our amended and restated certificate of incorporation, to be in effect immediately prior to the completion of this offering, will provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for any stockholder (including any beneficial owner) to bring (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or employees to us or to our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL or our certificate of incorporation or bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine, will be a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction or declines to accept jurisdiction, the federal district court for the District of Delaware); in all cases subject to such court having personal jurisdiction over the indispensable parties named as defendants.

In addition, our amended and restated certificate of incorporation will provide that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act but that the forum selection provision will not apply to claims brought to enforce a duty or liability created by the Exchange Act. Although we believe these provisions benefit us by providing increased consistency in the application of Delaware law for the specified types of actions and proceedings, the provisions may have the effect of discouraging lawsuits against us or our directors and officers. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation and amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, financial condition, and results of operations.

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the foregoing provisions. The exclusive forum clause may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. See the section entitled “Description of Capital Stock—Exclusive Forum Clause.”

We will incur increased costs and obligations as a result of being a publicly-traded company.

As a company with publicly-traded securities, we will be subject to the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NYSE and other applicable securities rules and regulations. These rules and regulations require that we adopt additional controls and procedures and disclosure, corporate governance and other practices thereby significantly increasing our legal, financial and other compliance costs. These new obligations will also make other aspects of our business more difficult, time-consuming or costly and increase demand on our personnel, systems and other resources. For example, to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we will need to commit significant resources, hire additional staff and provide additional management oversight. Furthermore, as a result of disclosure of information in this prospectus and in our Exchange Act and other filings required of a public company, our business and financial condition will become

 

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more visible, which we believe may give some of our competitors who may not be similarly required to disclose this type of information a competitive advantage. In addition to these added costs and burdens, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions, other regulatory actions and civil litigation, any of which could negatively affect the price of our common stock.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains “forward-looking statements.” These forward-looking statements are included throughout this prospectus, including in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Certain Relationships and Related Party Transactions,” and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity, capital resources and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “position,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements in this prospectus. All of our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we are expecting, including:

 

   

our limited operating history;

 

   

our history of losses and ability to achieve profitability;

 

   

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

 

   

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

 

   

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

 

   

the highly competitive nature of our business;

 

   

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

 

   

our ability to promote and develop our brands;

 

   

our ability to maintain and expand our client base;

 

   

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

 

   

significant environmental governmental regulation;

 

   

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

 

   

safety-related issues;

 

   

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

 

   

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

 

   

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

 

   

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

 

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government clients and contracts;

 

   

our ability to maintain our prices and manage costs;

 

   

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

 

   

laws and regulations regarding handling of confidential information;

 

   

any failure in or breach of our networks and systems;

 

   

our international operations;

 

   

product related risks;

 

   

environmental regulations and liabilities;

 

   

legal and regulatory claims and proceedings;

 

   

research and development activities;

 

   

anti-corruption and similar laws;

 

   

taxation in multiple jurisdictions;

 

   

insufficient insurance coverage;

 

   

seasonality of demand;

 

   

catastrophic events;

 

   

our indebtedness and ability to maintain sufficient liquidity;

 

   

the increase expenses associated with being a public company;

 

   

our anticipated uses of net proceeds from this offering; and

 

   

additional factors discussed in this prospectus, including in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”

The forward-looking statements contained in this prospectus are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control, as well as the other factors described in the section entitled “Risk Factors.” Further, many of these factors are, and may continue to be, amplified by the COVID-19 pandemic. Additional factors or events that could cause our actual results to differ may also emerge from time to time, and it is not possible for us to predict all of them. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by any forward-looking statement and, therefore, you

 

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should not regard any forward-looking statement as a representation or warranty by us or any other person that we will successfully achieve the expectation, plan or objective expressed in such forward-looking statement in any specified time frame, or at all. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this prospectus speaks only as of the date on which we make it. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

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USE OF PROCEEDS

We estimate that our proceeds from this offering will be approximately $148.1 million (or approximately $170.7 million if the underwriters exercise in full their option to purchase additional shares), based on the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use approximately $139.3 million of the net proceeds from this offering in connection with the redemption of all outstanding shares of our Series A-1 preferred stock and the remainder for general corporate purposes, including future investments in innovation and acquisitions in our highly fragmented industry.

Pending use of the net proceeds from this offering described above, we may invest the net proceeds in short-and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States government.

Each $1.00 increase or decrease in the assumed initial public offering price of $16.00 per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $9.4 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million in the number of shares of our common stock offered by us would increase or decrease the net proceeds that we receive from this offering by approximately $15.0 million, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

 

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DIVIDEND POLICY

We have no present intention to pay cash dividends on our common stock. Any determination to pay dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of operations, projections, liquidity, earnings, legal requirements, restrictions in the agreements governing our existing indebtedness and any other indebtedness we may enter into and other factors that our board of directors deems relevant.

The agreements governing our existing indebtedness and the terms of our outstanding preferred stock contain, and debt instruments that we enter into in the future may contain, covenants that place limitations on the amount of dividends we may pay. Additionally, holders of our Series A-2 preferred stock will be, following completion of this offering, entitled to receive cumulative dividends, accruing daily and compounded quarterly, at a rate of 9% per annum on the then-stated value of each share, whether or not earned or declared by our board of directors, and in preference to the holders of any and all other series or classes of our capital stock, including our common stock. See the sections entitled “Description of Capital Stock” and “Description of Certain Indebtedness.” In addition, under Delaware law, our board of directors may declare dividends only to the extent of our surplus, which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or, if there is no surplus, out of our net profits for the then current and immediately preceding year.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2020:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the following:

 

   

the payment by us, in shares of common stock, of the maximum portion of the Series A-1 preferred stock per-share redemption price payable in common stock, as permitted under the related certificate of designations;

 

   

the amendment and restatement of our certificate of incorporation;

 

   

the entry into the Unitranche Credit Agreement providing for a $225.0 million credit facility comprised of a $175.0 million term loan and a $50.0 million revolving credit facility, and the use of the proceeds therefrom to repay in full all amounts outstanding under our prior senior secured credit facility;

 

   

the issuance of 791,139 shares of our common stock in connection with our acquisition of CTEH (which does not include any shares of our common stock that may be issued over the next two years as contingent earn-out consideration in connection with the acquisition); and

 

   

the issuance of 17,500 shares of our Series A-2 preferred stock and the Series A-2 Warrant for an aggregate purchase price of $175.0 million; and

 

   

on a pro forma as adjusted basis to give effect to the pro forma adjustments set forth above and the sale and issuance by us of 10,000,000 shares of our common stock in this offering, based upon the assumed initial public offering price of $16.00, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of such proceeds as described in the section entitled “Use of Proceeds.”

 

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You should read this table together with the information in this prospectus in the sections entitled “Use of Proceeds,” “Selected Historical Consolidated Financial Information,” “Unaudited Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and “Description of Certain Indebtedness” and with the audited consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    As of March 31, 2020  
    Actual     Pro Forma     Pro Forma
As Adjusted
 

Cash(1)

  $ 1,047     $ 37,264     $ 43,924  
 

 

 

   

 

 

   

 

 

 

Debt

     

Term Loan Facility(2)

    47,500       175,000       175,000  

Revolving Line of Credit(2)

    110,681       25,000       25,000  

Capital Leases

    4,121       4,121       4,121  

Other Leases

    8       8       8  

Equipment Line of Credit

    3,605       3,605       3,605  

Less: Deferred Debt Issuance Costs

    (1,028     (4,449     (4,449
 

 

 

   

 

 

   

 

 

 

Total debt

    164,887       203,285       203,285  

Redeemable Series A-1 Preferred Stock $0.0001 par value - authorized, issued and outstanding shares: 12,000 at March 31, 2020

    134,237      

Convertible and Redeemable Series A-2 Preferred Stock $0.0001 par value - authorized, issued and outstanding shares: 17,500

      149,903       149,903  

Stockholders’ (deficit) equity:

     

Common stock, par value $0.000004 per share, as of March 31, 2020: actual, authorized 25,000,000 shares, issued and outstanding 8,370,107 shares; pro forma, 190,000,000 shares, issued and outstanding 10,332,001 shares; pro forma, as adjusted, authorized 190,000,000 shares, issued and outstanding 20,332,001 shares(3)

     

Additional paid in capital

    33,888       72,201       232,201  

Accumulated deficit

    (105,652     (107,586     (109,322

Other comprehensive loss

    (3     (3     (3
 

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

    (71,767     (35,388     122,876  
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 227,357     $ 317,800     $ 476,064  
 

 

 

   

 

 

   

 

 

 

 

(1)

Excludes $1.5 million of cash acquired in the CTEH business acquisition. Subsequent to June 30, 2020, $25 million in cash was used to pay down outstanding borrowings under our revolving credit facility, which repayment is not reflected in this table.

(2)

Actual amounts as of March 31, 2020 reflect borrowings outstanding under our prior senior secured credit facility. Pro forma and pro forma as adjusted amounts reflect outstanding borrowings under our new credit facility. As of July 13, 2020, there were no amounts outstanding under our revolving credit facility. See the section entitled “Description of Certain Indebtedness.”

(3)

Pro forma includes 77,312 unvested shares of restricted stock granted under the Company’s 2017 Stock Plan and excludes 116,375 shares of common stock issued as earn-out consideration that have been cancelled.

Each $1.00 increase or decrease in the assumed initial public offering price of $16.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, respectively, the amount of cash, additional paid-in capital, total stockholders’ (deficit) and total capitalization by $9.4 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1.0 million in the number of shares we are offering would increase or decrease, respectively, the amount of cash, stockholders’ (deficit) equity and total capitalization by approximately $15.0 million, assuming the

 

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assumed initial public offering price per share, as set forth on the cover page of this prospectus, remains the same after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only, and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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DILUTION

Dilution represents the difference between the amount per share paid by investors in this offering and the as adjusted net tangible book value per share of our common stock immediately after this offering. The data in this section have been derived from our condensed consolidated balance sheet as of March 31, 2020. Net tangible book value per share is equal to our total tangible assets less the amount of our total liabilities, divided by the sum of the number of our shares of common stock outstanding. Our net tangible book value as of March 31, 2020 was $(161.7) million, or $(19.32) per share of common stock.

After giving effect to (i) the issuance by us of 791,139 shares of our common stock in connection with the acquisition of CTEH; (ii) the issuance and sale by us of 10,000,000 shares of our common stock in this offering at an assumed initial public offering price of $16.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and other estimated offering expenses payable by us; and (iii) the application of such proceeds as described in the section entitled “Use of Proceeds,” including the payment by us, in shares of common stock, of the maximum portion of the per-share redemption price of our Series A-1 preferred stock in common stock, our net tangible book value, pro forma, as of March 31, 2020 would have been $(333.2) million, or $(16.36) per share of common stock. This represents an immediate increase in net tangible book value to our existing stockholders of $2.96 per share and an immediate dilution to new investors in this offering of $32.36 per share. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $ 16.00  

Net tangible book value per share of common stock as of March 31, 2020

   $ (19.32  

Pro forma increase in net tangible book value per share attributable to new investors

   $ (2.96  
  

 

 

   

Pro forma net tangible book value per share after the offering

     $ (16.36
    

 

 

 

Dilution per share to new investors

     $ 32.36  
    

 

 

 

The information in the preceding table is based on an assumed offering price of $16.00 per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus. A $1.00 increase or decrease in the assumed initial public offering price per share would increase or decrease, respectively, the pro forma net tangible book value after this offering by approximately $9.4 million and increase or decrease the dilution per share of common stock to new investors in this offering by $0.60 per share, in each case calculated as described above and assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Similarly, each increase or decrease of 1.0 million shares in the number of shares of our common stock offered by us would increase or decrease, as applicable, our pro forma net tangible book value by approximately $15.0 million and increase or decrease, as applicable, the dilution to new investors in this offering by $1.55 per share, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The following table shows on a pro forma basis at March 31, 2020, after giving effect to the issuance by us of 791,139 shares of our common stock in connection with the acquisition of CTEH, the total cash consideration paid to us and the average price per share paid by existing stockholders and by new investors in this offering, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

    

Shares purchased(1)

   

Total consideration(2)

   

Average
price
per share

 
    

Number

    

  %  

   

Number

    

  %  

 

Existing stockholders

     9,125,683        47.7     90,485,641        36.1   $ 9.92  

New investors

     10,000,000        52.3     160,000,000        63.9   $ 16.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     19,125,683        100     250,485,641        100   $ 13.10  

 

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(1)

If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own approximately 44% and our new investors would own approximately 56% of the total number of shares of our common stock outstanding after this offering.

 

(2)

If the underwriters exercise their option to purchase additional shares in full, the total consideration paid by our existing stockholders and new investors would be approximately $90,485,641 (or 33%) and $184,000,000 (or 67%), respectively.

We have not granted any awards under the 2017 Stock Plan and 2013 Stock Plan since March 31, 2020. The discussion above does not account for the grant of the IPO Awards, nor does it reflect the dilution you may experience upon any conversion of our shares of Series A-2 preferred stock into shares of common stock at a discounted rate, or upon the exercise of outstanding warrants to purchase shares of our common stock. See the sections entitled “Description of Capital Stock — Preferred Stock” and “Description of Capital Stock —Warrants.” Additionally, an aggregate of 1,155,938 additional shares of our common stock will initially be available for future awards under the 2017 Stock Plan, including the increase in the number of shares reserved for issuance thereunder authorized in connection with this offering, which shares are not included in the above discussion and tables. To the extent that we grant awards in the future with exercise prices below the initial public offering price in this offering, investors purchasing in this offering will incur additional dilution. See the section entitled “Shares Eligible for Future Sale.”

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

Our selected historical consolidated financial and other information presented and discussed below is derived from our audited consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2019 and 2018, included elsewhere in this prospectus. Except where otherwise noted, our summary consolidated balance sheet data presented below as of December 31, 2017 and December 31, 2016, and our summary consolidated statements of operations and cash flow data presented below for the periods then ended have been derived from our financial statements not included in this prospectus. The selected consolidated financial data in this section are not intended to replace the audited consolidated financial statements and related notes thereto included elsewhere in this prospectus and are qualified in their entirety by the audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. Our historical results presented below are not necessarily indicative of the results to be expected for any future period.

The summary financial data presented below represent portions of our audited consolidated financial statements and are not complete. You should read the selected historical consolidated financial data set forth below together with the sections entitled “Use of Proceeds,” “Capitalization,” “Unaudited Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Non-GAAP Financial Information,” “Related Party Transactions,” “Description of Certain Indebtedness” and our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

    

For the Years Ended December 31,

 
     2016     2017     2018     2019  
    

(in thousands except per share

and percentage data)

 

Consolidated Statement of Operations Data:

        

Revenues

   $ 114,780     $ 137,647     $ 188,805     $ 233,854  

Cost of revenues (exclusive of depreciation and amortization)

     74,605       86,324       134,734       163,983  

Selling, general and administrative expense

     34,985       42,539       38,615       50,663  

Related-party expense

     1,162       1,619       2,180       448  

Depreciation and amortization

     15,023       18,828       23,915       27,705  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (10,995     (11,663     (10,639     (8,945
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (8,946   $ (10,549   $ (16,491   $ (23,557
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding—basic and diluted

     6,373       7,116       7,533       8,789  

Net loss per shares attributable to common stockholders—basic and diluted

   $ (1.40   $ (3.93   $ (2.79   $ (4.91

Other Financial Data (unaudited)

        

Operating margin(1)

     (9.6 )%      (8.5 )%      (5.6 )%      (3.8 )% 

Adjusted EBITDA(2)

   $ 7,329     $ 13,833     $ 19,313     $ 31,242  

Adjusted EBITDA margin(2)(3)

     6.4     10.0     10.2     13.4

Consolidated Statement of Cash Flows Data:

        

Net cash provided by (used in) operating activities

   $ 4,287     $ 7,553     $ (2,845   $ 17,042  

Net cash used in investing activities

     (7,182     (37,740     (50,283     (86,983

Net cash provided by financing activities

     3,621       33,745       50,850       74,452  
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash, cash equivalents and restricted cash

   $ 726     $ 3,558     $ (2,278   $ 4,511  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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For the Years Ended December 31,

 
     2016      2017      2018      2019  
    

(in thousands except per share

and percentage data)

 

Consolidated Statement of Financial Position Data:

           

Current assets

   $ 28,226      $ 38,910      $ 53,999      $ 73,239  

Non-current assets

     105,186        139,652        180,372        258,599  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 133,412      $ 178,562      $ 234,371      $ 331,838  
  

 

 

    

 

 

    

 

 

    

 

 

 

Current liabilities

   $ 27,409      $ 25,866      $ 42,365      $ 73,252  

Non-current liabilities

     58,109        102,078        75,900        156,055  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     85,518        127,944        118,265        229,307  

Redeemable Series A-1 preferred stock $0.0001 par value—authorized issued and outstanding shares: 12.000 at December 31, 2019 and 2018; aggregate liquidation preference of $141,898 and $123,417 at December 31, 2019 and 2018

           109,206        128,822  

Convertible preferred stock, $0.0001 par value—authorized shares 100,000; issued and outstanding shares: 69,817 at December 31, 2017 and 2016

     27,582        45,017        

Total stockholders’ equity (deficit)

     20,312        5,601        6,900        (26,291
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities, Redeemable Series A-1 preferred stock and stockholders’ equity (deficit)

   $ 133,412      $ 178,562      $ 234,371      $ 331,838  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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

 

(2)

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

 

(3)

Represents Adjusted EBITDA as a percentage of revenues.

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma consolidated financial information and the related notes present our unaudited pro forma consolidated statements of operations for the three months ended March 31, 2020 and the year ended December 31, 2019, and our unaudited pro forma consolidated balance sheet as of March 31, 2020. The unaudited pro forma consolidated financial information has been derived by aggregating our historical consolidated financial statements and the historical financial statements of Emerging Compounds Treatment Technologies, Inc., or ECT2, and CTEH Holdings, LLC, or CTEH Holdings, each included elsewhere in this prospectus, and making certain pro forma adjustments to such aggregated financial information to give effect to the following transactions, or collectively, the Transactions:

 

   

The acquisition of ECT2, and the incurrence of debt to finance the acquisition;

 

   

The acquisitions of Target Emission Services Inc., Target Emissions Services USA LP, Air Water & Soil Laboratories, Inc. and LEHDER Environmental Services Ltd, and the incurrence of debt to finance these acquisitions;

 

   

The entry into the Unitranche Credit Agreement and the repayment in full of all amounts outstanding under our prior senior secured credit facility;

 

   

The issuance of Series A-2 preferred stock and the Series A-2 Warrant;

 

   

The acquisition of CTEH;

 

   

The issuance and sale by us of our common stock in this offering after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, the use of net proceeds received by us as described under “Use of Proceeds” and the automatic adjustment in the terms of the Series A-1 preferred stock; and

 

   

The repayment of the Series A-1 preferred stock and guaranteed dividend using a portion of the proceeds from this offering and the issuance of shares of our common stock.

The Transactions, along with the assumptions underlying the pro forma adjustments to the unaudited pro forma consolidated financial information, are described fully in the accompanying notes, which should be read in conjunction with the unaudited pro forma financial information.

 

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The table below provides the date each acquisition Transaction closed, the date and period for which each acquisition Transaction has been reflected in our historical financial statements and the date and period for which each acquisition Transaction is shown in the unaudited pro forma consolidated financial information giving effect to the Transactions as if they had occurred on the dates shown.

 

Acquired Company

 

Transaction
Close Date

 

Balance Sheet reflected
in historical financial
statements:

 

Period reflected in
historical financial
statements:

 

Period reflected
in the pro forma
adjustments

 

Pro forma
information
provided as if
Transaction
occurred:

Target Emission Services, Inc.

  April 30, 2019   As of December 31, 2019   May 1, 2019 to
December 31, 2019
  January 1, 2019 to
April 30, 2019
  January 1, 2019

Target Emission Services USA LP

  April 30, 2019   As of December 31, 2019   May 1, 2019 to
December 31, 2019
  January 1, 2019 to
April 30, 2019
  January 1, 2019

Air Water & Soil Laboratories, Inc.

  June 28, 2019   As of December 31, 2019   July 1, 2019 to
December 31, 2019
  January 1, 2019 to
June 30, 2019
  January 1, 2019

LEHDER Environmental Services Ltd

  July 31, 2019   As of December 31, 2019   August 1, 2019 to
December 31, 2019
  January 1, 2019 to
July 31, 2019
  January 1, 2019

Emerging Compounds Treatment Technologies, Inc.

  August 31, 2019   As of December 31, 2019   September 1, 2019 to
December 31, 2019
  January 1, 2019 to
August 31, 2019
  January 1, 2019

The Center for Toxicology and Environmental Health, L.L.C.

  April 2020   N/A   N/A   January 1, 2019 to
March 31, 2020
  January 1, 2019

The acquisition of CTEH, the issuance of the Series A-2 preferred stock, our entry into the Unitranche Credit Agreement and the repayment of our prior senior secured credit facility occurred on April 13, 2020, and are therefore not reflected in our historical consolidated balance sheet as of March 31, 2020. Accordingly, pro forma adjustments to the historical consolidated balance sheet as of March 31, 2020 have been made to reflect these Transactions.

The unaudited pro forma financial information herein has been prepared to illustrate the effects of the Transactions in accordance with GAAP and pursuant to Article 11 of Regulation S-X. The historical financial information has been adjusted in the unaudited pro forma financial information to give effect to pro forma events that are (i) directly attributable to the Transactions, (ii) factually supportable and (iii) with respect to the unaudited pro forma consolidated statements of operations, expected to have a continuing impact on the combined results. However, such adjustments are estimates based on certain assumptions and may not prove to be accurate. Information regarding these adjustments is subject to risks and uncertainties that could cause actual results to differ materially from our unaudited pro forma financial information.

Each of the acquisition Transactions was accounted for as a business combination using the acquisition method of accounting under the provisions of ASC Topic 805, Business Combinations, or ASC 805, and using the fair value concepts defined in ASC Topic 820, Fair Value Measurements. Under ASC 805, all assets acquired and liabilities assumed are recorded at their acquisition date fair value. The determination of the fair values of the assets acquired and liabilities assumed (and the related determination of estimated useful lives of depreciable and amortizable tangible and identifiable intangible assets) requires significant judgment and estimates. The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows related to the businesses acquired. However, for the CTEH acquisition, due to the timing of the acquisition, the excess purchase price over the carrying value of assets acquired and liabilities assumed has been estimated as the Company has not yet completed the initial purchase price allocation. The Company has used its best estimates based on the information available as of the date hereof.

In our opinion, all adjustments necessary to reflect the effects of the Transactions have been included and are based upon currently available information and assumptions that we believe are reasonable as of the date of this prospectus. Any of the factors underlying these estimates and assumptions may change or prove to be

 

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materially different. The unaudited pro forma financial information also does not purport to represent what our actual results of operations and financial position would have been had the Transactions occurred on the dates indicated, nor are they intended to be representative of or project our future financial condition or results of operations or financial position.

The unaudited pro forma consolidated financial information does not reflect any additional costs that may arise from being a public company or the realization of any expected cost savings, operating efficiencies or other synergies that may result from the Transactions as a result of any integration and restructuring activities or other planned cost savings initiatives following the completion of the Transactions.

The unaudited pro forma financial information is provided for informational and illustrative purposes only and should be read in conjunction with our historical financial statements and the historical financial statements of ECT2 and CTEH Holdings, each of which is included elsewhere in this prospectus, as well as the financial and other information appearing elsewhere in this prospectus, including in the sections entitled “Risk Factors,” “Use of Proceeds,” “Capitalization,” “Selected Historical Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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Montrose Environmental Group, Inc.

Unaudited Pro Forma Consolidated Statement of Operations

For the Three Months Ended March 31, 2020

 

(in thousands)  

As reported
for the quarter

ended
March 31,
2020

   

Issuance
of the
Unitranche
Facility(1)

   

Repayment
in full of
the Prior
Senior
Secured
Credit
Facility(2)

   

CTEH
Business
Acquisition(3)

   

Pro forma
Amounts
Business
Acquisition
of CTEH(4)

   

Repayment
of Series
A-1
Preferred
Stock(5)

   

IPO
Offering(6)

   

Total

Pro
Forma

Impact

   

Pro Forma
As Adjusted
at
March 31,
2020

 

Consolidated Statement of Operations Data:

                 

Revenues

  $ 61,031         $ 31,253 (3)          $ 31,253     $ 92,284  

Operating expenses (exclusive of depreciation and amortization)

    (65,329         (20,750 )(3)      (1,190 )(4)        (250 )(6)      (22,190     (87,519

Related party expense

    (119                   (119

Depreciation and amortization expense

    (7,560         (235 )(3)      (4,672 )(4)(4a)          (4,907     (12,467

Other (expenses) income

    (29,830         53 (3)            53       (29,777

Interest expense—net

    (2,593     (906 )(1)      (1,028 )(2)      (33 )(3)        12,264 (5)        10,297       7,704  

Benefit (expense) from income taxes

    3,152             (2,881 )(4)(4b)          (2,881     271  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (41,248   $ (906   $ (1,028   $ 10,288     $ (8,743   $ 12,264     $ (250   $ 11,625     $ (29,623
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA(7)

          10,556               10,556  

Adjusted EBITDA(8)

    5,553                     5,553  
                 

 

 

 

Pro forma Adjusted EBITDA(8)

                  $ 16,109  
                 

 

 

 

 

(1)

Incremental interest expense between the the Company’s prior senior secured credit facility interest expense and the Unitranche Credit Facility interest expense assuming the Company entered the Unitranche Credit Agreement on January 1, 2020 and repaid all amounts outstanding under the prior senior secured credit facility on such date.

(2)

The repayment of the Company’s prior senior secured credit facility assumes the write off of $1.0 million in debt issuance costs. This is considered a recurring expense in nature. Refer to Note 11 of the Company’s unaudited condensed consolidated financial statements included elsewhere in this prospectus.

(3)

Historical amounts for CTEH. See the unaudited condensed consolidated financial statements of CTEH Holdings included elsewhere in this prospectus.

(4)

Pro forma amounts consider acquisition bonus, estimated amortization expense of intangible assets and estimated income tax expense of $1.2 million, $4.7 million and $2.9 million, respectively. Acquisition bonuses are paid by the Company on a recurring basis.

(4a)

Intangible assets acquired include customer relationships, covenants not to compete, trade names and proprietary software. Amortization of intangible assets was estimated. Actual life will be determined through the purchase price accounting.

(4b)

The pro forma income tax expense has been determined using a combined state and federal tax rate of 28.0%

(5)

The principal and accrued interest on the Series A-1 preferred stock is expected to be fully repaid with the proceeds from this offering and the issuance of shares of common stock. See the section entitled “Use of Proceeds.” Out of the three year minimum guaranteed interest of $38.7 million, there was $11.7 million in interest earned but unaccrued as of March 31, 2020. Additionally, this pro forma amount accounts for the write off of the following with respect to the repayment in full of the Series A-1 preferred stock: (i) related discount of $11.3 million, (ii) transaction issuance costs of $1.4 million and (iii) the write off of the contingent put option of $36.7 million.

(6)

Assumes $0.3 million of estimated stock based compensation expense for options issued to certain executives.

(7)

EBITDA is a non-GAAP measure and has been presented in this unaudited pro forma financial information as a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP or Article 11 of the SEC’s Regulation S-X. EBITDA represents net income (loss), before interest expense–net, depreciation and amortization and benefit (expense) from income taxes.

 

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EBITDA is presented herein because it is an important metric used by management as one of the means by which it assesses acquisition targets. For additional information regarding why we believe non-GAAP measures provide useful information to investors and a discussion of certain limitations thereof, see the section entitled “Non-GAAP Financial Information.”

 

 

The following represents the reconciliation of EBITDA to net income for CTEH for the three months ended March 31, 2020 (in thousands):

 

Net income

   $ 10,288  

Interest expense–net

     33  

Depreciation and amortization

     235  

(Benefit) expense from income taxes

  
  

 

 

 

EBITDA

   $ 10,556  
  

 

 

 

 

(8)

Non-GAAP measure. See the section entitled “Non-GAAP Financial Information” for a discussion of non-GAAP measures, and a reconciliation of Montrose’s historical Adjusted EBITDA to reported net loss, the most directly comparable GAAP measure.

 

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Montrose Environmental Group, Inc.

Unaudited Pro Forma Consolidated Statement of Operations

For the Year Ended December 31, 2019

 

(in thousands)

 

As reported
for the fiscal
year ended
December 31,
2019

   

ECT2
business
acquisition(1)

   

ECT2
business
acquisition
Pro Forma(2)

   

Other
immaterial
business
acquisitions
pro forma
adjustments(3)

   

Issuance of
the
Unitranche
Credit
Facility(4)

   

CTEH
Business
Acquisition(5)

   

Pro forma
Amounts
Business
Acquisition
of CTEH(6)

   

IPO
Offering(7)

   

Total

Pro
Forma

Impact

   

Pro Forma
As Adjusted
at
December 31,
2019

 

Consolidated Statement of Operations Data:

                   

Revenues

  $ 233,854     $ 17,707 (1)      $ 7,739 (3)      $ 110,119 (5)        $ 135,565     $ 369,419  

Operating expenses (exclusive of depreciation and amortization)

    (214,646     (12,937 )(1)        (5,555 )(3)        (73,973 )(5)      (2,161 )(6)    $ (1,000 )(7)      (95,626     (310,272

Related party expense

    (448                     (448

Depreciation and amortization expense

    (27,705     (127 )(1)      (2,631 )(2)      (1,126 )(3)        (822 )(5)       (18,689 )(6)(6a)        (23,395     (51,100

Other (expenses)
income

    (10,978     (46 )(1)         27 (3)         17 (5)           (2     (10,980

Interest expense—net

    (6,755       (1,918 )(2)      (713 )(3)      (2,875 )(4)      (413 )(5)          (5,919     (12,674

Benefit (loss) from income taxes

    3,121       (1,142 )(1)        148 (3)          (9,780 )(6)(6b)        (10,744     (7,653
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (23,557   $ 3,455     $ (4,549   $ 520     $ (2,875   $ 34,928     $ (30,630   $ (1,000   $ (151   $ (23,708
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA(8)

      4,724         2,211         36,163             43,098  

Adjusted EBITDA(9)

    31,242                       31,242  
                   

 

 

 

Pro forma Adjusted EBITDA(9)

                    $ 74,340  
                   

 

 

 

 

(1)

Historical amounts for the period ended August 30, 2019 for ECT2. See the audited financial statements of ECT2 included elsewhere in this prospectus.

(2)

Pro forma amount for the amortization of intangible assets acquired and the interest expense incurred due to financing the purchase of the acquisition through the Company’s prior senior secured credit facility for the period ended August 30, 2019.

(3)

Represent pro forma results assuming the acquisitions occurred as of January 1, 2019.

(4)

Incremental interest expense between the Unitranche Credit Facility interest expense and the prior senior secured credit facility interest expense assuming the Company entered the Unitranche Credit Agreement on January 1, 2019 and repaid all amounts outstanding under the prior senior secured credit facility on such date.

(5)

Historical amounts for CTEH. See the audited consolidated financial statements of CTEH Holdings included elsewhere in this prospectus.

(6)

Amounts represent pro forma bonus expense, acquisition related expenses and estimated intangible assets amortization related to the CTEH acquisition.

(6a)

Intangible assets acquired include customer relationships, covenants not to compete, trade names and proprietary software. The amortization of the intangible assets was estimated. Actual life will be determined through the purchase price accounting.

(6b)

The pro forma income tax expense has been determined using a combined state and federal tax rate of 28.0%.

(7)

Estimated stock based compensation expense for options issued to certain executives.

(8)

EBITDA is a non-GAAP measure and has been presented in this unaudited pro forma financial information as a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP or Article 11 of the SEC’s Regulation S-X. EBITDA represents net income (loss), before interest expense–net, depreciation and amortization and benefit (expense) from income taxes.

 

 

EBITDA is presented herein because it is an important metric used by management as one of the means by which it assesses acquisition targets. For additional information regarding why we believe non-GAAP measures provide useful information to investors and a discussion of certain limitations thereof, see the section entitled “Non-GAAP Financial Information.”

 

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The following represents the reconciliation of EBITDA to net income for the Transaction indicated for the year ended December 31, 2019 (in thousands):

 

    

ECT2

    

Other
immaterial
business
acquisitions

    

CTEH

 

Net income

   $ 3,455      $ 520      $ 34,928  

Interest expense–net

        713        413  

Depreciation and amortization

     127        1,126        822  

Expense (benefit) from income taxes

     1,142        (148   
  

 

 

    

 

 

    

 

 

 

EBITDA

   $ 4,724      $ 2,211      $ 36,163  
  

 

 

    

 

 

    

 

 

 

 

(9)

Non-GAAP measure. See the section entitled “Non-GAAP Financial Information” for a discussion of non-GAAP measures, and a reconciliation of Montrose’s historical Adjusted EBITDA to reported net loss, the most directly comparable GAAP measure.

 

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Montrose Environmental Group, Inc.

Unaudited Pro Forma Consolidated Balance Sheet

As of March 31, 2020

 

   

As
reported
for the
quarter
ended
March 31,
2020

   

Issuance of
the
Unitranche
Credit
Facility(1)

   

Repayment
in full of
the Prior
Senior
Secured
Credit
Facility(2)

   

Issuance
of the
Series
A-2
Preferred
Stock(3)

   

Historical
Amounts
Business
Acquisition
of CTEH(4)

   

Pro Forma
Amounts
Business
Acquisition
of CTEH(5)

   

IPO
Offering(6)

   

Repayment
of Series
A-1
Preferred
Stock(7)

   

Total

Pro
Forma

Impact

   

Pro
Forma As
Adjusted
at
March 31,
2020

 

Assets

                   

Current Assets:

                   

Cash

  $ 1,047     $ 195,551 (1a)    $ (158,181 )(2)    $ 173,847 (3a)    $ 1,527 (4)    $ (175,000 )(5a)    $ 140,000 (6)    $ (139,340 )(7a)    $ 38,404     $ 39,451  

Restricted Cash

    473                       473  

Accounts receivable—net

    39,715             11,940 (4)      1,746 (5b)          13,686       53,401  

Contract assets

    14,398             6,406 (4)(4a)            6,406       20,804  

Prepaid and other current assets

    8,020             1,265 (4)             1,265       9,285  

Income tax receivable

    908                       908  

Non-Current Assets

                   

Property and equipment—net

    28,729             6,060 (4)             6,060       34,789  

Goodwill

    127,058               98,469 (5c)          98,469       225,527  

Other intangible assets—net

    97,155               130,833 (5c)          130,833       227,988  

Other assets

    2,444                       2,444  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

    319,947       195,551       (158,181     173,847       27,198       56,048       140,000       (139,340     295,123       615,070  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities, Redeemable Series A-1 Preferred Stock, Convertible and Redeemable Series A-2 Preferred Stock and Stockholders’ (Deficit) Equity

                   

Current Liabilities:

                   

Accounts payable and other accrued liabilities

  $ 29,494     $ 906 (1b)    $       $       $ 4,482 (4)      44,576 (5d)(5f)    $       $       $ 49,964     $ 79,458  

Accounts payable to related party

    9                       9  

Accrued payroll and benefits

    8,574             4,077 (4)             4,077       12,651  

Income tax payable

              2,881 (5g)          2,881       2,881  

Warrant option

    16,877           29,991 (3b)              29,991       46,868  

Current portion of long term debt

    7,460       1,641 (1c)       (5,000 )(2)                 (3,359     4,101  

Non-Current Liabilities:

                   

Other non-current liabilities

    490               6,809 (5d)          6,809       7,299  

Deferred tax liabilities—net

    419                       419  

Contingent put option

    36,727                   (36,727 )(7a)      (36,727  

Long-term debt—net of deferred financing fees

    157,427       193,910 (1d)      (152,153 )(2)                41,757       199,184  

Commitments and Contingencies

                   

Redeemable Series A-1 Preferred Stock $0.0001 par value -authorized, issued and outstanding shares: 12,000 at March 31, 2020

    134,237                   (134,237 )(7b)      (134,237  

Convertible and Redeemable Series A-2 Preferred Stock $0.0001 par value—authorized, issued and outstanding shares: 17, 500

          149,903 (3c)              149,903       149,903  

Stockholders’ (Deficit) Equity:

                   

Common stock, $0.000004 par value; authorized shares: 25,000,000; issued and outstanding shares 8,370,107 at March 31, 2020

                   

Additional paid-in capital

    33,888           (6,047 )(3d)      18,639 (4)(4b)      6,361 (5e)      160,250 (6)      19,360 (7c)       198,563       232,451  

Accumulated deficit

    (105,652     (906 )(1b)      (1,028 )(2)           (4,579 )(5f)      (20,250 )(6)      (12,264 )(7a)      (14,499     (120,151

Other comprehensive loss

    (3                     (3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities, Redeemable Series A-1 Preferred Stock, Convertible and Redeemable Series A-2 Preferred Stock and Stockholders’ (Deficit) Equity

  $ 319,947     $ 195,551     $ (158,181   $ 173,847     $ 27,198     $ 56,048     $ 140,000       (139,340     295,123       615,070  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
(1)

The Unitranche Credit Agreement provides for a credit facility of $225.0 million, comprised of a $175.0 million term loan and a $50.0 million revolving credit facility. The term loan has quarterly repayments starting on September 30, 2020, with the remaining outstanding principal amount due on the maturity date. Total amounts drawn at issuance were $175.0 million and $25.0 million for the term loan and the revolver, respectively.

(1a)

Total cash received from the issuance of the Unitranche Credit Facility amounted to $200.0 million of which $4.5 million was used to pay closing fees and was recorded as debt issuance costs.

(1b)

Incremental interest expense between the Unitranche Credit Facility interest expense and the prior senior secured credit facility interest expense assuming the Company entered the Unitranche Credit Agreement on January 1, 2020.

(1c)

Current portion of long term debt was determined based on the amortization schedule for the Unitranche Credit Facility. The Company will make quarterly repayments, initially of $0.5 million beginning on September 2020.

(1d)

Amounts represent the long term portion of amounts outstanding under the Unitranche Credit Facility ($175.0 million term loan and $25.0 million in the revolver) net of debt issuance costs of $4.5 million and the long term debt current portion of $1.6 million.

(2)

In April 2020, the Company repaid in full the $158.2 million outstanding under the Company’s prior senior secured credit facility ($5.0 million recorded as current debt and $141.3 million recorded as long term debt) with proceeds received from the Unitranche Credit Facility. Unamortized debt issuance costs linked to the Company’s prior senior secured credit facility of $1.0 million were written off.

(3)

The Company issued 17,500 shares of Series A-2 preferred stock with a par value of $0.0001 per share and the Series A-2 Warrant with a 10-year life for an aggregate purchase price of $175.0 million. Upon a qualifying IPO, the Series A-2 preferred stock becomes convertible into common equity, beginning on the four-year anniversary at a 15% discount to the common stock market price. See the section entitled “Description of Capital Stock—Preferred Stock—Series A-2 Preferred Stock.”

(3a)

Total proceeds received from the issuance of the of the Series A-2 preferred stock were $175.0 million of which $1.2 million was used to pay debt issuance costs.

(3b)

The Series A-2 Warrant has a preliminary fair market value of $30.0 million. Refer to Note 20 in the Company’s unaudited condensed consolidated financial statements included elsewhere in this prospectus.

(3c)

The Company determined that the Series A-2 preferred stock is considered temporary equity since it is redeemable at the option of the holder. The value assigned to the Series A-2 preferred stock was calculated as follows: (i) $175.0 million of proceeds received from the issuance of the instrument, less (ii) $30.0 million assigned to the Series A-2 Warrant, plus (iii) the estimated accretion for the period of $6.0 million, and less (iv) debt issuance cost amounting to $1.2 million.

(3d)

Amount represents the estimated accretion of the Series A-2 preferred stock for the period.

(4)

Amounts represent historical balances as of March 31, 2020 for the CTEH business acquisition.

(4a)

Contract assets consist of unbilled accounts receivable.

(4b)

Amounts represent the historical net assets acquired and net liabilities assumed or equity amounts. Subsidiaries estimated equity amounts are not part of the purchase price accounting and therefore have been removed in the pro forma column.

(5)

In April 2020, the Company completed the business acquisition of CTEH by acquiring 100% of its membership interests. CTEH is an environmental consulting company in Arkansas that specializes in environmental response and toxicology. The transaction qualified as an acquisition of a business and will be accounted for as a business combination.

(5a)

CTEH cash purchase price component amounted to $175.0 million. The cash component of the CTEH purchase price was funded via the issuance of Series A-2 preferred stock.

(5b)

The other purchase price component of the CTEH purchase price consisted of a target working capital amount. CTEH’s resulting working capital at closing did not meet the target amount and therefore, resulted in a working capital deficit due to the Company.

(5c)

These amounts represent the difference between the net assets acquired and liabilities assumed. Intangible assets acquired include customer relationships, covenants not to compete, tradenames and proprietary software. The Company estimated the amount allocated to intangible assets and goodwill as of March 31, 2020. Actual amounts will be determined through purchase price accounting.

(5d)

The contingent consideration element of the purchase price of CTEH’s acquisition is related to potential earn-out payments which are based on the expected achievement of revenue or earnings thresholds as of the date of the acquisition. The recorded amount of earn-out reflects a preliminary estimate for the first and second year earn-out amounting to $42.9 million and $6.8 million, respectively. These are estimates and the amounts will be finalized in purchase price accounting. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations.”

(5e)

Amounts represent the equity purchase price component of the acquisition amounting to $25.0 million net of the write off of the $18.6 million of the equity in CTEH historical equity balance. The common stock component of CTEH acquisition was paid through the issuance of 791,139 shares of common stock.

(5f)

Considers acquisition related expenses of $1.7 million and estimated income tax expense of $2.9 million.

(5g)

CTEH was a disregarded entity for tax purposes since the business was a limited liability company. The pro forma tax expense has been determined using a combined state and federal tax rate of 28.0%.

(6)

Assumes pro forma common shares outstanding of 10,332,001 as of March 31, 2020 and 10,000,000 shares issued in connection with this offering for net proceeds of $140.0 million, $6.0 million of executive compensation, $14.0 million of IPO issuance fees and $0.3 million of estimated stock based compensation for options issued to certain executives. Refer to the section entitled “Capitalization.”

(7)

The Series A-1 preferred stock is expected to be redeemed upon completion of this offering. See the section entitled “Use of Proceeds.”

(7a)

The principal and accrued interest on the Series A-1 preferred stock amounting to $139.3 million (net of $19.4 million expected to be paid in shares of common stock) is expected to be fully repaid with the proceeds from this offering and the issuance of shares of common stock. See the section entitled “Use of Proceeds.” Out of the three year minimum guaranteed interest of $38.7 million, there was $11.7 million in interest earned but unaccrued as of March 31, 2020. Additionally, this pro forma accounts for the write off of (i) related discount of $11.3 million, (ii) debt issuance costs of $1.4 million, and (iii) the write off of the contingent put option of $36.7 million.

(7b)

The accreted Series A-1 preferred stock balance is composed of the following: (i) $120.0 million principal balance, (ii) $27.0 accrued interest, (iii) less debt issuance discount of $1.4 million, and (iv) $11.3 million related to the warrant discount related to the stock purchase warrant issued concurrent with the Series A-1 preferred stock and recorded at the issuance of the instrument.

(7c)

Out of the three year minimum guaranteed interest of $38.7 million, an amount per share equal to the product of (i) 50.0% multiplied by (ii) the redemption price minus $10,000 ($19.4 million) will be paid in common stock.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the sections titled “Selected Consolidated Financial Data” and “Unaudited Pro Forma Financial Information,” and our historical audited consolidated financial statements and related notes and other information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” and included elsewhere in this prospectus.

Overview

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

Our Segments

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

Assessment, Permitting and Response

Through our Assessment, Permitting and Response segment, we provide scientific advisory and consulting services to support environmental assessments, environmental emergency response, and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. Our technical advisory and consulting offerings include regulatory compliance support and planning, environmental, ecosystem and toxicological assessments and support during responses to environmental disruption. We help clients navigate regulations at the local, state, provincial and federal levels. In addition to environmental toxicology, our scientists and response teams have helped over 70 clients address COVID-19-related needs, and continue to help clients navigate their preparation for and response to COVID-19 infections.

Measurement and Analysis

Through our Measurement and Analysis segment, our highly credentialed teams test and analyze air, water and soil to determine concentrations of contaminants as well as the toxicological impact of contaminants on flora, fauna and human health. Our offerings include source and ambient air testing and monitoring, leak detection and advanced analytical laboratory services such as air, storm water, wastewater and drinking water analysis. We are a market leader in environmental testing and laboratory services based on 2018 annual revenue according to EBI.

Remediation and Reuse

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

 

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

COVID-19

We are closely monitoring the impact of the COVID-19 pandemic on our business, including how it will impact our customers, employees and suppliers. While COVID-19 did not have a material adverse effect on our reported results for our first quarter, we did experience some changes to our business operations. The changes were primarily composed of client postponement of on-site environmental compliance testing, delays in project start dates, and postponement or reformatting of scientific presentations and sales visits. We believe these impacts are temporary and accordingly we have instituted temporary cost mitigation measures such as furloughs for a subset of our impacted workforce. Our businesses exposed to commercial food waste and non-specialized municipal water engineering projects also saw or are seeing more significant disruptions and, as a result, we exited those service lines as described further below. On the other hand, our recent CTEH acquisition has seen benefits from COVID-19 given client demand for its toxicology and response services. In the aggregate, the majority of our business and our outlook for 2020 has been largely unimpacted to-date. We have not experienced a significant slowdown in cash collections, and as a result cash flow from operations has not been materially adversely impacted. We also recently entered into a new credit facility, replacing our prior senior secured credit facility, and as a result, have increased cash on hand and borrowing capacity. We expect our sources of liquidity to be sufficient for our operating needs for the next twelve months. See “Liquidity and Capital Resources.”

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

Key Factors that Affect Our Business and Our Results

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

Acquisitions

We have been, and expect to continue to be, an acquisitive company. Since January 1, 2017, we have acquired 22 businesses (seven businesses in each of the last three fiscal years and one in the second quarter of 2020).

Acquisitions have expanded our environmental service capabilities across all three segments, our access to technology, as well as our geographic reach in the United States, Canada and Australia. We did not acquire any companies in the first quarter of 2020. For the year ended December 31, 2019, approximately $23.2 million, or 9.9% of our revenues in 2019, were generated from companies acquired in 2019, and for the year ended December 31, 2018, approximately $17.9 million, or 9.5% of our revenues in 2018, were generated from companies acquired in 2018. Revenues from acquired companies exclude intercompany revenues from revenue synergies realized between business lines within operating segments, as these are eliminated at the consolidated segment and Company level. We expect our revenue growth to continue to be driven in significant part by acquisitions, in particular, by our recent acquisition of CTEH.

 

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As a result of our acquisitions, goodwill and other intangible assets represent a significant proportion of our total assets, and amortization of intangible assets has historically been a significant expense. For the three months ended March 31, 2020 and March 31, 2019, amortization expense was $5.6 million and $4.5 million, respectively. For the years ended December 31, 2019 and December 31, 2018, amortization expense was $20.0 million and $16.3 million, respectively. Our historical financial statements also include other acquisition-related costs, including costs relating to external legal support, diligence and valuation services and other transaction and integration-related matters. For the three months ended March 31, 2020 and March 31, 2019, total acquisition-related costs were $1.3 million and $0.2 million, respectively. For the years ended December 31, 2019 and December 31, 2018, total acquisition-related costs were $3.5 million and $1.6 million, respectively. In addition, in any year gains and losses from changes in the fair value of earn-out related contingent consideration could be significant. For the three months ended March 31, 2020 and March 31, 2019, there were no material changes in the fair value of contingent consideration. For the years ended December 31, 2019 and December 31, 2018, change in the fair value of contingent consideration resulted in a net charge of $1.4 million and a net gain of $0.2 million, respectively. Additionally, we may be required to make up to $80.0 million in earn-out payments over the next two years in connection with our recent acquisition of CTEH, a portion of which may be paid in the form of shares of our common stock. See “Contractual Obligations” and “Liquidity and Capital Resources.” We expect that amortization of identifiable intangible assets and other acquisition-related costs, assuming we continue to acquire, will continue to be significant.

Organic Growth

We have grown organically and expect to continue to do so. We define organic growth as the change in revenues excluding revenues from acquisitions for the first twelve months following the date of acquisition. Due to the size and scale of our recent acquisition of CTEH, we also reference combined organic revenue growth in this prospectus, which represents our annual organic revenue growth plus CTEH’s annual revenue growth. We also adjust this combined organic revenue growth to exclude CTEH’s revenues generated from major environmental events resulting in one or more projects contributing more than $4.0 million of revenue in any year as the events are typically not recurring from year to year. Management uses organic growth as one of the means by which it assesses our results of operations. These measures of organic growth are not, however, a measure of revenue calculated in accordance with GAAP and should be considered in conjunction with our revenues calculated in accordance with GAAP.

Discontinued Service Lines

Periodically, or when circumstances warrant, we evaluate the performance of our business services to ensure that performance and outlook are consistent with expectations. During the quarter ended March 31, 2020, as part of this evaluation, we determined to scale back operations of our environmental lab in Berkeley, California, and to exit our non-specialized municipal water engineering service line and our food-waste biogas engineering service line. The factors underlying these decisions were accelerated and amplified by the COVID-19 pandemic, which for example, has made the collection of commercial food waste used in biodigesters less consistent and delayed the approval or initiation of certain projects dependent on municipal or state funding. As a part of discontinuing these service lines, we eliminated select personnel and, in the quarter ended March 31, 2020, booked an additional bad debt reserve related to the increased uncertainty around the ability to collect on receivables related to these service lines. Revenue from our non-specialized municipal water engineering service line and our food-waste biogas engineering or, collectively, the Discontinued Service Lines, which are included in the results of our Remediation and Reuse segment, were $10.9 million and $12.3 million in the years ended December 31, 2019 and 2018, respectively, and $1.0 million and $3.5 million in the quarters ended March 31, 2020 and 2019, respectively.

Revenue Mix

Our segments generate different levels of profitability and, accordingly, shifts in the mix of revenues between segments can impact our consolidated reported net income, operating margin, Adjusted EBITDA and

 

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Adjusted EBITDA margin from year to year. See the section entitled “Non-GAAP Financial Information” for a discussion of non-GAAP measures and a reconciliation thereof to the most directly comparable GAAP measure. Inter-company revenues between business lines within segments have been eliminated.

Financing Costs

Financing costs, relating primarily to interest expense on our debt, continue to be a significant component of our results of operations. For the three months ended March 31, 2020 and March 31, 2019, we incurred interest expense of $2.6 million and $1.3 million, respectively. For the year ended December 31, 2019, we incurred $6.8 million of interest expense and for the year ended December 31, 2018, we incurred $11.1 million of interest expense and $0.4 million in debt extinguishment costs. On April 13, 2020, we entered into the Unitranche Credit Agreement providing for a new $225.0 million credit facility comprised of a $175.0 million term loan and a $50.0 million revolving credit facility and used the proceeds therefrom to repay in full all amounts outstanding under our prior senior secured credit facility. We incurred debt extinguishment costs of $1.0 million in connection with this refinancing transaction. We expect interest expense to increase in future periods due to the higher interest rates under our new credit facility, and that interest expense will remain a significant cost as we continue to leverage our credit facility to support our operations and future acquisitions.

Corporate and Operational Infrastructure Investments

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

Seasonality

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

Earnings Volatility

We expect to experience increased annual and quarterly revenue and earnings volatility as a result of the timing of large contract wins in our Remediation and Reuse segment. In addition, the acquisition of CTEH exposes us to potentially significant revenue and earnings fluctuations tied to the timing of large emergency response projects following an incident or natural disaster. As a result, we may experience revenues and earnings in a quarter or year that are not indicative of future results.

 

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Results of Operations

Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

 

     For the Three Months
Ended March 31,
 
     2019     2020  
(in thousands, except per share data)             

Statements of operations data:

    

Revenues

   $ 50,954     $ 61,031  

Cost of revenues (exclusive of depreciation and amortization)

     37,095       44,398  

Selling, general and administrative expenses

     10,447       20,931  

Related party expense

     159       119  

Depreciation and amortization

     6,449       7,560  
  

 

 

   

 

 

 

Loss from operations

   $ (3,196   $ (11,977

Other income (expense)

     49       (29,830

Interest expense, net

     (1,279     (2,593
  

 

 

   

 

 

 

Loss before income taxes

     (4,426     (44,400

Income tax expense (benefit)

     816       (3,152
  

 

 

   

 

 

 

Net loss

   $ (5,242   $ (41,248

Accretion of redeemable preferred stock

     (4,534     (5,415
  

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (9,776   $ (46,663
  

 

 

   

 

 

 

Weighted average number of shares (basic and diluted)

     8,672       8,904  

Loss per share

   $ (1.13   $ (5.24

Other financial data:

    

Operating margin(1)

     (6.3 %)      (19.6 %) 

Adjusted EBITDA(2)

   $ 4,674     $ 5,553  

Adjusted EBITDA margin(2)

     9.2     9.1

Pro-forma revenue(3)

     $ 92,284  

Pro-forma net loss(3)

     $ (29,623

Pro-forma adjusted EBITDA(3)

     $ 16,109  

 

(1)

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

 

(2)

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

 

(3)

See the section entitled “Unaudited Pro Forma Financial Information.”

Revenues

For the three months ended March 31, 2020, we had revenues of $61.0 million, an increase of $10.0 million, or 19.8% over the three months ended March 31, 2019. The increase in revenues was driven by acquisitions completed since the end of the first quarter of 2019, which contributed $8.9 million to revenues in the first quarter of 2020. Excluding the impact of acquisitions, the increase in revenue was also driven by growth of $3.2 million in our Measurement and Analysis segment, partially offset by a decline in revenues related to the Discontinued Service Lines in our Remediation and Reuse segment.

For the three months ended March 31, 2020, our Assessment, Permitting and Response segment generated $4.5 million, or 7.4% of total revenues, our Measurement and Analysis segment generated $36.4 million, or 59.7% of total revenues, and our Remediation and Reuse segment generated $20.1 million, or

 

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32.9% of total revenues. For the three months ended March 31, 2019, we had revenues of $51.0 million, of which our Assessment, Permitting and Response segment generated $4.6 million, or 9.0% of total revenues, our Measurement and Analysis segment generated $28.3 million, or 55.6% of total revenues, and our Remediation and Reuse segment generated $18.1 million, or 35.4% of total revenues. Revenue from the Discontinued Service Lines of $1.0 million and $3.5 million for the three months ended March 31, 2020 and March 31, 2019, respectively, was all in our Remediation and Reuse segment.

Cost of Revenues

Cost of revenues consists of all direct costs required to provide services, including fixed and variable direct labor costs, equipment rental and other outside services, field and lab supplies, vehicle costs and travel- related expenses.

For the three months ended March 31, 2020, cost of revenues was $44.4 million or 72.7% of revenues, and was comprised of direct labor of $27.4 million, outside services (including construction, laboratory, shipping and freight and other outside services) of $9.3 million, field supplies, testing supplies and equipment rental of $4.3 million, project-related travel expenses of $1.6 million and other direct costs of $1.8 million. For the three months ended March 31, 2020, cost of revenues as a percentage of revenue was relatively unchanged compared to the prior year period.

For the three months ended March 31, 2019, cost of revenues was $37.1 million or 72.8% of revenues, and was comprised of direct labor of $22.0 million, outside services (including construction, laboratory, shipping and freight and other outside services) of $7.8 million, field supplies, testing supplies and equipment rental of $4.1 million, project-related travel expenses of $1.7 million and other direct costs of $1.5 million.

Selling, General and Administrative Expenses

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

For the three months ended March 31, 2020, selling, general and administrative expenses were $20.9 million, an increase of $10.5 million or 100.4% versus the three months ended March 31, 2019, of which $1.9 million was from the existing selling, general and administrative expenses of companies we acquired after the first quarter 2019. The increase was also driven by an increased investment in corporate infrastructure (primarily finance, sales and marketing, safety, IT and human resources), an increase in bad debt expense, an increase in costs incurred related to acquisitions, and costs related to preparing for our initial public offering.

For the three months ended March 31, 2020, selling, general and administrative expenses were comprised of indirect labor of $5.9 million, facilities costs of $2.9 million, stock-based compensation of $0.7 million, bad debt expense of $6.3 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $5.1 million.

For the three months ended March 31, 2019, selling, general and administrative expenses were $10.4 million, which was comprised of indirect labor of $4.2 million, facilities costs of $2.5 million, stock-based compensation of $0.8 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $2.9 million.

We expect our general and administrative expenses to increase as a result of additional insurance, legal, accounting, investor relations and other costs associated with becoming a public company.

 

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Related Party Expense

Related party expense for the three months ended March 31, 2020 and March 31, 2019, of $0.1 million and $0.2 million, respectively, represented fees paid to a related party for acquisition-related diligence support. See the section entitled “Certain Relationships and Related Party Transactions — Consulting Services.”

Depreciation and Amortization

Depreciation and amortization expense for the three months ended March 31, 2020, was $7.6 million and was comprised of amortization of finite lived intangibles of $5.6 million, arising as a result of our acquisition activity, and depreciation of property and equipment of $2.0 million. Depreciation and amortization expense for the three months ended March 31, 2019, was $6.4 million and was comprised of amortization of finite lived intangibles of $4.5 million and depreciation of property and equipment of $1.9 million. The increase in both depreciation and amortization for the three months ended March 31, 2020 versus the three months ended March 31, 2019, was primarily a result of acquisitions.

Other (Expense) Income

Other expense for the three months ended March 31, 2020 of $29.8 million was driven primarily by fair value adjustments related to the Series A-1 preferred stock contingent put option. The change in fair value of the contingent put option was influenced by the issuance of the Series A-2 preferred stock, which was deemed probable as of March 31, 2020. See Notes 10 and 14 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Other income for the three months ended March 31, 2019 was not material.

Interest Expense, Net

Interest expense, net incurred in the three months ended March 31, 2020, was $2.6 million, compared to $1.3 million for the three months ended March 31, 2019. The increase in interest expense was primarily driven by higher outstanding debt balances, including borrowings outstanding under our prior senior secured credit facility, and under equipment line of credit. See Note 11 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.

Income taxes benefit/expense

Income tax benefit was $3.2 million for the three months ended March 31, 2020, compared to an income tax expense of $0.8 million for the three months ended March 31, 2019.

Net loss and Adjusted EBITDA

For the three months ended March 31, 2020, net loss was $41.2 million and Adjusted EBITDA was $5.6 million. For the three months ended March 31, 2019, net loss was $5.2 million and Adjusted EBITDA was $4.7 million. See the section entitled “Non-GAAP Financial Information” for a discussion of non-GAAP measures and a reconciliation thereof to the most directly comparable GAAP measure.

 

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Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018

 

     Year Ended December 31,  
     2018     2019  
(in thousands, except per share data)             

Statements of operations data:

    

Revenues

   $ 188,805     $ 233,854  

Cost of revenues (exclusive of depreciation and amortization)

     134,734       163,983  

Selling, general and administrative expenses

     38,615       50,663  

Related party expense

     2,180       448  

Depreciation and amortization

     23,915       27,705  
  

 

 

   

 

 

 

Loss from operations

   $ (10,639   $ (8,945

Other income (expense)

     265       (10,978

Interest expense, net

     (11,085     (6,755
  

 

 

   

 

 

 

Loss before income taxes

     (21,459     (26,678

Income tax benefit

     (4,968     (3,121
  

 

 

   

 

 

 

Net loss

   $ (16,491   $ (23,557

Accretion of redeemable preferred stock

     (3,605     (19,616

Convertible preferred stock deemed dividend

     (932  
  

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (21,028   $ (43,173
  

 

 

   

 

 

 

Weighted average number of shares (basic and diluted)

     7,533       8,789  

Loss per share

   $ (2.79   $ (4.91

Other financial data:

    

Operating margin(1)

     (5.6 %)      (3.8 %) 

Adjusted EBITDA(2)

   $ 19,313     $ 31,242  

Adjusted EBITDA margin(2)

     10.2     13.4

Pro-forma revenue(3)

     $ 369,419  

Pro-forma net loss(3)

     $ (23,708

Pro-forma adjusted EBITDA(2)(3)

     $ 74,340  

 

(1)

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

 

(2)

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

 

(3)

See the section entitled “Unaudited Pro Forma Financial Information.”

Revenues

For the year ended December 31, 2019, we had revenues of $233.9 million, an increase of $45.1 million or 23.9% over the prior year. Of this increase, $23.2 million was provided by companies acquired in 2019. The remaining increase of $21.9 million was driven by growth in all three of our reporting segments. See “Segment Results of Operations” below.

For the year ended December 31, 2019, our Assessment, Permitting and Response segment generated $21.1 million, or 9.0% of total revenues, our Measurement and Analysis segment generated $135.5 million, or 58.0% of total revenues, and our Remediation and Reuse segment generated $77.3 million, or 33.0% of total revenues. For the year ended December 31, 2018, we had revenues of $188.8 million, of which our Assessment, Permitting and Response segment generated $3.7 million, or 1.9% of total revenues, our Measurement and Analysis segment generated $117.4 million, or 62.2% of total revenues, and our Remediation and Reuse segment generated $67.8 million, or 35.9% of total revenues. Revenue from Discontinued Service Lines contributed $10.9

 

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million and $12.3 million to revenues in the years ended December 31, 2019 and December 31, 2018, respectively, which was all in our Remediation and Reuse segment.

Cost of Revenues

For the year ended December 31, 2019, cost of revenues was $164.0 million or 70.1% of revenues, and was comprised of direct labor of $94.2 million, outside services (including construction, laboratory, shipping and freight and other outside services) of $34.8 million, field supplies, testing supplies and equipment rental of $20.5 million, project-related travel expenses of $8.7 million and other direct costs of $5.8 million. For the year ended December 31, 2019, cost of revenues as a percentage of revenue fell 1.3% from the prior year, as a result of lower labor and field supplies as a percentage of revenue, partially offset by higher outside services costs. These drivers were primarily as a result of changes in segment mix.

For the year ended December 31, 2018, cost of revenues was $134.7 million or 71.4% of revenues, and was comprised of direct labor of $79.4 million, outside services (including construction, laboratory, shipping and freight and other outside services) of $26.1 million, field supplies, testing supplies and equipment rental of $17.6 million, project-related travel expenses of $7.0 million and other direct costs of $4.6 million.

Selling, General and Administrative Expenses

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

For the year ended December 31, 2019, selling, general and administrative expenses were $50.7 million, an increase of $12.1 million or 31.2% versus the prior year, of which $3.5 million was from selling, general and administrative expenses pertaining to companies we acquired in 2019. The remaining $8.6 million increase was primarily due to an increase in bad debt of $1.2 million, an increase in expense related to the fair value adjustment of contingent consideration of $1.4 million, an increase in costs incurred related to acquisitions of $1.9 million, costs related to preparing for our initial public offering of $0.6 million and investment in corporate infrastructure (primarily finance, sales and marketing, safety, IT and human resources).

For the year ended December 31, 2019, selling, general and administrative expenses were comprised of indirect labor of $18.4 million, facilities costs of $10.7 million, stock-based compensation of $2.9 million, acquisition-related costs of $3.5 million, fair value change to contingent liabilities of $1.4 million, bad debt expense of $1.2 million, costs related to preparing for our initial public offering of $0.6 million and other costs (including software, travel, insurance, legal, consulting and audit services) of $12.0 million.

For the year ended December 31, 2018, selling, general and administrative expenses were $38.6 million, which was comprised of indirect labor of $13.7 million, facilities costs of $9.7 million, stock-based compensation of $4.90 million, acquisition-related costs of $1.6 million, gain on change in fair value of contingent consideration of $0.2 million and other costs (including software, travel, insurance, legal, consulting and audit services) of $8.9 million.

We expect our general and administrative expenses to increase as a result of additional insurance, legal, accounting, investor relations and other costs associated with becoming a public company.

Related Party Expense

Related party expense for the year ended December 31, 2019, of $0.5 million, represented fees paid to a related party for acquisition-related diligence support. Related party expense for the year ended December 31, 2018 of $2.2 million primarily represented management fees paid for advisory and consulting services provided

 

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under a monitoring fee agreement. The agreement was terminated effective September 30, 2018. Related party expense for the year ended December 31, 2018, also included $0.4 million of fees paid for acquisition-related diligence support. See the section entitled “Certain Relationships and Related Party Transactions.”

Depreciation and Amortization

Depreciation and amortization expense for the year ended December 31, 2019, was $27.7 million and was comprised of amortization of finite lived intangibles of $20.0 million, arising as a result of our acquisition activity, and depreciation of property and equipment of $7.7 million. Depreciation and amortization expense for the year ended December 31, 2018, was $23.9 million and was comprised of amortization of finite lived intangibles of $16.3 million and depreciation of property and equipment of $7.6 million. The increase in both depreciation and amortization for the year ended December 31, 2019 versus the prior year is primarily a result of acquisitions.

Other (Expense) Income

Other expense for the year ended December 31, 2019 of $11.0 million was driven primarily by fair value adjustments related to both the warrant option and Series A-1 preferred stock contingent put option (see Notes 12 and 13 to our audited consolidated financial statements included elsewhere in this prospectus). Other income for the year ended December 31, 2018 of $0.3 million related primarily to sublease rental income.

Interest Expense, Net

Interest expense, net incurred in the year ended December 31, 2019, was $6.8 million, compared to $11.1 million for the year ended December 31, 2018. The reduction in interest expense is primarily as a result of a lower average interest rate in 2019, as a result of the repayment of a second lien term loan facility and a convertible subordinated debt instrument in the fourth quarter of 2018 using the proceeds of the sale of our Series A-1 preferred stock. See Notes 14 and 17 to our audited consolidated financial statements included elsewhere in this prospectus. For the year ended December 31, 2019 interest expense was driven by interest incurred on our outstanding debt, including borrowings outstanding under our prior senior secured credit facility, and under equipment lines of credit. For the year ended December 31, 2018 interest expense was incurred on debt resulting from borrowing under our prior senior secured credit facility, our second lien term loan facility, a convertible subordinated debt instrument and under equipment lines of credit.

Income taxes benefit

Income tax benefit was $3.1 million for the year ended December 31, 2019, compared to an income tax benefit of $5.0 million for the year ended December 31, 2018.

Net loss and Adjusted EBITDA

For the year ended December 31, 2019, net loss was $23.6 million and Adjusted EBITDA was $31.2 million. For the year ended December 31, 2018, net loss was $16.5 million and Adjusted EBITDA was $19.3 million. See the section entitled “Non-GAAP Financial Information” for a discussion of non-GAAP measures and a reconciliation thereof to the most directly comparable GAAP measure.

 

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Segment Results of Operations

Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

 

     Three Months Ended March 31,  
     2019     2020  

(in thousands)

   Revenues      Adjusted
EBITDA(1)
    Adjusted
EBITDA
Margin(2)
    Revenues      Adjusted
EBITDA(1)
    Adjusted
EBITDA
Margin(2)
 

Assessment, Permitting and Response

   $ 4,575      $ 1,994       43.6   $ 4,530      $ 1,442       31.8

Measurements & Analysis

     28,331        3,989       14.1     36,440        7,379       20.2

Remediation & Reuse

     18,048        2,620       14.5     20,061        2,107       10.5
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Operating Segments

   $ 50,954      $ 8,603       16.9   $ 61,031      $ 10,928       17.9
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Corporate and Other

        (3,531     n/a          (5,375     n/a  

 

 

(1)

For purposes of evaluating segment profit, the Company’s chief operating decision maker reviews Adjusted EBITDA as a basis for making the decisions to allocate resources and assess performance. See Note 17 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.

(2)

Represents Adjusted EBITDA as a percentage of revenues.

Revenues

Assessment, Permitting and Response segment revenues for the three months ended March 31, 2020 were $4.5 million, compared to $4.6 million for the three months ended March 31, 2019.

Measurement and Analysis segment revenues for the three months ended March 31, 2020 were $36.4 million, an increase of $8.1 million or 28.6% compared to revenues for the three months ended March 31, 2019 of $28.3 million. The increase was driven by organic growth and by acquisitions completed subsequent to the first quarter of 2019, which contributed $4.9 million to revenues in the first quarter of 2020.

Remediation and Reuse segment revenues for the three months ended March 31, 2020 were $20.1 million, an increase of $2.1 million or 11.2% compared to revenues for the three months ended March 31, 2019 of $18.0 million. The increase was driven by organic growth and by acquisitions subsequent to the first quarter of 2019, which contributed $4.0 million to revenues in the first quarter or 2020, less revenues from Discontinued Service Lines in the Remediation and Reuse segment, which were $1.0 million and $3.5 million in the three months ended March 31, 2020 and March 31, 2019, respectively.

Adjusted EBITDA

Assessment, Permitting and Response segment Adjusted EBITDA was $1.4 million for the three months ended March 31, 2020, compared to $2.0 million for the three months ended March 31, 2019. For the three months ended March 31, 2020 and March 31, 2019, Adjusted EBITDA margin was 31.8% and 43.6%, respectively. The decline in Adjusted EBITDA and Adjusted EBITDA margin was the result of a planned increase in headcount to support expected future revenue growth.

Measurement and Analysis segment Adjusted EBITDA for the three months ended March 31, 2020 was $7.4 million, an increase of $3.4 million compared to Adjusted EBITDA for the three months ended March 31, 2019 of $4.0 million. For the three months ended March 31, 2020 Adjusted EBITDA margin was 20.2% compared to 14.1% in the prior year. The improvement in Adjusted EBITDA and Adjusted EBITDA margin was as a result of favorable business mix.

 

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Remediation and Reuse Adjusted EBITDA for the three months ended March 31, 2020 was $2.1 million, a decrease of $0.5 million compared to Adjusted EBITDA for the three months ended March 31, 2019 of $2.6 million. For the three months ended March 31, 2020 Adjusted EBITDA margin was 10.5% compared to 14.5% in the prior year. The decrease in Adjusted EBITDA and Adjusted EBITDA margin was a result of higher fixed costs in anticipation of growth and geographic expansion within our PFAS water treatment and agricultural waste biogas business lines, as well as earnings from Discontinued Service Lines in the prior year of $0.3 million.

Corporate and other costs were $5.4 million for the three months ended March 31, 2020 compared to $3.5 million for the three months ended March 31, 2019. The increase was driven by head count additions in sales and marketing, human resources, information technology, safety and finance made in 2019 subsequent to the first quarter, as well as an increase in bad debt reserve expense of $0.8 million given the potential impact of COVID-19.

Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018

 

     Year Ended December 31,  
     2018     2019  

(in thousands)

  

Revenues

    

Adjusted
EBITDA(1)

   

Adjusted
EBITDA
Margin(2)

   

Revenues

    

Adjusted
EBITDA

   

Adjusted
EBITDA
Margin(1)

 

Assessment, Permitting and Response

   $ 3,663      $ 1,339       36.6 %   $ 21,071      $ 7,572       35.9

Measurements & Analysis

     117,373      20,779       17.7 %     135,531      27,828     20.5

Remediation & Reuse

     67,769      11,400       16.8 %     77,252        9,736     12.6
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Operating Segments

   $ 188,805      $ 33,518       17.8   $ 233,854      $ 45,136       19.3
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Corporate and Other

        (11,701     n/a          (13,641     n/a  

 

 

(1)

For purposes of evaluating segment profit, the Company’s chief operating decision maker reviews Segment Adjusted EBITDA as a basis for making the decisions to allocate resources and assess performance. See Note 21 to our audited consolidated financial statements included elsewhere in this prospectus.

(2)

Represents Adjusted EBITDA as a percentage of revenues.

Revenues

Assessment, Permitting and Response segment revenues for the year ended December 31, 2019 were $21.1 million, compared to $3.7 million for the year ended December 31, 2018. The 475.2% increase was due to the acquisition of two businesses in the fourth quarter of 2018, which expanded our product portfolio and our scientific and technical advisory services footprint.

Measurement and Analysis segment revenues for the year ended December 31, 2019 were $135.5 million, an increase of $18.1 million or 15.5% compared to revenues for the year ended December 31, 2018 of $117.4 million. The increase was driven by organic growth and by acquisitions completed in 2019, which contributed $11.9 million to 2019 revenues.

Remediation and Reuse segment revenues for the year ended December 31, 2019 were $77.3 million, an increase of $9.5 million or 14.0% compared to revenues for the year ended December 31, 2018 of $67.8 million. The increase was driven by acquisitions completed in 2019, which contributed $11.3 million to 2019 revenues. Revenues from the Discontinued Service Lines in the Remediation and Reuse segment were $10.9 million and $12.3 million for the years ended December 31, 2019 and December 31, 2018, respectively.

 

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Adjusted EBITDA

Assessment, Permitting and Response segment Adjusted EBITDA was $7.6 million for the year ended December 31, 2019, compared to $1.3 million for the year ended December 31, 2018 driven by the increase in revenues. For the years ended December 31, 2019 and December 31, 2018, Adjusted EBITDA margin was 35.9% and 36.6%, respectively.

Measurement and Analysis segment Adjusted EBITDA for the year ended December 31, 2019 was $27.8 million, an increase of $7.0 million compared to Adjusted EBITDA for the year ended December 31, 2018 of $20.8 million. For the year ended December 31, 2019 Adjusted EBITDA margin was 20.5% compared to 17.7% in the prior year. The improvement in Adjusted EBITDA and Adjusted EBITDA margin was as a result of growth and favorable business mix.

Remediation and Reuse segment Adjusted EBITDA for the year ended December 31, 2019 was $9.7 million, a decrease of $1.7 million compared to Adjusted EBITDA for the year ended December 31, 2018 of $11.4 million. For the year ended December 31, 2019 Adjusted EBITDA margin was 12.6% compared to 16.8% in the prior year. The decrease in Adjusted EBITDA and Adjusted EBITDA margin was attributable to ongoing investments in personnel and infrastructure.

Corporate and other costs were $13.6 million for the year ended December 31, 2019 compared to $11.7 million for the year ended December 31, 2018. The increase was driven by higher labor costs in sales and marketing, human resources, information technology, safety and finance, as well as an increase in software, insurance and marketing costs, which were made in 2019 in support of anticipated acquisitions and revenue growth.

Liquidity and Capital Resources

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

Our principal sources of liquidity have been borrowings under our credit facility, prior senior secured credit facility and other borrowing arrangements and cash generated by operating activities. Historically, we have financed our operations and acquisitions from a combination of cash generated from operations, periodic borrowings under our credit facility, prior senior secured credit facility and other prior secured and unsecured borrowings and proceeds from the issuance of common and preferred stock. Our primary cash needs are for day to day operations, to fund working capital requirements, to fund our acquisition strategy, to pay interest and principal on our indebtedness and to make capital expenditures.

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

 

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Cash Flows

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

 

(in thousands)   

Year Ended December 31,

    

Three Months Ended
March 31,

 
    

2018

    

2019

    

2019

    

2020

 

Consolidated Statement of Cash flows data:

           

Net cash provided by (used in) operating activities

   $ (2,845    $ 17,042      $ 100      $ (8,978

Net cash used in investing activities

     (50,283      (86,983      (1,573      (1,660

Net cash provided by financing activities

     50,850        74,452        676        5,238  
  

 

 

    

 

 

    

 

 

    

 

 

 

Change in cash, cash equivalents and restricted cash

   $ (2,278    $ 4,511      $ (797    $ (5,400
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating Activities

Cash flows from operating activities can fluctuate from period-to-period as earnings, working capital needs and the timing of payments for taxes, bonus payments and other operating items impact reported cash flows. For the three months ended March 31, 2020, net cash used in operating activities was $9.0 million, a decrease of $9.1 million, when compared to net cash provided by operating activities of $0.1 million for the three months ended March 31, 2019. This decrease in cash flow from operating activities primarily reflects an increase in working capital of $5.4 million, as well as higher interest and acquisition-related costs of $2.4 million when compared to the three months ended March 31, 2019. The decrease in working capital was driven primarily by a decrease in accounts payable, due to the timing of payments and higher bonus payments in the quarter compared to the three months ended March 31, 2019.

For the year ended December 31, 2019, net cash provided by operating activities was $17.0 million, an increase of $19.8 million, when compared to net cash used in operating activities of $2.8 million, for the year ended December 31, 2018. This improvement in cash flow from operating activities reflects an increase in earnings before non-cash items, including depreciation and amortization, stock-based compensation expense and changes in fair value of derivatives, of $15.8 million and an improvement in the change in working capital of $11.1 million, compared to the prior year. The improvement in working capital was driven primarily by improved receivables and payables management.

Investing Activities

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

For the three months ended March 31, 2019, net cash used in investing activities was $1.6 million, primarily driven by the payment of assumed purchase price obligations of $1.5 million.

For the year ended December 31, 2019, net cash used in investing activities was $87.0 million, primarily driven by acquisition activity. For the year ended December 31, 2019, we completed a total of seven acquisitions for a total cash consideration of $81.4 million, net of cash acquired. In addition, in 2019 we purchased property and equipment for cash consideration of $4.7 million, and paid $1.5 million related to assumed purchase price obligations from prior year acquisitions. These investments were partially offset by property insurance proceeds and proceeds from the sale of property and equipment of $0.6 million.

For the year ended December 31, 2018, net cash used in investing activities was $50.3 million, primarily driven by acquisition activity. For the year ended December 31, 2018, we completed a total of seven acquisitions

 

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for a total cash consideration of $45.8 million, net of cash acquired. In addition, in 2018 we purchased property and equipment for cash consideration of $3.8 million, paid $0.5 million related to assumed purchase price obligations from prior year acquisitions and invested $0.3 million in software development. These investments were partially offset by property insurance proceeds and proceeds from the sale of property and equipment of $0.2 million.

Financing Activities

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

For the three months ended March 31, 2019, net cash provided by financing activities was $0.7 million. Cash provided by financing activities was driven by a $1.3 million increase in net borrowings under our prior senior secured credit facility, partially offset by the payment of acquisition-related contingent consideration of $0.4 million and the repayment of capital leases of $0.3 million.

For the year ended December 31, 2019, net cash provided by financing activities was $74.5 million. Cash provided by financing activities was driven by a $77.6 million increase in net borrowings under our prior senior secured credit facility, proceeds from the issuance of common stock of $1.5 million and the collection of a note receivable from stockholders of $0.1 million, partially offset by an amortization payment of $1.3 million related to our term loan under our prior senior secured credit facility, the repayment of capital leases of $2.0 million, the payment of acquisition-related contingent consideration of $1.1 million and the payment of debt issuance costs of $0.4 million.

For the year ended December 31, 2018, net cash provided by financing activities was $50.9 million. Cash provided by financing activities was driven by net proceeds from the issuance of our Series A-1 preferred stock of $118.4 million and a $20.0 million increase in net borrowings under our prior senior secured credit facility, partially offset by $36.3 million used to repay our second lien term loan under our prior senior secured credit facility, including a prepayment fee, the repayment of convertible preferred stock of $31.0 million, $11.9 million for the repayment of convertible subordinated debt, including accrued interest, the repurchase of common stock of $2.7 million, the repurchase of stock options of $1.4 million, the payment of acquisition-related contingent consideration of $2.0 million, the payment of debt issuance costs of $0.9 million and the repayment of capital leases of $1.0 million.

Credit Facility

As of March 31, 2020, our prior senior secured credit facility consisted of a $50.0 million term loan and a $130.0 million revolving credit facility.

 

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

 

Pricing
Tier

  

Consolidated

Leverage Ratio

  

Commitment
Fee

   

Eurodollar
Rate Loans and
LIBOR Letter
of Credit Fee

   

Daily
Floating
Rate Loans

   

Rate
Loans

 
1    > 3.75 to 1.0      0.50     4.00     4.00     3.00
2    £ 3.75 to 1.0 but > 3.00 to 1.0      0.50       3.50       3.50       2.50  
3    £ 3.00 to 1.0 but > 2.25 to 1.0      0.40       3.00       3.00       2.00  
4    £ 2.25 to 1.0      0.30       2.50       2.50       1.50  

As of March 31, 2020 and December 31, 2019, we fell within Pricing Tier 2. The weighted average interest rate on the prior senior secured credit facility as of March 31, 2020 and December 31, 2019 was 4.95% and 5.41%.

At March 31, 2020, there was an aggregate of $158.2 million outstanding under the prior senior secured credit facility, consisting of $47.5 million outstanding on the term loan and $110.7 million outstanding on the revolver, with available aggregate undrawn borrowing capacity of approximately $19.3 million under the revolver. At December 31, 2019, there was an aggregate of $146.3 million outstanding under the prior senior secured credit facility, consisting of $48.8 million outstanding on the term loan and $97.6 million outstanding on the revolver, with available aggregate undrawn borrowing capacity of approximately $32.4 million under the revolver. At March 31, 2020 and December 31, 2019 we were in compliance with the covenants under this credit agreement, including the financial covenants.

On April 13, 2020, we entered into a Unitranche Credit Agreement providing for a new $225.0 million credit facility comprised of a $175.0 million term loan and a $50.0 million revolving credit facility and repaid all amounts outstanding under the prior senior secured credit facility. The credit facility matures on the earliest of (a) April 13, 2025, (b) so long as our Series A-1 preferred stock has not been redeemed in full or otherwise not converted into common stock of Montrose, the date that is 180 days before the Series A-1 preferred equity mandatory redemption date, unless prior to such date, the Series A-1 preferred equity mandatory redemption date has been extended to a date not earlier than one hundred eighty (180) days after April 13, 2025 and (c) so long as our Series A-2 preferred stock has not been redeemed in full or otherwise not converted into common stock of Montrose, the date that is 180 days before the Series A-2 preferred equity mandatory redemption date, unless prior to such date, the Series A-2 preferred equity mandatory redemption date has been extended to a date not earlier than one hundred eighty (180) days after April 13, 2025. The term loan bears interest at a rate of LIBOR plus 5.0% (subject to a 1% LIBOR floor) or the base rate plus 4.0%. The revolver bears interest at a rate of LIBOR plus 3.5% or the base rate plus 2.5%. The revolver is also subject to an unused commitment fee of 0.35%. The term loan begins amortizing quarterly with fiscal quarter ending September 30, 2020, with a required repayment of (a) $0.5 million for fiscal quarter ending September 30, 2020 and each other fiscal quarter through and including June 30, 2021, (b) $1.1 million for fiscal quarter ending September 30, 2021 and each other fiscal quarter through and including June 30, 2021, and (c) $1.6 million for each fiscal quarter ending thereafter. We have the option to borrow incremental term loans up to an aggregate principal amount of $100.0 million subject to satisfaction of certain conditions, including the borrower’s pro forma compliance with the financial covenants under the credit facility. Immediately after giving effect to the incurrence of any such incremental term loans, the unitranche lenders must collectively hold at least 70% of all pari passu debt of all lenders under the credit facility. The existing lenders are not obligated to participate in any incremental term loan facility. A portion of the proceeds from this credit facility was used to repay all amounts outstanding under our prior senior secured credit facility.

 

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Our obligations under the new credit facility are guaranteed by certain of our existing and future direct and indirect subsidiaries, and such obligations are secured by substantially all of our assets. The credit facility includes a number of covenants imposing certain restrictions on our business, including, among other things, restrictions on our ability to incur indebtedness, prepay or amend other indebtedness, create liens, make certain fundamental changes including mergers or dissolutions, pay dividends and make other payments in respect of capital stock, make certain investments, sell assets, change our lines of business, enter into transactions with affiliates and other corporate actions. The credit facility also contains financial covenants requiring us to remain below a maximum consolidated total leverage ratio of 4.25 times, which steps down to 4.00 times beginning December 31, 2021 and then to 3.75 times beginning December 31, 2022, and a minimum consolidated fixed charge coverage ratio of 1.25 times.

The new credit facility contains mandatory prepayment feature upon a number of events, including with the proceeds of certain asset sales, proceeds from the issuance of any debt and proceeds of the capital contribution amounts contributed to cure a financial covenant default. The credit facility also includes mandatory prepayments of 50.0% of excess cash flow minus voluntary prepayments of the term loan and, solely to the extent accompanied by a permanent reduction in the revolving commitment, the revolving loan, if our consolidated total leverage ratio for the year ending December 31, 2020 is greater than or equal to 3.25 times and, for any year thereafter, the amount of any such mandatory prepayment shall be reduced to 25.0% of excess cash flow if the leverage ratio is less than 3.00 times. Pro forma for the acquisition of CTEH in April 2020, the Company’s leverage ratio was 2.67 times.

See the section entitled “Description of Certain Indebtedness” and Notes 14 and 24 to our audited December 31, 2019 consolidated financial statements included elsewhere in this prospectus.

Other Prior Indebtedness

In September 2017, we entered into a second lien term loan facility for $40.0 million. Borrowings under this facility bore interest at either LIBOR plus 9.5%, or a base rate equal to the higher of the federal funds rate plus 0.5% and the rate of interest in effect for such day as published by the Wall Street Journal as the prime rate, plus the applicable rate, at our election. We repaid this indebtedness, including a 1.0% prepayment fee, on October 19, 2018, with proceeds received from the issuance of our Series A-1 preferred stock.

In March 2017, we issued $9.9 million of convertible subordinated debt. The subordinated debt carried a 12.0% annual coupon, payable-in-kind, until its maturity. This debt, including accrued interest of $2.0 million, was repaid in full on October 19, 2018, with proceeds received from the issuance of our Series A-1 preferred stock.

See Note 14 to our audited consolidated financial statements included elsewhere in this prospectus.

Series A-1 Preferred Stock

On October 19, 2018, we issued 12,000 shares of our Series A-1 preferred stock. The Series A-1 preferred stock accrues dividends quarterly at an annual rate of 15.0% with respect to any dividends paid in cash and at an annual rate of 14.2%, compounded quarterly with respect to dividends that are accrued. In the event of a redemption, a holder is guaranteed a minimum of either two or three years of dividends depending on the nature of the redemption. Total accrued and unpaid dividends as of March 31, 2020, December 31, 2019 and December 31, 2018 were $27.0 million, $21.9 million and $3.4 million, respectively. The Series A-1 preferred stock is redeemable at our option at any time and, under certain circumstances, including an initial public offering, at the option of the holders of a majority of the Series A-1 preferred stock outstanding. The Series A-1 preferred stock also contains certain restrictive covenants. As of March 31, 2020, December 31, 2019 and December 31, 2018, we were subject to a maximum consolidated total leverage ratio, including the outstanding principal and accrued dividend on the Series A-1 preferred stock, of 10.0 times as of the end of any fiscal quarter

 

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until maturity. We were in compliance with the covenants as of March 31, 2020, December 31, 2019 and December 31, 2018. We intend to redeem all issued and outstanding shares of Series A-1 preferred stock with a portion of the proceeds from this offering.

See the sections entitled “Use of Proceeds” and “Description of Capital Stock—Preferred Stock— Series A-1 Preferred Stock” and Note 16 to our audited consolidated financial statements.

Series A-2 Preferred Stock

On April 13, 2020, the Company issued 17,500 shares of the Series A-2 preferred stock with a par value of $0.0001 per share and the Series A-2 Warrant, with a ten-year exercise period, in exchange for $175.0 million. Prior to the effectiveness of the offering contemplated herein, each share of Series A-2 preferred stock accrues dividends at the rate of 15.0% per annum with respect to dividends that are paid in cash, and 14.2% per annum, with respect to dividends that accrue and compound before a private offering (in certain circumstances) resulting in an annual dividend rate of 15.0%, and 9.0% per annum after a private offering (in certain circumstances). Upon the consummation of this offering, the Series A-2 preferred stock does not mature or have a cash repayment obligation; however, it is redeemable at the Company’s option. The Series A-2 preferred stock becomes convertible into our common stock beginning on the four-year anniversary of the Series A-2 preferred stock issuance. Upon the four-year anniversary of the issuance, holders of Series A-2 preferred stock may convert up to $60.0 million of such shares into our common stock at a conversion rate discounted to 85.0% of the volume weighted average trading value, with the permitted amount of Series A-2 preferred stock to be converted increasing at each subsequent anniversary of the issuance until the sixth anniversary, after which all of the Series A-2 preferred stock may be converted at the holder’s option. Following the completion of this offering, the Series A-2 preferred stock shall accrue dividends at a rate of 9.0% per annum, with such dividends accruing daily and compounding quarterly. If permitted under our existing debt facilities, we must make a cash dividend payment each quarter.

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

See the sections entitled “Description of Capital Stock—Preferred Stock—Series A-2 Preferred Stock” and Note 24 to our audited consolidated financial statements included elsewhere in this prospectus.

Contractual Obligations

The following table summarizes our contractual commitments as of March 31, 2020:

 

          Payments due by period  

Contractual obligations

 

Total

    Less than 1 year     1-3 years     3-5 years     More than 5 years  
 

Principal

   

Interest

   

Principal

   

Interest

   

Principal

   

Interest

   

Principal

   

Interest

 

Long-term debt obligations(1)

  $ 166,601     $ 5,000     $ 266     $ 153,181     $ 8,154       n/a       n/a       n/a       n/a  

Capital lease obligations

    8,747       2,452       407       5,013       608       261       6       n/a       n/a  

Operating lease obligations(2)

    19,088       6,118       n/a       11,166       n/a       1,646       n/a       158       n/a  

Contingent liabilities related to acquisitions(3)

    4,082       3,703       n/a       379       n/a          

 

(1)

Long-term debt obligations interest calculations assume balances outstanding as of March 31, 2020 under our prior senior secured credit facility.

 

(2)

We lease office facilities over various terms expiring through 2028. Certain of these operating leases contain rent escalation clauses.

 

(3)

Estimated fair value of acquisition related earn-out payments.

 

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In addition, the CTEH acquisition agreement includes an earn-out provision that provides for the payment of additional consideration based on CTEH’s results in 2020 and 2021, up to a maximum aggregate amount of $80.0 million. Specifically, any earn-out to be paid in respect of 2020 will be equal to twelve times the excess of CTEH’s targeted 2020 EBITDA of $18.3 million (as calculated pursuant to the acquisition agreement), with the payment amount not to exceed $50.0 million. Any earn-out to be paid in respect of 2021 will equal ten times CTEH’s 2021 EBITDA less CTEH’s 2020 EBITDA, with the payment amount not to exceed $30.0 million. The 2020 CTEH earn-out is payable 100.0% in common stock unless the Company has consummated an IPO or a private placement of common stock where proceeds are no less than $75.0 million, in which event 50.0% of the 2020 CTEH earn-out is payable in common stock and 50.0% in cash. The 2021 CTEH earn-out, if any, is payable in cash.

Off-Balance Sheet Arrangements

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

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We have market risk exposure arising from changes in interest rates on our credit facility, which bears interest at rates that are benchmarked against LIBOR. Based on our overall interest rate exposure to variable rate debt outstanding as of March 31, 2020, a 1.0% increase or decrease in interest rates would increase or decrease annual income (loss) before income taxes by approximately $1.6 million ($2.0 million if calculated based on the terms of the Unitranche Credit Agreement and the amount of variable rate debt outstanding thereunder as of June 3, 2020).

Impact of Inflation

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

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect amounts reported in our audited consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.

Management evaluated the development and selection of our critical accounting policies and estimates and believes that the following involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our audited consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance

 

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between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More information on all of our significant accounting policies, as well as recently adopted and issued accounting pronouncements that may have an impact on these policies, can be found in Note 2 and Note 3 to our audited consolidated financial statements.

Use of Estimates

The preparation of the audited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the audited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates inherent in the preparation of the audited consolidated financial statements include, but are not limited to, management’s forecast of future cash flows used as a basis to assess recoverability of long-lived assets, the allocation of purchase price to tangible and intangible assets, allowances for doubtful accounts, the estimated useful lives over which property and equipment is depreciated and intangible assets are amortized, fair value of contingent consideration payables, the fair value of warrants, fair value of contingent put option, fair value of common stock issued, stock-based compensation expense and deferred taxes. Actual results could materially differ from those estimates.

Revenue Recognition

Revenue is recognized in accordance with FASB Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. The following is considered by the Company in the recognition of revenue under ASC 606:

The Company’s services are performed under two general types of contracts (i) fixed-price and (ii) time-and-materials. Under fixed-price contracts, customers pay an agreed-upon amount for a specified scope of work agreed to in advance of the project. Under time-and-materials contracts, customers pay for the hours worked and resources used based on agreed-upon rates. Certain of the Company’s time-and-materials contracts are subject to maximum contract amounts. The duration of the Company’s contracts ranges from less than one month to over a year, depending on the scope of services provided.

The Company accounts for individual promises in contracts as separate performance obligations if the promises are distinct. The assessment requires judgment. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Certain contracts in our Measurement and Analysis have multiple performance obligations, most commonly due to the contracts providing for multiple laboratory tests which are individual performance obligations.

For the Measurement and Analysis contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on the relative standalone selling price of each performance obligation. The standalone selling price of each performance obligation is generally determined by the observable price of a service when sold separately.

Fixed fee contracts—On the majority of fixed fee contracts, the Company recognizes revenue, over time, using either the proportion of actual costs incurred to the total costs expected to complete the contract performance obligation (“cost to cost method”), under the time-elapsed basis. The Company determined that the cost to cost method best represents the transfer of services as the proportion closely depicts the efforts or inputs completed towards the satisfaction of a fixed fee contract performance obligation. Under the time-elapsed basis, the arrangement is considered a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e. distinct days of service). The Company applies a time-based measure of progress to the total transaction price, which results in ratable recognition over

 

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the term of the contract. For a portion of the Company’s laboratory service contracts, revenue is recognized as performance obligations are satisfied over time, with recognition reflecting a series of distinct services using the output method. The Company determined that this method best represents the transfer of services as the customer obtains equal benefit from the service throughout the service period.

There are inherent uncertainties in the estimation process for cost to cost contracts, as the estimation of total contract costs is complex, subject to many variables and requires judgment. It is possible that estimates of costs to complete a performance obligation will be revised in the near-term based on actual progress and costs incurred. These uncertainties primarily impact the Company’s contracts in the Remediation and Reuse segment including those contracts associated with Emerging Compounds Treatments Technologies, Inc., which was acquired in August 2019.

Time-and-materials contracts—Time-and-materials contracts contain variable consideration. However, performance obligations qualify for the “Right to Invoice” Practical Expedient. Under this practical expedient, the Company is allowed to recognize revenue, over time, in the amount to which the Company has a right to invoice. In addition, the Company is not required to estimate such variable consideration upon inception of the contract and reassess the estimate each reporting period. The Company determined that this method best represents the transfer of services as, upon billing, the Company has a right to consideration from a customer in an amount that directly corresponds with the value to the customer of the Company’s performance completed to date.

Accounting for Acquisitions

We account for acquisitions using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. The purchase price of acquisitions is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on estimated fair values, and any excess purchase price over the identifiable assets acquired and liabilities assumed is recorded as goodwill. Goodwill represents the premium we pay over the fair value of the net tangible and intangible assets acquired. We may use independent valuation specialists to assist in determining the estimated fair values of assets acquired and liabilities assumed, which could require certain significant management assumptions and estimates. Transaction costs associated with acquisitions are expensed as they are incurred.

Goodwill Impairment Analysis

We test goodwill for impairment annually for each reporting unit in the fourth quarter of the fiscal year and between annual tests, if events occur or circumstances change which suggest that goodwill should be evaluated. Such events or circumstances include significant changes in legal factors and business climate, recent losses at a reporting unit, and industry trends, among other factors. A reporting unit is defined as an operating segment or one level below an operating segment. Our impairment tests are performed at the reporting unit level on October 1 every year.

During the impairment test, we estimate the fair value of the reporting unit using income and market approaches, and compare that amount to the carrying value of that reporting unit. In the event the fair value of the reporting unit is determined to be less than the carrying value, goodwill is impaired, and an impairment loss equal to the excess, limited to the total amount of goodwill allocated to the reporting unit, is recognized.

The impairment evaluation process includes, among other things, making assumptions about variables such as revenue growth rates, profitability, discount rates, and industry market multiples, which are subject to a high degree of judgment. Material assumptions used in the impairment analysis included the weighted average cost of capital percent and terminal growth rates.

 

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Contingent Consideration

Some of our acquisition agreements include contingent consideration arrangements, which are generally based on the achievement of future performance thresholds. For each transaction, we estimate the fair value of contingent consideration payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability. Changes in the fair value of contingent consideration are recognized as a component of the selling, general and administrative expenses in our consolidated statements of operations.

Stock-based Compensation

We currently sponsor two stock incentive plans that allow for issuance of employee stock options and other forms of equity incentives. Under one of the plans, there are certain awards that were issued to non-employees in exchange for their services and are accounted for under ASC 505, Equity-Based Payments to Non-Employees. ASC 505 requires that the fair value of the equity instruments issued to a non-employee be measured on the earlier of: (i) the performance commitment date or (ii) the date the services required under the arrangement have been completed. The fair value of the remaining stock-based payment awards is expensed over the vesting period of each tranche on a straight-line basis. Any modification of an award that increases its fair value will require us to recognize additional expense. The fair value of stock options under its employee stock incentive plan are estimated as of the grant date using the Black-Scholes option valuation model, which is affected by its estimates of the risk-free interest rate, its expected dividend yield, expected term and the expected share price volatility of its common shares over the expected term. No forfeiture or dividend rates are used in the calculation as these are not applicable to us. Employee options are accounted for in accordance with the guidance set forth by ASC 718.

Fair Value of Common Stock

Due to the absence of an active market for our common stock, the fair value of our common stock was estimated based on current available information. This estimate required significant judgment and considers several factors, including valuations of our common stock prepared by an independent third-party valuation firm. The fair value of our common stock was estimated primarily using an income approach based on discounted estimated future cash flows. We also utilized the market approach as an additional reference point to evaluate the reasonableness of the fair value determined under the income approach. These estimates are highly subjective in nature and involve a large degree of uncertainty. Such estimates of the fair value of our common stock were used in the measurement of stock-based compensation expense, warrant options, and the purchase price of business acquisitions for which common stock was an element of the purchase price.

Following this offering, valuation models, including estimates and assumptions used in such models, will not be necessary to estimate the fair value of our common stock, as shares of our common stock will be traded in the public market and the fair value will be determined based on the closing price of our common stock.

Income Taxes

We account for income taxes under the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded when it is more-likely-than-not some of the deferred tax assets may not be realized. Significant judgment is applied when assessing the need for a valuation allowance and we consider future taxable income, reversals of existing deferred tax assets and liabilities and ongoing prudent and feasible tax planning strategies in making such assessment. Should a change in circumstances lead to a change in judgment regarding the utilization of deferred tax assets in future years, we will adjust the related valuation allowance in the period such change in circumstances occurs.

 

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For acquired business entities, if we identify changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period, and they relate to new information obtained about facts and circumstances existing as of the acquisition date, those changes are considered a measurement period adjustment and the offset is recorded to goodwill.

We record uncertain tax positions on the basis of the two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we would recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. We have determined that there are no uncertain tax positions as of December 31, 2018. We classify interest and penalties recognized on uncertain tax positions as a component of income tax expense.

JOBS Act Accounting Election

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

 

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NON-GAAP FINANCIAL INFORMATION

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

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

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

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

 

     For the Years Ended