UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to         

Commission File Number: 001-39394

 

Montrose Environmental Group, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

46-4195044

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

1 Park Plaza, Suite 1000

Irvine, California

92614

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (949) 988-3500

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.000004 per share

 

MEG

 

The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  

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

 

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 any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  

As of May 7, 2021, the registrant had 26,055,727 shares of common stock, $0.000004 par value per share, outstanding.

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1

 

Unaudited Condensed Consolidated Statements of Financial Position

1

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

2

 

Unaudited Condensed Consolidated Statements of Redeemable Series A-1 Preferred Stock, Convertible and Redeemable Series A-2 Preferred Stock and Stockholders’ (Deficit) Equity

3

 

Unaudited Condensed Consolidated Statements of Cash Flows

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

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

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.

Controls and Procedures

41

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3.

Defaults Upon Senior Securities

42

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

43

Signatures

44

 

 

 

 

i


 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MONTROSE ENVIRONMENTAL GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(In thousands, except share data)

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and restricted cash

 

$

10,641

 

 

$

34,881

 

Accounts receivable—net

 

 

65,771

 

 

 

54,102

 

Contract assets

 

 

61,636

 

 

 

38,576

 

Prepaid and other current assets

 

 

8,830

 

 

 

6,709

 

Total current assets

 

 

146,878

 

 

 

134,268

 

NON-CURRENT ASSETS:

 

 

 

 

 

 

 

 

Property and equipment—net

 

 

34,941

 

 

 

34,399

 

Goodwill

 

 

282,199

 

 

 

274,667

 

Other intangible assets—net

 

 

157,315

 

 

 

154,854

 

Other assets

 

 

3,896

 

 

 

4,538

 

TOTAL ASSETS

 

$

625,229

 

 

$

602,726

 

LIABILITIES, CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK AND

   STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable and other accrued liabilities

 

$

52,431

 

 

$

34,877

 

Accrued payroll and benefits

 

 

22,564

 

 

 

21,181

 

Business acquisitions contingent consideration, current

 

 

50,364

 

 

 

49,902

 

Current portion of long-term debt

 

 

6,214

 

 

 

5,583

 

Total current liabilities

 

 

131,573

 

 

 

111,543

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Business acquisitions contingent consideration, long-term

 

 

16,971

 

 

 

4,565

 

Other non-current liabilities

 

 

2,514

 

 

 

2,523

 

Deferred tax liabilities—net

 

 

2,591

 

 

 

2,815

 

Conversion option

 

 

21,488

 

 

 

20,886

 

Long-term debt—net of deferred financing fees

 

 

169,425

 

 

 

170,321

 

Total liabilities

 

 

344,562

 

 

 

312,653

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK $0.0001

   PAR VALUE—

 

 

 

 

 

 

 

 

Authorized, issued and outstanding shares: 17,500 at March 31, 2021 and

   December 31, 2020; aggregate liquidation preference of $182.2 million at March 31, 2021 and

   December 31, 2020

 

 

152,928

 

 

 

152,928

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Common stock, $0.000004 par value; authorized shares: 190,000,000 at

    March 31, 2021 and December 31, 2020; issued and outstanding shares: 25,438,857 and

    24,932,527 at March 31, 2021 and December 31, 2020, respectively

 

 

 

 

 

 

Additional paid-in-capital

 

 

261,588

 

 

 

259,427

 

Accumulated deficit

 

 

(133,949

)

 

 

(122,353

)

Accumulated other comprehensive income

 

 

100

 

 

 

71

 

Total stockholders’ equity

 

 

127,739

 

 

 

137,145

 

TOTAL LIABILITIES, CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK

   AND STOCKHOLDERS’ EQUITY

 

$

625,229

 

 

$

602,726

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1


 

MONTROSE ENVIRONMENTAL GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

REVENUES

 

$

133,817

 

 

$

61,031

 

COST OF REVENUES (exclusive of depreciation and

   amortization shown below)

 

 

95,316

 

 

 

44,398

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

 

 

25,000

 

 

 

20,519

 

INITIAL PUBLIC OFFERING EXPENSE

 

 

 

 

 

531

 

FAIR VALUE CHANGES IN BUSINESS ACQUISITIONS

   CONTINGENT CONSIDERATION

 

 

11,064

 

 

 

 

DEPRECIATION AND AMORTIZATION

 

 

10,769

 

 

 

7,560

 

LOSS FROM OPERATIONS

 

 

(8,332

)

 

 

(11,977

)

OTHER EXPENSE

 

 

 

 

 

 

 

 

Other expense

 

 

(574

)

 

 

(29,830

)

Interest expense—net

 

 

(2,688

)

 

 

(2,593

)

Total other expenses—net

 

 

(3,262

)

 

 

(32,423

)

LOSS BEFORE EXPENSE (BENEFIT) FROM INCOME TAXES

 

 

(11,594

)

 

 

(44,400

)

INCOME TAXES EXPENSE (BENEFIT)

 

 

2

 

 

 

(3,152

)

NET LOSS

 

$

(11,596

)

 

$

(41,248

)

 

 

 

 

 

 

 

 

 

EQUITY ADJUSTMENT FROM FOREIGN CURRENCY

   TRANSLATION

 

 

29

 

 

 

(3

)

COMPREHENSIVE LOSS

 

 

(11,567

)

 

 

(41,251

)

ACCRETION OF REDEEMABLE SERIES A-1 PREFERRED

   STOCK

 

 

 

 

 

(5,415

)

CONVERTIBLE AND REDEEMABLE SERIES A-2

   PREFERRED STOCK DIVIDEND

 

 

(4,100

)

 

 

 

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

 

(15,696

)

 

 

(46,663

)

WEIGHTED AVERAGE COMMON SHARES

   OUTSTANDING— BASIC AND DILUTED

 

 

25,117

 

 

 

8,904

 

NET LOSS PER SHARE ATTRIBUTABLE TO COMMON

   STOCKHOLDERS— BASIC AND DILUTED

 

$

(0.62

)

 

$

(5.24

)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


 

 

 

MONTROSE ENVIRONMENTAL GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE SERIES A-1 PREFERRED STOCK, CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total

 

 

 

Redeemable Series A-1

 

 

Convertible and Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Stockholders'

 

 

 

Preferred Stock

 

 

Series A-2 Preferred Stock

 

 

 

Common Stock

 

Additional

 

Accumulated

 

Comprehensive

 

(Deficit)

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

Paid-In Capital

 

Deficit

 

(Loss) Income

 

Equity

 

BALANCE—December 31, 2019

 

 

12,000

 

 

$

128,822

 

 

 

 

 

$

 

 

 

 

8,370,107

 

 

$

 

$

38,153

 

$

(64,404

)

$

(40

)

$

(26,291

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,248

)

 

 

 

(41,248

)

Accretion of the redeemable

   series A-1 preferred stock to

   redeemable value

 

 

 

 

 

5,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,415

)

 

 

 

 

 

(5,415

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,150

 

 

 

 

 

 

1,150

 

Accumulated other comprehensive

   income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37

 

 

37

 

BALANCE—March 31, 2020

 

 

12,000

 

 

$

134,237

 

 

 

 

 

$

 

 

 

 

8,370,107

 

 

$

 

$

33,888

 

$

(105,652

)

$

(3

)

$

(71,767

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE—December 31, 2020

 

 

 

 

$

 

 

 

17,500

 

 

$

152,928

 

 

 

 

24,932,527

 

 

$

 

$

259,427

 

$

(122,353

)

$

71

 

$

137,145

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,596

)

 

 

 

(11,596

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,805

 

 

 

 

 

 

1,805

 

Dividend payment to the Series A-2

   preferred shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,100

)

 

 

 

 

 

(4,100

)

Common stock issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

506,330

 

 

 

 

 

4,456

 

 

 

 

 

 

4,456

 

Accumulated other comprehensive

   income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

 

29

 

BALANCE—March 31, 2021

 

 

 

 

$

 

 

 

17,500

 

 

$

152,928

 

 

 

 

25,438,857

 

 

$

 

$

261,588

 

$

(133,949

)

$

100

 

$

127,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3


 

 

MONTROSE ENVIRONMENTAL GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,596

)

 

$

(41,248

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Provision for bad debt

 

 

508

 

 

 

6,333

 

Depreciation and amortization

 

 

10,769

 

 

 

7,560

 

Stock-based compensation expense

 

 

1,805

 

 

 

1,150

 

Fair value changes in embedded derivatives

 

 

602

 

 

 

29,627

 

Fair value changes in business acquisitions

   contingent consideration

 

 

11,064

 

 

 

 

Deferred income taxes

 

 

2

 

 

 

(3,152

)

Other

 

 

50

 

 

 

(180

)

Changes in operating assets and liabilities—net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable and contract assets

 

 

(29,029

)

 

 

(319

)

Prepaid expenses and other current assets

 

 

787

 

 

 

(683

)

Accounts payable and other accrued liabilities

 

 

3,183

 

 

 

(5,005

)

Accrued payroll and benefits

 

 

(2,058

)

 

 

(2,458

)

Other assets

 

 

 

 

 

(603

)

Net cash used in operating activities

 

 

(13,913

)

 

 

(8,978

)

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(922

)

 

 

(1,558

)

Proprietary software development and other software costs

 

 

(204

)

 

 

(102

)

Cash paid for acquisitions—net of cash acquired

 

 

(6,272

)

 

 

 

Net cash used in investing activities

 

 

(7,398

)

 

 

(1,660

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from line of credit

 

 

 

 

 

50,453

 

Payments on line of credit

 

 

 

 

 

(37,275

)

Repayment of term loan

 

 

(547

)

 

 

(1,250

)

Payment of contingent consideration and other

   purchase price obligations

 

 

 

 

 

(4,703

)

Repayment of capital leases

 

 

(625

)

 

 

(685

)

Payments of deferred offering costs

 

 

 

 

 

(1,175

)

Debt issuance costs

 

 

 

 

 

(127

)

Proceeds from issuance of common stock for

   exercised stock options

 

 

2,185

 

 

 

 

Dividend payment to the Series A-2 shareholders

 

 

(4,100

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(3,087

)

 

 

5,238

 

CHANGE IN CASH, CASH EQUIVALENTS AND

   RESTRICTED CASH

 

 

(24,398

)

 

 

(5,400

)

Foreign exchange impact on cash balance

 

 

158

 

 

 

36

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

 

 

 

 

 

 

 

 

Beginning of year

 

 

34,881

 

 

 

6,884

 

End of period

 

$

10,641

 

 

$

1,520

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS

   INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,500

 

 

$

1,745

 

Cash paid for income tax

 

$

305

 

 

$

64

 

SUPPLEMENTAL DISCLOSURES OF NON-CASH

   INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Accrued purchases of property and equipment

 

$

594

 

 

$

613

 

Property and equipment purchased under

   capital leases

 

$

670

 

 

$

1,493

 

Accretion of the redeemable series A-1 preferred

   stock to redeemable value

 

$

 

 

$

5,415

 

Common stock issued to acquire new businesses

 

$

2,271

 

 

$

 

Acquisitions unpaid contingent consideration

 

$

67,335

 

 

$

4,082

 

Offering costs included in accounts payable and

   other accrued liabilities

 

$

 

 

$

49

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


 

MONTROSE ENVIRONMENTAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except where otherwise indicated)

1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Description of the Business—Montrose Environmental Group, Inc. (“Montrose” or the “Company”) is a corporation formed on November 2013, under the laws of the State of Delaware. The Company has approximately 70 offices across the United States, Canada and Australia and over 2,000 employees as of March 31, 2021.  

Montrose is an environmental services company serving the recurring environmental needs of a diverse client base, including Fortune 500 companies and federal, state and local governments through the following three segments:

Assessment, Permitting and ResponseThrough its Assessment, Permitting and Response segment, Montrose provides scientific advisory and consulting services to support environmental assessments, environmental emergency response, and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. The Company’s technical advisory and consulting offerings include regulatory compliance support and planning, environmental, ecosystem and toxicological assessments and support during responses to environmental disruption. Montrose helps clients navigate regulations at the local, state, provincial and federal levels.

Measurement and AnalysisThrough its Measurement and Analysis segment, Montrose’s teams test and analyze air, water and soil to determine concentrations of contaminants as well as the toxicological impact of contaminants on flora, fauna and human health. Montrose’s offerings include source and ambient air testing and monitoring, leak detection and repair (“LDAR”) and advanced analytical laboratory services such as air, storm water, wastewater and drinking water analysis.

Remediation and ReuseThrough its Remediation and Reuse segment, Montrose provides clients with engineering, design, implementation and operations and maintenance services, primarily to treat contaminated water, remove contaminants from soil or create biogas from waste. The Company does not own the properties or facilities at which it implements these projects or the underlying liabilities, nor does it own material amounts of the equipment used in projects; instead, the Company assists clients in designing solutions, managing projects and mitigating their environmental risks and liabilities at their locations.

Initial Public Offering—On July 27, 2020, the Company completed its initial public offering (“IPO”) of common stock, in which it sold 11,500,000 shares, including 1,500,000 shares issued pursuant to the underwriters full exercise on July 24, 2020 of the underwriters’ option to purchase additional shares, at a price to the public of $15.00 per share, resulting in net proceeds to the Company of approximately $161.3 million after deducting underwriting discounts of $11.2 million. Additionally, the Company offset $4.4 million of deferred IPO costs against IPO proceeds recorded to additional paid in capital. These deferred IPO costs were directly attributable to the IPO offering in accordance with Staff Accounting Bulletin Topic 5: Miscellaneous Accounting. The Company’s common stock began trading on the New York Stock Exchange on July 23, 2020.

Basis of Presentation—The unaudited condensed consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries. These unaudited condensed consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The unaudited condensed consolidated financial statements include all accounts of the Company and, in the opinion of management, include all recurring adjustments and normal accruals necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the dates and periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2020. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. All intercompany transactions, accounts and profits, have been eliminated in the unaudited condensed consolidated financial statements.

2. SUMMARY OF NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements—The Company qualifies as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) and therefore intends to take advantage of certain exemptions from various public company reporting requirements, including delaying adoption of new or revised accounting standards until those standards apply to private companies. The Company has elected to use this extended transition period under the JOBS Act. The effective dates shown below reflect the election to use the extended transition period.

5


 

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standard Codification (“ASC”) 740 and clarifies and amends certain guidance to promote consistent application. The standard was adopted as of January 1, 2021 and did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting. Under the revised guidance, the accounting for awards issued to non-employees will be similar to the accounting for employee awards. The new guidance is effective for fiscal years beginning after December 15, 2019. The standard was adopted as of January 1, 2020 and did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The revised guidance eliminates Step 2 of the current goodwill impairment analysis test, which requires hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance was adopted as of January 1, 2020 and did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted—In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on the unaudited condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the expected transition away from reference rates that are expected to be discontinued, such as LIBOR. ASU 2020-04 was effective upon issuance. The Company may elect to apply the guidance prospectively through December 31, 2022. The Company is currently evaluating the impact of the adoption of the standard on the unaudited condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The standard introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses and will apply to trade receivables. The new guidance will be effective for the Company’s annual and interim periods beginning after December 15, 2022. The Company does not anticipate the adoption of this standard to have a material impact on the unaudited condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842), to improve financial reporting regarding leasing transactions. The ASU primarily affects the accounting by the lessee in that it requires a lessee to recognize lease assets and liabilities, initially measured at the present value of the lease payments, on the balance sheets for those leases classified as operating leases under previous guidance. The new leasing standard is effective for the Company’s annual and interim periods beginning after December 15, 2021. The Company anticipates a material increase in assets and liabilities due to the recognition of the required right-of-use asset and corresponding liability for all significant lease obligations that are currently classified as operating leases.

3. REVENUES AND ACCOUNTS RECEIVABLE

The Company’s main revenue sources derive from the following revenue streams:

Assessment, Permitting and Response Revenues—Assessment, Permitting and Response revenues are generated from multidisciplinary environmental consulting services. The majority of the contracts are fixed-price or time and material based.

Measurement and Analysis Revenues—Measurement and Analysis revenues are generated from emissions sampling, testing and reporting services, leak detection services, ambient air monitoring services and laboratory testing services. The majority of the contracts are fixed-price or time-and-materials based.

6


 

Remediation and Reuse RevenuesRemediation and Reuse revenues are generated from operating and maintenance (“O&M”) services (on biogas and waste water treatment facilities), as well as remediation, monitoring and environmental compliance services. Services on the majority of O&M contracts are provided under long-term fixed-fee contracts. Remediation, monitoring and environmental compliance contracts are predominantly fixed-fee and time-and-materials based.

Disaggregation of Revenue—The Company disaggregates revenue by its operating segments. The Company believes disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, and uncertainty of revenue and cash flows are affected by economic factors. Disaggregated revenue disclosures are provided in Note 19.

Contract Balances—The Company presents contract balances for unbilled receivables (contract assets), as well as customer advances, deposits and deferred revenue (contract liabilities) within contract assets and accounts payable and accrued expenses, respectively, on the unaudited condensed consolidated statements of financial position. Amounts are generally billed at periodic intervals (e.g., weekly, bi-weekly or monthly) as work progresses in accordance with agreed-upon contractual terms. The Company utilizes the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component as the period between when the Company transfers services to a customer and when the customer pays for those services is one year or less. Amounts recorded as unbilled receivables are generally for services the Company is not entitled to bill based on the passage of time. Under certain contracts, billing occurs subsequent to revenue recognition, resulting in contract assets. The Company sometimes receives advances or deposits from customers before revenue is recognized, resulting in contract liabilities.

The following table presents the Company’s contract balances:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Contract assets

 

$

61,636

 

 

$

38,576

 

Contract liabilities

 

 

6,476

 

 

 

6,114

 

 

Contract assets acquired through business acquisitions amounted to $0.5 million and $6.5 million as of March 31, 2021 and December 31, 2020, respectively. Contract liabilities acquired through business acquisitions amounted to $0.5 million and zero as of March 31, 2021 and December 31, 2020, respectively. Revenue recognized during the three months ended March 31, 2021, included in the contract liabilities balance at the beginning of the year was $1.2 million. The revenue recognized from the contract liabilities consisted of the Company satisfying performance obligations during the normal course of business.

The amount of revenue recognized from changes in the transaction price associated with performance obligations satisfied in prior periods during the three months ended March 31, 2021 was not material.

Remaining Unsatisfied Performance Obligations—Remaining unsatisfied performance obligations represent the total dollar value of work to be performed on contracts awarded and in progress. The amount of remaining unsatisfied performance obligations increases with new contracts or additions to existing contracts and decreases as revenue is recognized on existing contracts. Contracts are included in the amount of remaining unsatisfied performance obligations when an enforceable agreement has been reached. As of March 31, 2021 and December 31, 2020, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied was approximately $25.4 million and $24.4 million, respectively. As of March 31, 2021, the Company expected to recognize approximately $22.3 million of this amount as revenue within the next year and $3.1 million the year after.

Accounts Receivable, Net—Accounts receivable, net consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Accounts receivable, invoiced

 

$

64,314

 

 

$

57,228

 

Accounts receivable, other

 

 

5,766

 

 

 

1,139

 

Allowance for doubtful accounts

 

 

(4,309

)

 

 

(4,265

)

Accounts receivable—net

 

$

65,771

 

 

$

54,102

 

 

The Company extends non-interest-bearing trade credit to its customers in the ordinary course of business. Accounts receivable are shown on the face of the unaudited condensed consolidated statements of financial position, net of an allowance for doubtful accounts. In determining the allowance for doubtful accounts, the Company analyzes the aging of accounts receivable, historical bad debts, customer creditworthiness and current economic trends. During the first quarter of 2020, there was a global outbreak of a new strain of coronavirus, COVID-19. The COVID-19 pandemic has added uncertainty to the collectability of certain receivables, particularly in industries hard hit by the pandemic. As a result, the Company recorded a $6.3 million bad debt reserve during the first

7


 

quarter of 2020. The bad debt adjustment included a $5.5 million reserve for one customer in the Company’s Remediation and Reuse segment in which management concluded to discontinue select service lines as of March 31, 2020 (Note 19).

As of March 31, 2021 and December 31, 2020, the Company had one customer who accounted for 15.9% and 10.2%, respectively, of our gross accounts receivable. For the three months ended March 31, 2021, the Company had three customers who accounted for 16.3%, 12.7% and 10.2% of revenue. The Company did not have any customers that exceeded 10.0% of revenue as of March 31, 2020. The Company performs ongoing credit evaluations, and accordingly, believes that the balances from these largest customers do not represent a significant credit risk.

The allowance for doubtful accounts consisted of the following:

 

 

 

Beginning

Balance

 

 

Bad Debt

Expense

 

 

Charged to

Allowance

 

 

Other(1)

 

 

Ending

Balance

 

Three months ended March 31, 2021

 

$

4,265

 

 

$

508

 

 

$

(473

)

 

$

9

 

 

$

4,309

 

Year ended December 31, 2020

 

 

1,327

 

 

 

4,532

 

 

 

(2,633

)

 

 

1,039

 

 

 

4,265

 

____________________

(1)

This amount consists of additions to the allowance due to business acquisitions.

4. PREPAID AND OTHER CURRENT ASSETS

Prepaid and other current assets consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Deposits

 

$

796

 

 

$

708

 

Prepaid expenses

 

 

5,613

 

 

 

3,510

 

Supplies

 

 

2,421

 

 

 

2,491

 

Prepaid and other current assets

 

$

8,830

 

 

$

6,709

 

 

5. PROPERTY AND EQUIPMENT, NET

Property and equipment are stated at cost or estimated fair value for assets acquired through business combinations. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term, including options that are deemed to be reasonably assured, or the estimated useful life of the improvement.

Property and equipment, net, consisted of the following:

 

 

 

Estimated

 

March 31,

 

 

December 31,

 

 

 

Useful Life

 

2021

 

 

2020

 

Lab and test equipment

 

7 years

 

$

19,017

 

 

$

18,631

 

Vehicles

 

5 years

 

 

14,047

 

 

 

13,320

 

Equipment

 

3–7 years

 

 

33,263

 

 

 

32,177

 

Furniture and fixtures

 

7 years

 

 

3,023

 

 

 

2,938

 

Leasehold improvements

 

7 years

 

 

6,884

 

 

 

6,767

 

Aircraft

 

10 years

 

 

834

 

 

 

834

 

Building

 

39 years

 

 

2,975

 

 

 

2,975

 

 

 

 

 

 

80,043

 

 

 

77,642

 

Land

 

 

 

 

725

 

 

 

725

 

Construction in progress

 

 

 

 

489

 

 

 

219

 

Less accumulated depreciation

 

 

 

 

(46,316

)

 

 

(44,187

)

Total property and equipment—

   net

 

 

 

$

34,941

 

 

$

34,399

 

Total depreciation expense included in the unaudited condensed consolidated statements of operations was $2.2 million and $2.0 million for the three months ended March 31, 2021 and March 31, 2020, respectively.  

8


 

6. BUSINESS ACQUISITIONS

In line with the Company’s strategic growth initiatives, the Company acquired one business during the three months ended March 31, 2021 and several businesses during the year ended December 31, 2020. The results of each of those acquired businesses are included in the unaudited condensed consolidated financial statements beginning on the acquisition date. Each transaction qualified as an acquisition of a business and was accounted for as a business combination. All acquisitions resulted in the recognition of goodwill. The Company paid these premiums resulting in such goodwill for a number of reasons, including expected synergies from combining operations of the acquiree and the Company while also growing the Company’s customer base, acquiring assembled workforces, expanding its presence in certain markets and expanding and advancing its product and service offerings. The Company recorded the assets acquired and liabilities assumed at their acquisition date fair value, with the difference between the fair value of the net assets acquired and the acquisition consideration reflected as goodwill.

The identifiable intangible assets for acquisitions are valued using the excess earnings method discounted cash flow approach for customer relationships, the relief from royalty method for trade names, the patent and external proprietary software, the “with and without” method for covenants not to compete and the replacement cost method for the internal proprietary software by incorporating Level 3 inputs as described under the fair value hierarchy of ASC 820. These unobservable inputs reflect the Company’s own assumptions about which assumptions market participants would use in pricing an asset on a non-recurring basis. These assets will be amortized over their respective estimated useful lives.

Other purchase price obligations (primarily deferred purchase price liabilities and target working capital liabilities or receivables) are included on the unaudited condensed consolidated statements of financial position in accounts payable and other accrued liabilities, other non-current liabilities or accounts receivable-net in the case of working capital deficits. Contingent consideration outstanding from acquisitions are included on the unaudited condensed consolidated statements of financial position in business acquisition contingent consideration, current or in business acquisitions contingent consideration, long-term. These obligations are scheduled to be settled if certain performance thresholds are met.

The Company considers several factors when determining whether or not contingent consideration liabilities are part of the purchase price, including the following: (i) the valuation of its acquisitions is not supported solely by the initial consideration paid, (ii) the former stockholders of acquired companies that remain as key employees receive compensation other than contingent consideration payments at a reasonable level compared with the compensation of the Company’s other key employees and (iii) contingent consideration payments are not affected by employment termination. The Company reviews and assesses the estimated fair value of contingent consideration at each reporting period.

Transaction costs related to business combinations totaled $0.2 million and $1.3 million for the three months ended March 31, 2021 and March 31, 2020, respectively. These costs are expensed within selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations.

Acquisitions Completed During the Three Months Ended March 31, 2021

MSE Group—In January 2021, the Company completed the acquisition of MSE Group (“MSE”) by acquiring 100.0% of its membership interests. MSE is a provider of environmental assessment, compliance, engineering, and design services primarily to the U.S. federal government. MSE is based in Orlando, FL with additional offices in Tampa, Orlando, Jacksonville, San Antonio, TX, and Wilmington, NC, and satellite locations nationwide. The upfront cash payment made to acquire MSE was funded through cash on hand and the common stock portion of the purchase price was funded through the issuance of 71,740 shares of common stock.

The following table summarizes the elements of the purchase price of MSE:

 

 

 

Cash

 

 

Common

Stock

 

 

Other

Purchase

Price

Components

Current

 

 

Other

Purchase

Price

Components

Long Term

 

 

Contingent

Consideration

Current

 

 

Contingent

Consideration

Long Term

 

 

Total

Purchase

Price

 

MSE

 

$

9,082

 

 

$

2,271

 

 

$

10,146

 

 

$

 

 

$

 

 

$

1,804

 

 

$

23,303

 

 

The other purchase price components of the MSE purchase price consist of a target working capital amount, a 338 election tax liability, 2020 and 2021 purchase price true ups and contingent consideration. The 2020 and 2021 purchase price true up elements are based on MSE’s actual 2020 and 2021 results.  The contingent consideration element is related to earn-outs which are based on the expected achievement of revenue or earnings thresholds as of the date of the acquisition and for which the maximum potential amount is limited. The Company paid the target working capital amount and the 2020 purchase price true up in April 2021 (Note 22). The Company may be required to make up to $6.2 million in aggregate true up and earn-out payments in 2022 and 2023.

9


 

The preliminary purchase price attributable to the MSE acquisition was allocated as follows:

 

 

 

MSE

 

Cash

 

$

2,810

 

Accounts receivable

 

 

3,068

 

Other current assets

 

 

31

 

Current assets

 

 

5,909

 

Property and equipment

 

 

513

 

Customer relationships

 

 

8,720

 

Trade names

 

 

521

 

Covenants not to compete

 

 

922

 

Goodwill

 

 

7,532

 

Total assets

 

 

24,117

 

Current liabilities

 

 

(814

)

Total liabilities

 

 

(814

)

Purchase price

 

$

23,303

 

 

MSE results of operations have been combined with those of the Company since the date of acquisition. The Company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2021 includes revenue and pre-tax loss of $4.0 million and $0.3 million, respectively. MSE is included in the Company’s Remediation and Reuse segment.

The weighted average useful lives for the acquired customer relationships and related backlog for the MSE acquisition are 7 years and 2 years, respectively. The weighted average useful lives for the acquired tradenames and covenants not to compete for the MSE acquisition are 2 years and 5 years, respectively.

Goodwill associated with the MSE acquisition is deductible for income tax purposes.

The Company has not yet completed the initial purchase price allocation for this acquisition due to the timing of the close of the transaction.

Acquisitions Completed During the Year Ended December 31, 2020

The Center for Toxicology and Environmental Health, L.L.C.—In April 2020, the Company completed the acquisition of The Center for Toxicology and Environmental Health, L.L.C. (“CTEH”) by acquiring 100.0% of its membership interests. CTEH is an environmental consulting company headquartered in Arkansas that specializes in environmental response and toxicology. The cash payment made to acquire CTEH was funded through the issuance of the Convertible and Redeemable Series A-2 Preferred Stock (Note 16) and the common stock portion of the purchase price was funded through the issuance of 791,139 shares of common stock. 

Leed Environmental Inc.— In September 2020, the Company acquired certain testing assets, and operations from Leed Environmental Inc. (“LEED”). LEED provides environmental project management and coordination services. LEED expands the Company’s remediation capabilities in the Northeast region of the United States. The cash payment made to acquire LEED was funded via cash on hand.

American Environmental Testing Co.— In September 2020, the Company acquired certain assets and operations of American Environmental Testing Co. (“AETC”), a stack testing company in Utah. AETC expands the Company’s air measurement and analysis capabilities in the West Coast region. The cash payment made to acquire AETC was funded via cash on hand.

The following table summarizes the elements of purchase price of the acquisitions completed during the year ended December 31, 2020:

 

 

 

Cash

 

 

Common

Stock

 

 

Other

Purchase

Price

Components

Current

 

 

Other

Purchase

Price

Components

Long Term

 

 

Contingent

Consideration

Current

 

 

Contingent

Consideration

Long Term

 

 

Total

Purchase

Price

 

CTEH

 

$

175,000

 

 

$

25,000

 

 

$

(1,939

)

 

$

 

 

$

34,451

 

 

$

10,543

 

 

$

243,055

 

All other acquisitions

 

 

450

 

 

 

 

 

 

50

 

 

 

100

 

 

 

210

 

 

 

 

 

 

810

 

Total

 

$

175,450

 

 

$

25,000

 

 

$

(1,889

)

 

$

100

 

 

$

34,661

 

 

$

10,543

 

 

$

243,865

 

10


 

 

 

The contingent consideration elements of the purchase price of the acquisitions is related to earn-outs which are based on the expected achievement of revenue or earnings thresholds as of the date of the acquisition and for which the maximum potential amount is limited.

The CTEH first year earn-out was calculated at twelve times CTEH’s 2020 EBITDA (as defined in the purchase agreement) in excess of $18.3 million, with a maximum first year earn-out payment of $50.0 million, which was fully achieved. The second year earn-out is to be calculated at ten times CTEH’s 2021 EBITDA in excess of actual 2020 EBITDA (with actual 2020 EBITDA subject to a minimum of $18.3 million and a maximum of $22.5 million), with a maximum second year earn-out payment of $30.0 million. The 2020 earn-out was initially payable 100.0% in common stock, but as a result of the completion of the Company’s IPO (Note 1), 50.0% was payable in cash. In April 2021, the 2020 earn-out payment was made with 50.0% paid in cash and the remaining 50.0% paid in common stock of the Company (Note 22). The 2021 earn-out, if any, is payable 100.0% in cash.

The purchase price attributable to the acquisitions was allocated as follows: