EDGAR 10-K Filing

Company CIK: 1643615
Filing Year: 2024
Filename: 1643615_10-K_2024_0000950170-24-023043.json

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ITEM 1. BUSINESS
Item 1. Business.
Since our inception in 2012, our mission has been to help clients and communities meet their environmental goals and needs. According to data derived from a 2023 Environmental Industry Study prepared by Environmental Business International, Inc., or EBI, which we commissioned and update annually, the global environmental industry is estimated to be approximately $1.44 trillion, with $494.0 billion concentrated in the United States.
We service complex 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:
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 more accurately measuring methane and greenhouse gas emissions or 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, software 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 approximately 5,900 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.
Our financial success is driven by both strong organic and acquisition-driven growth, and as a result, our total revenue has grown at a compounded annual growth rate of 28% since 2019.
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.
Our approach has allowed us to successfully and consistently 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.
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 and research commissioned by Montrose, as of 2023 the global environmental industry is estimated to generate approximately $1.44 trillion in revenues, with $494 billion concentrated in the United States. According to EBI, this $494 billion U.S. environmental market is expected to grow at a CAGR of 3.6% per year from 2024 through 2026, up from its previous forecast of 2.8% per year from 2023 through 2026. EBI concludes that strong tailwinds of infrastructure funding, energy security, energy transition, Environmental, Social and Governance, or ESG, and climate resilience, in addition to traditional drivers of air quality, water quality, responsible waste management, resource recovery, remediation and restoration are leading to positive growth across all environmental sectors in the global market.
Public Demands, Industrial Activity, Climate Change and Regulations Each Drive Needs for Environmental Services
Heightened public awareness and increasing stakeholder 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 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 regulatory 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. Testing and monitoring are typically recurring processes driven by regulations 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, Australia and Europe, 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.
We expect these trends to continue and to spur future growth in the environmental services industry.
The Environmental Services Industry is Highly Fragmented and Complex
According to EBI, thousands of firms operate in many of the markets in which we operate. Several larger firms provide environmental services as a part of their broader product portfolio. However, much of the industry is served by small firms that provide limited service offerings that address specific regulations and geographies. It is difficult for small firms to expand their offerings or geographies 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 focus on environmental solutions to address their impact on the environment, we believe they value environmental solutions providers with scale, technology and broad service capabilities. Providers able to address the full lifecycle of environmental concerns and needs, particularly for companies and organizations with multi-jurisdictional footprints subject to complex regulatory frameworks and impacts across environmental media (e.g., air, water and soil) will continue to enjoy competitive advantages.
Segments
We provide environmental services to our clients through our integrated solutions across three business segments-Assessment, Permitting and Response, Measurement and Analysis and Remediation and Reuse.
Assessment, Permitting and Response. Our Assessment, Permitting and Response segment provides scientific advisory and consulting services to support environmental assessments, environmental emergency response and recovery, toxicology consulting and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. We work closely with clients to navigate the regulatory process at the local, state, provincial and federal levels, identify the potential environmental and political impacts of their decisions and develop practical mitigation approaches, as needed. In addition to environmental toxicology, and given our expertise in helping businesses plan for and respond to disruptions, our scientists and response teams have helped clients navigate their preparation for and response to emergency response situations.
We believe this segment maintains a number of competitive advantages, including:
•strong brands and market leadership, particularly with environmental preparedness and response;
•strong relationships with key private and public sector clients with needs for multiple environmental services, facilitating cross selling opportunities;
•a core team of approximately 1,100 employees, including well-known technical experts with longstanding client relationships and significant experience across the key disciplines in the segment;
•technology, software and data management capabilities, particularly within our response segment;
•our proven ability to help clients navigate regulatory, public and legal scrutiny; and
•a national reach established by having successfully assessed and permitted hundreds of projects in jurisdictions across the United States.
This segment, which is primarily based on a time and materials, or T&M, revenue model, generated approximately 35% of our revenue for the fiscal year ended December 31, 2023.
Measurement and Analysis. Our Measurement and Analysis segment is one of the largest providers of environmental testing and laboratory services in North America. Supported by approximately 1,160 employees across more than 55 locations in the US and Canada, our highly credentialed teams test and analyze air, water and soil to determine concentrations of contaminants, as well as the toxicological impact of contaminants on flora, fauna and human health. Our offerings include source and ambient air testing and monitoring, leak detection, and advanced multi-media laboratory services, including air, soil, stormwater, wastewater and drinking water analysis.
We believe we have a variety of sustainable competitive advantages in this market, including:
•reputable brands;
•one of the most prominent air testing companies in North America with vertically integrated testing and analytical capabilities, including ultra-trace analysis;
•comprehensive laboratory network in the United States, offering a complete suite of analytical solutions for virtually all environmental projects;
•one of the most experienced providers of advanced optical gas imaging “OGI” testing used to detect hydrocarbon gas leaks; and
•our proprietary software, technologies, processes and applications, including the ability to detect air contaminants in real time at ultra-trace concentrations.
This segment, which is primarily based on a fixed price and, for out-of-scope work, a T&M revenue model, generated approximately 32% of our revenue for the fiscal year ended December 31, 2023.
Remediation and Reuse. Our Remediation and Reuse segment provides clients with engineering, design, and implementation services, primarily to treat contaminated water, remove contaminants from soil or create biogas from waste. Approximately 720 of our employees, including engineers, scientists and consultants, provide these services to assist our clients in designing solutions, managing products and mitigating environmental risks and liabilities at their locations. We do not own the properties or facilities at which we implement these projects or the underlying liabilities, nor do we own material amounts of the equipment used in projects.
We believe this segment’s competitive advantages include:
•strong brands;
•advanced technologies and our owned and licensed intellectual property portfolio, such as our patented water treatment systems and proprietary process to optimize the generation of biogas;
•a team with industry-leading experts and several patent-generating scientists; and
•local expertise and capabilities with respect to unique soil, sediment and water table characteristics and contamination types.
This segment, which is primarily based on a fixed price and, for out-of-scope work, a T&M revenue model, generated approximately 33% of our revenue for the fiscal year ended December 31, 2023 primarily through project-based work.
This table illustrates a summary of our segments.
Differentiated Technology, Processes and Applications
Advanced technology, innovative processes, and applications are key competitive advantages in the environmental services industry. Our team of industry leaders are integral drivers of our investments in differentiated services. As our brand and environmental platform grows, our experts are increasingly able to deploy innovative technologies that address our clients’ needs, further differentiate our services and create new barriers to entry. Recent examples of our investment and development activities are related to real time air quality and methane emissions monitoring, environmental data management and visualization software, and PFAS removal and destruction technologies.
In total, our research and development team has been awarded seventeen patents and has an additional thirty-three patents submitted for patent consideration in the United States. Our research and development team continued to innovate in the following areas: water treatment, particularly PFAS and selenium removal, PFAS destruction, PFAS testing, foam fractionation, vapor treatment and removal, CO2 capture, and resource recovery.
Strategic Acquisitions
We operate in a growing and highly fragmented market with thousands of potential acquisition targets. Given our success in identifying, executing and integrating approximately 70 acquisitions since our inception in 2012, we believe we can continue to selectively acquire additive businesses. We seek to acquire businesses at disciplined valuation levels that:
•are led by high quality scientists and management teams,
•expand our portfolio of services,
•provide access to differentiated technologies or processes, and
•extend our geographic coverage.
We have personnel specifically dedicated to identifying acquisition targets, exploring acquisition opportunities, negotiating terms and overseeing acquisition and post-acquisition integration. Our in-house acquisition team has established extensive relationships throughout the industry and maintains and regularly re-evaluates an established pipeline of potential acquisition opportunities, largely driven by word of mouth and personal introductions.
Since January 1, 2021 we have acquired the following businesses:
Acquired Business
Date of Acquisition
Segment
Location
2024 Acquisitions
Epic Environmental Pty Ltd (“Epic”)
January 31, 2024
Remediation and
Reuse
Brisbane, Australia
Two Dot Consulting, LLC ("2DOT")
February 29, 2024
Remediation and
Reuse
Denver, Colorado
2023 Acquisitions
Frontier Analytical Laboratories (“Frontier”)
January 3, 2023
Measurement and
Analysis
El Dorado Hills, CA
Environmental Alliance, Inc. ("EAI")
February 1, 2023
Remediation and
Reuse
Wilmington, DE
GreenPath Energy LTD (“GreenPath”)
May 1, 2023
Measurement and
Analysis
Calgary, Canada
Matrix Solutions, Inc. ("Matrix")
June 1, 2023
Remediation and
Reuse
Calgary, Canada
Vandrensning ApS. ("Vandrensning")
July 31, 2023
Remediation and
Reuse
Copenhagen, Denmark
2022 Acquisitions
Environmental Standards, Inc. (“Environmental Standards”)
January 31, 2022
Assessment,
Permitting and
Response
Valley Forge, PA
Industrial Automation Group, Inc. (“IAG”)
January 31, 2022
Remediation and
Reuse
Atlanta, GA
TriAD Environmental Consultants, Inc. (“TriAD”)
August 1, 2022
Remediation and
Reuse
Nashville, TN
AirKinetics, Inc. (“AirKinetics”)
September 1, 2022
Measurement and
Analysis
Anaheim, CA
Huco Consulting, Inc. (“Huco”)
November 30, 2022
Assessment,
Permitting and
Response
Houston, TX
2021 Acquisitions
Horizon Water and Environment, LLC (“Horizon”)
November 1, 2021
Assessment,
Permitting and
Response
Oakland, CA
Environmental Chemistry, Inc. (“ECI”)
October 1, 2021
Measurement and
Analysis
Houston, TX
SensibleIoT, LLC (“Sensible”)
August 1, 2021
Measurement and
Analysis
Paso Robles, CA
Environmental Intelligence, LLC (“EI”)
July 1, 2021
Assessment,
Permitting and
Response
Laguna Beach, CA
Vista Analytical Laboratory, Inc. (“Vista”)
June 3, 2021
Measurement and
Analysis
El Dorado Hills, CA
MSE Group, LLC ("MSE")
January 1, 2021
Remediation and
Reuse
Orlando, FL
We believe we add value to the businesses we acquire by emphasizing a team-centric culture focused on innovation and investment, expanding career opportunities for new employees from smaller businesses, providing a larger eco-system of environmental services and capabilities to further client relationships, and implementing award-winning safety programs and operating processes. Each business we acquire is systematically integrated into our systems and processes, thereby creating revenue synergy opportunities and operating leverage.
Clients
We provide environmental services to approximately 5,900 clients operating in a number of sectors and industries, including but not limited to energy (oil, gas and/or petrochemical), industrials and manufacturing, power and utilities, technology, chemicals, financial services, engineering services, and media, as well as local, state, provincial and federal government entities. We have long-term, and through our legacy companies, decades-old relationships. We serve a diversified client base in both the private and public sectors. For the fiscal year ended December 31, 2023, our revenues were derived approximately 89% from the private sector and 11% from the public sector.
Our largest client represented approximately 10% of revenue for fiscal year ended December 31, 2023, with these revenues derived from over 13 separate projects. As a result of the nature of our environmental emergency response business, our Assessment, Permitting and Response segment may at times experience higher customer concentration levels based on the severity, duration and outcome of certain types of environmental emergencies for which we provide response services, as was the case in 2023 when 43% of our Assessment, Permitting and Response segment revenues were attributable to three customers. See Item 1A. “Risk Factors.”
For the fiscal year ended December 31, 2023, 51% of our revenue came from customers engaging us to provide more than one service, an increase of 16 percentage points from the 35% we generated from customers buying more than one service in the fiscal year ended December 31, 2022. We have expanded our relationships with our existing customer base with our vertically integrated business model. Our maturing client relationships coupled with our integrated structure across all our business lines has increased the level of client engagement.
Contracts
Our client contracts are generally fixed price, including milestone-based fixed price contracts in our Remediation and Reuse segment, and, for out-of-scope work, T&M based. Our Assessment, Permitting and Response client contracts are generally T&M based. Our client contracts vary from purchase-order based contracts utilizing standard terms and conditions to comprehensive master services agreements with terms of multiple years. In accordance with industry practice, most of our contracts, both in the private and public sector, are subject to termination at the discretion of the client. In such situations, our contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of termination. See Item 1A. “Risk Factors.”
Competition
We operate in a competitive, but fragmented, market. No single company or group of companies dominates across the entire environmental services market in which we operate. Our primary competitors are divisions of large companies, various small companies, which generally are limited to a specific service and focused on a niche market or geographic region and our clients’ own in-house resources. We believe that few, if any, of our competitors currently provide the full range of environmental solutions that we offer. Instead, each of our segments has competitors with narrower service offerings and/or geographies. Our Assessment, Permitting and Response segment competitors include the environmental divisions of ERM, Ramboll, Geosyntec, Exponent, WSP and other large engineering companies and small businesses. Our Measurement and Analysis segment competitors include the environmental divisions of SGS, TRC Companies, Eurofins, Pace Analytical and other large testing companies and small businesses. Our Remediation and Reuse segment competitors include the environmental divisions or remediation segments of Tetra Tech, AECOM, Xylem, Veolia, Mead & Hunt, and other large engineering companies and other small businesses.
We compete based on the following factors, among others: reputation, safety track record, quality, geographic reach, price, technical capabilities, access to innovative technology and breadth of services. We believe that our current capabilities position us to compete favorably in each of these factors.
The environmental services industry has significant barriers to entry which would make it difficult for new competitors to enter the market. These barriers include:
•highly technical, costly and time-consuming accreditation and licensure requirements;
•ability to deploy/services client needs across geographies;
•advanced quality and safety programs and mandated scores;
•the complex and geographically varying regulatory landscape that requires significant industry experience;
•the need to acquire or develop innovative technologies and processes that are acceptable to regulatory bodies, which in our case occurred over many years of client and regulator engagements and at significant research and development expense; and
•emphasis by large clients on size and scale, length of relationship and past service record.
Intellectual Property
We utilize a combination of intellectual property safeguards, including patents, copyrights, trademarks, trade secrets and licenses, as well as employee and third-party confidentiality agreements, to protect our intellectual property. However, we do not principally rely on any single piece of intellectual property, nor is any single piece of intellectual property material to our financial condition or results of operations.
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. Additionally, due to the field-based nature of certain of our services, weather patterns generally impact our field-based teams’ ability to operate in the winter months. As a result, our operating results in our Measurement and Analysis segment and, following the acquisition of Matrix in Canada, the Remediation and Reuse segment, experience some quarterly variability with generally lower revenues and lower earnings in the first and fourth quarters and typically we experience higher overall revenues and earnings in the second and third quarters. As we continue to grow and expand into new geographies and service lines, quarterly variability in our Measurement and Analysis and Remediation and Reuse segments may deviate from historical trends.
Human Capital Resources
We believe one of our greatest strengths is our employees who strive to innovate and deliver unparalleled service to our clients and communities. Our employees are passionate about the environment and supporting one another. We are committed to fostering a diverse, fair and inclusive workplace with a focus on respect, trust and belonging. We invest in the success and development of our employees and maintain people-centric strategies from recruiting, engagement, development, compensation and benefits to safety and communication.
Employees
As of December 31, 2023, we had approximately 3,100 employees (which includes full-time, part-time and stand-by environmental emergency response personnel). Approximately 2,400, or 77%, of our employees work in our U.S. operations and approximately 700 or 23% work in foreign operations. Other than in Sweden, none of our facilities are covered by collective bargaining agreements.
Talent Attraction
We believe that we are part of the future of environmental solutions, and we continue to differentiate ourselves by attracting top talent that brings diverse perspectives, experiences, and expertise that can help solve some of the toughest environmental challenges our clients’ face. We are focused on attracting and hiring talented and diverse people while at the same time appreciating each candidates’ career aspirations and development areas.
Our internal talent acquisition team has decades of experience that spans industries, enabling them to be forward-thinking, strategic, and anticipatory of talent trends. This team performs the majority of the recruiting and hiring by partnering closely with our business leaders and technical teams to understand their current and future talent needs.
We have developed and maintained relationships with external search firms to better inform them regarding our business and talent requirements. We leverage these firms for niche and specialized executive, professional and technical roles.
We have also advanced our partnerships with select universities by engaging with 20 top-tier universities across the United States and Canada. As part of our engagement efforts in 2023, we met with over 1,000 students, participated in classroom and school panel presentations, and interviewed and hired numerous talented students. We are committed to continuing this initiative with our 2024 spring and fall university relations campaigns. We believe these campaigns can better enable us to identify and hire top talent for our internships and entry-level full-time roles, as well as to develop a strong talent pipeline for years to come.
Finally, we prioritize developing relationships and affiliations with professional organizations that promote underrepresented populations and affinity groups, such as the Society of Women Environmental Professionals. We post our career opportunities on various diversity job boards and have expanded our military recruiting initiative.
Employee Engagement
We actively engage with our employees to help them gain a deeper understanding our business, to provide them with important updates, and to share information about our recently developed patents and acquired businesses. Periodic town halls led by our CEO and quarterly town halls led by our divisional leaders are used to communicate corporate initiatives, reinforce key messages, recognize employee accomplishments and solicit employee feedback. Our monthly newsletter - Montrose Matters - is another communication channel that allows us to highlight projects, provide sustainability updates and recognize employee accomplishments. Finally, we hold annual meetings with our business leaders to provide state-of-the-business updates, as well as to facilitate team building and recognition of accomplishments.
In addition to these all-employee events, we have incorporated into our business a number of additional employee engagement initiatives, including:
•Implementing an employee engagement solution known as New Leader and Team Assimilation which accelerates the integration, collaboration and engagement of new leaders with their team by following a structured process which allows leaders to share their vision and strategy and better empowers employees to share their expectations about the new leader; and
•For our newly acquired and integrated businesses, conducting post-integration acquisition surveys to gather feedback and identify potential enhancements to our processes.
Additionally, we are planning to conduct an Employee Engagement Survey in 2024 to understand employee feedback and provide an opportunity for increased employee engagement.
Employee Training and Development
Our employee-centric model is focused on serving our employees and empowering them to grow both professionally and personally. We make investments in a variety of training and development programs, including mentoring, on-the-job and classroom training, and a tuition reimbursement program. Our employees' ability to grow and learn reflects directly on Montrose, therefore we also encourage our employees to obtain professional licenses and certifications to stay current in their field. Additionally, we also provide in-house compliance-based training,
including on our Code of Conduct and Ethics Policy and Anti-Harassment and Cybersecurity Awareness. We regularly review and update our training and development programs to reflect developments in applicable fields, lessons we have learned and employee feedback.
We understand that high-potential and high-performing employees want to be part of an organization making meaningful impacts while also progressing their own careers. Investing in our employees’ professional career paths creates a sense of belonging and is a key pillar of our retention strategy.
Our divisional and corporate leaders work closely with their teams to understand each employee’s career aspirations and to support them in career development. Leaders engage with employees to establish goals aligned with their career aspirations, to identify areas for development and to facilitate their professional growth. Goals and development areas are reviewed during year-end performance reviews. We believe this level of engagement and development, with goal setting and development plans, is critical for talent development and retention. Moreover, we leverage our internal employee Talent Profile tool for employees to document their career accomplishments, certifications and career aspirations. Our employees use our Talent Profiles to source talent throughout the organization for their projects.
We conduct organizational talent reviews to assess our collective talent, evaluate macro-organizational trends, identify and mitigate talent risk, identify successorship opportunities, and enable us to have the talent to meet our goals and serve our clients. In 2023, we held robust calibration exercises and talent review discussions with executive and senior leaders across our business, which resulted in action plans designed to further develop, engage, and retain our talent, build successorship, and meet business objectives. Our Board of Directors and its committees are also regularly updated on our organizational talent reviews and talent development efforts as part of their succession planning oversight.
Additionally, we conduct periodic 360-degree feedback surveys for our business leaders. These surveys are essential to understanding leadership strengths, development opportunities and assembling of each leader’s development plan.
Employee Retention and Rewards
Core to our talent retention strategy is our carefully designed and comprehensive compensation package. We strive to maintain a fair and equitable compensation program for comparable roles, experience and performance that is independent of employee race, gender, sexual orientation, or other personal characteristics. Annually, we conduct an annual gender pay equity assessment to ensure equitable compensation for employees performing substantially similar work by job and level across all businesses and all corporate functions, regardless of gender.
We conduct annual compensation planning, in which business line and corporate leaders evaluate team members for performance-based salary increases and promotions. We also reward employees’ performance with project-based and annual performance cash bonus program opportunities. We offer long-term equity incentives to a number of our employees under our stock incentive plan. We believe strongly in employee ownership of Montrose, and we believe our equity incentives can help to retain employees and create value for our clients, for our employees and for our stockholders.
We also believe in recognizing our employees for their contributions. Our leaders have opportunities to identify and nominate employees who have excelled and gone above and beyond their responsibilities and expectations. These employees are recognized individually, in team settings, or by our CEO in broader settings.
Globally, we offer country-specific and what we believe are competitive healthcare, life, and disability insurance, retirement programs and paid time-off programs.
Diversity, Fairness and Inclusion
At Montrose, diversity, fairness, and inclusion (“DF&I”) are key to fulfilling our Company aspirations to be the future of environmental solutions. Our Board’s Compensation Committee has direct oversight of our diversity, fairness and inclusion (“DF&I”) programs, priorities, and strategies. Our DF&I strategies are aimed towards promoting a diverse, inclusive, and fair organization and culture that embraces each person’s unique perspectives and differences such as race, ethnicity, gender identification, sexual orientation, age, religion, culture, military status, title or position in the company, geography, educational background or disability.
Our DF&I efforts help to identify the inclusion, fairness, and diversity strengths, issues, and opportunities within our business. Our DF&I committee, established in July 2020, is comprised of employees across our various teams, divisions and geographies and is overseen by our SVP of Human Resources. They work to build awareness and formalize employee engagement, training, development and policies that support our DF&I goals and initiatives. Our SVP of Human Resources acts as the committee’s executive sponsor, serving as the liaison between the committee and our executive leadership team, works to formalize the committee’s objectives, and increases communications across Montrose.
We aim to build positive environments built on mutual respect, equitable access to opportunities, and appreciation for the value each employee delivers to the Montrose team, our clients and our communities. In furtherance of these efforts, we have deployed mandatory inclusion training to our full-time workforce.
Our WeLEAD (Women Empowering Leadership) program, which was established in January 2020, is focused on fostering the recruitment, retention and professional development of women at our company. Our WeLEAD program is developing an alliance of women leaders across Montrose, with a key emphasis on mentorship and talent development, and has successfully recommended policy changes which are implemented to promote the development and retention of female talent within the organization.
Further to its mission, WeLEAD coordinates a formal annual mentorship program, with approximately 100 employees participating in the 2023-2024 program. The program provides a structured environment for one-on-one mentorship, along with facilitated small and large group sessions and events, and a regular newsletter providing topics for conversation and supplemental resources.
In 2023, we expanded our employee resource groups (“ERGs”) beyond WeLEAD to include BEAM (Black Employees At Montrose) and PRISM (Pride, Recognition, Identity, Solidarity at Montrose). The ERGs aim to develop communities across business lines that facilitate a support mechanism and foster a sense of inclusion, success sharing and mentorship.
BEAM is dedicated to creating an inclusive and equitable workplace where diversity thrives and the unique experiences and perspectives of our Black colleagues are celebrated. BEAM’s mission is to foster an environment where everyone feels valued, supported, and empowered to reach their fullest potential. Leveraging the power of collective advocacy and mentorship to shape the future leaders of the Company, BEAM aims to provide essential tools, initiatives and a platform for professional growth in order to propel its members towards excellence in both their careers and environmental stewardship.
PRISM is a collective of LGBTQIA+ employees and supportive non-identifying employees - all dedicated to community outreach and advocacy, creating visibility and promoting leadership development. PRISM’s mission is to promote inclusivity and equity regardless of LGBTQIA+ identity at Montrose by partnering with employees, clients, and vendors, participating in PRIDE events and educating others through shared experiences that influence change in language and policies.
We continue our efforts to highlight the diverse perspectives of our employees and the celebration of holidays and commemorative periods throughout the year. The DF&I committee released reflections of employees, internally and externally, and educational communications for holidays, heritage months and various dates dedicated to diverse backgrounds and cultures.
Our DF&I committee also actively works with our human resources and talent acquisition teams to expand our recruiting efforts of science, technology, engineering and math professionals, as well as engaging with colleges and professional organizations that promote individuals from underrepresented populations. For example, we have sponsored events for the Society of Women Environmental Professionals to build a long-term relationship. Additionally, the committee, in coordination with our human resources team continues to review our job posting templates for inclusive and fair recruitment language aimed towards facilitating a diverse applicant pool.
Further to our DF&I commitments and as part of our sustainability commitments, we have committed to reach gender parity in the workforce by 2040.
Community Development
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 donations made by employees, board members, clients and others 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.
Governance
Our human capital strategy is led by our Human Resources function under the direction of our SVP of Human Resources, with active oversight by our Board’s Compensation Committee. The Compensation Committee and Board receive regular updates on human capital matters, including training and development, and related strategic initiatives from our SVP of Human Resources and our executive leadership team.
Health, Safety and Wellness
Our culture of safety and wellbeing of our employees is supported by a dedicated team of health and safety professionals.
Across our organization, we demonstrate our strong commitment of safety to our employees with frequent communications and systems that actively engage employees and encourage all employee's input and involvement. The foundation of the safety program focuses on ensuring that our employees are sufficiently trained to perform their job duties, have properly operating equipment including correct Personal Protective Equipment such as gloves, eyewear and respirators, job hazards are properly identified, mitigated and planned for prior to work commencement, and the entire process is documented to validate and improve performance. All employee time associated with safety preparation and training is
fully paid to employees. Current initiatives include driving safety, chemical safety, job safety planning and job hazard analysis. Further to our commitment to our employees, we employ a third party occupational medical provider that is available to all employees 24/7 to discuss occupational health concerns. Finally, all of our employees have complete stop work authority and can stop any project or task if there is any concern about a safety issue without any fear of retribution.
Our dedication and commitment to safety have resulted in us again receiving National Safety Council Award for Operational Excellence.
Compliance with Federal, State/Provincial and Local Laws
Our operations subject us to environmental, health and safety laws and regulations in jurisdictions where we operate, including the United States, Canada, Australia and Europe. Such laws and regulations relate to, among other things, the discharge of wastewater, the discharge of hazardous materials into the environment, the handling, storage, use, transport, treatment and disposal of hazardous materials and solid, hazardous and other wastes and workplace health and safety. These laws and regulations impose a variety of requirements and restrictions on some of our operations and the services we provide. The failure by us to comply with these laws and regulations could result in fines, penalties, enforcement actions, third-party claims, damage to property or natural resources and personal injury claims, requirements to investigate or cleanup property or to pay for the costs of investigation or cleanup or regulatory or judicial orders requiring corrective measures, and could negatively impact our reputation with clients. We are not aware of any pending environmental compliance or remediation matters that, in the opinion of management, are reasonably likely to have a material effect on our business, financial condition, results of operations or prospects.
A portion of our revenue is derived from working with the U.S. federal government. When working with U.S. governmental agencies and entities, we must comply with laws and regulations relating to the formation, administration and performance of contracts. Internationally, we are subject to various government laws and regulations (including the U.S. Foreign Corrupt Practices Act, or FCPA, and similar non-U.S. laws and regulations). To help promote compliance with these and other laws and regulations, our employees are sometimes required to complete tailored ethics and other compliance training relevant to their position and our operations.
Information About Our Executive Officers
Vijay Manthripragada, 47 - Mr. Manthripragada joined Montrose Environmental as our President in September 2015. In June 2016 Mr. Manthripragada also joined our Board of Directors and, since February 2016, he has served as our President and Chief Executive Officer. Before joining Montrose Environmental, Mr. Manthripragada most recently served as the Chief Executive Officer of PetCareRx, Inc., from 2013 to 2015. Prior to PetCareRx, Mr. Manthripragada was at Goldman Sachs where he held various positions from 2006 to 2013. Mr. Manthripragada received his Master of Business Administration from The Wharton School, University of Pennsylvania and his Bachelor of Science in Biology from Duke University.
Allan Dicks, 51 - Mr. Dicks has been our Chief Financial Officer since August 2016. Before joining Montrose Environmental, Mr. Dicks first served as a consultant interim Chief Financial Officer from February 2015 to April 2015 and then Chief Financial Officer from April 2015 to June 2016 of Convalo Health International, Corp., a public Canadian healthcare company. Prior to that, Mr. Dicks held a number of finance-focused executive positions starting in 2000, including Chief Financial Officer of Universal Services of America, Chief Financial Officer of Moark, LLC, a division of Land O’ Lakes, Inc., Vice President of Finance of White Cap Construction Supply, a division of HD Supply, and first as assistant Corporate Controller and subsequently as a division Chief Financial Officer of Dole Food Company, Inc. Mr. Dicks started his career at PricewaterhouseCoopers where he spent nine years, three of which were in the mergers and acquisitions group. Mr. Dicks received his Bachelor of Commerce and Accounting degrees from the University of the Witwatersrand in South Africa. He is a Chartered Accountant in South Africa and is a Certified Public Accountant (inactive) in the State of California.
Nasym Afsari, 41 - Ms. Afsari has been our General Counsel since November 2014 and our Secretary since August 2015. Before joining Montrose Environmental, Ms. Afsari was an attorney in the corporate practice of Paul Hastings LLP, an international law firm, from September 2007 to October 2014. At Paul Hastings, Ms. Afsari represented a variety of business entities in all aspects of corporate and business law, including domestic and cross-border mergers and acquisitions, venture capital financing, private placements and joint venture transactions. Ms. Afsari earned her Juris Doctorate from the University of California at Los Angeles and a dual Bachelor of Arts degree in Economics and Psychology from the University of California at Berkeley.
Joshua W. LeMaire, 50 - Mr. LeMaire has been our Chief Operating Officer since June 2017, prior to which he was our Vice President, Business Development and Marketing, starting in July 2015. Before Montrose Environmental, from 2011 to 2015, Mr. LeMaire consulted on acquisitions of dental service organizations through his consulting firm, Aries Dental Management Group, LLC and prior to that, Mr. LeMaire was the Vice President, Sales and Marketing at ExamWorks Group, Inc., from 2008 to 2011, where he managed the company’s corporate branding initiative, sales and marketing programs and strategic corporate relationships. Prior to ExamWorks, Mr. LeMaire held several
leadership roles at Becker-Parkin Dental Supply Co., including Executive Vice President of Sales and Marketing, Vice President of Full Service Sales and National Sales Manager. Mr. LeMaire also worked as a National Sales Manager at Sky Financial Solutions.
Jose M. Revuelta, 42 - Mr. Revuelta has served as our Chief Strategy Officer since June 2017, prior to which he was our Vice President and served in several other interim executive positions with Montrose Environmental since March 2014. Prior to joining Montrose Environmental, Mr. Revuelta was a Vice President with the Infrastructure and Private Equity business of UBS Global Asset Management, a large scale global investment manager, from 2008 to 2014, where he focused on the energy, utility, transportation and environmental sectors, and a member of the Infrastructure Group in the Investment Banking division of UBS from 2006 to 2008. Mr. Revuelta previously served on the Board of Northern Star Generation. Mr. Revuelta received his Master of Business Administration from the Columbia Business School, Columbia University and a Master of Science/Bachelor of Science in Industrial Engineering from Universidad Pontificia Comillas in Madrid, Spain.
Available Information
We are subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and in accordance therewith, we file reports, proxy statements and other information with the Securities and Exchange Commission, or the SEC. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available through the investor relations section of our website, www.montrose-env.com. Reports are available on our website free of charge as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The information on or that can be accessed through our website is not a part of this Annual Report on Form 10-K or incorporated into any other filings we make with the SEC and the inclusion of our website address is an inactive textual reference only. In addition, the SEC maintains an Internet site that contains our reports, proxy statements and other information that we electronically file with, or furnish to, the SEC at www.sec.gov.

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ITEM 1A. RISK FACTORS
Item 1A. Ris k Factors.
Summary
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 Annual Report on Form 10-K, including the financial statements and the related notes included in Item 8. “Financial Statements and Supplementary Data,” before making an investment decision. The discussion of these risks is organized by the following sections: Risks Related to Our Limited Operating History, Risks Related to Our Industry and the Broader Economy, Risks Related to Our Acquisition Strategy, Risks Related to the Nature of Our Business, Risks Related to Our Contracts and Revenue Streams, Technology and Privacy Related Risks, Risks Related to Our Indebtedness, Risks Related to Ownership of Our Common Stock, Risks Related to Provisions in Our Charter Documents, and General Risks. Some of the more significant risks include:
•general global economic, business and other conditions and the cyclical nature of some of our end markets;
•the highly competitive nature of our business;
•rapidly changing technology and industry and regulatory standards;
•our ability to execute on our acquisition strategy and successfully integrate and realize benefits of our acquisitions;
•the parts of our business that depend on difficult to predict natural or manmade events;
•our work on high profile projects and the risks related thereto;
•our ability to maintain necessary accreditations and other authorizations;
•significant environmental governmental regulation;
•our ability to attract and retain qualified managerial and skilled technical personnel;
•safety-related issues;
•our ability to expand our client base; and
•lack of compliance with prescribed organizational policies and procedures may result in poor performance or suboptimal transactions.
If any of the risks described below 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.
Risks Related to Our Industry and the Broader Economy
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, 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, such as inflation and supply chain difficulties, 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 prices 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.
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 ERM, Ramboll, Geosyntec, Exponent, WSP and other large engineering companies and small businesses, in our Measurement and Analysis segment, the environmental divisions of SGS, TRC Companies, Eurofins, Pace Analytical and other large testing companies and small businesses, and in our Remediation and Reuse segment, the environmental divisions or remediation segments of Tetra Tech, AECOM, Xylem, Veolia, Mead & Hunt, and 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.
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.
Risks Related to Our Acquisition Strategy
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 partially dependent on acquiring and integrating the operations of companies in the environmental services industry. Since January 1, 2020, we have acquired 19 companies. 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 terms of our Series A-2 preferred stock also restrict our ability to make certain acquisitions without the consent of the holder majority, including acquisitions in excess of $75.0 million. 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. We may become liable for certain unforeseen pre-acquisition liabilities of an acquired business, including, among others, tax liabilities, environmental liabilities, contingent consideration 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.
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.
We have not yet completed the integration of our June 2023 acquisition of Matrix, including with respect to our internal control over financial reporting, and we excluded this business from our management’s report on our internal controls over financial reporting and the effectiveness thereof as of December 31, 2023 included herein, as permitted by guidelines established by the SEC for newly acquired businesses. See Item 9A. “Controls and Procedures.” As a result, there may risks related to the integration of Matrix that we have not discovered, including those listed above or others that we may not currently appreciate.
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.
Risks Related to the Nature of Our Business
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 our environmental emergency response business that 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. For example, this segment’s revenues significantly increased during in the fiscal year ended December 31, 2021, due in significant part to the contribution of COVID-19 work during the heights of the pandemic. 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 and, therefore, at times, ours as well. 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, during the heights of the pandemic, for the fiscal year ended December 31, 2021, 58% of our Assessment, Permitting and Response segment revenues, were attributable to just three customers, each of whom engaged us in connection with COVID-19 related support across dozens of independent projects. In the year ended December 31, 2022, as the pandemic began to subside, this percentage dropped to 32%. Similarly, for the fiscal year ended December 31, 2023, 43% of total Assessment, Permitting and Response segment revenues, were attributable to just three customers, each of whom engaged us in connection with environmental emergency response related support across multiple projects. 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.
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 our CTEH business. This division of CTEH conducts environmental sampling and provides toxicological assessments, among other services, in emergency situations and natural disasters, many of which are widely covered by the press and in the public eye, such Hurricane Harvey in 2017, Intercontinental Terminals Co, and ITC, fires in 2019, the pandemic and the Norfolk Southern train derailment in 2023. 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 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 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 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. 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, particularly given the recent competition in the job market. 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 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.
Our environmental emergency response business places our employees in dangerous situations which may present serious and enhanced safety issues that could adversely affect our business.
Our environmental emergency response business is focused on assisting companies, governments and communities with responses to and recovery from environmental emergencies. A significant portion of our environmental emergency response 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 the error. Our CTEH business is often responsible for the presentation of plans and advice in emergency situations, including natural disasters and manmade accidents. While our 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 may use small aircraft to transport employees to project sites which could expose us to risks associated with air travel.
We use a small aircraft in our business, particularly in connection with our emergency response services. 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, as occurred on February 22, 2023, when our airplane crashed killing five 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. The success of our environmental emergency response 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.
ESG matters, including those related to climate change, sustainability and the goals and initiatives we set and implement and the public statements and disclosures we make in respect of these matters, may have an adverse effect on our business.
Companies across all industries are facing increasing scrutiny relating to their environmental, social and governance, or ESG, practices. Changing consumer preferences are also resulting in increased demands regarding the environmental impact on sustainability. This scrutiny and demand could require additional transparency, due diligence and reporting and could cause us to incur additional costs or to make changes to our operations to comply with these demands. Further, concern over climate change and other environmental sustainability matters may result in new or increased legal and regulatory requirements to reduce or mitigate impacts to the environment, including greenhouse gas emissions regulations, alternative energy policies and sustainability initiatives. For example, in March 2022, the SEC proposed rules that would require companies to make certain climate-related disclosures, including information about climate-related risks, GHG emissions and certain climate-related financial statement metrics. The SEC expects to finalize these rules in 2024. In January 2023, the European Union’s Corporate Sustainability Reporting Directive (“CSRD”) went into effect, which introduced more detailed sustainability reporting requirements. The CSRD phases in over time, with its disclosure requirements with respect to our EU operations going into effect for fiscal year 2025 with reporting required in 2026. In addition, in October 2023, the Governor of California signed into law the Climate-Related Financial Risk Act and the Climate Corporate Data Accountability Act, which impose significant and mandatory climate-related reporting requirements for large companies doing business in the state, as well as the Voluntary Carbon Market Disclosures Act, which requires companies operating in California to make certain disclosures to support any
claims they make in the state regarding net zero, carbon neutrality, or significant GHG reductions, as well as disclosure regarding voluntary carbon offsets purchased, used, marketed, or sold within California. Increased regulatory requirements may be more aggressive than any sustainability measures we may be currently undertaking or may implement in the future may cause disruptions in supply chains or an increase in operating and compliance costs. If we do not adapt to or comply with these and other new regulations or if we are perceived to have not responded appropriately to the growing concern for ESG matters, we may face legal or regulatory actions or the imposition of fines, penalties, or other sanctions and adverse publicity, any of which could materially harm our reputation or have a material adverse effect on our business, financial condition or results of operations.
We have developed, and will continue to establish, goals, targets and other objectives related to sustainability matters. These statements reflect our current plans and do not constitute a guarantee that they will be achieved. Our efforts to research, establish, accomplish and accurately report on these goals, targets and objectives expose us to numerous operational, reputational, financial, legal and other risks. Our ability to achieve any stated goal, target or objective is subject to numerous factors and conditions, many of which are outside of our control. Examples of these factors include evolving regulatory requirements affecting sustainability standards or disclosures or imposing different requirements, the pace of changes in technology, the availability of requisite financing and the availability of third parties with whom we do or will do business that can meet our sustainability and other standards.
Our business may face increased scrutiny from the investment community, other stakeholders, regulators and the media regarding our sustainability activities, including the goals, targets and objectives that we announce, and our methodologies and timelines for pursuing them. Additionally, we may be subject to higher expectations or greater scrutiny than other companies due to the nature of our business. If our sustainability practices do not meet investor or other stakeholder expectations and standards, which continue to evolve, our reputation, our ability to attract or retain employees, and our attractiveness as an investment, business partner, or as an acquiror could be negatively impacted. Similarly, our failure or perceived failure to pursue or fulfill our goals, targets and objectives, to comply with ethical, environmental or other standards, regulations or expectations, or to satisfy various reporting standards with respect to these matters, within the timelines we announce, or at all, could have the same negative impacts, as well as expose us to government enforcement actions and private litigation. Even if we achieve our goals, targets and objectives, we may not realize all of the benefits that we expected at the time they were established.
Product and systems offerings subject us to risks that could adversely affect our business.
Certain of our environmental solutions include product or system offerings, including those offered by ECT2 and our biogas division. We have a limited history in offering products and designing and building systems as compared to the services we offer, 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, may incur penalties under the customer agreement and may be required to obtain replacement products if available. 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 or systems and related increased costs. If product or system defects or other issues are not discovered until after they 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 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.
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, particularly in our Measurement and Analysis segment, and, following the acquisition of Matrix in Canada, the Remediation and Reuse segment, 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. Further, we generated meaningful revenues related to COVID-19 response work, particularly in 2021, and as a result of the pandemic subsiding, we may not be able to replace these revenue streams in future periods. 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, pandemic, 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.
Risks Related to Our Contracts and Revenue Streams
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 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, 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.
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 11% of our revenues for the fiscal year ended December 31, 2023. 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 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.
Technology and Privacy Related Risks
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 efforts to minimize the likelihood and impact of adverse cybersecurity incidents and to protect data and intellectual property may not be successful and our business could be negatively affected by cyber or security threats or other disruptions. We routinely experience various cybersecurity threats to our technology infrastructure, unauthorized attempts to gain access to our company, employee and customer-sensitive information, insider threats and other attacks. Our customers, suppliers, subcontractors and partners experience similar security threats. In addition to cyber threats, we face threats to the security of our facilities and employees, which could materially disrupt our business if carried out. We could also be impacted by the improper conduct of our employees or others working on behalf of us who have access to export controlled or Controlled Unclassified Information ("CUI"), which could adversely affect our business and reputation. The threats we face vary from attacks common to most industries, such as ransomware, to more advanced and persistent threats, highly organized adversaries, including nation state actors, which target us and other defense contractors and other companies. These threats can cause disruptions to our business operations. In addition to cyber threats, our cybersecurity and processing systems, as well as those of our third-party service providers, including cloud 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 could include phishing-attacks, denial-of-service attacks, ransomware, malware, and hacking. If we are unable to protect sensitive information, including complying with evolving information security and data protection/privacy regulations, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures. Moreover, depending on the severity of an incident, our customers’ data, our employees’ data, our intellectual property (including trade secrets and research, development and engineering know-how), and other third-party data (such as subcontractors, suppliers and vendors) could be compromised.
As previously disclosed, on June 11, 2022, we were the target of an organized ransomware attack on our IT systems that, although not ultimately material to our results of operations for the year ended December 31, 2022, and December 31, 2023, or any individual fiscal quarter within those years, the attack led to the temporary disruption of our regular operations and lost revenues in 2022. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Key Factors that Affect Our Business and Our Results-Cybersecurity.”
We believe our possession of CUI, confidential or protected 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 another 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. Because of the persistence, sophistication and volume of cyber-attacks, we may not be successful in defending against an attack that could have a material adverse effect on us and due to the evolving nature of these security threats, the impact of any future incident cannot be predicted. We also typically work cooperatively with our customers, suppliers, subcontractors, and entities we acquire, who or which are subject to similar threats, to seek to minimize the impact of cyber threats, other security threats or business disruptions. These entities, which are typically outside our control and may have access to our information, have varying levels of cybersecurity expertise and safeguards, and their relationships with government contractors, including us, may increase the likelihood that they are targeted by the same cyber threats we face. 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 data breaches, cyber-attacks, or system failures.
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, other than as noted above, there has not been a significant breach of our systems, and no attack on our systems has had a direct, material impact on us or our business to date. We cannot, however, predict the extent and severity of any additional future attacks that may occur.
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.
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.
As of December 31, 2023, our Senior Secured Credit Agreement, provided for a $300.0 million credit facility comprised of a $175.0 million term loan and a $125.0 million revolving line of credit, or the 2021 Credit Facility. In February 2024, the Company partially exercised its option to access the $150 million accordion under our Senior Secured Credit Agreement, and as a result, the Senior Secured Credit Agreement was amended to provide for an additional $100.0 million credit availability under the 2021 Credit Facility, comprised of an additional $50.0 million term loan and $50.0 million revolving credit facility. The revolving credit facility includes a $20.0 million sublimit for the issuance of letters of credit. Subject to certain exceptions, all amounts under the 2021 Credit Facility will become due on April 27, 2026. As of December 31, 2023, our total indebtedness was $164.5 million, consisting of $154.2 million outstanding under the 2021 Credit Facility, all of which was outstanding under the term loan, and $10.3 million under our aircraft loan.
Further, following the exercise of the accordion feature in February 2024, the Company has the remaining option to borrow incremental term loans or request an increase in the aggregate commitments under the revolving credit facility up to an aggregate amount of $150.0 million subject to the satisfaction of certain conditions described in greater detail in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.” We also may enter into new borrowing arrangements and incur significant indebtedness in the future to continue to support our organic and acquisition-related growth.
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 2021 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 “-Risks Related to Our Business and Industry” and elsewhere in this Annual Report on Form 10-K. 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 “-Risks Related to Our Business and Industry” and elsewhere in this Annual Report on Form 10-K.
We may not be able to borrow additional financing or to refinance our 2021 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 2021 Credit Facility is subject to significant conditions, as described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
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 2021 Credit Facility and our Series A-2 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. As of December 31, 2023, the 2021 Credit Facility provided for an aggregate unused commitment of $125.0 million (without giving effect to any outstanding letters of credit, and subject to borrowing base limitations). The 2021 Credit Facility also allows us to increase the aggregate borrowings thereunder by up to $150.0 million. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
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 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 2021 Credit Facility, airplane loan, and our Series A-2 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.
Our 2021 Credit Facility restricts our ability to engage in some business and financial transactions.
Our 2021 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.
In addition, our 2021 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 2021 Credit Facility if we are unable to comply with the financial and other covenants included therein. Our 2021 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 2021 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 2021 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 Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
Risks Related to Ownership of Our Common Stock
The trading price of our common stock has been and may continue to be volatile and could decline substantially.
The market price of our common stock has been, and may continue to 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;
•the continuation of an active trading market in our common stock or any significant volatility in the liquidity of that market;
•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;
•inflation and 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.
The trading market for our common stock is also influenced in part by the research and other reports that industry or securities analysts may publish about us or our business or industry. If one or more analysts downgrade our stock, issue other unfavorable commentary about us or our industry or inaccurate research, or cease coverage or fail to regularly publish reports on us, our stock price and trading volume could decline.
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.
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 2021 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 Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-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.
Oaktree may have conflicts of interest with other stockholders.
OCM Montrose II Holdings, L.P., an affiliate of Oaktree Capital Management, L.P., or collectively, Oaktree, is the holder of all issued and outstanding shares of our Series A-2 preferred stock. Oaktree is in the business of making investments in companies and, notwithstanding its ownership of our preferred stock and that it has a right to appoint a representative on our board of directors, Oaktree 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 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. Oaktree also has a right of first offer with respect to its pro rata portion of any new securities we may issue, 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 “Corporate Opportunities” in the Description of Securities exhibit incorporated by reference as exhibit 4.2 to this Annual Report on Form 10-K.
Future sales of our common stock in the public market could cause our stock price to fall.
Shares held by our affiliates are eligible for resale in the public market, subject to applicable securities laws, including the Securities Act of 1933, as amended, or 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. However, pursuant to the terms of an Investor Rights Agreement, Messrs. Richard Perlman and James Price, Oaktree, and certain other stockholders have the right to demand that we register their 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. Approximately 2,500,000 shares of common stock held by affiliates and certain other parties entitled to these registration rights were registered on a shelf registration statement filed with the SEC on August 11, 2021 and declared effective on August 20, 2021. This registration statement also registered approximately 320,000 shares held at such time by other executive officers and directors. Oaktree also holds all outstanding shares of our Series A-2 stock, which may be converted into shares of common stock in the future and would also receive the benefit of these registration rights. See Note 16 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” Registration of these or other shares enables those shares to be sold in the public market, subject to certain restrictions in the Investor Rights Agreement. Any sale by Messrs. Perlman and Price, Oaktree, by our executive officers or other stockholders 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.
We have also registered the shares available under our Amended and Restated 2017 Stock Incentive Plan and outstanding awards issued under this plan and our prior stock option plan. Subject to the terms of the awards pursuant to which these shares have been or 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 awards granted under our stock incentive plans will be available for sale in the public market immediately.
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, any sale or perception of a possible sale by Oaktree 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.
Risks Related to Provisions in Our Charter Documents
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 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 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 2017 Stock Plan permits accelerated vesting of stock 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 2021 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 “Provisions of Our Certificate of Incorporation, Bylaws and Delaware Law That May Have an Anti-Takeover Effect” in the Description of Securities exhibit incorporated by reference as exhibit 4.2 to this Annual Report on Form 10-K.
Our amended and restated certificate of incorporation includes 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 provides 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, is 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 provides that the federal district courts of the United States are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act but that the forum selection provision does 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 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 “Exclusive Forum Clause” in the Description of Securities exhibit incorporated by reference as exhibit 4.2 to this Annual Report on Form 10-K.
General Risks
Our profitability will suffer if we are not able to price our services appropriately 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, raise or otherwise appropriately set our pricing, or we are not able to maintain or reduce costs as and when needed, we will not be able to sustain our margins and our business and results of operations will be adversely affected. For example, in 2023, we experienced higher labor costs as a result of inflation. If we are not able to raise the rates we charge for our services to offset the impact of any cost increases, 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;
•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 other related factors, including inflation; and
•our overhead costs necessary to support the successful delivery of services.
Our profitability is a function of our ability to raise prices, control our costs and improve our efficiency. We may not be able to raise prices sufficiently to cover higher costs of labor and other input costs. In addition, 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.
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 $30.9 million and $31.8 million for the fiscal years ended December 31, 2023 and 2022, respectively, and we may incur net losses in the future. As of December 31, 2023, we had an accumulated deficit of $210.4 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. 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.
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 our core brands, including 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 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. We are also investing more in brand development and there can be no assurances that this investment will generate additional revenues or business. 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.
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 ECT2 acquisition further expanded our IP portfolio. We are also expanding the software and application design work that we do in house, including applications to take real-time measurements of certain contaminants in the air and have increased our research and development spending. 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, whether as a result of the use of third party equipment or technologies or those that we may develop in-house. Regardless of the merit of such claims, responding to these types of claims can be expensive, time consuming 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.
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, including our expansion into Europe. 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, including the wars in Ukraine and the Middle East and surrounding areas;
•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 actions, such as the United Kingdom’s departure from the European Union (Brexit), 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.
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 “-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.
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.
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. Further, we may not be able to recover any increased investment in our research and development activities if the particular activities do not generate viable commercial services or products we can offer to our customers or use in the provision of services. 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.
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 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.
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.
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 are 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. Our independent registered public accounting firm is required to formally attest to the effectiveness of our internal control over financial reporting.
To comply with the requirements of being a public company, and to comply with the heightened standards of public companies who are not “Emerging Growth Companies” following the loss of that status at the end of 2021, we have undertaken and may need to undertake in the future 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 or issues an adverse report in the event it is not satisfied with the level at which our controls are documented, designed or operating, 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. Failure to maintain effective controls and procedures and comply with Section 404 could also delay or otherwise adversely affect our ability to timely produce accurate financial statements and related information, which could restrict our access to capital markets and cause the price of our common stock to fall.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
Our principal executive offices are located at 5120 Northshore Drive, North Little Rock, Arkansas. We currently operate out of approximately 115 locations across North America, Australia and Europe, all of which are leased locations other than our corporate headquarters and one environmental laboratory in Richmond, Virginia used in our Measurement and Analysis segment. Our lease terms vary from month-to-month to multi-year current commitments of generally up to 15 years, with our average commitment being 5 years. We believe that our existing facilities are adequate to meet our current requirements and that comparable space is readily available in similar locations.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
From time to time, we are subject to various legal proceedings that arise in the normal course of our business activities, including those involving labor and employment, anti-discrimination, commercial disputes and other matters. We are not a party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our results of operations or financial position. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information for Common Stock
Our common stock is traded on the New York Stock Exchange under the symbol “MEG”.
Holders of Record
As of February 23, 2024, there were approximately 190 stockholders of record of our common stock. This number does not represent the actual number of beneficial owners of our common stock because shares are often held in “street name” by securities dealers, brokers, institutions and others for the benefit of individual owners who have the right to vote their shares. We are unable to estimate the total number of beneficial owners represented by these record holders.
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 Series A-2 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 are 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. 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.
Unregistered Sales of Equity Securities
On January 31, 2024, we issued an aggregate of 161,342 shares of common stock to the former owners of Epic as purchase price consideration. The issuance of common stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof as a transaction by an issuer not involving any public offering.
Stock Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing, or otherwise subject to the liabilities under the Securities Act or Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
The following graph depicts the total cumulative stockholder return on our common stock from July 23, 2020, the first day of trading of our common stock on the NYSE, through December 31, 2023, relative to the performance of the Russell 2000 Index and MSCI USA ESG Leaders. The graph assumes an initial investment of $100.00 at the close of trading on July 23, 2020 and that all dividends paid by companies included in these indices have been reinvested. The performance shown in the graph below is not intended to forecast or be indicative of future stock price performance.
Date
Montrose Environmental Group
Russell 2000 Index
MSCI USA ESG Leaders
7/23/20
$
100.00
$
100.00
$
100.00
9/30/20
159.00
101.00
104.00
12/31/20
206.00
133.00
116.00
3/31/21
334.60
150.20
123.97
6/30/21
357.73
156.65
134.98
9/30/21
411.60
149.82
136.20
12/31/21
470.07
153.03
152.66
3/31/22
352.87
141.51
143.68
6/30/22
225.07
117.18
120.76
9/30/22
224.33
114.62
113.16
12/31/22
295.93
121.75
121.81
3/31/23
162.14
125.09
131.78
6/30/23
191.45
131.60
143.35
9/30/23
133.00
124.85
140.23
12/31/23
146.05
142.37
157.30
Securities Authorized for Issuance Under Equity Compensation Plans
For information on securities authorized for issuance under our equity compensation plans, see Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved.]
Selected Financial Data.
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 years ended December 31, 2023 and 2022 included in Item 8. “Financial Statements Supplementary Data.” Except where otherwise noted, our summary consolidated balance sheet data presented below as of December 31, 2021, 2020 and 2019, and our summary consolidated statements of operations and cash flow data presented below for the fiscal years ended December 31, 2020 and 2019 have been derived from our financial statements not included in this Annual Report on Form 10-K.
The summary financial data presented below represent portions of our audited consolidated financial statements and are not complete or otherwise intended to replace our audited consolidated financial statements and related notes. You should read the selected historical consolidated financial data set forth below together with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes thereto included in Item 8. “Financial Statements and Supplementary Data.” Our historical results presented below are not necessarily indicative of the results to be expected for any future period.
For the Years Ended December 31,
(in thousands except per share and percentage data)
Consolidated Statement of Operations Data:
Revenues
$
624,208
$
544,416
$
546,413
$
328,243
$
233,854
Cost of revenues (exclusive of depreciation and
amortization)
383,903
351,882
369,028
215,492
163,983
Selling, general and administrative expense
222,861
176,295
117,658
85,546
49,719
Fair value changes in business acquisition
contingencies
(3,227
)
24,372
12,942
1,392
Depreciation and amortization
45,780
47,479
44,810
37,274
27,705
Loss from operations
(28,420
)
(28,013
)
(9,455
)
(23,011
)
(8,945
)
Net loss
$
(30,859
)
$
(31,819
)
$
(25,325
)
$
(57,949
)
$
(23,557
)
Weighted average common shares outstanding-basic
and diluted
30,058
29,688
26,724
16,479
8,789
Net loss per shares attributable to common
stockholders-basic and diluted
$
(1.57
)
$
(1.62
)
$
(1.56
)
$
(6.48
)
$
(4.91
)
Consolidated Statement of Cash Flows Data:
Net cash provided by operating activities
56,022
20,649
37,581
1,850
17,042
Net cash used in investing activities
(101,624
)
(38,687
)
(71,641
)
(179,740
)
(86,983
)
Net cash (used in) provided by financing activities
(20,110
)
(38,764
)
146,103
205,902
74,452
Change in cash, cash equivalents and restricted cash
$
(65,712
)
$
(56,802
)
$
112,043
$
28,012
$
4,511
Consolidated Statement of Financial Position Data:
Current assets
200,924
247,928
293,858
134,268
73,239
Non-current assets
615,862
543,986
539,236
468,458
258,599
Total assets
$
816,786
$
791,914
$
833,094
$
602,726
$
331,838
Current liabilities
126,287
111,442
147,695
111,543
73,252
Non-current liabilities
216,319
214,357
215,970
201,110
156,055
Total liabilities
$
342,606
$
325,799
$
363,665
$
312,653
$
229,307
Redeemable Series A-1 preferred stock $0.0001 par
value-authorized, issued and outstanding shares:
12,000 at December 31, 2019; aggregate
liquidation preference of $141.9 million at December 31, 2019
-
-
-
-
128,822
Convertible and Redeemable Series A-2 preferred
stock $0.0001 par value-authorized, issued and
outstanding shares: 17,500 at December 31, 2023,
2022, 2021, and 2020; aggregate liquidation preference of
$182.2 million at December 31, 2023, 2022, 2021, and 2020
152,928
152,928
152,928
152,928
-
Total stockholders’ equity (deficit)
321,252
313,187
316,501
137,145
(26,291
)
Total liabilities, Convertible preferred stock,
Redeemable Series A-1 preferred stock,
Convertible and Redeemable Series A-2 preferred
stock and stockholders’ equity (deficit)
$
816,786
$
791,914
$
833,094
$
602,726
$
331,838

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes and other information included in Item 8. “Financial Statements and Supplementary Data.” 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 Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K. See “Forward-looking Statements.”
Overview
Since our inception in 2012, our mission has been to help clients and communities meet their environmental goals and needs. According to data derived from a 2022 Environmental Industry Study prepared by Environmental Business International, Inc., or EBI, which we commissioned, the global environmental industry is estimated to be approximately $1.44 trillion, with $494.0 billion concentrated in the United States.
Our Segments
We provide environmental services to our clients through three business segments-Assessment, Permitting and Response, Measurement and Analysis and Remediation and Reuse. For more information on each of our operating segments, see Item 1. “Business” and our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Assessment, Permitting and Response
Through our Assessment, Permitting and Response segment, we primarily 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.
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.
Remediation and Reuse
Through our Remediation and Reuse segment, we provide clients with engineering, design, and implementation 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.
These operating segments have been structured and organized to align with how we view and manage the business with the full lifecycle of our clients’ targeted environmental concerns and needs in mind. Within each segment, we cover similar service offerings, regulatory frameworks, internal operating structures and client types. Corporate activities not directly related to segment performance, including general corporate expenses, interest and taxes, are reported separately.
Key Factors that Affect Our Business and Our Results
Our operating results and financial performance are influenced by a variety of internal and external trends and other factors. Some of the more important factors are discussed briefly below.
Acquisitions
We have been, and expect to continue to be, an acquisitive company. Acquisitions have expanded our environmental service capabilities across all three segments, our access to technology, as well as our geographic reach in the United States, Canada, Europe and Australia. See Item 1. “Business-Strategic Acquisitions.” The table below sets forth the number of acquisitions completed in each of the last three fiscal years, fiscal year revenues generated by and the percentage of total annual revenues attributable to those acquisitions:
(revenues in thousands)
Acquisitions
Completed
Fiscal Year
Revenues
Attributable
to Acquisitions
Percentage
of Fiscal
Year
Revenues
Fiscal year 2023
$
69,059
11.1
%
Fiscal year 2022
20,154
3.7
%
Fiscal year 2021
33,738
6.2
%
Revenues from acquired companies exclude intercompany revenues from revenue synergies realized between business lines within operating segments, as these are eliminated at the consolidated segment and Company level. We expect our revenue growth to continue to be driven in significant part by acquisitions. See Note 8 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
As a result of our acquisitions, goodwill and other intangible assets represent a significant proportion of our total assets, and amortization of intangible assets has historically been a significant expense. Our historical financial statements also include other acquisition-related costs, including costs relating to external legal support, diligence and valuation services and other transaction and integration-related matters. In addition, in any year gains and losses from changes in the fair value of business acquisition contingencies such as earn outs could be significant. The amount of each for the last three fiscal years is:
Year Ended December 31,
(in thousands)
Amortization expense
$
30,130
$
36,053
$
35,154
Acquisition-related costs
6,930
1,891
2,088
Fair value changes in business acquisition
contingencies
(3,227
)
24,372
We expect that amortization of identifiable intangible assets and other acquisition-related costs, assuming we continue to acquire, will continue to be significant.
We made earn-out payments of $30.0 million and $50.0 million in March 2022 and April 2021, respectively, in connection with our CTEH acquisition. $25.0 million of the 2021 CTEH earn-out payment was made in the form of shares of our common stock. In connection with certain of our acquisitions, we may make up to $7.1 million in aggregate earn-out payments between the years 2024 and 2026, of which up to $1.5 million may be paid only in cash, up to $4.5 million may be paid only in common stock and up to $1.1 million may be paid, at our option, in cash or common stock. These amounts reflect a $1.5 million earn-out payment made in the first quarter of 2024 in connection with our Huco acquisition, $1.1 million of which was paid in shares of common stock and $0.4 million was paid in cash. See Note 8 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Organic Growth
We define organic growth as the change in revenues excluding revenues from i) our environmental emergency response business, ii) acquisitions for the first twelve months following the date of acquisition, and iii) businesses held for sale, disposed of or discontinued. As a result of the growth in CTEH non-emergency response work, which is similar to services provided in our advisory businesses, we are including CTEH revenues from non-emergency response work in organic growth. This change did not impact previously reported organic growth. Management uses organic growth as one of the means by which it assesses our results of operations. Organic growth is not, however, a measure of revenue growth calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should be considered in conjunction with revenue growth calculated in accordance with GAAP. We have grown organically over the long term and expect to continue to do so.
Discontinued Service Lines and Contracts
Periodically, or when circumstances warrant, we evaluate the performance of our business services to ensure that performance and outlook are consistent with expectations, and that the services offered are consistent with the Company’s mission.
As part of this evaluation, during the first quarter of 2023, we determined to discontinue one of our specialty service lines within the lab testing business, the Discontinued Specialty Lab, whose service offering was non-core to our business. On December 29, 2023, we sold the assets of the Discontinued Specialty Lab for a total sales price of $4.8 million. Proceeds from the sale were paid in cash of $0.5 million, and a promissory note receivable of $4.3 million. We recorded a gain on the sale of the assets of approximately $1.8 million and recorded a current expected loss of $2.2 million against the promissory note receivable. The Discontinued Specialty Lab, which was part of our Measurement and Analysis segment, generated revenues of $8.8 million, $17.0 million and $23.9 million in the years ended December 31, 2023, 2022 and 2021, respectively. The discontinuation of this specialty service line did not represent a strategic shift that had a major effect on our operations and financial results, therefore it did not meet the requirements to be classified as discontinued operations.
During the fourth quarter of 2022, we determined to exit our lab in Berkeley, California and terminate the related positions. This discontinued lab, which was included in our Measurement and Analysis segment, did not generate any material revenue during the years ended December 31, 2022 and 2021.
During the second quarter of 2022, we determined to exit all legacy water treatment and biogas operations and maintenance contracts, collectively, the Discontinued O&M Contracts. Revenue from our water treatment and biogas operations and maintenance contracts, which were included in the results of our Remediation and Reuse segment, were $3.6 million and $12.1 million in the years ended December 31, 2022 and 2021, respectively. This decision did not impact the Company’s specialized PFAS water treatment operations and maintenance contracts.
Revenue Mix
Our segments generate different levels of profitability and, accordingly, shifts in the mix of revenues between segments can impact our consolidated reported net income, net loss margin, Segment Adjusted EBITDA and Segment Adjusted EBITDA margin from quarter to quarter and year to year. Inter-company revenues between business lines within segments have been eliminated. See Note 19 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Financing Costs
On April 27, 2021, we entered into the 2021 Credit Facility and repaid all amounts outstanding under our prior credit facility. The 2021 Credit Facility consists of a $175.0 million term loan and a $125.0 million revolving credit facility. The revolving credit facility includes a $20.0 million sublimit for the issuance of letters of credit. The interest rate on the 2021 Credit Facility varies depending on leverage, which, prior to May 31, 2023, was a minimum of LIBOR plus 1.5% and a maximum of LIBOR plus 2.5%. We incurred debt extinguishment costs of $4.1 million in connection with this refinancing. Further, on May 31, 2023, we amended our 2021 Credit Facility to transition the reference rate from LIBOR to SOFR plus 0.10%. The transition to SOFR did not materially impact the interest rate we pay or change any material terms of the 2021 Credit Facility.
On May 30, 2023, we amended the interest rate swap transaction we entered into on January 27, 2022, to convert the floating component of the interest rate on $100.0 million of borrowings to 1-Month Term SOFR and a new coupon of 1.319% until January 27, 2025. Prior to the amendment, the floating component of the interest rate was 1.39%. Further, on May 30, 2023, we entered into a second interest rate swap transaction fixing the floating component of the interest rate on an additional $70.0 million of borrowings to 1-Month Term SOFR and a coupon of 3.88% until April 27, 2026.
Interest expense, net was $7.8 million, $5.2 million and $11.6 million (inclusive of the $4.1 million loss on extinguishment of the 2020 Credit Facility) in the years ended December 31, 2023, 2022 and 2021, respectively. We expect interest expense to remain a significant cost as we continue to leverage our credit facility to support our operations and future acquisitions.
See Note 13 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Corporate and Operational Infrastructure Investments
Our historical operating results reflect the impact of our ongoing investments in our corporate infrastructure to support our growth. We have made and expect to continue to make investments in our business platform that we believe have laid the foundation for continued growth. Investments in logistics, quality, risk management, sales and marketing, safety, human resources, research and development, finance and information technology and other areas enable us to support continued growth. These investments should allow us to improve our margins over time.
Seasonality
Due to the field-based nature of certain of our services, weather patterns generally impact our field-based teams’ ability to operate in the winter months. As a result, our operating results in our Measurement and Analysis segment and, following the acquisition of Matrix in Canada, the Remediation and Reuse segment, experience quarterly variability with generally lower revenues and lower earnings in the first and fourth quarters and higher overall revenues and earnings in the second and third quarters. As we continue to grow and expand into new geographies and service lines, quarterly variability in our Measurement and Analysis and Remediation and Reuse segments may deviate from historical trends.
Earnings Volatility
In addition to the impact of seasonality on earnings, the acquisition of CTEH exposes us to potentially significant revenue and earnings fluctuations tied both to the timing of large environmental emergency response projects following an incident or natural disaster, and the benefit from COVID-19 related work primarily in 2021. COVID-19 related revenue was $4.7 million, $65.2 million and $189.9 million in the years ended December 31, 2023, 2022 and 2021, respectively. During 2023, we have also seen significant revenue from emergency response services related to discrete events. Total revenue from emergency response related services, which include COVID-19 revenues, was $91.4 million, $88.0 million and $211.5 million in the in the years ended December 31, 2023, 2022 and 2021, respectively. Demand for environmental emergency response services remains difficult to predict and as a result, we may have experienced revenues and earnings in prior years that are not indicative of future results, making those periods particularly difficult comparisons for future periods. Earnings volatility is also driven by the timing of large projects, particularly in our Remediation and Reuse segment, and the impact of acquisitions. As a result of these factors, and because demand for environmental services is not driven by specific or predictable patterns in one or more fiscal quarters, our business is better assessed based on yearly results.
Cybersecurity
As previously disclosed, on June 11, 2022 we were the target of an organized ransomware attack on our IT systems that led to the temporary disruption of our regular operations. The Company's financial systems are cloud based and were not affected. We engaged third party experts, including cyber legal counsel and a cybersecurity firm, to perform a fulsome forensic investigation of this attack and we promptly notified federal law enforcement. Based on the results of the investigation, we do not believe there has been any misuse of confidential or sensitive client data, have made notifications to clients, and have proactively addressed client concerns regarding our security environment. Furthermore, we identified a limited number of individuals whose personally identifiable information may have been accessed from our systems and made appropriate notifications to such individuals and required regulators. The Company has insurance coverage, subject to a $0.3 million deductible, against recovery costs and business interruption resulting from cyber-attacks. In January 2023, the Company received $1.0 million in business interruption insurance proceeds related to the cyber-attack. This amount was recorded as insurance income within other income (expense) in the fourth quarter of 2022. These proceeds partially offset the estimated $1.5 million cost of the cyber-attack recognized in the second and third quarters of 2022.
COVID-19
To date, COVID-19 related adverse impacts have not had a material adverse effect on our reported results or our liquidity. On the other hand, we have seen benefits from COVID-19 given client demand for CTEH’s toxicology and response services, which represented a meaningful revenue stream, in 2021 and to a lesser extent, 2022, primarily as a result of COVID-19 response work performed by CTEH. COVID-19 revenues were negligible in the year ended December 31, 2023. Given the significance and non-recurring nature of our COVID-19 related revenues in prior periods, our historical results may not be comparable to future results.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was enacted. The CARES Act included several significant provisions for corporations, including those pertaining to net operating losses, interest deductions and payroll tax benefits. We utilized certain of these provisions in 2020, including the deferral of the employer side social security
payments for payroll for the eligible portion of the year. In total, we deferred approximately $5.0 million of 2020 payments to 2021 and 2022, of which $2.5 million was repaid in December 2021 and the remaining amount was paid in the fourth quarter of 2022.
Results of Operations
Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
Year Ended December 31,
(in thousands except per share data)
Statements of operations data:
Revenues
$
624,208
$
544,416
Cost of revenues (exclusive of depreciation and amortization)
383,903
351,882
Selling, general and administrative expense
222,861
176,295
Fair value changes in business acquisition
contingencies
(3,227
)
Depreciation and amortization
45,780
47,479
Loss from operations
$
(28,420
)
$
(28,013
)
Other income
4,374
3,683
Interest expense, net
(7,793
)
(5,239
)
Loss before income taxes
(31,839
)
(29,569
)
Income tax (benefit) expense
(980
)
2,250
Net loss
$
(30,859
)
$
(31,819
)
Series A-2 dividend payment
(16,400
)
(16,400
)
Net loss attributable to common stockholders
$
(47,259
)
$
(48,219
)
Weighted average number of shares
(basic and diluted)
30,058
29,688
Loss per share - basic and diluted
$
(1.57
)
$
(1.62
)
Revenues
For the year ended December 31, 2023, we generated revenues of $624.2 million, an increase of $79.8 million or 14.7% from the year ended December 31, 2022. The period over period increase in revenues was primarily driven by $77.5 million from revenues pertaining to companies we acquired in 2023 and from a full year of revenue contribution from our 2022 acquisitions, strong organic growth in our Assessment, Permitting and Response segment and strong organic growth in our Measurement and Analysis segment, and an increase in environmental emergency response revenues. These increases were partially offset by lower revenues in the Discontinued Specialty Lab, the exiting of the Discontinued O&M Contracts in 2022, and lower ECT2 revenues due to the wind down of certain large PFAS projects, delays in the timing of EPA PFAS regulations and a strategic shift in our biogas business towards higher margin services. Revenue from our environmental emergency response business, including revenues from COVID-19 related work, was $91.4 million in the year ended December 31, 2023, compared to $88.0 million in the year ended December 31, 2022. Total revenue from COVID-19 related services was $4.7 million and $65.2 million in the years ended December 31, 2023 and December 31, 2022, respectively. Revenue from the Discontinued Specialty Lab was $8.8 million and $17.0 million in the years ended December 31, 2023 and December 31, 2022, respectively. The Discontinued O&M Contracts generated revenues of zero and $3.6 million in the years ended December 31, 2023 and December 31, 2022, respectively.
Revenue by segment, and as a percentage of total revenues, was as follows:
Year Ended December 31,
Revenues
% of Total Revenues
Revenues
% of Total Revenues
(revenue in thousands)
Assessment, Permitting and Response
$
220,727
35.4
%
$
187,234
34.4
%
Measurement and Analysis (1)
197,095
31.6
%
172,432
31.7
%
Remediation and Reuse
206,386
33.1
%
184,750
33.9
%
$
624,208
$
544,416
_________________________________
(1) Includes revenue of $8.8 million and $17.0 million from the Discontinued Specialty Lab for the year ended December 31, 2023 and December 31, 2022, respectively. See “-Discontinued Service Lines and Contracts ” above.
See “-Segment Results of Operations” below.
Cost of Revenues
Cost of revenues consists of all direct costs required to provide services, including fixed and variable direct labor costs, equipment purchases and rental, and other outside services, field and lab supplies, vehicle costs and travel-related expenses. Variable costs of revenues generally follow the same trends as revenue, while fixed costs tend to change primarily as a result of acquisitions.
For the year ended December 31, 2023, cost of revenues was $383.9 million or 61.5% of revenues, and was comprised of direct labor of $187.0 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $95.3 million, field supplies, testing supplies and equipment rental of $66.9 million, project-related travel expenses of $21.7 million and other direct costs of $13.0 million.
For the year ended December 31, 2022, cost of revenues was $351.9 million or 64.6% of revenues, and was comprised of direct labor of $155.0 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $83.3 million, field supplies, testing supplies and equipment rental of $77.9 million, project-related travel expenses of $19.3 million and other direct costs of $16.4 million.
For the year ended December 31, 2023, cost of revenues as a percentage of revenue decreased 3.1% from the year ended December 31, 2022, primarily as a result of a $11.0 million decrease in field and testing supplies and equipment rental costs due to a decline in the percentage of total revenue from Remediation and Reuse projects, which tend to have higher cost of sales as a percentage of revenue, and a decrease of $9.5 million in direct labor attributable to a shift in roles and responsibilities as described under the Selling, General and Administrative Expense section below.
Selling, General and Administrative Expense
Selling, general and administrative expense consists of general corporate overhead, including executive, legal, finance, safety, risk management, human resource, marketing and information technology related costs, as well as indirect operational costs of labor, rent, insurance and stock-based compensation.
For the year ended December 31, 2023, selling, general and administrative expense was $222.9 million, an increase of $46.6 million or 26.4% versus the year ended December 31, 2022. This increase was primarily driven by an increase of approximately $9.5 million related to the impact of the shift of employee roles and responsibilities of certain employees from providing direct field support (and therefore included in cost of revenues in 2022), to providing more specialized, multi-location overhead support functions (such as accounting, HR and management) and therefore included in selling general and administrative expenses in the current year. The increase was also driven by acquisitions and by higher labor and medical benefit costs, primarily reflecting inflationary increases. Selling, general and administrative expense pertaining to companies we acquired in 2023 and from the inclusion of a full year of results from 2022 acquisitions accounted for $21.7 million of the increase. The year-over-year increase was also driven by a $5.0 million increase in acquisition-related costs, $4.2 million related to an increase in bad debt expense (which was a charge of $3.1 million in the current year, versus a credit of $(1.1) million in the prior year), $2.2 million related to an increase in the defined contribution plan, $2.1 million increase in stock-based compensation expense, and the timing of certain external expenditures, which occurred later in the year in 2022, partially offset by a gain on the sale of the assets of the Discontinued Specialty Lab of $1.8 million. See “-Key Factors that Affect Our Business and Our Results -Discontinued Service Lines and Contracts” and Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for additional information regarding the impact of inflation on our business.
For the year ended December 31, 2023, selling, general and administrative expense of $222.9 million was comprised of indirect labor of $114.0 million, stock-based compensation expense of $43.9 million, facilities costs of $23.0 million, acquisition-related costs of $6.9 million, bad debt expense of $3.1 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $32.0 million.
For the year ended December 31, 2022, selling, general and administrative expense of $176.3 was comprised of indirect labor of $80.6 million, stock-based compensation of $41.8 million, facilities costs of $18.2 million, acquisition-related costs of $1.9 million, a
bad debt recovery of $(1.1) million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $34.9 million.
Fair Value Changes in Business Acquisition Contingencies
For the year ended December 31, 2023, fair value changes in business acquisition contingencies resulted in an expense of $0.1 million versus a gain of $3.2 million for the year ended December 31, 2022. The majority of the change in value in the year ended December 31, 2022, was attributable to a $3.5 million gain related to acquisitions' 338(h)(10) elections make-whole tax accruals. See “-Key Factors that Affect Our Business and Our Results -Acquisitions” and Notes 8 and 14 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Depreciation and Amortization
Depreciation and amortization expense for the year ended December 31, 2023, was $45.8 million and was comprised of amortization of finite lived intangibles of $30.1 million, arising as a result of our acquisition activity, depreciation of property and equipment of $10.3 million and finance leases right-of-use asset amortization of $5.4 million.
Depreciation and amortization expense for the year ended December 31, 2022, was $47.5 million and was comprised of amortization of finite lived intangibles of $36.1 million, arising as a result of our acquisition activity, depreciation of property and equipment of $7.2 million and finance leases right-of-use asset amortization of $4.2 million.
The decrease in amortization was primarily a result of the timing of when certain large value intangible assets became fully amortized during the year ended December 31, 2023 versus the year ended December 31, 2022. The increases in depreciation of property and equipment and the amortization of finance leases were primarily a result of higher property and equipment and right of use assets outstanding during the year ended December 31, 2023 when compared to the year ended December 31, 2022.
See Notes 6, 7, 8 and 9 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Other Income
Other income for the year ended December 31, 2023 of $4.4 million was driven by the fair value adjustment of the Series A-2 preferred stock conversion option of $6.7 million, partially offset by the fair value adjustment on our interest rate swap of $2.6 million.
Other income for the year ended December 31, 2022 of $3.7 million was driven by a gain related to the fair value adjustment on our interest rate swap of $6.0 million which was partially offset by an expense of $2.7 million related to the fair value adjustment of the Series A-2 preferred stock conversion option and $0.7 million impairment loss related to the decision to exit the Berkeley lab.
See Notes 7, 14 and 16 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Interest Expense, Net
Interest expense, net incurred in the year ended December 31, 2023, was $7.8 million, compared to $5.2 million for the year ended December 31, 2022. The increase in interest expense was primarily due to higher interest rates, an increase in interest expense as a result of the new aircraft loan, and lower interest income as a result of lower average cash balances, partially offset by the impact of the second interest rate swap transaction entered into on May 30, 2023. See “-Key Factors that Affect Our Business and Our Results-Financing Costs” and Note 7 and 13 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Income Tax (Benefit) Expense
Income tax (benefit) expense was $(1.0) million and $2.3 million for the years ended December 31, 2023 and 2022, respectively. The difference between our effective tax rate of 3.3% and the federal statutory rate of 21.0% is primarily attributable to items recorded for GAAP but permanently disallowed for U.S. federal income tax purposes, recognition of a U.S. federal and state valuation allowance of $24.0 million, state and foreign income tax provisions and Global Intangible Low Taxed Income.
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
Year Ended December 31,
(in thousands except per share data)
Statements of operations data:
Revenues
$
544,416
$
546,413
Cost of revenues (exclusive of depreciation and
amortization)
351,882
369,028
Selling, general and administrative expense
176,295
117,658
Fair value changes in business acquisition
contingencies
(3,227
)
24,372
Depreciation and amortization
47,479
44,810
Loss from operations
$
(28,013
)
$
(9,455
)
Other expense
3,683
(2,546
)
Interest expense, net
(5,239
)
(11,615
)
Loss before income taxes
(29,569
)
(23,616
)
Income tax expense
2,250
1,709
Net loss
$
(31,819
)
$
(25,325
)
Series A-2 dividend payment
(16,400
)
(16,400
)
Net loss attributable to common stockholders
$
(48,219
)
$
(41,725
)
Weighted average number of shares
(basic and diluted)
29,688
26,724
Loss per share - basic and diluted
$
(1.62
)
$
(1.56
)
Revenues
For the year ended December 31, 2022, revenues were $544.4 million, a decrease of $2.0 million or 0.4% from the year ended December 31, 2021. The period over period decrease in revenues was primarily driven by an expected reduction in revenue from environmental emergency responses due to lower demand for COVID-19 related services, of $123.5 million, and exiting the Discontinued O&M Contracts. The decrease was mostly offset by strong organic growth in our Measurement and Analysis and Remediation and Reuse operating segments, and the businesses in our Assessment, Permitting and Response operating segment other than environmental emergency responses, which contributed $121.1 million in organic revenue. The decrease was offset to a lesser extent by acquisitions completed in the year ended December 31, 2022, as well as by 2021 acquisitions prior to their one-year anniversary date, which performed well and captured revenue synergies as part of Montrose. In the aggregate, 2021 and 2022 acquisitions contributed revenues of $44.5 million. Revenue from our environmental emergency response business, which includes COVID-19 revenues, was $88.0 million in the year ended December 31, 2022 as compared to $211.5 million in the year ended December 31, 2021. Total revenue from COVID-19 related services was $65.2 million and $189.9 million in the years ended December 31, 2022 and 2021, respectively. Discontinued O&M Contracts generated revenues of $3.6 million and $12.1 million in the years ended December 31, 2022 and 2021, respectively.
Revenue by segment, and as a percentage of total revenues, was as follows:
Year Ended December 31,
(revenue in thousands)
Revenues
% of Total Revenues
Revenues
% of Total Revenues
Assessment, Permitting and Response
$
187,234
34.4
%
$
261,865
47.9
%
Measurement and Analysis (1)
172,432
31.7
%
153,208
28.0
%
Remediation and Reuse
184,750
33.9
%
131,340
24.0
%
$
544,416
$
546,413
_________________________________
(1) Includes revenue of $17.0 million and $23.9 million from the Discontinued Specialty Lab for the year ended December 31, 2022 and 2021, respectively. See “-Discontinued Service Lines and Contracts ” above.
See “-Segment Results of Operations” below.
Cost of Revenues
For the year ended December 31, 2022, cost of revenues was $351.9 million or 64.6% of revenues, and was comprised of direct labor of $155.0 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $83.3 million, field supplies, testing supplies and equipment rental of $77.9 million, project-related travel expenses of $19.3 million and other direct costs of $16.4 million.
For the year ended December 31, 2021, cost of revenues was $369.0 million or 67.5% of revenues, and was comprised of direct labor of $147.3.0 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $143.3 million, field supplies, testing supplies and equipment rental of $50.2 million, project-related travel expenses of $17.8 million and other direct costs of $10.4 million.
For the year ended December 31, 2022, cost of revenues as a percentage of revenue decreased 2.9% from the year ended December 31, 2021, as a result of significantly lower outside service costs in 2022 when compared to 2021 driven primarily by a decrease in external lab expenses needed to support CTEH’s COVID-19 response work during 2022, partially offset by higher equipment costs primarily to support higher water treatment and biogas revenues.
Selling, General and Administrative Expense
For the year ended December 31, 2022, selling, general and administrative expense was $176.3 million, an increase of $58.6 million or 49.8% versus the year ended December 31, 2021. This increase was primarily driven by $33.0 million related to an increase in stock compensation expense primarily related to a one-time grant of restricted stock awards and stock appreciation rights to certain executives and selected employees (See Note 17 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”), $10.2 million from selling, general and administrative expense pertaining to companies we acquired in 2022 and from 2021 acquisitions prior to their one-year anniversary date, $5.4 million related to the higher labor and medical benefit costs, primarily reflecting inflationary increases, an increase in headcount to support growth in our PFAS water treatment business, and investments in corporate infrastructure (primarily administrative, marketing, finance, IT, legal and human resources) and $3.1 million was from an increase in the defined contribution plan employer contributions following the reinstatement of employer matching during the second quarter of 2021, as well as higher travel and office function expenses.
For the year ended December 31, 2022, selling, general and administrative expense of $176.3 was comprised of indirect labor of $80.6 million, stock-based compensation of $41.8 million, facilities costs of $18.2 million, acquisition-related costs of $1.9 million, a bad debt recovery of $(1.1) million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $34.9 million.
For the year ended December 31, 2021, selling, general and administrative expense of $117.7 million was comprised of indirect labor of $61.2 million, facilities costs of $14.7 million, stock-based compensation of $8.8 million, acquisition-related costs of $2.1 million, bad debt expense of $1.1 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $29.8 million.
Fair Value Changes in Business Acquisition Contingencies
For the year ended December 31, 2022, fair value changes in business acquisition contingencies resulted in a gain of $3.2 million versus an expense of $24.4 million for the year ended December 31, 2021. The majority of the change in value in the year
ended December 31, 2022, was attributable to a $3.5 million gain related to acquisitions' 338(h)(10) elections make-whole tax accruals. The majority of the change in value in the year ended December 31, 2021 period was attributable to the CTEH earn-outs. See “-Key Factors that Affect Our Business and Our Results -Acquisitions” and Notes 8 and 14 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Depreciation and Amortization
Depreciation and amortization expense for the year ended December 31, 2022, was $47.5 million and was comprised of amortization of finite lived intangibles of $36.1 million, arising as a result of our acquisition activity, depreciation of property and equipment of $7.2 million and finance leases right-of-use asset amortization of $4.2 million.
Depreciation and amortization expense for the year ended December 31, 2021, was $44.8 million and was comprised of amortization of finite lived intangibles of $35.2 million, depreciation of property and equipment of $6.4 million and finance leases right-of-use asset amortization of $3.2 million.
The increase in amortization, depreciation of property and equipment and the amortization of finance leases right-of-use asset for the year ended December 31, 2022 versus the year ended December 31, 2021, was primarily a result of acquisitions. See Notes 6, 7, 8 and 9 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Other Income (Expense)
Other income for the year ended December 31, 2022 of $3.7 million was driven by a gain related to the fair value adjustment on our interest rate swap of $6.0 million which was partially offset by an expense of $2.7 million related to the fair value adjustment of the Series A-2 preferred stock conversion option and $0.7 million impairment loss related to the decision to exit the Berkeley lab. Other expense for the year ended December 31, 2021 of $2.5 million was driven primarily by fair value adjustments related to the Series A-2 preferred stock conversion option. See Notes 14, 16 and 19 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Interest Expense, Net
Interest expense, net incurred in the year ended December 31, 2022, was $5.2 million, compared to $11.6 million for the year ended December 31, 2021. The decrease in interest expense was driven by lower outstanding debt balances during the year ended December 31, 2022 when compared to the year ended December 31, 2021, as well as the $4.1 million loss on extinguishment of debt realized in the year ended December 31, 2021 in connection with the repayment in full of the 2020 Credit Facility. See Note 13 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Income Tax Expense
Income tax expense was $2.3 million for the year ended December 31, 2022, compared to an income tax expense of $1.7 million for the year ended December 31, 2021. The difference between our effective tax rate of 7.7% and the federal statutory rate of 21.0% is primarily attributable to items recorded for GAAP but permanently disallowed for U.S. federal income tax purposes, recognition of a U.S. federal and state valuation allowance of $30.6 million, state and foreign income tax provisions and Global Intangible Low Taxed Income.
Segment Results of Operations
Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
Year Ended December 31,
(in thousands except percentage data)
Segment
Revenues
Segment
Adjusted
EBITDA(1)
Segment
Adjusted
EBITDA
Margin(2)
Segment
Revenues
Segment
Adjusted
EBITDA(1)(5)
Segment
Adjusted
EBITDA
Margin(2)(5)
Assessment, Permitting and Response
$
220,727
$
52,148
23.6
%
$
187,234
$
37,458
20.0
%
Measurement and Analysis
197,095
(3)
37,217
18.9
%
172,432
(3)
31,588
(4)
18.3
%
Remediation and Reuse
206,386
27,087
13.1
%
184,750
30,616
16.6
%
Total Operating Segments
$
624,208
$
116,452
18.7
%
$
544,416
$
99,662
18.3
%
Corporate and Other
$
(37,876
)
n/a
$
(31,212
)
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 19 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
(2)Represents Segment Adjusted EBITDA as a percentage of revenues.
(3)Includes revenue of $8.8 million and $17.0 million from the Discontinued Specialty Lab for the year ended December 31, 2023 and 2022, respectively. See “-Discontinued Service Lines and Contracts ” above.
(4)Includes Adjusted EBITDA of $2.1 million from the Discontinued Specialty Lab. See “-Discontinued Service Lines and Contracts ” above.
(5)Includes the add back of start-up losses and investment in new services of $2.3 million, which are not added-back in 2023. See Note 19 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Revenues
Assessment, Permitting and Response segment revenues for the year ended December 31, 2023 were $220.7 million, compared to $187.2 million for the year ended December 31, 2022. The increase was driven by organic growth of 24.3%, growth in revenues from environmental emergency responses, and revenues of $5.9 million from companies we acquired in 2023 and from a full year of revenue contribution from our 2022 acquisitions. Total revenue from environmental emergency response related services, which include COVID-19 revenues, was $91.4 million and $88.0 million in the years ended December 31, 2023 and 2022, respectively. Total revenue from COVID-19 related services was $4.7 million and $65.2 million in the years ended December 31, 2023 and 2022, respectively.
Measurement and Analysis segment revenues for the year ended December 31, 2023 were $197.1 million, an increase of $24.7 million or 14.3% compared to revenues for the year ended December 31, 2022 of $172.4 million. The increase was driven primarily by organic growth of 17.0%, as well as by revenues of $5.8 million from companies we acquired in 2023 and from a full year of revenue contribution from our 2022 acquisitions, partially offset by a decline of $8.2 million from the Discontinued Specialty Lab.
Remediation and Reuse segment revenues for the year ended December 31, 2023 were $206.4 million, an increase of $21.6 million or 11.7% compared to revenues for the year ended December 31, 2022 of $184.8 million. The increase was driven by revenues of $65.8 million from companies we acquired in 2023 and from a full year of revenue contribution from our 2022 acquisitions, partially offset by lower ECT2 revenues due to the wind down of certain large PFAS projects, delays in the timing of EPA PFAS regulations and a strategic shift in our biogas business towards higher margin services, as well as the exiting of Discontinued O&M Contracts in the second quarter of 2022, which generated revenues of zero and $3.6 million in the years ended December 31, 2023 and 2022, respectively.
Segment Adjusted EBITDA
Assessment, Permitting and Response Segment Adjusted EBITDA was $52.1 million for the year ended December 31, 2023, an increase of $14.6 million or 39.2%, compared to Segment Adjusted EBITDA of $37.5 million for the year ended December 31, 2022. For the years ended December 31, 2023 and 2022, Segment Adjusted EBITDA margin was 23.6% and 20.0% respectively. The increase in Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was primarily due to higher revenues primarily from organic growth, and favorable revenue mix, including the impact of higher margins generated on certain environmental emergency response services.
Measurement and Analysis Segment Adjusted EBITDA for the year ended December 31, 2023 was $37.2 million, an increase of $5.6 million or 17.8% compared to Segment Adjusted EBITDA for the year ended December 31, 2022 of $31.6 million. Excluding Adjusted EBITDA from the Discontinued Specialty Lab, Segment Adjusted EBITDA was $37.2 million and $29.5 million for the years ended December 31, 2023 and 2022, respectively, an increase of $7.7 million or 26.1%. For the year ended December 31, 2023, Segment Adjusted EBITDA margin was 18.9% compared to 18.3% in the prior year. The increase in Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was due to higher revenues primarily from organic growth, and favorable revenue mix. Excluding the Discontinued Specialty Lab, Segment Adjusted EBITDA margin for the years ended December 31, 2023 and 2022 was 19.8% and 19.0%, respectively.
Remediation and Reuse Segment Adjusted EBITDA for the year ended December 31, 2023 was $27.1 million, a decrease of $3.5 million or 11.5% compared to Segment Adjusted EBITDA for the year ended December 31, 2022 of $30.6 million. For the year ended December 31, 2023, Segment Adjusted EBITDA margin was 13.1% compared to 16.6% in the prior year. The decrease in Segment Adjusted EBITDA was primarily attributable to lower revenues in our ECT2 water and biogas business, which includes the planned shift away from lower margin services. Segment Adjusted EBITDA margin for the year ended December 31, 2023 was primarily impacted by the acquisition of Matrix in June 2023.
Corporate and other costs were $37.9 million for the year ended December 31, 2023 compared to $31.2 million for the year ended December 31, 2022. Corporate costs as a percentage of revenues were 6.1% and 5.7% in the years ended December 31, 2023 and 2022, respectively. The increase in corporate costs and corporate costs as a percentage of revenues was primarily attributable to an increase in discretionary bonus expense of $5.5 million, which primarily reflects an outperformance in 2023 versus an underperformance in 2022.
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
Year Ended December 31,
(in thousands except percentage data)
Segment
Revenues
Segment
Adjusted
EBITDA(1)(5)
Segment
Adjusted
EBITDA
Margin(2)(5)
Segment
Revenues
Segment
Adjusted
EBITDA(1)(5)
Segment
Adjusted
EBITDA
Margin(2)(5)
Assessment, Permitting and Response
$
187,234
$
37,458
20.0
%
$
261,865
$
57,128
21.8
%
Measurement and Analysis
172,432
(3)
31,588
(4)
18.3
%
153,208
(3)
31,270
(4)
20.4
%
Remediation and Reuse
184,750
30,616
16.6
%
131,340
19,326
14.7
%
Total Operating Segments
$
544,416
$
99,662
18.3
%
$
546,413
$
107,724
19.7
%
Corporate and Other
$
(31,212
)
n/a
$
(30,082
)
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 19 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
(2)Represents Segment Adjusted EBITDA as a percentage of revenues.
(3)Includes revenue of $17.0 million and $23.9 million from the Discontinued Specialty Lab for the year ended December 31, 2022 and 2021, respectively. See “-Discontinued Service Lines and Contracts ” above.
(4)Includes Adjusted EBITDA of $2.1 million and $6.4 million from the Discontinued Specialty Lab for the year ended December 31, 2022 and December 31, 2021, respectively. See “-Discontinued Service Lines and Contracts ” above.
(5)Includes the add back of start-up losses and investment in new services of $2.3 million and $4.4 million for the year ended December 31, 2022 and December 31, 2021, respectively. See Note 19 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Revenues
Assessment, Permitting and Response segment revenues for the year ended December 31, 2022 were $187.2 million, compared to $261.9 million for the year ended December 31, 2021. The decrease was driven by an expected $117.6 million decrease in environmental emergency response revenues in 2022 when compared to 2021, as a result of lower revenue from COVID-19 related services. The expected decrease in COVID-19 related revenues was partially offset by organic growth in our other service lines and revenues of $37.1 million from acquisitions completed during 2022 and revenues from 2021 acquisitions prior to their one year anniversary. Total revenues from emergency response related services, which include COVID-19 revenues, was $88.0 million and $211.5 million in the in the years ended December 31, 2022 and 2021, respectively. Total revenue from COVID-19 related services was $65.2 million and $189.9 million in the year ended December 31, 2022 and 2021, respectively.
Measurement and Analysis segment revenues for the year ended December 31, 2022 were $172.4 million, an increase of $19.2 million or 12.5% compared to revenues for the year ended December 31, 2021 of $153.2 million. The increase was driven primarily by organic growth, as well as by revenues of $6.1 million from acquisitions completed during 2022 and revenues from 2021 acquisitions prior to their one year anniversary.
Remediation and Reuse segment revenues for the year ended December 31, 2022 were $184.8 million, an increase of $53.5 million or 40.7% compared to revenues for the year ended December 31, 2021 of $131.3 million. The increase was driven primarily by organic growth related to increases in demand for our water treatment technology (PFAS removal) and waste-to-resources (agricultural waste to biogas) services, as well as by revenues of $1.2 million from acquisitions completed during 2022, partially offset by the impact of Discontinued O&M Contracts, which generated revenues of $3.6 million and $12.1 million in the years ended December 31, 2022 and 2021, respectively.
Segment Adjusted EBITDA
Assessment, Permitting and Response Segment Adjusted EBITDA was $37.5 million for the year ended December 31, 2022, compared to $57.1 million for the year ended December 31, 2021. For the years ended December 31, 2022 and 2021, Segment Adjusted EBITDA margin was 20.0% and 21.8% respectively. The decrease in Segment Adjusted EBITDA was a result of an expected decrease in COVID-19 related revenues during the year ended December 31, 2022 when compared to the year ended December 31, 2021. The decrease in Segment Adjusted EBITDA margin was a result of acquisitions, which operate at lower margins, and business mix, partially offset by the impact of lower COVID-19 related work, which was at lower margins, in 2022 versus the prior year.
Measurement and Analysis Segment Adjusted EBITDA for the year ended December 31, 2022 was $31.6 million, an increase of $0.3 million compared to Segment Adjusted EBITDA for the year ended December 31, 2021 of $31.3 million. For the year ended December 31, 2022, Segment Adjusted EBITDA margin was 18.3% compared to 20.4% in the prior year. The increase in Segment Adjusted EBITDA was due to higher revenues, whereas the decrease in Segment Adjusted EBITDA margin was a result of business mix and the impact of the cyber-attack in June 2022, which temporarily disrupted certain of our labs’ ability to operate in July 2022.
Remediation and Reuse Segment Adjusted EBITDA for the year ended December 31, 2022 was $30.6 million, an increase of $11.3 million compared to Segment Adjusted EBITDA for the year ended December 31, 2021 of $19.3 million. For the year ended December 31, 2022, Segment Adjusted EBITDA margin was 16.6% compared to 14.7% in the prior year. The increase in both Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was a result of significantly higher revenues and business mix, partially offset by our continued investments in operating infrastructure in this segment that temporarily impact margins.
Corporate and other costs were $31.2 million for the year ended December 31, 2022 compared to $30.1 million for the year ended December 31, 2021. The cost increase was primarily driven by continued investment in corporate support functions. Corporate and other costs were 5.7% and 5.5% of revenues in the years ended December 31, 2022 and 2021, respectively.
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and other sources, including availability under our credit facility, and their sufficiency to fund our operating and investing activities.
Our principal sources of liquidity have been cash generated by operating activities, borrowings under our credit facilities, other borrowing arrangements, and proceeds from the issuance of common and preferred stock. Historically, we have financed our operations and acquisitions from a combination of cash generated from operations, periodic borrowings under senior secured credit facilities, and proceeds from the issuance of common and preferred stock. Our primary cash needs are for day to day operations, to fund working capital requirements, to fund our acquisition strategy and any related cash earn-out obligations, to pay interest and principal on our indebtedness and dividends on our Series A-2 preferred stock, and to make capital expenditures. Additionally, in connection with certain acquisitions, we agree to earn-out provisions and other purchase price adjustments that may require future payments. For example, the CTEH acquisition agreement included an earn-out provision that provided for the payment of contingent consideration based on CTEH’s results in excess of a specified target. CTEH fully achieved the target in 2021 and a $30.0 million earn-out payment was paid in cash in the first quarter of 2022. See Note 8 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data."
We may also make up to $7.1 million in aggregate earn-out payments between the years 2024 and 2026 in connection with certain of our acquisitions of which up to $1.5 million may be paid only in cash, up to $4.5 million may be paid only in common stock and up to $1.1 million may be paid in cash or, at our option, in common stock. These amounts reflect a $1.5 million earn-out payment made in the first quarter of 2024 in connection with our Huco acquisition, $1.1 million of which was paid in shares of common stock and $0.4 million was paid in cash. See Note 8 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
We expect to continue to finance our liquidity requirements, including any cash earn-out payments that may be required in connection with acquisitions, through cash generated from operations and borrowings under our credit facility. We believe these sources will be sufficient to fund our cash needs in the short-term and long-term.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Year Ended December 31,
(in thousands)
Consolidated statement of cash flows data:
Net cash provided by operating activities
$
56,022
$
20,649
$
37,581
Net cash used in investing activities
(101,624
)
(38,687
)
(71,641
)
Net cash (used in) provided by financing activities
(20,110
)
(38,764
)
146,103
Change in cash, cash equivalents and restricted
cash
$
(65,712
)
$
(56,802
)
$
112,043
Operating Activities
Cash flows from operating activities can fluctuate from period-to-period as earnings, working capital needs and the timing of payments for contingent consideration, taxes, bonus payments and other operating items impact reported cash flows.
For the year ended December 31, 2023, net cash provided by operating activities was $56.0 million compared to net cash provided by operating activities of $20.6 million for the year ended December 31, 2022. Cash provided by operating activities for the years ended December 31, 2023 and December 31, 2022, includes payment of contingent consideration of $0.6 million and $19.5 million, respectively. Excluding payment of contingent consideration, cash provided by operating activities was $56.6 million and $40.1 million in the years ended December 31, 2023 and December 31, 2022, respectively. The period-over-period increase of $16.5 million, excluding the impact of contingent consideration, was primarily due to a lower increase in working capital in the current period of $3.3 million versus an increase in working capital in the prior year period of $14.1 million, as well as higher earnings before non-cash items of $6.5 million.
Working capital increased by $3.3 million in the year ended December 31, 2023, primarily due to a decrease in accounts payable and other accrued liabilities of $8.9 million, an increase in accounts receivable and contract assets of $2.9 million and an increase in prepaid expenses and other current assets of $0.9 million, partially offset by an increase in accrued payroll and benefits of $9.5 million.
For the year ended December 31, 2022, net cash provided by operating activities was $20.6 million compared to net cash provided by operating activities of $37.6 million for the year ended December 31, 2021. Cash provided by operations includes payment of contingent consideration of $19.5 million and $15.6 million in the years ended December 31, 2022 and 2021, respectively. Excluding payment of contingent consideration, cash provided by operating activities was $40.1 million for the year ended December 31, 2022, compared to cash provided by operating activities of $53.2 million in the prior year, a decrease of $13.1 million. The period-over-period decrease, excluding the impact of contingent consideration, was primarily due to lower earnings before non-cash items, of $9.3 million, primarily due to expected lower revenue from COVID-19 services and an increase in working capital in 2022 of $14.1 million versus an increase in working capital in the prior year of $10.1 million.
Working capital increased by $14.1 million in the year ended December 31, 2022, primarily due to a decrease in accounts payable and other accrued liabilities of $9.9 million, as a result of lower contract liabilities due to the timing of project completion and the timing of vendor payments, a decrease in accrued payroll and benefits of $6.8 million, and an increase in prepaid expenses and other current assets of $1.8 million, partially offset by a decrease in accounts receivable and contract assets of $4.4 million.
Investing Activities
For the year ended December 31, 2023, net cash used in investing activities was $101.6 million, driven by cash paid for the acquisitions of Matrix, GreenPath, Vandrensning, Frontier and EAI, net of cash acquired, of $66.2 million, as well as $29.6 million in cash consideration for purchases of property and equipment (which included the purchase of a $12.2 million replacement aircraft for use in emergency responses following an aircraft crash in February 2023), $3.4 million in proprietary software development costs, $2.6 million related to the minority investment in certain companies and the payment of assumed purchase price obligations of $1.4 million, partially offset by proceeds received from the sale of property and equipment of $1.0 million.
For the year ended December 31, 2022, net cash used in investing activities was $38.7 million, primarily driven by cash paid for the acquisitions of Environmental Standards, IAG, Triad, AirKinetics and Huco, net of cash acquired of $28.6 million and purchases of property and equipment for cash consideration of $9.6 million.
For the year ended December 31, 2021, net cash used in investing activities was $71.6 million, primarily driven by cash paid for the acquisitions of MSE, Vista, EI, Sensible, ECI and Horizon, net of cash acquired of $55.7 million, as well as payment of assumed purchase price obligations of $9.3 million and purchases of property and equipment for cash consideration of $6.7 million.
Financing Activities
For the year ended December 31, 2023, net cash used in financing activities was $20.1 million. Cash used in financing activities was driven by the payment of the quarterly dividends on the Series A-2 preferred stock of $16.4 million, amortization payments on the 2021 Credit Facility term loan and the aircraft loan of $12.2 million and $0.6 million, respectively, the repayment of finance leases of $4.6 million and the payment of acquisition-related contingent consideration of $1.9 million, partially offset by proceeds received from the aircraft loan of $10.9 and proceeds from the exercise of stock options of $4.7 million.
For the year ended December 31, 2022, net cash used in financing activities was $38.8 million. Cash used in financing activities was driven by the payment of the quarterly dividends on the Series A-2 preferred stock of $16.4 million, the payment of acquisition-related contingent consideration of $11.1 million, term loan amortization payments of $8.8 million related to our 2021 Credit Facility, and the repayment of finance leases of $4.0 million, partially offset by proceeds received from the exercise of stock options of $1.6 million.
For the year ended December 31, 2021, net cash provided by financing activities was $146.1 million. Cash provided by financing activities was driven by borrowings under the 2021 Credit Facility, consisting of $175.0 million under the term loan and $37.0 million under the revolver, net proceeds received from the follow-on offering of $169.3 million and proceeds received from the exercise of stock options of $7.2 million, partially offset by the use of proceeds from the 2021 Credit Facility to repay the $213.4 million outstanding under the 2020 Credit Facility, the payment of the quarterly dividend on the Series A-2 preferred stock of $16.4 million, the payment of acquisition-related contingent consideration of $9.9 million, and the repayment of finance leases of $2.7 million.
Credit Facilities
2021 Credit Facility
On April 27, 2021, we entered into a Senior Secured Credit Agreement, or the 2021 Credit Facility, providing for a $300.0 million credit facility comprised of a $175.0 million term loan and a $125.0 million revolving credit facility, and used a portion of the proceeds to repay all amounts outstanding under the prior credit facility. The 2021 revolving credit facility includes a $20.0 million sublimit for the issuance of letters of credit. Subject to certain exceptions, all amounts under the 2021 Credit Facility will become due on April 27, 2026. We have the option to borrow incremental term loans or request an increase in the aggregate commitments under the revolving credit facility up to an aggregate amount of $150.0 million subject to the satisfaction of certain conditions. In February 2024, we partially exercised this option, as discussed below. See Note 22 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
The 2021 Credit Facility term loan must be repaid in quarterly installments. Prior to May 31, 2023, the 2021 Credit Facility term loan and the revolver bore interest subject to the Company’s leverage ratio and LIBOR. On May 31, 2023, we amended our 2021 Credit Facility to transition the reference rate from LIBOR to SOFR plus 0.10%. The transition to SOFR did not materially impact the interest rate paid by the Company or change any material terms of the 2021 Credit Facility.
On May 30, 2023, we amended the 2022 Interest Rate Swap transaction we originally entered into on January 27, 2022, to convert the floating component of the interest rate on $100.0 million of borrowings to 1-Month Term SOFR and a new coupon of 1.319% until January 27, 2025. Prior to the amendment, the floating component of the interest rate was subject to LIBOR and a coupon of 1.39%. The transition to SOFR did not materially impact the interest rate we pay or change any material terms of the 2022 Interest Rate Swap.
On May 30, 2023, we entered into a second interest rate swap transaction fixing the floating component of the interest rate on an additional $70.0 million of borrowings to 1-Month Term SOFR and a coupon of 3.88% until April 27, 2026.
Additionally, effective September 1, 2023, we updated our annual achievement of certain sustainability and environmental, social and governance related objectives as provided for in the 2021 Credit Facility, resulting in an interest rate reduction of 0.025% (compared to an interest rate reduction of 0.05% in the previous trailing twelve month period).
Our obligations under the 2021 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 2021 Credit Facility includes a number of covenants imposing certain restrictions on our business. The 2021 Credit Facility also includes financial covenants requiring us to remain below a maximum total net leverage ratio and a minimum fixed charge coverage ratio. As of December 31, 2023, our consolidated total leverage ratio was 1.9 times and we were in compliance with all covenants under the 2021 Credit Facility.
The weighted average interest rate on the 2021 Credit Facility for the years ended December 31, 2023 and 2022 was 6.7% and 3.5%, respectively, before the benefit of our interest rate swaps. Weighted average interest rates, net of the benefit of our interest rate swaps, as of December 31, 2023 and 2022 were 4.1% and 2.3%, respectively.
The 2021 Credit Facility contains a mandatory prepayment feature upon a number of events, including with the proceeds of certain asset sales and proceeds from the issuance of any debt.
In February 2024, we partially exercised our option to access the $150.0 million accordion under our Senior Secured Credit Agreement, and as a result, the Senior Secured Credit Agreement was amended to provide for an additional $100.0 million credit availability under the 2021 Credit Facility, comprised of an additional $50.0 million term loan and $50.0 million revolving credit facility. Furthermore, we exercised our credit facility covenant holiday, increasing its leverage capacity from 3.75 times to 4.25 times for four quarters beginning with the first quarter of 2024.
See Note 13 and 22 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
2020 Credit Facility
On April 13, 2020, we entered into a Unitranche Credit Agreement, or the 2020 Credit Facility, providing for a $225.0 million credit facility comprised of a $175.0 million term loan and a $50.0 million revolving credit facility. The 2020 Credit facility was repaid in full in April 2021. The resulting loss on extinguishment upon repayment of the 2020 Credit Facility in April 2021, amounted to $4.1 million, of which $1.0 million was related to fees paid and $3.1 related to unamortized debt issuance costs. Total loss on extinguishment is recorded in interest expense-net within the consolidated statement of operations for the year ended December 31, 2021.
See Note 13 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Loan and Aircraft Security Agreement
On May 18, 2023, we entered into a Loan and Aircraft Security Agreement to finance $10.9 million of the purchase of a new aircraft, which must be repaid in 60 monthly consecutive installments, and all outstanding amounts will become due on May 18, 2028. The aircraft loan bears interest subject to 1-Month Term SOFR and a coupon of 1.86%. The entire principal balance may be prepaid in full subject to a 3.0%, 2.0% and 1.0% prepayment fee if paid prior to the first, second and third anniversary of the loan, respectively.
See Note 13 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Series A-2 Preferred Stock
On April 13, 2020, we issued 17,500 shares of the Series A-2 preferred stock with a par value of $0.0001 per share and a warrant to purchase common stock, in exchange for $175.0 million. The Series A-2 preferred stock does not mature or have a cash repayment obligation; however, it is redeemable at our 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. The Series A-2 preferred stock is subject to a 9.0% interest rate per annum with required quarterly cash payments. If permitted under our existing debt facilities, we must pay the Series A-2 preferred stock dividend in cash each quarter.
In January 2024, we repaid $60.0 million of the outstanding principal balance of the Series A-2 preferred stock.
See Note 16 and 22 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
Critical Accounting Policies and Estimates
The Company's significant accounting policies and estimates are described in Notes 2 and 3 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” , which were prepared in accordance with U.S. GAAP. Critical accounting policies are those that we believe are both most important to the portrayal of our financial condition and results of operations, and require complex, subjective judgments, often as a result of the need to make estimates and assumptions about the effect of matters that are inherently uncertain. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances and judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. The Company considers the following policies and estimates to be the most critical in understanding the judgments that are involved in preparing its consolidated financial statements:
Use of Estimates
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, subsequent measurement of goodwill, fair value of contingent consideration payables, fair value of embedded derivatives, equity-based compensation expense and deferred taxes. Actual results could materially differ from those estimates.
Revenue Recognition
Revenue is recognized in accordance with Financial Accounting Standards Board Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers. The following is considered in the recognition of revenue under ASC 606:
We account 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, we allocate 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.
On the majority of fixed fee contracts, we recognize revenue, over time, using either the proportion of actual costs incurred to the total costs expected to complete the contract performance obligation, or the cost to cost method, under the time-elapsed basis.
There are inherent uncertainties in the estimation process for cost to cost contracts, as the estimation of total contract costs and estimates to complete 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 our contracts in the Remediation and Reuse segment.
Time-and-materials contracts contain variable consideration. However, performance obligations qualify for the “Right to Invoice” Practical Expedient. Under this practical expedient, we are allowed to recognize revenue, over time, in the amount to which we have a right to invoice.
Accounting for Acquisitions and Business Acquisition Contingencies
We account for acquisitions using the acquisition method of accounting. The most critical areas of judgment in applying the acquisition method include selecting the appropriate valuation techniques and assumptions that are used to measure the acquired assets and assumed liabilities at fair value, particularly for intangible assets, contingent consideration, acquired tangible assets such as property, plant and equipment. We may use independent valuation specialists to assist in determining the estimated fair values of assets acquired and liabilities assumed.
Subsequent changes in the fair value of contingent consideration are recognized as a gain or loss in our consolidated statements of operations. Payments of contingent consideration are reflected in financing activities in our consolidated statements of cash flows to the extent included as part of the initial purchase price, or in operating activities if the payment exceeds the amount included in the initial purchase price.
Impairments of Long Lived Assets and Goodwill
Certain events or changes in circumstances may indicate that the recoverability of the carrying amount of long lived assets should be assessed. When such events or changes in circumstances are present, we estimate the future cash flows expected to result from the use of the asset (or asset group) and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount, we recognize an impairment based on the fair value of such assets.
Goodwill is tested for impairment at least annually should an event or circumstances indicate that a reduction in fair value of the reporting unit may have occurred during the year, goodwill would also be tested at such occasion.
We use a two-step process to assess the realizability of goodwill. The first step (generally referred to as a "step 0" analysis) is a qualitative assessment that analyzes current economic indicators associated with a particular reporting unit. For example, we analyze changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there are indicators of a significant decline in the fair value of a particular reporting unit. If the qualitative assessment indicates a stable or improved fair value, no further testing is required. If a qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we will proceed to the quantitative second step (generally referred to as a "step 1" analysis) where the fair value of a reporting unit is calculated based on weighted income and market-based approaches. If the fair value of a reporting unit is lower than its carrying value, an impairment to goodwill is recorded, not to exceed the carrying amount of goodwill in the reporting unit.
Step 1 of the quantitative test requires comparison of the fair value of each of the reporting units to the respective carrying value. If the carrying value of the reporting unit is less than the fair value, no impairment exists. Otherwise, we would recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit.
Embedded Derivatives
Embedded derivatives that are required to be bifurcated from the underlying host instrument are accounted for and valued as a separate financial instrument. These embedded derivatives are bifurcated, accounted for at their estimated fair value, which is based on certain estimates and assumptions, and presented separately on the consolidated statements of financial position. Changes in fair value of the embedded derivatives are recognized as a component of other income/ expense on our consolidated statements of operations.
Stock-based Compensation
We sponsor stock incentive plans that allow for issuance of employee stock options and other forms of equity incentives.
Awards that are issued to non-employees in exchange for their services 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.
Certain of the performance based restricted stock units will only meet the requirements for establishing a grant date when the final calculated financial performance metrics and the amount of awards have been approved by our Board of Directors, which will then trigger the service inception date, the fair value of the awards, and the associated expense recognition period.
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 dividend rates are used in the calculation as these are not applicable to us. Forfeitures are recognized as incurred. Employee options are accounted for in accordance with the guidance set forth by ASC 718.
The fair value of stock appreciation rights is estimated at the grant date using the geometric Brownian motion model.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We have market risk exposure arising from changes in interest rates on our credit facility, which bears interest at rates that are benchmarked subject to the Company’s leverage ratio and SOFR. Based on our overall interest rate exposure to variable rate debt outstanding as of December 31, 2023, which factors in our interest rate swaps on $170.0 million of debt, a 1.0% increase or decrease in interest rates on the term loan, aircraft loan, and revolver would have minimal impact in our annual income (loss) before income taxes.
Inflation Risk
We experienced higher labor and significantly higher travel and other direct costs in the fiscal year ended December 31, 2022 as a result of inflation, particularly in our Measurement and Analysis and Remediation and Reuse segments. In the year ended December 31, 2023, we also experienced, and continue to experience, higher labor costs as a result of inflation. We believe we have successfully raised prices in businesses with short term contracts to offset these inflationary effects. We also have and are continuing to raise prices on medium term (one to four quarter) contracts as these contracts are renewed or new contracts are won, and as a result have been able to offset much of the impact of inflation to date. We expect to continue to raise prices if direct costs continue to increase, and although inflation has increased our Selling, general and administrative expense in the year ended December 31, 2023, we do not believe over a longer period of time that inflation will have a material effect on our business, financial condition or results of operations. If our costs were to become subject to additional and unanticipated significant sustained inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.
Foreign Exchange Risk
Foreign exchange risk exposure arises because we sell our services throughout the United States, Canada, Europe, and Australia. Our exposure to this risk has increased significantly in 2023 due to our acquisition of Matrix in Canada and, to a lesser extent, Vandrensning in Europe in the second and third quarter of 2023, respectively. Revenues in certain foreign countries as well as certain expenses related to those revenues are transacted in currencies other than the U.S. dollar. As such, our future operating results are exposed to changes in exchange rates. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously invoiced amounts can be positively or negatively affected by changes in exchange rates in the course of collection.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
Statements of Financial Position
Statements of Operations and Comprehensive Loss
Statements of Convertible and Redeemable Series A-2 Preferred Stock and Stockholders’ Equity
Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Montrose Environmental Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Montrose Environmental Group, Inc. and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, convertible and redeemable series A-2 preferred stock and stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion	
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition for fixed fee contracts with customers under the cost-to-cost method - Refer to Note 2 to the financial statements
Critical Audit Matter Description
The Company has certain contracts with customers in which revenue is recognized over time using the proportion of actual costs incurred to the total costs expected to complete the contract performance obligation (“cost-to-cost method”). The Company has 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. There are inherent uncertainties in the estimation process for cost-to-cost contracts, as the estimation of total contract costs and estimates to complete is complex, subject to many variables, and requires judgment. Further, 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 judgments and estimation directly affect the amount of revenue recognized during the period relative to the total contract value.
Given the judgments necessary to estimate the total costs of fixed fee contract performance obligations, auditing such estimates required extensive audit effort due to the subjectivity involved in assessing the estimates to complete and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates of the proportion of actual costs incurred to the total costs expected to complete contract performance obligations included the following, among others:
•We selected a sample of long-term cost-to-cost contracts and performed the following:
−Evaluated whether the contracts were properly included in management’s calculation of long-term cost-to-cost revenue based on the terms and conditions of each contract, including whether continuous transfer of control to the customer occurred as progress was made toward fulfilling the performance obligation.
−Compared the transaction price to the consideration expected to be received based on current rights and obligations under the contracts and any modifications that were agreed upon with the customers.
−Tested the accuracy and completeness of the costs incurred to date for the performance obligation.
−Evaluated the estimates of total costs for the performance obligation by:
▪Comparing costs incurred to date to the costs management estimated to be incurred to date.
▪Evaluating management’s ability to achieve the estimates of total costs by performing corroborating inquiries with the Company’s project managers, and comparing the estimates to management’s work plans, budgets, and supplier contracts.
▪Comparing management’s estimates for the selected contracts to costs and profits of similar performance obligations, when applicable.
−Testing the mathematical accuracy of management’s calculation of revenue for the performance obligation.
•We evaluated management’s ability to estimate total costs accurately by comparing actual costs to historical estimates for performance obligations that have been fulfilled.
/s/ Deloitte & Touche LLP
Costa Mesa, California
February 29, 2024
We have served as the Company’s auditor since 2016.
MONTROSE ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands, except share data)
December 31,
ASSETS
CURRENT ASSETS:
Cash, cash equivalents and restricted cash
$
23,240
$
89,828
Accounts receivable-net
112,360
94,711
Contract assets
51,629
52,403
Prepaid and other current assets
13,668
10,292
Income tax receivable
Total current assets
$
200,924
$
247,928
NON-CURRENT ASSETS:
Property and equipment-net
56,825
36,045
Operating lease right-of-use asset-net
32,260
26,038
Finance lease right-of-use asset-net
13,248
9,840
Goodwill
364,449
323,868
Other intangible assets-net
140,813
142,107
Other assets
8,267
6,088
TOTAL ASSETS
$
816,786
$
791,914
LIABILITIES, CONVERTIBLE AND REDEEMABLE SERIES A-2
PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities
$
59,920
$
63,412
Accrued payroll and benefits
34,660
20,528
Business acquisitions contingent consideration, current
3,592
3,801
Current portion of operating lease liabilities
9,963
7,895
Current portion of finance lease liabilities
3,956
3,775
Current portion of long-term debt
14,196
12,031
Total current liabilities
$
126,287
$
111,442
NON-CURRENT LIABILITIES:
Business acquisitions contingent consideration, long-term
2,448
4,454
Other non-current liabilities
6,569
Deferred tax liabilities-net
6,064
5,742
Conversion option
19,017
25,731
Operating lease liability-net of current portion
25,048
19,437
Finance lease liability-net of current portion
8,185
6,486
Long-term debt-net of deferred financing fees
148,988
152,494
Total liabilities
$
342,606
$
325,799
COMMITMENTS AND CONTINGENCIES (Note 15)
CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK
$0.0001 PAR VALUE-
Authorized, issued and outstanding shares: 17,500 at December 31, 2023
and 2022; aggregate liquidation preference of
$182.2 million at December 31, 2023 and 2022
$
152,928
$
152,928
STOCKHOLDERS’ EQUITY:
Common stock, $0.000004 par value; authorized shares: 190,000,000
at December 31, 2023 and 2022; issued and outstanding shares: 30,190,231
and 29,746,793 at December 31, 2023 and 2022, respectively
$
-
$
-
Additional paid-in capital
531,831
492,676
Accumulated deficit
(210,356
)
(179,497
)
Accumulated other comprehensive (loss) income
(223
)
Total stockholders’ equity
$
321,252
$
313,187
TOTAL LIABILITIES, CONVERTIBLE AND REDEEMABLE SERIES A-2
PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
$
816,786
$
791,914
The accompanying notes are an integral part of these consolidated financial statements.
MONTROSE ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
Year Ended December 31,
REVENUES
$
624,208
$
544,416
$
546,413
COST OF REVENUES (exclusive of depreciation and
amortization)
383,903
351,882
369,028
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE
222,861
176,295
117,658
FAIR VALUE CHANGES IN BUSINESS
ACQUISITION CONTINGENCIES
(3,227
)
24,372
DEPRECIATION AND AMORTIZATION
45,780
47,479
44,810
LOSS FROM OPERATIONS
(28,420
)
(28,013
)
(9,455
)
OTHER EXPENSE:
Other income (expense)
4,374
3,683
(2,546
)
Interest expense-net
(7,793
)
(5,239
)
(11,615
)
Total other expenses-net
(3,419
)
(1,556
)
(14,161
)
LOSS BEFORE (BENEFIT) EXPENSE FROM
INCOME TAXES
(31,839
)
(29,569
)
(23,616
)
INCOME TAX (BENEFIT) EXPENSE
(980
)
2,250
1,709
NET LOSS
$
(30,859
)
$
(31,819
)
$
(25,325
)
EQUITY ADJUSTMENT FROM FOREIGN
CURRENCY TRANSLATION
(231
)
(28
)
(35
)
COMPREHENSIVE LOSS
$
(31,090
)
$
(31,847
)
$
(25,360
)
CONVERTIBLE AND REDEEMABLE SERIES A-2
PREFERRED STOCK DIVIDEND
(16,400
)
(16,400
)
(16,400
)
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS
$
(47,259
)
$
(48,219
)
$
(41,725
)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING-BASIC AND DILUTED
30,058
29,688
26,724
NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS-
BASIC AND DILUTED
$
(1.57
)
$
(1.62
)
$
(1.56
)
The accompanying notes are an integral part of these consolidated financial statements.
MONTROSE ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(In thousands, except share data)
Convertible and
Redeemable
Series A-2
Preferred Stock
Common Stock
Additional
Paid-In
Accumulated
Accumulated
Other
Comprehensive
Total
Stockholders’
Shares
Amount
Shares
Amount
Capital
Deficit
Income (Loss)
Equity
BALANCE-January 1, 2021
17,500
$
152,928
24,932,527
$
-
$
259,427
$
(122,353
)
$
$
137,145
Net loss
-
-
-
-
-
(25,325
)
-
(25,325
)
Stock-based compensation
-
-
-
-
10,321
-
-
10,321
Dividend payment to the Series A-2
preferred shareholders
-
-
-
-
(16,400
)
-
-
(16,400
)
Common stock issued
-
-
1,812,394
-
41,641
-
-
41,641
Issuance of common stock in connection
with follow-on offering, net of
issuance costs of $0.6 million
-
-
2,875,000
-
169,154
-
-
169,154
Accumulated other comprehensive loss
-
-
-
-
-
-
(35
)
(35
)
BALANCE-December 31, 2021
17,500
$
152,928
29,619,921
$
-
$
464,143
$
(147,678
)
$
$
316,501
Net loss
-
-
-
-
-
(31,819
)
-
(31,819
)
Stock-based compensation
-
-
-
-
43,290
-
-
43,290
Dividend payment to the Series A-2
preferred shareholders
-
-
-
-
(16,400
)
-
-
(16,400
)
Common stock issued
-
-
126,872
-
1,643
-
-
1,643
Accumulated other comprehensive loss
-
-
-
-
-
-
(28
)
(28
)
BALANCE-December 31, 2022
17,500
$
152,928
29,746,793
$
-
$
492,676
$
(179,497
)
$
$
313,187
Net loss
-
-
-
-
-
(30,859
)
-
(30,859
)
Stock-based compensation
-
-
-
-
47,267
-
-
47,267
Dividend payment to the Series A-2
preferred shareholders
-
-
-
-
(16,400
)
-
-
(16,400
)
Common stock issued
-
-
443,438
-
8,288
-
-
8,288
Accumulated other comprehensive loss
-
-
-
-
-
-
(231
)
(231
)
BALANCE-December 31, 2023
17,500
$
152,928
30,190,231
$
-
$
531,831
$
(210,356
)
$
(223
)
$
321,252
The accompanying notes are an integral part of these consolidated financial statements.
MONTROSE ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
OPERATING ACTIVITIES:
Net loss
$
(30,859
)
$
(31,819
)
$
(25,325
)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for bad debt
3,142
(1,097
)
1,135
Depreciation and amortization
45,780
47,479
44,810
Amortization of right-of-use asset
10,194
9,289
8,151
Stock-based compensation expense
47,267
43,290
10,321
Fair value changes in financial instruments
(4,129
)
(3,396
)
2,195
Fair value changes in business acquisition
contingencies
(3,227
)
24,372
Deferred income taxes
(980
)
2,250
1,709
Debt extinguishment costs
-
-
4,052
Other
(84
)
(195
)
Changes in operating assets and liabilities-net of acquisitions:
Accounts receivable and contract assets
(2,923
)
4,394
(36,164
)
Prepaid expenses and other current assets
(918
)
(1,763
)
(1,148
)
Accounts payable and other accrued liabilities
(8,912
)
(9,878
)
23,996
Accrued payroll and benefits
9,464
(6,830
)
3,244
Payment of contingent consideration
(611
)
(19,457
)
(15,628
)
Change in operating leases
(10,493
)
(8,935
)
(7,944
)
Net cash provided by operating activities
$
56,022
$
20,649
$
37,581
INVESTING ACTIVITIES:
Proceeds from corporate owned and property insurance
Purchases of property and equipment
(29,578
)
(9,583
)
(6,885
)
Proceeds from the sale of property and equipment
Proprietary software development and other software costs
(3,352
)
(593
)
(699
)
Payment of purchase price true ups
(1,425
)
(389
)
(9,336
)
Minority investments
(2,626
)
-
-
Cash paid for acquisitions-net of cash acquired
(66,187
)
(28,625
)
(55,731
)
Net cash used in investing activities
$
(101,624
)
$
(38,687
)
$
(71,641
)
FINANCING ACTIVITIES:
Proceeds from line of credit
-
-
109,000
Repayment of the line of credit
-
-
(109,000
)
Proceeds from term loans
-
-
175,000
Repayment of term loans
(12,211
)
(8,750
)
(173,905
)
Proceeds from the aircraft loan
10,935
-
-
Repayment of aircraft loan
(591
)
-
-
Payment of contingent consideration and
other purchase price true ups
(1,949
)
(11,107
)
(9,865
)
Repayment of finance leases
(4,584
)
(3,967
)
(2,711
)
Proceeds from issuance of common stock
in public offerings, net of issuance costs
-
-
169,783
Payments of deferred offering costs
-
(183
)
(446
)
Debt issuance cost
-
-
(2,590
)
Proceeds from issuance of common stock for exercised
stock options
4,690
1,643
7,237
Dividend payment to the series A-2 shareholders
(16,400
)
(16,400
)
(16,400
)
Net cash (used in) provided by financing activities
$
(20,110
)
$
(38,764
)
$
146,103
CHANGE IN CASH, CASH EQUIVALENTS AND
RESTRICTED CASH
(65,712
)
(56,802
)
112,043
Foreign exchange impact on cash balance
(876
)
(111
)
(183
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
Beginning of year
89,828
146,741
34,881
End of year
$
23,240
$
89,828
$
146,741
(continued in next page)
The accompanying notes are an integral part of these consolidated financial statements.
MONTROSE ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Cash paid for interest
$
8,059
$
6,514
$
5,012
Cash paid for income tax, net
$
$
$
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Accrued purchases of property and equipment
$
1,098
$
2,261
$
Property and equipment purchased under finance leases
$
8,298
$
5,061
$
1,766
Accrued lease surrender liability (Note 7)
$
5,947
$
-
$
-
Common stock issued to acquire new businesses
$
2,598
$
-
$
8,320
Acquisitions unpaid contingent consideration
$
6,040
$
8,255
$
35,800
Acquisitions contingent consideration paid in shares
$
1,000
$
-
$
26,084
Offering costs included in accounts payable and other accrued liabilities
$
-
$
-
$
Promissory note receivable issued in connection
with the sale of assets of the Discontinued Specialty Lab (Note 19)
$
4,348
$
-
$
-
(concluded)
The accompanying notes are an integral part of these consolidated financial statements.
MONTROSE ENVIRONMENTAL GROUP, INC.
NOTES TO 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 115 offices across the United States, Canada, Australia and Europe and approximately 3,100 employees as of December 31, 2023.
Montrose is an environmental services company serving the recurring environmental needs of a diverse client base, including Fortune 500 companies and federal, state and local governments through the following three segments:
Assessment, Permitting and Response-Through its Assessment, Permitting and Response segment, Montrose primarily provides scientific advisory and consulting services to support environmental assessments, environmental emergency response, and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. The Company’s technical advisory and consulting offerings include regulatory compliance support and planning, environmental, ecosystem and toxicological assessments and support during responses to environmental disruption. Montrose helps clients navigate regulations at the local, state, provincial and federal levels.
Measurement and Analysis-Through its Measurement and Analysis segment, Montrose’s teams test and analyze air, water and soil to determine concentrations of contaminants, 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 and advanced analytical laboratory services such as air, storm water, wastewater and drinking water analysis.
Remediation and Reuse-Through its Remediation and Reuse segment, Montrose provides clients with engineering, design, and implementation 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.
Follow-on Offering-On October 1, 2021, the Company completed a follow-on offering of common stock, in which it sold 2,875,000 shares, including 375,000 shares issued pursuant to the underwriters full exercise on October 5, 2021 of the underwriters’ option to purchase additional shares, at a price to the public of $62.00 per share, resulting in net proceeds to the Company of approximately $169.8 million after deducting underwriting discounts of $8.5 million. Additionally, the Company offset $0.6 million of deferred follow-on offering costs against follow-on proceeds recorded to additional paid in capital. These deferred follow-on offering costs were directly attributable to the follow-on offering in accordance with Staff Accounting Bulletin Topic 5: Miscellaneous Accounting.
Basis of Presentation-The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Intercompany balances and transactions are eliminated.
Reclassifications-Certain reclassifications have been made to prior period amounts in the audited consolidated financial statements to conform to the current period presentation. For the year ended December 31, 2022 and 2021, proprietary software development and other software costs, as well as proceeds from the sale of property and equipment were presented within purchases of property and equipment in the statements of cash flows. As of December 31, 2023, these amounts were reclassified to the proprietary software development and other software costs and proceeds from the sale of property and equipment financial statement line items within the statements of cash flow. These reclassifications did not have a material impact on previously reported amounts.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates-The preparation of the 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include, but are not limited to, management’s forecasts of future cash flows used as a basis to assess recoverability of goodwill and 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, subsequent measurement of goodwill, the fair value of contingent consideration payables, the fair value of embedded derivatives, equity-based compensation expense and deferred taxes. These estimates could materially differ from actual results.
Cash, Cash Equivalents and Restricted Cash-The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The Company considers cash deposits in banks as cash with original maturities at purchase of three months or less as cash equivalents.
Cash, long-term debt and financial instruments subject the Company to concentrations of credit risk. To minimize the risk of credit loss, these financial instruments are primarily held with large, reputable financial institutions. The Company has not experienced losses in such accounts and believes it is not exposed to any significant credit risk associated with these accounts.
Cash that is restricted as to withdrawal or use under the terms of certain contractual agreements is recorded in restricted cash in the Company’s consolidated statements of financial position. The Company’s $2.7 million restricted cash balance as of December 31, 2023 primarily consisted of a $1.0 million sublease deposit (Note 19) and $1.3 million of holdback amounts payable in connection with an acquisition (Note 8).
Accounts Receivables-Net-Accounts receivable are shown on the face of the consolidated statements of financial position, net of an allowance for doubtful accounts. The allowance for doubtful accounts is established at the origination of an account in accordance with Accounting Standard Update ("ASU") 2016-13, Financial Instruments-Credit Losses (Topic 326). Accounting Standards Codification ("ASC") 326 requires the Company to estimate the lifetime expected credit losses on such instruments and to record an allowance to offset the receivables.
Financial Instruments- The Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:
Level 1-Quoted prices in active markets for identical assets or liabilities.
Level 2-Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3-Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. The inputs to the determination of fair value are based upon the best information in the circumstances and may require significant management judgment or estimation.
The Company considers the carrying values of cash, cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses to approximate fair value for these financial instruments due to the short maturities of these instruments. The Company’s interest rate swap, embedded derivatives, and any acquisition’s contingent consideration are carried at fair value and determined according to the fair value hierarchy above.
The Company’s variable rate borrowings under its Credit Facility (Note 13) is tied to market indices and, thus, approximate fair value. The estimated fair value of the long-term debt under the credit facility is based on borrowing rates currently available to the Company for loans with similar terms and remaining maturities.
Impairment of Long-Lived Assets-Certain events or changes in circumstances may indicate that the recoverability of the carrying amount of long lived assets should be assessed. When such events or changes in circumstances are present, the Company estimates the future cash flows expected to result from the use of the asset (or asset group) and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount, the Company recognizes an impairment based on the fair value of such assets. During the year ended December 31, 2022, management determined certain of the Company's operating lease right-of-use assets were impaired (Note 7).
Acquisitions-The Company first assesses whether the acquisition represents a purchase of assets or a business. If the transaction is a business acquisition, the Company accounts for the acquisition using business combination 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 the Company pays over the fair value of the net tangible and intangible assets acquired. The Company 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 of businesses are expensed as they are incurred.
Business Acquisition Contingencies- Some of the Company’s acquisition agreements include contingent consideration arrangements, which are generally based on the achievement of future performance thresholds. For each transaction, the Company estimates 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. Subsequent changes in the fair value of contingent consideration are recognized as a gain or loss in the consolidated statements of operations. Payments of contingent consideration are reflected in financing activities in the consolidated statements of cash flows to the extent included as part of the initial purchase price, or in operating activities if the payment exceeds the amount included in the initial purchase price.
Goodwill-Goodwill is not amortized but instead qualitatively or quantitatively tested for impairment at least annually should an event or circumstances indicate that a reduction in fair value of the reporting unit may have occurred during the year, goodwill would also be tested at such occasion. The Company performs its goodwill test at the reporting unit level. If necessary, the goodwill quantitative impairment test is performed on October 1 every year.
The Company uses a two-step process to assess the realizability of goodwill. The first step (generally referred to as a "step 0" analysis) is a qualitative assessment that analyzes current economic indicators associated with a particular reporting unit. For example, the Company analyzes changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there are indicators of a significant decline in the fair value of a particular reporting unit. If the qualitative assessment indicates a stable or improved fair value, no further testing is required. If a qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will proceed to the quantitative second step (generally referred to as a "step 1" analysis) where the fair value of a reporting unit is calculated based on weighted income and market-based approaches. If the fair value of a reporting unit is lower than its carrying value, an impairment to goodwill is recorded, not to exceed the carrying amount of goodwill in the reporting unit.
Step 1 of the quantitative test requires comparison of the fair value of each of the reporting units to the respective carrying value. If the carrying value of the reporting unit is less than the fair value, no impairment exists. Otherwise, the Company would recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit.
During 2023 and 2022, the Company elected to perform a step 1 impairment analysis. Based on the analysis performed, management determined that no impairment of goodwill existed in any of the Company’s reporting units as of the testing date (October 1, 2023). Also, no triggering events or changes in circumstances occurred during the period October 1, 2023 through December 31, 2023 that warranted retesting goodwill for impairment.
Embedded Derivatives-Embedded derivatives that are required to be bifurcated from the underlying host instrument are accounted for and valued as a separate financial instrument. These embedded derivatives are bifurcated, accounted for at their estimated fair value, which is based on certain estimates and assumptions, and presented separately on the consolidated statements of financial position. Changes in fair value of the embedded derivatives are recognized as a component of other income/expense on the Company’s consolidated statements of operations (Note 16).
Foreign Currency-The Company has operations in the United States, Canada, Australia and Europe. The results of its non-U.S. dollar based functional currency operations are translated to U.S. dollars at the average exchange rates during the period. The Company’s assets and liabilities are translated using the exchange rate as of the date of the consolidated statement of financial position and equity is translated using historical rates. Adjustments resulting from the translation of the consolidated financial statements of the Company’s foreign functional currency subsidiaries into U.S. dollars are excluded from the determination of net income (loss) and instead are accumulated in a separate component of stockholders’ equity. Foreign exchange transaction gains and losses are included in selling, general and administrative expense on the consolidated statements of operations.
Accumulated Other Comprehensive Income (Loss)-Accumulated other comprehensive income (loss), as presented on the consolidated statements of redeemable convertible and redeemable series A-2 preferred stock and stockholders’ equity (deficit), consists of unrealized gains and losses on foreign currency translation. Comprehensive income (loss) is not included in the computation of income tax benefit.
Revenue Recognition-Revenue is recognized in accordance with 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 the Company’s 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 the Company’s 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 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 and estimates to complete 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.
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.
Segment Reporting-Operating segments are components of an enterprise for which discrete financial reporting information is available and evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company has identified its Chief Executive Officer as the CODM. The CODM views the Company’s operations and manages the businesses as three operating segments, which are also the Company’s reportable segments: (i) Assessment, Permitting and Response, (ii) Measurement and Analysis, and (iii) Remediation and Reuse. The CODM reviews the operating results of these segments on a regular basis and allocates company resources depending on the needs of each group and the availability of resources.
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.
Selling, General and Administrative Expense-Selling, general and administrative expenses consist of indirect costs, including management and executive compensation, corporate costs related to finance, accounting, human resources, information technology, legal, administrative, safety, professional services, rent and other general expenses.
Follow-On Offering Expense-The offering costs associated with the October 2021 follow-on offering mainly consisted of legal, accounting and filing fees. Total follow-on offering costs of $0.6 million, were deferred through the date of the follow-on offering, and then
capitalized and offset against proceeds received. Follow-on offering expenses that were determined to be non-capitalizable were expensed as incurred.
Stock-Based Compensation-The Company sponsors stock incentive plans that allow for issuance of employee stock options, restricted stock awards, restricted stock units and stock appreciation rights awards.
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.
Certain of the performance based restricted stock units will only meet the requirements for establishing a grant date when the final calculated financial performance metrics and the amount of awards have been approved by the Company’s Board of Directors, which will then trigger the service inception date, the fair value of the awards, and the associated expense recognition period.
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 the Company 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 expected dividend yield, expected term and the expected share price volatility of its common shares over the expected term. No dividend rates are used in the calculation as these are not applicable to the Company. Forfeitures are recognized as incurred. Employee options are accounted for in accordance with the guidance set forth by ASC 718, Stock Based Compensation.
The fair value of stock appreciation rights is estimated at the grant date using the geometric Brownian motion model. This process has been widely used to model stock prices and is the underpinning of the Black-Scholes option pricing model and other extensions of the Random Walk Hypothesis of stock price movements and the Efficient Market Hypothesis. The Company's current intent and ability is to settle the stock appreciation rights awards in common stock and, as such, accounts for the awards as equity classified awards.
Income Taxes- The Company accounts 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. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enacted date.
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 the Company considers all available positive and negative evidence, including 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, the Company will adjust the related valuation allowance in the period such change in circumstances occurs.
For acquired business entities, if the Company identifies 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.
The Company records uncertain tax positions on the basis of the two-step process in which (i) it determines 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 (ii) for those tax positions that meet the more-likely-than-not recognition threshold, the Company would recognize the largest amount of tax benefit that is more than 50.0% likely to be realized upon ultimate settlement with the related tax authority. The Company has determined that there are no uncertain tax positions as of December 31, 2023 and 2022. The Company classifies interest and penalties recognized on uncertain tax positions as a component of income tax expense.
3. SUMMARY OF NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements-In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. Under the new guidance (ASC 805-20-30-28), the acquirer should determine what contract assets and/or contract liabilities it would have recorded under ASC 606 (the revenue guidance) as of the acquisition date, as if the acquirer had entered
into the original contract at the same date and on the same terms as the acquiree. The new guidance was adopted as of January 1, 2023 and did not have a material impact on the Company’s consolidated financial statements; however, it may impact the accounting for future acquisitions. The future impact of this new guidance will be primarily a function of the facts and circumstances specific to any acquisitions consummated after adoption and therefore cannot be predicted.
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 London Interbank Offered Rate (“LIBOR”). In May 2023, the Company adopted the guidance when it amended certain of its agreements to transition from LIBOR to a Secured Overnight Financing Rate (“SOFR”) (Note 13). The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted-In August 2023, the FASB issued Business Combinations - Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement, under which an entity that qualifies as either a joint venture or a corporate joint venture is required to apply a new basis of accounting upon the formation of the joint venture. Specifically, the ASU provides that a joint venture or a corporate joint venture must initially measure its assets and liabilities at fair value on the formation date. The amendments in ASU 2023-05 are effective for all joint ventures within the ASU’s scope that are formed on or after January 1, 2025. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on its consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures. The amendments improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The purpose of the amendments is to enable investors to better understand an entity’s overall performance and assess potential future cash flows. The amendments in ASU 2023-07 are effective for all public entities for fiscal years beginning after December 15, 2023, and should be applied on a retrospective basis to all periods presented. Early adoption is permitted. The Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. ASU 2023-09 is effective for the Company beginning January 1, 2025 and allows the use of a prospective or retrospective approach. The Company is currently evaluating the impact of the adoption of the standard on its consolidated financial statements.
4. REVENUES AND ACCOUNTS RECEIVABLE
The Company’s main revenue sources derive from the following revenue streams:
Assessment, Permitting and Response Revenues-Assessment, Permitting and Response revenues are generated from multidisciplinary environmental consulting services. The majority of the contracts are fixed-price or time and material based.
Measurement and Analysis Revenues-Measurement and Analysis revenues are generated from emissions sampling, testing and reporting services, leak detection services, ambient air monitoring services and laboratory testing services. The majority of the contracts are fixed-price or time-and-materials based.
Remediation and Reuse Revenues-Remediation and Reuse revenues are generated from engineering, design, implementation and operating and maintenance (“O&M”) services primarily to treat contaminated water, remove contaminants from soil or create biogas from waste. Engineering, design and implementation contracts are predominantly fixed-fee and time-and-materials based. Services on the majority of O&M contracts are provided under long-term fixed-fee contracts.
Disaggregation of Revenue-The Company disaggregates revenue by its operating segments and geographic location. The Company believes disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, and uncertainty of revenue and cash flows are affected by economic factors. Disaggregated revenue disclosures are provided in Note 19, Segment Information and Geographic Location Information.
Contract Balances-The Company presents contract balances for unbilled receivables (contract assets), as well as customer advances, deposits and deferred revenue (contract liabilities) within contract assets and accounts payable and other accrued expenses, respectively, on the 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 as of December 31:
Contract assets
$
51,629
$
52,403
Contract liabilities (Note 10)
8,132
18,549
Contract assets acquired through business acquisitions amounted to $2.2 million and $1.7 million as of December 31, 2023 and 2022, respectively. Contract liabilities acquired through business acquisitions amounted to zero as of both December 31, 2023 and 2022.
Revenue recognized during the year ended December 31, 2023, included in the contract liability balance at the beginning of the year was $14.4 million. The revenue recognized from the contract liabilities consisted of the Company satisfying performance obligations during the normal course of business.
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 December 31, 2023 and 2022, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied was approximately $81.9 million and $100.4 million, respectively. As of December 31, 2023, the Company expected to recognize approximately 70.5% of this amount as revenue within a year, and the remaining 29.5% to be recognized as revenue beyond one year.
Accounts Receivable, Net-Accounts receivable, net as of December 31, consisted of the following:
Accounts receivable, invoiced
$
115,064
$
95,055
Accounts receivable, other
1,571
Allowance for doubtful accounts
(2,724
)
(1,915
)
Accounts receivable-net
$
112,360
$
94,711
The Company did not have any customers that exceeded 10.0% of its gross receivables as of December 31, 2023 and 2022. The Company had a customer who accounted for approximately 10.0%, 14.4%, and 10.0% of revenue for the years ended December 31, 2023, 2022, and 2021, respectively.
The Company performs ongoing credit evaluations and based on past collection experience; the Company believes that the receivable 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
(Recovery)
Charged to
Allowance
Other
Ending
Balance
Year ended December 31, 2023
$
1,915
$
3,142
(1)
$
(2,333
)
$
-
$
2,724
Year ended December 31, 2022
4,581
(1,097
)
(1,696
)
(2)
1,915
Year ended December 31, 2021
4,265
1,135
(1,548
)
(2)
$
4,581
(1)Amount includes $2.2 million of current expected losses on the Discontinued Specialty Lab promissory note receivable as described in Note 19.
(2)This amount consists of additions to the allowance due to business acquisitions.
5. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets as of December 31, consisted of the following:
Deposits
$
1,764
$
1,394
Prepaid expenses
8,085
5,266
Supplies
3,819
3,632
Prepaid and other current assets
$
13,668
$
10,292
6. 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, as of December 31, consisted of the following:
Estimated
Useful Life
Lab and test equipment
7 years
$
20,341
$
21,171
Vehicles
5 years
6,033
5,732
Equipment
3-7 years
50,387
40,940
Furniture and fixtures
7 years
2,963
2,841
Leasehold improvements
7 years
10,808
8,576
Aircraft
10-20 years
12,312
Building
39 years
5,748
2,975
108,592
83,166
Land
1,089
Construction in progress
3,956
3,150
Less accumulated depreciation
(56,812
)
(50,996
)
Total property and equipment-net
$
56,825
$
36,045
Total depreciation expense for property and equipment, net included on the consolidated statements of operations was $10.3 million, $7.2 million and $6.4 million for the years ended December 31, 2023, 2022, and 2021, respectively.
7. LEASES
Leases are classified as either finance or operating leases based on criteria in ASC 842. The Company has finance leases for its vehicle and equipment leases and operating leases for its real estate space and office equipment leases. The Company’s operating and finance leases generally have original lease terms between 1 year and 15 years, and in some instances include one or more options to renew. The Company includes options to extend the lease term if the options are reasonably certain of being exercised. The Company currently considers some of its renewal options to be reasonably certain to be exercised. Some leases also include early termination options, which can be exercised under specific conditions. The Company does not have material residual value guarantees or restrictive covenants associated with its leases.
Finance and operating lease assets represent the right to use an underlying asset for the lease term, and finance and operating lease liabilities represent the obligation to make lease payments arising from the lease.
The Company calculates the present value of its finance and operating leases using an estimated incremental borrowing rate (“IBR”), which requires judgment. For real estate operating leases, the Company estimates the IBR based on prevailing market rates for collateralized debt in a similar economic environment with similar payment terms and maturity dates commensurate with the terms of the lease. For all other leases, the Company estimates the IBR based on the stated interest rate on the contract. Since many of the inputs used to calculate the rate implicit in the leases are not readily determinable from the lessee’s perspective, the Company will not use the implicit interest rate.
Certain leases contain variable payments, these payments are expensed as incurred and not included in the Company’s operating lease right-of-use assets and operating lease liabilities. These amounts primarily include payments for maintenance, utilities, taxes, and insurance and are excluded from the present value of the Company’s lease obligations.
The Company does not record operating lease right-of-use assets or operating lease liabilities for leases with an initial term of 12 months or less. The Company also combines lease and non-lease components on all new or modified operating leases into a single lease component for all classes of assets.
When a lease is terminated before the expiration of the lease term, irrespective of whether the lease is classified as a finance lease or an operating lease, the lessee would derecognize the Right of Use ("ROU") asset and corresponding lease liability. Any difference would be recognized as a gain or loss related to the termination of the lease. Similarly, if a lessee is required to make any payments or receives any consideration when terminating the lease, it would include such amounts in the determination of the gain or loss upon termination.
The components of lease expense were as follows:
Year Ended December 31,
Statement of Operations Location
Operating lease cost
Lease cost
Selling, general and administrative expense
$
11,663
$
10,017
Variable lease cost
Selling, general and administrative expense
1,313
1,319
Lease termination gain-net (1)
Selling, general and administrative expense
(737
)
-
Impairment of ROU asset (2)
Other income/ expense
-
Total operating lease cost
$
12,239
$
12,061
Finance lease cost
Amortization of ROU assets
Depreciation and amortization
$
5,351
$
4,179
Interest on lease liabilities
Interest expense-net
Total finance lease cost
6,006
4,646
Total lease cost
$
18,245
$
16,707
_________________________________________________
(1) During the year ended December 31, 2023, the Company became responsible for a lease surrender liability of $8.3 million as a result of terminating one of its newly acquired businesses' lease agreements. The lease surrender fee is payable in equal installments beginning on February 28, 2024, through December 31, 2031. The present value of the current and long term portion of the surrender fee liability of $0.5 million and $5.4 million, on a discounted basis, is included in accounts payable and other accrued liabilities and other non-current liabilities, respectively, on the consolidated statements of financial position. Upon the termination of the lease, the Company wrote off the related $2.3 million and $8.9 million, ROU asset and lease liability, respectively, and recorded a gain of $0.7 million, net of the surrender fee, within selling, general and administrative expense on the consolidated statements of operations.
(2) During the year ended December 31, 2022, the Company vacated certain of its real estate space that is no longer needed for current operations. The impairment analysis on these ROU assets resulted in an impairment loss of $0.7 million.
Supplemental cash flows information related to leases was as follows:
Year Ended December 31,
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used in finance leases
$
$
Operating cash flows used in operating leases
11,931
9,662
Financing cash flows used in finance leases
5,797
3,967
Lease liabilities arising from new ROU assets
Operating leases
$
31,459
$
12,443
Finance leases
7,636
4,915
Weighted average remaining lease terms and weighted average discount rates were:
Year Ended December 31,
Operating Leases
Finance
Leases
Operating Leases
Finance
Leases
Weighted average remaining lease term (years)
4.42
3.51
4.43
3.30
Weighted average discount rate
4.16%
6.32%
2.64%
5.37%
The following is a schedule by year of the maturities of lease liabilities with original terms in excess of one year:
December 31,
Operating Leases
Finance Leases
$
11,185
$
4,582
8,692
3,502
6,560
2,866
4,556
1,865
2028 and thereafter
7,573
Total undiscounted future minimum lease payments
38,566
13,552
Less imputed interest
(3,555
)
(1,411
)
Total discounted future minimum lease payments
$
35,011
$
12,141
8. BUSINESS ACQUISITIONS
In line with the Company’s strategic growth initiatives, the Company acquired several businesses during the years ended December 31, 2023, 2022 and 2021. The results of each of those acquired businesses are included in the consolidated financial statements beginning on the respective acquisition dates. 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, external proprietary software and developed technology, the “with and without” method for covenants not to compete and the replacement cost method for the internal proprietary software by incorporating Level 3 inputs as described under the fair value hierarchy of ASC 820. These unobservable inputs reflect the Company’s own assumptions about which assumptions market participants would use in pricing an asset on a non-recurring basis. These assets will be amortized over their respective estimated useful lives.
Other purchase price obligations (primarily deferred purchase price liabilities and target working capital liabilities or receivables) are included on the 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 consolidated statements of financial position in business acquisition contingent consideration, current or in business acquisitions contingent consideration, long-term. The contingent consideration elements of the purchase price of the acquisitions are related to earn-outs which are based on the expected achievement of revenue or earnings thresholds as of the date of the acquisition and for which the maximum potential amount is limited.
The Company considers several factors when determining whether or not contingent consideration liabilities are part of the purchase price, including the following: (i) the valuation of its acquisitions is not supported solely by the initial consideration paid, (ii) the former stockholders of acquired companies that remain as key employees receive compensation other than contingent consideration payments at a reasonable level compared with the compensation of the Company’s other key employees and (iii) contingent consideration payments are not affected by employment termination. The Company reviews and assesses the estimated fair value of contingent consideration at each reporting period.
The Company may be required to make up to $7.1 million in aggregate earn-out payments between the years 2024 and 2026, of which up to $1.5 million may be paid only in cash, up to $4.5 million may be paid only in common stock and up to $1.1 million may be paid, at the Company's option, in cash or common stock.
Transaction costs related to business combinations totaled $6.9 million, $1.9 million and $2.1 million for the years ended December 31, 2023, 2022, and 2021, respectively. These costs are expensed within selling, general and administrative expense in the accompanying consolidated statements of operations.
2023 Acquisitions
Frontier Analytical Laboratories (“Frontier”) -In January 2023, the Company completed the acquisition of Frontier by acquiring certain of its assets and operations. Frontier is a specialized environmental laboratory based in El Dorado Hills, CA.
Environmental Alliance, Inc. (“EAI”)-In February 2023, the Company completed the acquisition of EAI by acquiring 100.0% of its common stock. EAI provides environmental remediation and consulting services, and is based in Wilmington, DE.
GreenPath Energy LTD (“GreenPath”) -In May 2023, the Company completed the acquisition of GreenPath by acquiring 100.0% of its common stock. GreenPath is a leading optical gas imaging and leak detection and management services firm and is based in Calgary, Canada.
Matrix Solutions, Inc. ("Matrix") -In June 2023, the Company completed the acquisition of Matrix by acquiring 100.0% of its common stock. Matrix is one of Canada’s leading environmental consulting and engineering companies and is based in Calgary, Canada.
Vandrensning ApS. ("Vandrensning") -In July 2023, the Company completed the acquisition of Vandrensning by acquiring 100.0% of its common stock. Vandrensning, based outside Copenhagen, Denmark, specializes in water treatment solutions.
The following table summarizes the elements of the purchase price of the acquisitions completed during 2023:
Cash
Common
Stock
Other
Purchase
Price
Components
Contingent
Consideration
Total
Purchase
Price
Matrix
$
46,563
$
-
$
2,019
(1)
$
-
$
48,582
All other 2023 acquisitions
22,077
2,598
1,096
26,221
Total
$
68,640
$
2,598
$
2,469
$
1,096
$
74,803
______________________________
(1) Includes $1.3 million in holdback amounts payable to the seller. Cash funds to be used for payment have been classified as restricted cash in the Company's consolidated statement of financial position.
The upfront cash payment made to acquire the acquisitions completed during 2023 was funded through cash on hand. The other purchase price components mainly consist of deferred purchase price liabilities and working capital amounts.
The preliminary purchase price attributable to the acquisitions was allocated as follows:
Matrix
(As initially reported)
Matrix Measurement Period Adjustments
Matrix (As Adjusted)
All Other 2023
Acquisitions
(As Initially Reported)
All Other 2023
Acquisitions Measurement Period Adjustments
All Other 2023
Acquisitions (As Adjusted)
Total(1)
Cash
$
1,524
$
1,524
$
1,524
$
$
-
$
$
2,453
Accounts receivable and contract assets
15,752
-
15,752
3,441
(19
)
3,422
19,174
Other current assets
2,094
(262
)
1,832
(86
)
2,185
Current assets
19,370
1,262
19,108
4,809
(105
)
4,704
23,812
Property and equipment
2,231
-
2,231
1,705
-
1,705
3,936
Operating lease right-of-use asset
14,760
(9,981
)
4,779
-
4,825
Customer relationships
-
12,781
12,781
7,741
(560
)
7,181
19,962
Trade names
-
2,151
2,151
-
2,373
Covenants not to compete
-
2,198
2,198
(121
)
2,708
Other intangible assets
-
-
-
-
Goodwill
36,118
(8,834
)
27,284
11,702
1,800
13,502
40,786
Total assets
72,479
(423
)
70,532
27,300
1,014
28,314
98,846
Current liabilities
11,267
(668
)
10,599
(20
)
11,557
Operating lease liability-net of
current portion
12,500
(2,175
)
10,325
-
10,357
Deferred tax liability
-
-
1,103
1,103
1,999
Other non-current liabilities
-
-
-
-
Total liabilities
23,897
(1,947
)
21,950
1,010
1,083
2,093
24,043
Purchase price
$
48,582
$
1,524
$
48,582
$
26,290
$
(69
)
$
26,221
$
74,803
______________________________
(1) The Company is continuing to obtain information to complete the valuation of certain of these acquisitions' assets and liabilities.
The weighted average useful lives for the 2023 acquired companies’ identifiable intangible assets are as follows:
Customer Relationships
Tradenames
Covenants Not to Compete
Proprietary Software
Matrix
2.5
n/a
GreenPath
All other 2023 acquisitions
n/a
Goodwill associated with the Frontier acquisition is deductible for income tax purposes.
Frontier and GreenPath are included in the Company’s Measurement and Analysis segment. EAI, Matrix and Vandrensning are included in the Company’s Remediation and Reuse segment.
For the acquisitions completed during the year ended December 31, 2023, the results of operations since the acquisition dates have been combined with those of the Company. The Company’s consolidated statement of operations for the year ended December 31, 2023 includes revenue and pre-tax income of $69.1 million and $8.8 million, respectively, related to these acquisitions.
2022 Acquisitions
Environmental Standards, Inc. (“Environmental Standards”)-In January 2022, the Company completed the acquisition of Environmental Standards, Inc. by acquiring 100.0% of its common stock. Environmental Standards is a provider of environmental consulting and
data validation services. Environmental Standards is based in Valley Forge, PA with satellite locations nationwide.
Industrial Automation Group, Inc. (“IAG”)-In January 2022, the Company completed the acquisition of Industrial Automation Group, Inc. by acquiring certain of its employees and a covenant not to compete. IAG provides highly specialized engineering services which are additive to the Company’s water treatment and renewable energy technology implementations. IAG is based in Atlanta, GA.
TriAD Environmental Consultants, Inc. (“TriAD”)-In August 2022, the Company completed the acquisition of TriAD Environmental Consultants, Inc. by acquiring 100.0% of its common stock. TriAD is a provider of environmental consulting services. TriAD is based in Nashville, TN.
AirKinetics, Inc. (“AirKinetics”)-In September 2022, the Company completed the acquisition of AirKinetics, Inc. by acquiring 100.0% of its common stock. AirKinetics is a provider of emissions testing services. AirKinetics is based in Anaheim, CA.
Huco Consulting, Inc. (“Huco”)-In November 2022, the Company completed the acquisition of Huco Consulting, Inc. by acquiring 100.0% of its common stock. Huco primarily specializes in the implementation of environment, health and safety software for industrial, commercial and government clients. Huco is based in Houston, TX.
The upfront cash payment made to acquire all of the 2022 acquisitions was funded through cash on hand.
The following table summarizes the elements of the original purchase price of the acquisitions completed during 2022:
Cash
Common
Stock
Other
Purchase
Price
Components
Contingent
Consideration
Total
Purchase
Price
Environmental Standards
$
14,473
$
-
$
$
1,166
$
16,183
All other 2022 acquisitions
15,271
-
1,134
(1)
1,500
17,905
Total
$
29,744
$
-
$
1,678
$
2,666
$
34,088
___________________________
(1) Amounts do not consider measurement period adjustments of $0.2 million recorded during 2023. See column "All Other 2022 Acquisitions Measurement Period Adjustments during 2023" in table below for further details.
The other purchase price components of the Environmental Standards purchase price consisted of a surplus working capital amount and other deferred liabilities. The other purchase price components of all the other acquisitions purchase price mainly consisted of working capital
amounts.
The final purchase price attributable to the 2022 acquisitions was allocated as follows:
Environmental Standards
All Other 2022 Acquisitions
(As Initially Reported)
All Other 2022 Acquisitions Measurement Period Adjustments during 2023
All Other 2022 Acquisitions
(As Adjusted)
Total
Cash
$
$
$
-
$
$
1,119
Accounts receivable and contract assets
5,200
2,646
-
2,646
7,846
Other current assets
-
Current assets
5,951
3,586
-
3,586
9,537
Property and equipment
-
Operating lease right-of-use asset-net
2,895
-
3,110
Customer relationships
5,807
5,812
-
5,812
11,619
Trade names
1,010
-
1,649
Covenants not to compete
-
Goodwill
4,131
8,412
(159
)
8,253
12,384
Total assets
20,231
19,329
(159
)
19,170
39,401
Current liabilities
1,720
1,314
-
1,314
3,034
Operating lease liability-net of
current portion
2,328
-
2,438
Total liabilities
4,048
1,424
-
1,424
5,472
Purchase price
$
16,183
$
17,905
$
(159
)
$
17,746
$
33,929
For the acquisitions completed during the year ended December 31, 2022, the results of operations since the acquisition dates have been combined with those of the Company. The Company’s consolidated statement of operations for the year ended December 31, 2022 includes revenue and pre-tax income of $20.2 million and $2.9 million, respectively, related to these acquisitions.
Environmental Standards and Huco are included in the Company’s Assessment, Permitting and Response segment, IAG and TriAD are included in the Remediation and Reuse segment and AirKinetics is included in the Measurement and Analysis segment.
The weighted average useful lives for the 2022 acquired companies’ identifiable intangible assets are as follows:
Customer Relationships
Tradenames
Covenants Not to Compete
Environmental Standards
All other 2022 acquisitions
While initially anticipating making IRC §338(h)(10) elections, with respect to various acquisitions completed during the year ended December 31, 2022, the Company later decided against such elections during 2023. Therefore, goodwill associated with the IAG acquisition is the sole 2022 transaction for which goodwill is deductible for income tax purposes.
2021 Acquisitions
MSE Group, LLC (“MSE”)-In January 2021, the Company completed the acquisition of MSE Group, LLC by acquiring 100.0% of its membership interests. MSE is a provider of environmental assessment, permitting and remediation services primarily to the U.S. federal government. MSE is based in Orlando, FL with additional offices in Tampa, Orlando, Jacksonville, San Antonio, TX, and Wilmington, NC, and satellite locations nationwide. The upfront cash payment made to acquire MSE was funded through cash on hand and the common stock portion of the purchase price was funded through the issuance of 71,740 shares of common stock.
Vista Analytical Laboratory, Inc. (“Vista”)-In June 2021, the Company completed the acquisition of Vista Analytical Laboratory, Inc. (“Vista”) by acquiring 100.0% of its common stock. Vista provides specialty analytical services related to Per- and polyfluoroalkyl substances (“PFAS”) and other semi-volatile organic compounds. Vista is based in Dorado Hills, CA. The upfront cash payment made to acquire Vista was funded through cash on hand and the common stock portion of the purchase price was funded through the issuance of 9,322 shares of common stock.
Environmental Intelligence, LLC (“EI”) -In July 2021, the Company completed the acquisition of Environmental Intelligence, LLC (“EI”) by acquiring 100.0% of its membership interests. EI provides environmental consulting services and is recognized for its innovative work
in wildlife mitigation and biological assessments. EI is based in Laguna Beach, CA and enhances Montrose’s ecological planning and service capabilities in California and the US West Coast. The upfront cash payment made to acquire EI was funded through cash on hand and the common stock portion of the purchase price was funded through the issuance of 43,100 shares of common stock.
SensibleIoT, LLC (“Sensible”) -In August 2021, the Company completed the business acquisition of SensibleIoT, LLC (“Sensible”) by acquiring 100.0% of its membership interests. Sensible is a technology platform that connects sensors and sources of environment data to a central, proprietary database that enables real-time client interaction. Sensible provides Montrose with an advanced ability to integrate environmental services and enhance environmental data analytics for clients. The upfront cash payment made to acquire Sensible was funded through cash on hand and the common stock portion of the purchase price was funded through the issuance of 19,638 shares of common stock.
Environmental Chemistry, Inc. (“ECI”) -In October 2021, the Company completed the business acquisition of Environmental Chemistry, Inc. (“ECI”) by acquiring 100.0% of its common stock. ECI provides a full suite of environmental laboratory analytical services to industrial, governmental, and engineering/consulting clients. Combined with the Company’s existing Houston, TX laboratory, ECI (located also in Houston, TX) will enable Montrose to provide air, water and soil analytical services in the gulf coast region. The upfront cash payment made to acquire ECI was funded through cash on hand.
Horizon Water and Environment, LLC (“Horizon”)- In November 2021, the Company completed the business acquisition of Horizon Water and Environment, LLC (“Horizon”) by acquiring 100.0% of its membership interests. Horizon is an environmental consulting firm specializing in planning, watershed science, and environmental compliance for water and natural resource projects. The upfront cash payment made to acquire Horizon was funded through cash on hand and the common stock portion of the purchase price was funded through the issuance of 34,921 shares of common stock.
The following table summarizes the elements of the final purchase price of the acquisitions completed during 2021:
Cash
Common
Stock
Other
Purchase
Price
Components
Contingent
Consideration
Total
Purchase
Price
MSE
$
9,082
$
2,271
$
10,701
$
1,804
$
23,858
EI
20,721
2,274
(63
)
-
22,932
All other 2021 acquisitions
29,683
3,775
1,228
5,600
40,286
Total
$
59,486
$
8,320
$
11,866
$
7,404
$
87,076
The other purchase price components of the MSE purchase price consisted of a surplus working capital amount, a seller make-whole for taxes related to a 338(h)(10) election, an integration payment liability and a purchase price true up related to MSE’s financial performance in the fourth quarter of 2020. The other purchase price components of the EI purchase price consisted of a surplus working capital amount. The other
purchase price components of all the other acquisitions purchase price mainly consisted of working capital amounts and 338(h)(10) election liabilities.
The final purchase price attributable to the 2021 acquisitions was allocated as follows:
MSE
EI
All Other 2021 Acquisitions
Total
Cash
$
2,810
$
$
$
3,753
Accounts receivable and contract
assets
2,980
4,675
4,133
11,788
Other current assets
Current assets
5,821
5,009
5,115
15,945
Property and equipment
1,168
1,713
Operating lease right-of-use asset-net
2,233
3,079
Customer relationships
8,720
10,073
12,830
31,623
Trade names
1,958
3,475
Covenants not to compete
1,248
2,681
Acquired technology
-
-
Goodwill
8,176
8,960
19,569
36,705
Total assets
25,413
25,687
44,442
95,542
Current liabilities
1,007
2,719
2,351
6,077
Operating lease liability-net of
current portion
1,805
2,389
Total liabilities
1,555
2,755
4,156
8,466
Purchase price
$
23,858
$
22,932
$
40,286
$
87,076
For the acquisitions completed during the year ended December 31, 2021, the results of operations since the acquisition dates have been combined with those of the Company. The Company’s consolidated statement of operations for the year ended December 31, 2021 includes revenue and pre-tax income of $33.7 million and $0.8 million, respectively, related to these acquisitions.
MSE is included in the Company’s Remediation and Reuse segment, Vista, Sensible and ECI are included in the Company’s Measurement and Analysis segment and EI and Horizon are included the Company’s Assessment, Permitting and Response segment.
The weighted average useful lives for the acquired companies’ identifiable intangible assets are as follows:
Customer Relationships
Tradenames
Covenants
Not to Compete
Developed Technology
MSE
2-7
n/a
EI
n/a
All other 2021 acquisitions
n/a-3
n/a-5
n/a-5
Goodwill associated with all of these acquisitions was deductible for income tax purposes.
Supplemental Unaudited Pro-Forma-The unaudited consolidated financial information summarized in the following table gives effect to the 2023, 2022, and 2021 acquisitions assuming they occurred on January 1, 2021. These unaudited consolidated pro forma operating results include results from certain acquired companies that have not been audited and whose accounting policies prior to acquisition may differ from those of the Company. As a result, these unaudited consolidated pro forma operating results may not be comparable to revenues and earnings had these consolidated pro forma results been audited and consistent accounting policies applied. These unaudited consolidated pro forma operating results do not assume any impact from revenue, cost or other operating synergies that are expected or may have been realized as a result of the acquisitions. These unaudited consolidated pro forma operating results are presented for illustrative purposes only and are not indicative of the
operating results that would have been achieved had the acquisitions occurred on January 1, 2021, nor does the information project results for any future period.
As reported
Acquisitions
Pro-Forma
(Unaudited)
Consolidated
Pro-Forma
(Unaudited)
Revenues
$
624,208
$
25,852
$
650,060
Net (loss) income
(30,859
)
(30,050
)
Revenues
$
544,416
$
93,357
$
637,773
Net (loss) income
(31,819
)
5,535
(26,284
)
Revenues
$
546,413
$
128,466
$
674,879
Net (loss) income
(25,325
)
11,457
(13,868
)
9. GOODWILL AND INTANGIBLE ASSETS
Amounts related to goodwill as of December 31, are as follows:
Assessment,
Permitting and
Response
Measurements
and
Analysis
Remediation
and
Reuse
Total
Balance as of December 31, 2022
$
185,116
$
86,205
$
52,547
$
323,868
Goodwill acquired during the year
-
7,691
33,095
40,786
Prior year acquisitions measurement period adjustments (Note 8)
(170
)
(6
)
(159
)
Foreign currency translation impact
-
-
(46
)
(46
)
Balance as of December 31, 2023
$
184,946
$
93,890
$
85,613
$
364,449
Amounts related to finite-lived intangible assets as of December 31, are as follows:
Estimated
Useful Life
Gross
Balance
Accumulated
Amortization
Total
Intangible
Assets-Net
Finite lived intangible assets
Customer relationships
2-15 years
$
227,986
$
116,226
$
111,760
Covenants not to compete
4-5 years
36,250
30,889
5,361
Trade names
1-5 years
24,434
20,719
3,714
Proprietary software
3-5 years
26,486
19,309
7,177
Patent
16 years
17,479
4,678
12,801
Total other intangible assets-net
$
332,635
$
191,821
$
140,813
Estimated
Useful Life
Gross
Balance
Accumulated
Amortization
Total
Intangible
Assets-Net
Finite lived intangible assets
Customer relationships
2-15 years
$
208,024
$
95,768
$
112,256
Covenants not to compete
4-5 years
33,542
28,280
5,262
Trade names
1-5 years
22,061
18,256
3,805
Proprietary software
3-5 years
22,698
15,810
6,888
Patent
16 years
17,479
3,583
13,896
Total other intangible assets-net
$
303,804
$
161,697
$
142,107
Intangible assets with finite lives are stated at cost, less accumulated amortization and impairment losses, if any. These intangible assets are amortized using the straight-line method over the estimated useful lives of the assets.
Amortization expense for the years ended December 31, 2023, 2022, and 2021 was $30.1 million, $36.1 million and $35.2 million, respectively.
Future amortization expense is estimated to be as follows for each of the five following years and thereafter ending December 31:
28,119
20,815
16,266
15,597
12,795
Thereafter
47,221
Total
$
140,813
10. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Accounts payable and other accrued liabilities consisted of the following as of December 31:
Accounts payable
$
31,053
$
25,353
Accrued expenses
16,059
14,754
Other business acquisitions purchase price
obligations
1,022
1,185
Contract liabilities
8,132
18,549
Other current liabilities
3,654
3,571
Total accounts payable and other accrued liabilities
$
59,920
$
63,412
11. ACCRUED PAYROLL AND BENEFITS
Accrued payroll and benefits consisted of the following as of December 31:
Accrued bonuses
$
18,453
$
8,624
Accrued paid time off
1,316
1,088
Accrued payroll
11,814
8,410
Accrued other
3,077
2,406
Total accrued payroll and benefits
$
34,660
$
20,528
12. INCOME TAXES
The following is a geographical breakdown of income before the provision for (loss) income taxes as of December 31:
Pre-tax loss:
Federal
$
(35,111
)
$
(27,991
)
$
(24,574
)
Foreign
3,272
(1,578
)
Total
(31,839
)
(29,569
)
(23,616
)
Income tax (benefit) expense for the years ended December 31, is comprised of the following:
Current:
Federal
$
-
$
-
$
(49
)
State
1,840
Foreign
(1,131
)
Total
Deferred:
Federal
(438
)
State
(960
)
1,726
Foreign
(291
)
(715
)
-
Total
(1,689
)
1,528
1,192
Income tax (benefit) expense
$
(980
)
$
2,250
$
1,709
The Company’s deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities as of December 31, are as follows:
Deferred tax assets:
Net operating losses
$
14,200
$
15,641
Allowance for bad debts
Employee related
12,626
5,655
Contingent consideration
10,294
9,755
ROU assets
11,529
10,526
Transaction costs
2,347
-
Other
6,883
6,526
Total deferred tax asset
58,575
48,655
Deferred tax liabilities:
Intangible assets
(15,005
)
(6,070
)
Property and equipment
(11,086
)
(5,785
)
Lease liabilities
(11,140
)
(10,033
)
Interest rate swap
(900
)
(1,739
)
Section 481A adjustment
(1,538
)
-
Other
(941
)
(218
)
Total deferred tax liability
(40,610
)
(23,845
)
Valuation allowance
(24,029
)
(30,552
)
Net deferred tax liability
$
(6,064
)
$
(5,742
)
A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate for the years ended December 31, is as follows:
Tax completed at federal statutory rate
21.00
%
21.00
%
21.00
%
State tax net of federal benefit
(9.12
)
2.42
15.41
Non-deductible expenses
(2.24
)
(0.34
)
(0.47
)
Equity compensation
(1.71
)
(16.95
)
31.95
Embedded derivatives
4.47
(1.90
)
(1.97
)
Transaction costs
4.47
-
-
Foreign taxes
0.97
0.05
(0.06
)
Federal deferred tax adjustment
(30.42
)
-
6.41
Change in valuation allowance
19.23
(12.13
)
(80.26
)
GILTI
(3.39
)
-
-
Other
0.07
0.18
0.67
Effective income tax rate
3.33
%
(7.67
)
%
(7.32
)
%
The Company elected to account for the global intangible low-taxed income inclusion as a period cost.
The Company recorded a valuation allowance against its US, Australia and Sweden net deferred tax assets as realization of such assets is not more likely than not. The impact of indefinite lived deferred items was considered in recording such valuation allowance. The (decrease) increase in the Company’s valuation allowance was $(6.5) million and $3.6 million during the year ended December 31, 2023 and 2022, respectively.
The Company’s policy is to record any penalties or interest related to any unrecognized tax benefits as a component of the income tax provision. As of December 31, 2023, 2022, and 2021, the Company does not have any unrecognized tax benefits.
The Company makes IRC Section 338 elections, to treat certain stock transactions as asset acquisitions. The Company makes such determination after a transaction has occurred and records preliminary anticipated ASC 740 impacts. Once finalized, any changes in anticipated treatment are accounted for upon filing of income tax returns and prior to relevant statutory deadlines (Note 8).
As of December 31, 2023, federal and state net operating loss carryforwards of approximately $54.5 million and $69.8 million are available to offset future federal and state taxable income, respectively.
Federal net operating loss carryforwards will begin to expire during 2036 while the Company’s state net operating loss carryforwards will begin to expire during various years, dependent on the jurisdiction. Federal net operating losses generated beginning in 2018 are carried forward indefinitely. Therefore, $51.5 million of Federal net operating loss carryforwards will not expire.
The Company is subject to audit by federal and state tax authorities in the ordinary course of business. The Company’s federal income tax returns remain subject to examination for the 2015 through 2023 tax years. The Company files in multiple state jurisdictions which remain subject to examination for various years depending on such state jurisdiction. The Company is also subject to audit by tax authorities in Canada, Australia, Germany, Sweden, and Denmark for which returns are subject to examination for various years, dependent on the jurisdiction.
The Organization for Economic Co-operation and Development (“OECD”) has introduced a framework to implement a global minimum corporate tax of 15%, referred to as Pillar Two. Many aspects of Pillar Two will be effective beginning in calendar year 2024 and other aspects will be effective beginning in calendar year 2025. While it is uncertain whether the U.S. will adopt Pillar Two, certain countries in which the Company operates have adopted legislation and other countries are in the process of introducing legislation to implement Pillar Two. While the Company does not expect Pillar Two to have a material impact on its effective tax rate, the Company's analysis is ongoing as the OECD releases additional guidance and countries implement additional legislation.
The Inflation Reduction Act (“IRA”) was signed into law on August 16, 2022. Among other provisions, the IRA includes a 15% corporate minimum tax applied to large corporations, known as the “CAMT”. The CAMT does not impact the Consolidated Financial Statements for 2023. The Company will continue to evaluate the impact of CAMT on future years.
The Tax Cuts and Jobs Act of 2017, enacted tax provisions, that became effective during the taxable year ended December 31, 2022, requiring companies compute adjusted taxable income for IRC §163(j) purposes with the inclusion of depreciation and amortization deductions, making such limitation less taxpayer favorable. The Company adopted such provisions and recorded a corresponding deferred tax asset during the year ended December 31, 2022.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted. The CARES Act includes several significant provisions for corporations, including those pertaining to net operating losses, interest deductions and payroll tax benefits. Under ASC 740, the effects of new legislation are recognized upon enactment. Accordingly, the effects of the CARES Act have been incorporated into the income tax provision computation for the year ended December 31, 2020. These provisions did not have a material impact on the income tax provision. The Company deferred the employer side social security payments for payroll paid for the portion of 2020 following enactment as permitted by the CARES Act. In total, the Company deferred approximately $5.0 million of 2020 payments to 2021 and 2022, of which $2.5 million was repaid in 2021 and the remaining amount was paid in 2022.
13. DEBT
Debt as of December 31, consisted of the following:
Term loan facility
$
154,219
$
166,250
Revolving line of credit
-
-
Aircraft loan
10,344
-
Less deferred debt issuance costs
(1,379
)
(1,725
)
Total debt
163,184
164,525
Less current portion of long-term debt
(14,196
)
(12,031
)
Long-term debt, less current portion
$
148,988
$
152,494
Deferred Financing Costs-Costs relating to debt issuance have been deferred and are presented as discounted against the underlying debt instrument. These costs are amortized to interest expense over the terms of the underlying debt instruments.
2021 Credit Facility-On April 27, 2021, the Company entered into a new Senior Secured Credit Agreement providing for a $300.0 million credit facility comprised of a $175.0 million term loan and a $125.0 million revolving line of credit (the “2021 Credit Facility”), and used a portion of the proceeds from the 2021 Credit Facility to repay all amounts outstanding under the 2020 Credit Facility (as defined below). The
2021 revolving credit facility includes a $20.0 million sublimit for the issuance of letters of credit. Subject to certain exceptions, all amounts under the 2021 Credit Facility will become due on April 27, 2026. The Company has the option to borrow incremental term loans or request an increase in the aggregate commitments under the revolving credit facility up to an aggregate amount of $150.0 million subject to the satisfaction of certain conditions.
The 2021 Credit Facility term loan must be repaid in quarterly installments and shall amortize at the following future quarterly rates:
Date
Quarterly Installment Rate
March 31, 2024
1.88%
June 30, 2024
1.88%
September 30, 2024
1.88%
December 31, 2024
1.88%
March 31, 2025
1.88%
June 30, 2025
1.88%
September 30, 2025
1.88%
December 31, 2025
2.50%
March 31, 2026
2.50%
April 27, 2026
Remaining balance
Repayments of quarterly installments were scheduled to begin with the quarter ended December 31, 2021. The first quarterly installment repayment, amounting to $2.2 million, was paid in January 2022. Exclusive of the payment made in respect of the quarter ended December 31, 2021, the quarterly installment repayments for the year ended December 31, 2022 amounted to $6.6 million. The December 31, 2022 installment repayment, amounting to $2.2 million, was paid in January 2023. Exclusive of the payment made in respect of the quarter ended December 31, 2022, the quarterly installment repayments for the year ended December 31, 2023, amounted to $9.8 million.
On May 31, 2023, the Company amended its 2021 Credit Facility agreement to transition the reference rate from LIBOR to SOFR plus 0.10%. The transition to SOFR did not materially impact the interest rate paid by the Company or change any material terms of the 2021 Credit Facility.
The 2021 Credit Facility term loan and the revolver bear interest subject to the applicable spread based on the Company’s leverage ratio and SOFR plus 0.10% as follows:
Pricing Tier
Consolidated Leverage
Ratio
Senior Credit Facilities
SOFR Spread
Senior Credit Facilities
Base Rate Spread
Commitment
Fee
Letter of
Credit Fee
≥ 3.75x to 1.0
2.50
%
1.50
%
0.25
%
2.50
%
<3.75x to 1.0 but ≥ 3.25 to 1.0
2.25
1.25
0.23
2.25
<3.25x to 1.0 but ≥ 2.50 to 1.0
2.00
1.00
0.20
2.00
<2.50x to 1.0 but ≥ 1.75 to 1.0
1.75
0.75
0.15
1.75
<1.75x to 1.0
1.50
0.50
0.15
1.50
On May 30, 2023, the Company amended the interest rate swap transaction it entered into on January 27, 2022 (the "2022 Interest Rate Swap"), to convert the floating component of the interest rate on $100.0 million of borrowings to 1-Month Term SOFR and a new coupon of 1.319% until January 27, 2025. Prior to the amendment, the floating component of the interest rate was subject to LIBOR and a coupon of 1.39%. The transition to SOFR did not materially impact the interest rate paid by the Company or change any material terms of the 2022 Interest Rate Swap.
Further, on May 30, 2023, the Company entered into a second interest rate swap transaction fixing the floating component of the interest rate on an additional $70.0 million of borrowings to 1-Month Term SOFR and a coupon of 3.88% until April 27, 2026.
Additionally, effective September 1, 2022, the Company received an interest rate reduction of 0.05% under the 2021 Credit Facility based on the Company’s achievement of certain sustainability and environmental, social and governance related objectives as provided for in the 2021 Credit Facility. Effective September 1, 2023, the interest rate reduction was decreased to 0.025% based on the most recent annual assessment of the Company’s achievement of these objectives.
The 2021 Credit Facility includes a number of covenants imposing certain restrictions on the Company’s business, including, among other things, restrictions on the Company’s ability, subject to certain exceptions and baskets, to incur indebtedness, incur liens on its assets, agree to any additional negative pledges, pay dividends or repurchase stock, limit the ability of its subsidiaries to pay dividends or distribute assets, make investments, enter into any transaction of merger or consolidation, liquidate, wind-up or dissolve, or convey any part of its business, assets or property, or acquire the business, property or assets of another person, enter into sale and leaseback transactions, enter into certain transactions
with affiliates, engage in any material line of business substantially different from those engaged on the closing date, modify the terms of indebtedness subordinated to the loans incurred under the 2021 Credit Facility and modify the terms of its organizational documents. The 2021 Credit Facility also includes financial covenants which required the Company to remain below a maximum total net leverage ratio of 4.25 times until the fiscal quarter ended September 31, 2022, which stepped down to 4.00 times during the fiscal quarter ending December 31, 2022 through and including the fiscal quarter ending September 30, 2023 and then further stepping down to 3.75 times beginning with the fiscal quarter ending December 31, 2023, and a minimum fixed charge coverage ratio of 1.25 times. As of December 31, 2023 and 2022, the Company’s consolidated total leverage ratio was 1.9 times and 1.3 times, respectively, and the Company was in compliance with all covenants under the 2021 Credit Facility.
The 2021 Credit Facility requires customary mandatory prepayments of the term loan and revolver and cash collateralization of letters of credit, subject to customary exceptions, including 100.0% of the proceeds of debt not permitted by the 2021 Credit Facility, 100.0% of the proceeds of certain dispositions, subject to customary reinvestment rights, where applicable, and 100.0% of insurance or condemnation proceeds, subject to customary reinvestment rights, where applicable. The 2021 Credit Facility also includes customary events of default and related acceleration and termination rights.
The weighted average interest rate on the 2021 Credit Facility for the years ended December 31, 2023 and 2022 was 6.7% and 3.5%, respectively.
The Company’s obligations under the 2021 Credit Facility are guaranteed by certain of the Company’s existing and future direct and indirect subsidiaries, and such obligations are secured by substantially all of the Company’s assets, including the capital stock or other equity interests in those subsidiaries.
2020 Credit Facility- The Company's Unitranche Credit Agreement (the “2020 Credit Facility”), which was paid in full in April 2021 via proceeds from the issuance of the 2021 Credit Facility, consisted of a $175.0 million term loan and a $50.0 million revolving credit facility. The resulting loss on extinguishment upon repayment of the 2020 Credit Facility amounted to $4.1 million, of which $1.0 million was related to fees paid and $3.1 related to unamortized debt issuance costs. Total loss on extinguishment is recorded in interest expense-net within the consolidated statement of operations for the year ended December 31, 2021.
Loan and Aircraft Security Agreement-On May 18, 2023, the Company entered into a Loan and Aircraft Security Agreement to finance $10.9 million of the purchase a new aircraft (the "Aircraft Loan"). The Aircraft Loan must be repaid in 60 monthly consecutive installments and all outstanding amounts will become due on May 18, 2028. The Aircraft Loan bears interest subject to 1-Month Term SOFR and a coupon of 1.86%. The entire principal balance may be prepaid in full subject to a 3.0%, 2.0% and 1.0% prepayment fee if paid prior to the first, second and third anniversary of the loan, respectively. The aircraft serves as collateral security for the Aircraft Loan.
Equipment Line of Credit-The Company has a $5.0 million equipment leasing facility for the purchase of equipment and related freight, installation costs and taxes paid. Any unused capacity on this equipment leasing facility expires on March 31, 2024. Interest on the line of credit is determined based on a three-year swap rate at the time of funding. Equipment leased through this line of credit met the finance lease criteria as per ASC 842 and accordingly is accounted for as finance lease right-of-use assets and finance lease liabilities (Note 6).
The following is a schedule of the aggregate annual maturities of long-term debt presented on the consolidated statement of financial position, gross of deferred debt issuance cost of $1.4 million, based on the terms of the 2021 Credit Facility and the Aircraft Loan:
December 31,
2021 Credit Facility
Aircraft Loan
Total
$
13,125
$
1,071
$
14,196
14,219
1,149
15,368
126,875
1,230
128,105
-
1,318
1,318
-
5,576
5,576
Total
$
154,219
$
10,344
$
164,563
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, the following financial assets and liabilities are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
Interest rate swap(1)
$
3,461
$
6,046
Total assets
$
3,461
$
6,046
Business acquisitions contingent consideration,
current
$
3,592
$
3,801
Business acquisitions contingent consideration,
long-term
2,448
4,454
Conversion option
19,017
25,731
Total liabilities
$
25,057
$
33,986
_____________________________
(1) Included in other assets in the consolidated statement of financial position.
The estimated fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.
The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis:
Level 3
Interest
Rate
Swap
Total
Assets
Business
Acquisitions
Contingent
Consideration,
Current
Business
Acquisitions
Contingent
Consideration,
Long-term
Conversion Option
Total
Liabilities
Balance-at January 1, 2021
$
-
$
-
$
49,902
$
4,565
$
20,886
$
75,353
Acquisitions
-
-
2,801
4,603
-
7,404
Series A-2 compound embedded option
-
-
-
-
2,195
2,195
Changes in fair value included in
earnings
-
-
14,111
10,261
-
24,372
Payment of contingent consideration
payable
-
-
(50,443
)
-
-
(50,443
)
Reclass of long term to short term
contingent liabilities
-
-
15,079
(15,079
)
-
-
Balance-at December 31, 2021
$
-
$
-
$
31,450
$
4,350
$
23,081
$
58,881
Acquisitions
-
-
-
2,666
-
2,666
Changes in fair value included in
earnings
6,046
6,046
(196
)
2,650
2,954
Payment of contingent consideration
payable
-
-
(30,515
)
-
-
(30,515
)
Reclass of long term to short term
contingent liabilities
-
-
2,366
(2,366
)
-
-
Balance-at December 31, 2022
$
6,046
$
6,046
$
3,801
$
4,454
$
25,731
$
33,986
Acquisitions
-
-
-
1,127
Changes in fair value included in
earnings
(2,585
)
(2,585
)
(174
)
(22
)
(6,714
)
(6,910
)
Payment of contingent consideration
payable
-
-
(3,146
)
-
-
(3,146
)
Reclass of long term to short term
contingent liabilities
-
-
2,714
(2,714
)
-
-
Balance-at December 31, 2023
$
3,461
$
3,461
$
3,592
$
2,448
$
19,017
$
25,057
Quantitative Information about Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3):
Interest Rate Swaps-The interest rate swaps fair value is estimated based on a mid-market price for the swap as of the close of business of the reporting period. The fair value is prepared by discounting future cash flows of the swaps to arrive at a current value of the swap. Forward curves and volatility levels inputs are determined on the basis of observable market inputs when available and on the basis of estimates when
observable market inputs are not available. The Company does not apply hedge accounting but instead recognizes the instrument at fair value on the consolidated statement of financial position within other assets, with changes in fair value recognized as other income (expense) in each reporting period.
Business Acquisitions Contingent Consideration-The fair value of the contingent consideration payable associated with the acquisition of CTEH and MSE was determined using a Monte Carlo simulation of earnings in a risk-neutral Geometric Brownian Motion framework. The fair value of the contingent consideration payable associated with the acquisition of Environmental Standards was determined using a Probabilistic (Scenario Based) method. The fair values of the contingent consideration payables for the other acquisitions, including Sensible, were calculated based on expected target achievement amounts, which are measured quarterly and then subsequently adjusted to actuals at the target measurement date. Prior to the second quarter of 2023, the fair value of the contingent consideration payable associated with the acquisition of Sensible was determined using a Monte Carlo simulation of earnings in a risk-neutral Geometric Brownian Motion framework. As of December 31, 2023, the Sensible earnout is expected to be achieved in full and therefore, the entire payable has been recorded. The method used to price these liabilities is considered level 3 due to the subjective nature of the unobservable inputs used to determine the fair value. The input is the expected achievement of earn-out thresholds.
Conversion Option-The fair value of the conversion option associated with the issuance of the Convertible and Redeemable Series A-2 Preferred Stock (Note 16) was estimated using a “with-and-without” method. The “with-and-without” methodology considers the value of the security on an as-is basis and then without the embedded conversion premium. The difference between the two scenarios is the implied fair value of the embedded derivative. The unobservable input is the required rate of return on the Series A-2. The considerable quantifiable inputs in the valuation relate to the timing of conversions or redemptions.
15. COMMITMENTS AND CONTINGENCIES
Leases-The Company leases office facilities over various terms expiring through 2031. Certain of these operating leases contain rent escalation clauses. The Company also has office equipment leases that expire through 2028 (Note 7).
Other Commitments-The Company has commitments under the 2021 Credit Facility, its Aircraft Loan, its equipment line of credit and its lease obligations (Notes 7 and 13).
Contingencies-The Company is subject to purchase price contingencies related to earn-outs associated with certain acquisitions (Note 8 and 14).
Legal-In the normal course of business, the Company is at times subject to pending and threatened legal actions. In management’s opinion, any potential loss resulting from the resolution of these matters is not expected to have a material effect on the consolidated results of operations, financial position or cash flows of the Company.
16. CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK
On April 13, 2020, the Company entered into an agreement to issue 17,500 shares of the Convertible and Redeemable Series A-2 Preferred Stock with a par value of $0.0001 per share and a detachable warrant to purchase shares of the Company’s common stock with a 10-year life, in exchange for gross proceeds of $175.0 million, net of $1.3 million debt issuance costs. The Convertible and Redeemable Series A-2 Preferred Stock warrants were exercised in full on July 30, 2020. Dividends on the Convertible and Redeemable Series A-2 Preferred Stock accrued through the date of the Company’s IPO on July 23, 2020, and were added to the principal balance outstanding as of that date. All dividends on the Convertible and Redeemable Series A-2 Preferred Stock after that date have been paid in cash. The Company paid dividends of $16.4 million during all the years ended December 31, 2023, 2022 and 2021. The principal balance outstanding as of December 31, 2023, is $182.2 million.
The Convertible and Redeemable Series A-2 Preferred Stock terms include the following: (i) no mandatory redemption, (ii) no stated value cash repayment obligation other than in the event of certain defined liquidation events, (iii) only redeemable at the Company’s option, (iv) convertible into common stock beginning in April 2024 at a 15.0% discount to the common stock market price (with a limit of $60.0 million in stated value of Convertible and Redeemable Series A-2 Preferred Stock eligible to be converted in any 60-day period prior to the seventh anniversary of issuance and the amount of stated value of the Convertible and Redeemable Series A-2 Preferred Stock eligible for conversion limited to $60.0 million during year 5 and $120.0 million (which includes the aggregate amount of the stated value of the Convertible and Redeemable Series A-2 Preferred Stock and any accrued but unpaid dividends added to such stated value of any shares of Convertible and Redeemable Series A-2 Preferred Stock converted in year 5) during year 6), (v) 9.0% dividend rate per year with required quarterly cash payments, (vi) in an event of noncompliance, the dividend rate shall increase to 12.0% per annum for the first 90-day period from and including
the date the noncompliance event occurred, and thereafter shall increase to 14.0% per annum, (vii) debt incurrence test ratio of 4.5 times, and (viii) minimum repayment amount of $25.0 million.
The Company may, at its option on any one or more dates, redeem all or a minimum portion (the lesser of (i) $25.0 million in aggregate stated value of the Convertible and Redeemable Series A-2 Preferred Stock and (ii) all of the Convertible and Redeemable Series A-2 Preferred Stock then outstanding) of the outstanding Convertible and Redeemable Series A-2 Preferred Stock in cash.
The Convertible and Redeemable Series A-2 Preferred Stock does not meet the definition of a liability pursuant to “ASC 480- Distinguishing Liabilities from Equity.” However, as (i) the instrument is redeemable upon a change of control as defined in the certificate of designations governing the terms of the Convertible and Redeemable Series A-2 Preferred Stock, and (ii) the Company cannot assert it would have sufficient authorized and unissued shares of common stock to settle all future conversion requests due to the variable conversion terms, the instrument is redeemable upon the occurrence of events that are not solely within the control of the Company, and therefore the Company classifies the Convertible and Redeemable Series A-2 Preferred Stock as mezzanine equity. Subsequent adjustment of the carrying value of the instrument is required if the instrument is probable of becoming redeemable. As of December 31, 2023, the Company has determined that a change of control is not probable. Additionally, as of December 31, 2023, the Company has determined that it is not probable that there will be a future conversion request that the Company is unable to settle with authorized and issued shares based on the Company’s current stock price and available shares as well as the Company’s monitoring efforts to ensure there are a sufficient number of shares available to settle any conversion request. Therefore, as of December 31, 2023, the Company has determined that the instrument is not probable of becoming redeemable, and does not believe subsequent adjustment of the carrying value of the instrument will be necessary.
The Convertible and Redeemable Series A-2 Preferred Stock contains a conversion option of the preferred shares to shares of common stock beginning in April 2024. As of December 31, 2023 and 2022, this conversion embedded feature had a net fair value of $19.0 million and $25.7 million, respectively. The change in net fair value of $6.7 million, $2.7 million and $2.2 million for the years ended December 31, 2023, 2022 and 2021, respectively, was recorded to other income (expense).
17. STOCKHOLDERS’ EQUITY
Authorized Capital Stock-The Company was authorized to issue 190,000,000 shares of common stock, with a par value of $0.000004 per share as of December 31, 2023 and 2022.
Warrants- In May 2015, the Company issued warrants to acquire 116,350 shares of Common Stock at a price of approximately $17.19 per share to the placement agent as consideration for backstopping the financing completed in May 2015. These warrants were exercised in full as a cashless transaction during the first quarter of 2021. As a result of this cashless transaction, the resulting number of shares issued was 67,713 shares.
Common Stock Issuances-During the years ended December 31, the Company issued the following shares of common stock:
Shares
Average
Price
per Share
Total
Shares
Average
Price
per Share
Total
Shares
Average
Price
per Share
Total
Common stock issued
in connection
with follow-on
offering
-
$
-
$
-
-
$
-
-
2,875,000
$
59.05
$
169,783
Acquisitions
86,577
30.01
2,598
-
-
-
178,721
46.55
8,320
Exercise of warrants (1)
-
-
-
-
-
-
67,713
17.19
-
Exercise of options
239,358
19.59
4,690
101,340
16.21
1,643
959,890
7.54
7,237
Restricted shares, net (1)
90,815
36.77
-
25,532
66.30
-
42,263
30.69
-
Payment of earn-out
liability and purchase
price true up
26,688
37.47
1,000
-
-
-
563,807
46.26
26,084
Total
443,438
$
26.22
$
8,288
126,872
$
26.29
$
1,643
4,687,394
$
45.63
$
211,424
___________________________
(1) Represents the non-cash release of shares of common stock due to the exercise of warrants and the vesting of restricted stock.
Employee Equity Incentive Plans-The Company has two plans under which stock-based awards have been issued: (i) the Montrose 2017 Stock Incentive Plan (“2017 Plan”) and (ii) the Montrose Amended & Restated 2013 Stock Option Plan (“2013 Plan”) (collectively the “Plans”).
As of December 31, 2023, there was $122.8 million of total unrecognized stock compensation expense related to unvested options, restricted stock and stock appreciation rights granted under the Plans. Such unrecognized expense is expected to be recognized over a weighted-average three year period. The following number of shares were authorized to be issued and available for grant as of December 31:
2017 Plan
Shares authorized to be issued
6,330,713
5,140,112
3,944,750
Shares available for grant(1)
662,662
367,243
23,153
2013 Plan
Shares authorized to be issued
2,036,219
2,037,019
2,047,269
Shares available for grant
-
-
-
_______________________
(1) In January 2023 and January 2022 the Board of Directors ratified the addition of 1,189,801 and 1,185,112 shares of common stock, respectively, to the number of shares available for issuance under the 2017 Plan pursuant to the annual increase provision of such plan. Unless the Board of Directors determines otherwise, additional annual increases will be effective on each January 1, through January 1, 2027. The 2017 Plan permits the company to settle awards, if and when vested, in cash at its discretion. Pursuant to the terms of the 2017 Plan, the number of shares authorized for issuance thereunder will only be reduced with respect to shares of common stock actually issued upon exercise or settlement of an award. Shares of common stock subject to awards that have been canceled, expired, forfeited or otherwise not issued under an award and shares of common stock subject to awards settled in cash do not count as shares of common stock issued under the 2017 Plan. The Company expects to have sufficient shares available under the 2017 Plan to satisfy the future settlement of outstanding awards. Shares reserved for future issuance include 3,000,000 shares underlying the 3,000,000 performance stock appreciation rights granted in December 2021 that are subject to vesting based on the achievement of certain market conditions. Assuming achievement at the highest price performance hurdle, approximately 2,000,000 shares of common stock would be issued upon vesting of these performance SARs. To date, none of the market conditions have been achieved. Shares available for grant exclude these awards of stock appreciation rights approved in December 2021 that are subject to vesting based on the achievement of certain market conditions. To date, none of the market conditions, have been, and they may not be, achieved. See footnote 1 to the table in Common Stock Reserved for Future Issuance below for additional information on stock appreciation rights.
Total stock compensation expense for the Plans was as follows:
2017 plan
2013 plan
Options
Restricted Stock
SARs
Options
Total
Cost of revenue
$
1,685
$
1,661
$
-
$
-
$
3,346
Selling, general and administrative expense
4,885
29,851
9,185
-
43,921
Total
$
6,570
$
31,512
$
9,185
$
-
$
47,267
2017 plan
2013 plan
Options
Restricted Stock
SARs
Options
Total
Cost of revenue
$
1,507
$
-
$
-
$
-
$
1,507
Selling, general and administrative expense
8,531
23,972
9,280
-
41,783
Total
$
10,038
$
23,972
$
9,280
$
-
$
43,290
2017 plan
2013 plan
Options
Restricted Stock
SARs
Options
Total
Cost of revenue
$
1,482
$
-
$
-
$
$
1,492
Selling, general and administrative expense
6,552
1,959
8,829
Total
$
8,034
$
1,959
$
$
$
10,321
Montrose Amended & Restated 2017 Stock Incentive Plan
Restricted Stock Awards and Restricted Stock Units-The Company issues restricted stock awards ("RSAs") to certain 2017 Plan participants as Director’s compensation. There were 17,346, 10,920 and 19,309 RSAs granted during the years ended December 31, 2023, 2022 and 2021 respectively. These RSAs vest one year from the date of grant, or, in each case, in full upon a change in control, subject to the
participant’s continued service as a Director throughout such date, or upon retirement. Members of the Board of Directors that receive stock-based compensation are treated as employees for accounting purposes.
During 2023 and 2022, the Board of Directors approved the grant of RSUs under certain supplemental incentive plans ("SI Plans"). There were 370,349 and 95,404 RSUs issued under these SI Plans during the years ended December 31, 2023 and 2022. No RSUs were granted under these SI Plans during the years ended December 31, 2021.There were 237,634 RSUs issued during 2023 that vested 1/3 on the date of grant, and will vest 1/3 on the one-year anniversary of the grant, and 1/3 on the two-year anniversary of the grant, subject to continued service through each such date. The remaining RSUs vest annually over a 4-year period from the date of grant, subject to continued service through each such date.
During 2021, the Board of Directors approved the grant of 1,671,391 restricted stock units (“RSUs”) to certain executives and selected employees of the Company under the 2017 Plan. These RSUs represent the right to receive one share of the Company’s common stock upon vesting. These incentives were designed to (i) retain selected employees of the Company for a minimum of 5 years, (ii) reward selected employees for the Company’s significant outperformance and stockholder value creation in 2021, and (iii) provide incentives to selected employees of the Company to accelerate value creation for stockholders and other stakeholders over the next five-year period. With respect to 1,355,182 RSUs, 50.0% will vest on each of the 4th and 5th anniversaries of the date of grant, subject to continued service through each such date. With respect to the remaining 316,209 RSUs (“The Performance-Vested RSUs”), 50.0% will vest on each of the 4th and 5th anniversaries of the date of grant, subject to continued service through each such date and further subject to Company achieving $90.0 million in adjusted EBITDA (as reported) for any trailing twelve-month period from and after December 31, 2022. If the Performance Criteria is not met prior to the 4th anniversary of the date of grant, none of the Performance-Vested RSUs will vest at such time, and if the Performance Criteria is subsequently met prior to the 5th anniversary of the date of grant, all of the Performance-Vested RSUs will vest at such time, subject to continued service through such date. If the Performance Criteria is not met by the 5th anniversary of the date of grant, all of the Performance-Vested RSUs will be forfeited.
During 2021, the Board of Directors approved and reserved for future issuance an aggregate of 135,517 RSUs (the “Future RSU Pool”) to be granted under the 2017 Plan to certain of its executives and selected employees. Final determination and allocation of the awards
under the Future RSU Pool will be determined on December 16, 2025 based on individual performance and continued service through such date. Any RSUs granted under the Future RSU Pool will vest on December 16, 2026, subject to continued service through such date.
RSA and RSU activity was as follows:
Shares
Average Price per Share
Total
(in thousands)
Awards granted
793,133
$
34.33
$
27,231
Awards forfeited
(11,311
)
32.13
Awards vested
90,815
36.77
3,339
Shares
Average Price per Share
Total
(in thousands)
Awards granted
106,324
$
46.82
$
4,978
Awards vested
25,532
31.27
798,470
Shares
Average Price per Share
Total
(in thousands)
Awards granted
1,690,700
$
66.45
$
112,347
Awards vested
42,263
30.68
1,296,522
There were no forfeitures of RSAs or RSUs during the years ended December 31, 2022 and 2021.
There were an aggregate of 2,846,019, 2,064,197, and 1,957,873, shares underlying outstanding RSA and RSU awards as of December 31, 2023, 2022, and 2021, respectively.
Stock Appreciation Rights- During the year ended December 31, 2021, the Board of Directors approved the grant of 3,000,000 units of stock appreciation rights (“SARs”) to certain executives and selected employees under the 2017 Plan. These SARs represent the right to receive,
upon exercise, a payment equal to the excess of (a) the fair market value of one share of the Company’s common stock, over (b) an exercise price of $66.79, payable, at the Company’s election, in cash or shares of common stock. These SARs vest on the 5th anniversary of the date of grant based on achievement of performance hurdles over a five year period, subject to continued service on the vesting date. The performance hurdles shall be deemed achieved if the average trading price per share of the Company’s common stock equals or exceeds the following stock prices:
SARs Stock Price Performance Hurdle
Portion of SARs Subject to Performance Hurdle
$
133.58
1/3
$
166.98
1/3
$
200.37
1/3
The performance hurdles shall be deemed achieved if the average trading price per share of the Company’s common stock equals or exceeds the applicable stock price performance hurdle set forth above for the trading days falling in a consecutive 20-day period prior to the vesting date. None of the market conditions have been achieved as of December 31, 2023.
The SARs expire 10 years after the grant date. The fair value of these SARs at the grant date was $46.0 million. The weighted average remaining contract life of these SARs as of December 31, 2023 was 7.96 years.
Options-Options issued to all optionees under the 2017 Plan vest over 4-years from the date of issuance (or earlier vesting start date, as determined by the Board of Directors) as follows: one half on the second anniversary of date of grant and the remaining half on the fourth anniversary of the date of grant, with the exception of certain annual grants to certain executive officers, which vest annually over a 3-year and 1-year period. The following summarizes the options activity of the 2017 Plan for the years ended December 31, 2023, 2022 and 2021:
Options to Purchase Common Stock
Weighted-Average Exercise Price per Share
Weighted Average Grant Date Fair Value per Share
Weighted Average Remaining Contract Life (in Years)
Aggregate Intrinsic Value of In-The-Money Options (in Thousands)
Outstanding at January 1, 2021
1,840,229
$
$
9.09
$
15,598
Granted
300,620
-
-
Forfeited/cancelled
(33,875
)
-
-
-
Expired
(1,550
)
-
-
-
Exercised
(68,695
)
-
-
2,169
Outstanding at December 31, 2021
2,036,729
$
$
8.30
$
91,030
Granted
698,534
-
-
Forfeited/cancelled
(96,211
)
-
-
-
Exercised
(59,486
)
-
-
1,398
Outstanding at December 31, 2022
2,579,566
$
$
7.76
$
37,295
Granted
253,980
-
-
Forfeited/cancelled
(134,170
)
-
-
-
Expired
(6,450
)
-
-
-
Exercised
(176,654
)
-
-
3,726
Outstanding at December 31, 2023
2,516,272
$
$
7.03
$
13,825
Exercisable at December 31, 2023
1,373,313
-
6.44
8,198
The following weighted-average assumptions were used in the Black-Sholes option-pricing model calculation for the years ended December 31:
Common stock value (per share)
$
32.41
$43.74
$44.28
Expected volatility
33.55
%
33.44
%
55.34
%
Risk- free interest rate
3.77
%
2.03
%
0.82
%
Expected life (years)
7.00
6.98
6.40
Forfeiture rate
None
None
None
Dividend rate
None
None
None
Montrose Amended & Restated 2013 Stock Option Plan-The following summarizes the activity of the 2013 Plan for the years ended December 31, 2023, 2022 and 2021:
Options to Purchase Common Stock
Weighted-Average Exercise Price per Share
Weighted Average Grant Date Fair Value per Share
Weighted Average Remaining Contract Life (in Years)
Aggregate Intrinsic Value of In-The-Money Options (in Thousands)
Outstanding at January 1, 2021
1,787,869
$
$
5.40
$
43,867
Expired
(625
)
-
-
-
Exercised
(889,570
)
-
-
45,161
Outstanding at December 31, 2021
897,674
$
$
4.37
$
57,529
Expired
(125
)
-
-
-
Exercised
(41,854
)
-
-
1,626
Outstanding at December 31, 2022
855,695
$
$
3.31
$
32,478
Expired
(800
)
-
-
-
Exercised
(62,704
)
-
-
1,950
Outstanding at December 31, 2023
792,191
$
$
2.38
$
20,380
Exercisable at December 31, 2023
792,191
-
2.38
20,380
Total shares outstanding from exercised options were 1,549,788 shares, 1,310,430 shares and 1,209,090 shares as of December 31, 2023, 2022 and 2021.
Common Stock Reserved for Future Issuances-At December 31, the Company has reserved certain stock of its authorized but unissued common stock for possible future issuance in connection with the following:
Montrose 2013 Stock Incentive Plan
792,191
855,695
2,047,269
Montrose 2017 Stock Incentive Plan(1)
8,647,656
7,724,524
6,921,597
Total
9,439,847
8,580,219
8,968,866
_______________________
(1) In January 2023 and January 2022 the Board of Directors ratified the addition of 1,189,801 and 1,185,112 shares of common stock, respectively, to the number of shares available for issuance under the 2017 Plan pursuant to the annual increase provision of such plan. Unless the Board of Directors determines otherwise, additional annual increases will be effective on each January 1, through January 1, 2027. The 2017 Plan permits the company to settle awards, if and when vested, in cash at its discretion. Pursuant to the terms of the 2017 Plan, the number of shares authorized for issuance thereunder will only be reduced with respect to shares of common stock actually issued upon exercise or settlement of an award. Shares of common stock subject to awards that have been canceled, expired, forfeited or otherwise not issued under an award and shares of common stock subject to awards settled in cash do not count as shares of common stock issued under the 2017 Plan. The Company expects to have sufficient shares available under the 2017 Plan to satisfy the future settlement of outstanding awards. Shares reserved for future issuance include 3,000,000 shares underlying the 3,000,000 performance SARs granted in December 2021 that are subject to vesting based on the achievement of certain market conditions. Assuming achievement at the highest price performance hurdle, approximately 2,000,000 shares of common stock would be issued upon vesting of these performance SARs. Shares available for grant exclude these awards. To date, none of the market conditions, have yet been, and they may not be, achieved.
18. NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during each period. The Convertible and Redeemable Series A-2 Preferred Stock is considered a participating security during the applicable period. Net losses are not allocated to the Convertible and Redeemable Series A-2 stockholders, as they were not contractually obligated to share in the Company’s losses.
Diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common and dilutive common equivalent shares outstanding for the period using the treasury-stock method or the as-converted method. Potentially dilutive shares are comprised of RSAs, RSUs, SARs and shares of common stock underlying stock options outstanding under the Plans to purchase common stock. During the years ended December 31, 2023, 2022, and 2021, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss and potentially dilutive shares being anti-dilutive.
The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders of the Company:
In thousands, except for net loss per share
Net loss
$
(30,859
)
$
(31,819
)
$
(25,325
)
Convertible and redeemable series A-2
preferred stock dividend
(16,400
)
(16,400
)
(16,400
)
Net loss attributable to common
stockholders - basic and diluted
(47,259
)
(48,219
)
(41,725
)
Weighted-average common shares
outstanding - basic and diluted
30,058
29,688
26,724
Net loss per share attributable to common
stockholders - basic and diluted
$
(1.57
)
$
(1.62
)
$
(1.56
)
The following common stock equivalents were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive for the years ended December 31:
2023 (1)
2022 (1)
2021 (1)
Stock options
3,308,463
3,435,261
1,687,413
Restricted stock
2,468,722
1,777,715
1,693,923
Series A-2
5,952,609
4,983,282
4,085,083
SARs
3,000,000
3,000,000
3,000,000
Total
14,729,794
13,196,258
10,466,419
____________________________________________
(1) Includes 7,660,169, 6,886,942 and 4,051,206 shares underlying equity awards that were out of the money as of December 31, 2023, 2022 and 2021, respectively.
19. SEGMENT INFORMATION AND GEOGRAPHIC LOCATION INFORMATION
The Company has three operating and reportable segments: Assessment, Permitting and Response, Measurement and Analysis, and Remediation and Reuse. These segments are monitored separately by management for performance against budget and prior year and are consistent with internal financial reporting. The Company’s operating segments are organized based upon primary services provided, the nature of the production process, their type of customers, methods used to distribute the products, and the nature of the regulatory environment.
Segment Adjusted EBITDA is the primary measure of operating performance for all three operating segments. Segment Adjusted EBITDA is the calculated Company’s Earnings before Interest, Tax, Depreciation and Amortization (“EBITDA”), adjusted to exclude certain transactions such as stock-based compensation, acquisition costs, and fair value changes in financial instruments, amongst others. Beginning in the first quarter of 2023, the calculation of Segment adjusted EBITDA no longer adjusts for start-up losses and investment in new services as the CODM no longer reviews the Segment Adjusted EBITDA measure without these costs. The CODM does not review segment assets as a measure of segment performance.
During the first quarter of 2023, the Company determined to discontinue one of its specialty service lines within the lab testing business (the "Discontinued Specialty Lab"). On December 29, 2023, the Company sold the assets of the Discontinued Specialty Lab for a total sales price of $4.8 million, of which $0.5 million was received in cash and $4.3 million was issued as a promissory note receivable. The Company recorded a gain on the sale of $1.8 million, which is included in selling, general and administrative expense on the consolidated statements of operations and comprehensive loss. The promissory note receivable is subject to an annual 9.0% interest rate and will be repaid to the Company in 60 monthly installments with the remaining balance payable in full on December 29, 2028. Further, due to the buyers' limited credit history, the Company recorded a current expected loss of $2.2 million, which is included as part of selling, general, and administrative expense on the consolidated statements of operations and comprehensive loss. The $2.1 million promissory note receivable, net of current expected losses, is included in other assets on the consolidated statement of financial position. Additionally, the Company received $1.0 million as a security deposit for office space subleased to the buyer. Such security deposit has been placed in a separate interest-bearing account (strictly for the benefit of the buyer) and has been recorded as restricted cash and is included in other non-current liabilities on the consolidated statement of financial position. The security deposit will be released to the buyer in 2028 upon termination of the lease term. The Discontinued Specialty Lab performance was sporadic and its service offering was non-core to the Company’s business. The discontinuation of this specialty service line, which was part of
the Company's Measurement and Analysis segment, did not represent a strategic shift that had a major effect on the Company’s operations and financial results, therefore it did not meet the requirements to be classified as discontinued operations.
Corporate and Other includes costs associated with general corporate overhead (including executive, legal, finance, safety, human resources, marketing and IT related costs) that are not directly related to supporting operations. Overhead costs that are directly related to supporting operations (such as insurance, software, licenses, shared services and payroll processing costs) are allocated to the operating segments on a basis that reasonably approximates an estimate of the use of these services.
Segment revenues and Segment Adjusted EBITDA for the years ended December 31, consisted of the following:
Segment
Revenues
Segment
Adjusted
EBITDA
Segment
Revenues
Segment
Adjusted
EBITDA (3)
Segment
Revenues
Segment
Adjusted
EBITDA (3)
Assessment, Permitting and Response
$
220,727
$
52,148
$
187,234
$
37,458
$
261,865
$
57,128
Measurement and Analysis
197,095
(1)
37,217
172,432
(1)
31,588
(2)
153,208
(1)
31,270
(2)
Remediation and Reuse
206,386
27,087
184,750
30,616
131,340
19,326
Total Operating Segments
624,208
116,452
544,416
99,662
546,413
107,724
Corporate and Other
-
(37,876
)
-
(31,212
)
-
(30,082
)
Total
$
624,208
$
78,576
$
544,416
$
68,450
$
546,413
$
77,642
(1)Includes revenue of $8.8 million, $17.0 million and $23.9 million from the Discontinued Specialty Lab for the year ended December 31, 2023, 2022 and 2021, respectively.
(2)Includes Adjusted EBITDA of $2.1 million and $6.4 million from the Discontinued Specialty Lab for the year ended December 31, 2022 and 2021, respectively.
(3)Includes the add back of start-up losses and investment in new services of $2.3 million and $4.4 million for the year ended December 31, 2022 and 2021, respectively.
Presented below is a reconciliation of the Company’s segment measure to net loss for the years ended December 31:
Total
$
78,576
$
68,450
$
77,642
Interest expense, net
(7,793
)
(5,239
)
(11,615
)
Income tax benefit (expense)
(2,250
)
(1,709
)
Depreciation and amortization
(45,780
)
(47,479
)
(44,810
)
Stock-based compensation
(47,267
)
(43,290
)
(10,321
)
Start-up losses and investment in new services
-
(2,277
)
(4,407
)
Acquisition costs
(6,930
)
(1,891
)
(2,088
)
Fair value changes in financial instruments
4,129
3,396
(2,195
)
Fair value changes in business acquisition
contingencies
(84
)
3,227
(24,372
)
Discontinued Specialty Lab
(6,112
)
(1)
-
-
Expenses related to financing transactions
(35
)
(7
)
(50
)
Other losses or expenses, net
(543
)
(2)
(4,459
)
(3)
(1,400
)
(4)
Net loss
$
(30,859
)
$
(31,819
)
$
(25,325
)
(1)Amounts consist of operating losses before depreciation related to the Discontinued Specialty Lab, which include $2.2 million in current expected credit losses on the promissory note receivable issued upon the sale and a $1.8 million gain on the sale of its assets.
(2)Amounts are primarily comprised of lease abandonment charges and expenses related to an aircraft accident, partially offset by a gain on the surrender of a lease and an aircraft insurance gain.
(3)Amounts include costs associated with the exiting of the legacy water treatment and biogas operations and maintenance contracts and the Company's start-up lab in Berkley, California, as well as an impairment charge for certain operating lease right-of-use assets (Note 7) and severance costs related to the restructuring within the Company’s soil remediation business.
(4)Amounts include non-operational charges incurred due to the remeasurement of finance leases as a result of the adoption of ASC 842 and costs related to the implementation of a new ERP.
The following table presents revenues by geographic location for the year ended December 31:
United States
$
539,578
$
523,189
$
526,672
Canada
72,608
12,002
10,358
Other international
12,022
9,225
9,383
Total Revenue
$
624,208
$
544,416
$
546,413
20. RELATED-PARTY TRANSACTIONS
The Company did not have any material related party transactions during the years ended December 31, 2023 and 2022.
21. DEFINED CONTRIBUTION PLAN
On January 1, 2014, the Company established the Montrose Environmental Group 401(k) Savings Plan (the “401(k) Savings Plan”). As of December 31, 2023, 2022, and 2021, plan participants may defer up to 85.0% of their eligible wages for the year, up to the Internal Revenue Service dollar limit and catch-up contribution allowed by law. Prior to May 22, 2020, the Company provided employer matching contributions equal to 100.0% of the first 3.0% of the participant’s compensation and 50.0% of the participant’s elective deferrals that exceed 3.0% but do not exceed 4.0% of the participant’s compensation. Beginning on May 22, 2020, the Company temporarily ceased making employer contributions. Employer contributions were reinstated beginning on April 23, 2021. Employer contributions for years ended December 31, 2023, 2022, and 2021 were $7.9 million, $5.7 million and $2.6 million, respectively, and are included within selling, general, and administrative expense on the consolidated statements of operations.
22. SUBSEQUENT EVENTS
Convertible and Redeemable Series A-2 Preferred Stock-On January 1, 2024, the Company redeemed $60.0 million of the outstanding Convertible and Redeemable Series A-2 Preferred Stock with cash.
Debt- In January 2024, the Company partially exercised its option to access the $150.0 million accordion under the Senior Secured Credit Agreement, and as a result, the Senior Secured Credit Agreement was amended to provide for an additional $100.0 million credit availability under the 2021 Credit Facility, comprised of an additional $50.0 million term loan and $50.0 million revolving credit facility. Furthermore, the Company exercised its credit facility covenant holiday, increasing its leverage capacity from 3.75 times to 4.25 times for four quarters beginning with the first quarter of 2024.
Business Acquisitions-In January 2024, the Company completed the business acquisition of Epic Environmental Pty Ltd (“Epic”) by acquiring 100.0% of its common stock. Epic provides environmental and engineering consulting services, and is based in Brisbane, Australia.
In February 2024, the Company completed the business acquisition of Two Dot Consulting, LLC (“2DOT”) by acquiring 100.0% of its common stock. 2DOT provides environmental and engineering consulting services, and is based in Denver, Colorado.
These transactions qualified as business acquisitions and will be accounted for as business combinations. The following table summarizes the elements of the purchase price of these acquisitions:
Cash (1)
Common
Stock
Deferred Common
Stock
Maximum Contingent Earnout
Total
Purchase
Price
Epic
$
19,914
$
4,838
$
5,070
$
6,627
$
36,449
2DOT
39,393
1,832
4,652
20,000
65,877
(1) The cash portion of these acquisitions’ purchase price was funded through proceeds received from the revolving credit facility.
The Company has not yet completed the initial purchase price allocation for these acquisitions, including obtaining all of the information required for the valuation of the acquired intangible assets, goodwill, assets and liabilities assumed, due to the timing of the close of the transactions.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of December 31, 2023, the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2023, the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules which require us to include in this Annual Report on Form 10-K, an assessment by management of the effectiveness of our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). In addition, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2023 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
As permitted by guidelines established by the SEC for newly acquired businesses, we excluded Matrix, one of our recently acquired businesses in 2023 (the “Excluded Acquisition”), from the scope of our annual report on internal controls over financial reporting for the year ended December 31, 2023. The Excluded Acquisition comprised approximately 10.4% of our consolidated total assets as of December 31, 2023, and approximately 9.2% of our consolidated revenues for the year then ended. We are in the process of integrating this business into our overall internal controls over financial reporting and plan to include it in our scope for the year ended December 31, 2024.
The effectiveness of our internal control over financial reporting as of December 31, 2023 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our system of internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed or operated, can provide only reasonable, but not absolute, assurance that the objectives of the system of internal control are met. The design of our control system reflects the fact that there are resource constraints, and that the benefits of such control system must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control failures and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the intentional acts of individuals, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurance that the design of any particular control will always succeed in achieving its objective under all potential future conditions.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Montrose Environmental Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Montrose Environmental Group, Inc. and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2023, of the Company and our report dated February 29, 2024, expressed an unqualified opinion on those financial statements.
As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Matrix Solutions, Inc., which was acquired on June 1, 2023, and whose financial statements constitute approximately 10.4% of total assets and approximately 9.2% of revenues of the Company’s consolidated financial statement amounts as of and for the year ended December 31, 2023. Accordingly, our audit did not include the internal control over financial reporting at Matrix Solutions, Inc.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Costa Mesa, California
February 29, 2024

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
On November 28, 2023, Vijay Manthripragada, Chief Executive Officer, amended an existing trading plan intended to satisfy Rule 10b5-1(c). The plan, as amended, provides for (a) the sale of up to 12,500 shares of Company Common Stock between February 23, 2024 and December 2, 2024 and (b) the purchase of up to 100,000 shares of Company common stock in connection with the exercise of stock options, and the sale of up to 100,000 of such shares between February 23, 2024 and December 2, 2024.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
Except as set forth below and as set forth under “Information About Our Executive Officers” in Item 1. “Business” the information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2023. This information will appear in the proxy statement under the headings “The Board of Directors- Class I Director Nominees,” “The Board of Directors- Continuing Directors,” “Other Matters - Delinquent Section 16(a) Reports,” and “The Corporate Governance - Committees of the Board of Directors.”
Code of Business Conduct and Ethics for Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer.
We have adopted a Code of Ethics which applies to our chief executive officer, chief financial officer, chief accounting officer and all our other employees, and which can be found through our investor relations website, investors.montrose-env.com. We are not including this or any other information on our website as a part of, nor incorporating it by reference into, this Annual Report on Form 10-K or any of our other SEC filings.
In the event the Company makes any amendment to, or grants any waiver from, a provision of the Code of Business Conduct and Ethics that applies to the principal executive officer, principal financial officer or principal accounting officer that requires disclosure under applicable SEC or NYSE rules, the Company will disclose such amendment or waiver and reasons therefore on its website at investors.montrose-env.com within the time period required by such rules.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2023. This information will appear in the proxy statement under the headings “Compensation Committee Matters” and “Corporate Governance - Compensation Committee Interlocks and Insider Participation.”

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Except as set forth below, the information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2023. This information will appear in the proxy statement under the heading “Security Ownership of Certain Beneficial Owners and Management.”
Information with Respect to Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2023, with respect to the Company’s existing equity compensation plan:
Plan Category
Number of
Securities to be
Issued Upon
Exercise of
Outstanding Option and Rights
(column (a))
Weighted-Average
Exercise Price of
Outstanding Options,
and Rights
(column (b))
Number of
Securities
Remaining Available
for Future Issuance
under Equity
Compensation
Plans (Excluding
Securities Reflected
in Column (a))
(column (c))
Equity compensation plans
approved by security
holders (1)
3,308,463
(2)
$
25.05
1,381,378
(3)
(1)Includes the Company’s 2013 Amended and Restated Stock Option Plan and the Company’s 2017 Amended and Restated Stock Incentive Plan.
(2)Excludes unvested restricted stock and SARs awards issued under the Company’s 2017 Amended and Restated Stock Incentive Plan.
(3)Pursuant to the terms of the 2017 Amended and Restated Stock Incentive Plan, the number of shares of common stock authorized for issuance under the plan automatically increase on January 1 of each year and will end with a final increase on January 1, 2027, in an amount equal to 4% of the total number of shares of common stock outstanding on December 31st of the preceding calendar year. The amount referenced excludes such adjustment as of January 1, 2024.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2023. This information will appear in the proxy statement under the headings “Certain Relationships and Related Party Transactions” and “Corporate Governance - Director Independence.”

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services.
The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2023. This information will appear in the proxy statement under the heading “Audit Committee Matters.”
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules.
(a)List the following documents filed as a part of the report:
(1)The list of consolidated financial statements and related notes, together with the report of Deloitte & Touche LLP, appear in Part II, Item 8. “Financial Statements and Supplementary Data” and are hereby incorporated by reference.
(2)Financial statement schedules have been omitted because they are not applicable, not material or the required information is otherwise included.
(3)The following documents are filed, furnished or incorporated by reference as exhibits to this report as required by Item 601 of Regulation S-K.
Exhibit
No.
Description of Exhibit
2.1
Membership Interest Purchase Agreement among CTEH Holdings, LLC, Montrose Planning & Permitting, LLC, Montrose Environmental Group, Inc., The Center for Toxicology and Environmental Health, L.L.C. and the Seller Indemnifying members dated March 28, 2020. (a)
3.1
Amended and Restated Certificate of Incorporation. (b)
3.2
Certificate of Designation of Cumulative Series A-2 Preferred Stock. (a)
3.3
Amended and Restated Bylaws. (b)
4.1
Third Amended and Restated Investor Rights Agreement dated April 13, 2020 by and among Montrose Environmental Group, Inc., OCM Montrose Holdings, L.P., OCM Montrose II Holdings, L.P. and the common stockholders party thereto. (a)
4.2
Description of Registrant’s Securities. (h)
10.1#
Form of Indemnification Agreement entered into with Directors and Executive Officers. (a)
10.2
Credit Agreement, dated April 27, 2021 among Montrose Environmental Group, Inc., Montrose Environmental Group Ltd., the Guarantors (defined therein), each financial institution from time to time party thereto, Bank of the West, as Administrative Agent, Swing Line Lender, L/C Issuer, Sole Bookrunner and Joint Lead Arranger, and Capital One, National Association and BOFA Securities, Inc., each as Joint Lead Arranger. (e)
10.3
First Amendment to Credit Agreement, dated August 30, 2022, by and among Montrose Environmental Group, Inc., Montrose Environmental Group Ltd., the other Loan Parties thereto, the Lenders party thereto, and Bank of the West, as Administrative Agent (f).
10.4#
Offer Letter by and between Montrose Environmental Group, Inc. and Vijay Manthripragada, dated July 13, 2015. (a)
10.5#
Executive Compensation Letter by and between Montrose Environmental Group, Inc. and Vijay Manthripragada, dated June 23, 2016. (a)
10.6#
Offer Letter by and between Montrose Environmental Group, Inc. and Allan Dicks, dated August 8, 2016.(a)
10.7#
Executive Compensation Letter by and between Montrose Environmental Group, Inc. and Allan Dicks, dated August 8, 2016. (a)
10.8#
Offer Letter by and between Montrose Environmental Group, Inc. and Nasym Afsari, dated October 14, 2014. (a)
10.9#
Executive Compensation Letter by and between Montrose Environmental Group, Inc. and Nasym Afsari, dated June 23, 2016. (a)
10.10#
Amendment to the Executive Compensation Letter by and between Montrose Environmental Group, Inc. and Nasym Afsari, dated September 14, 2017. (a)
10.11#
Offer Letter by and between Montrose Environmental Group, Inc. and Joshua M. LeMaire, dated July 2, 2015. (a)
10.12#
Executive Compensation Letter by and between Montrose Environmental Group, Inc. and Joshua M. LeMaire, dated June 23, 2016. (a)
10.13#
Offer Letter by and between Montrose Environmental Group, Inc. and Jose M. Revuelta, dated March 4, 2014. (a)
10.14#
Executive Compensation Letter by and between Montrose Environmental Group, Inc. and Jose M. Revuelta, dated June 23, 2016. (a)
10.15#
Montrose Environmental Group, Inc. Amended and Restated 2013 Stock Option Plan.(a)
10.16#
Amendment No. 1 to Montrose Environmental Group, Inc. Amended and Restated 2013 Stock Option Plan. (a)
10.17#
Amendment No. 2 to Montrose Environmental Group, Inc. Amended and Restated 2013 Stock Option Plan. (a)
10.18#
Amendment No. 3 to Montrose Environmental Group, Inc. Amended and Restated 2013 Stock Option Plan. (a)
10.19#
Amendment No. 4 to Montrose Environmental Group, Inc. Amended and Restated 2013 Stock Option Plan. (a)
10.20#
Amendment No. 5 to Montrose Environmental Group, Inc. Amended and Restated 2013 Stock Option Plan. (a)
10.21#
Amendment No. 6 to Montrose Environmental Group, Inc. Amended and Restated 2013 Stock Option Plan. (a)
10.22#
Amendment No. 7 to Montrose Environmental Group, Inc. Amended and Restated 2013 Stock Option Plan. (a)
10.23#
Amendment No. 8 to Montrose Environmental Group, Inc. Amended and Restated 2013 Stock Option Plan. (a)
10.24#
Form of Option Award Agreement under the Montrose Environmental Group, Inc. Amended and Restated 2013 Stock Option Plan. (a)
10.25#
Montrose Environmental Group, Inc. Amended and Restated 2017 Stock Incentive Plan. (b)
10.26#
Form of Grant Notice and Standard Terms and Conditions for Stock Options under the Montrose Environmental Group, Inc. Amended and Restated 2017 Stock Incentive Plan. (a)
10.27#
Form of Grant Notice and Standard Terms and Conditions for Restricted Stock under the Montrose Environmental Group, Inc. Amended and Restated 2017 Stock Incentive Plan. (a)
10.28#
Form of Confidential Information, Non-Solicitation and Non-Compete Agreement (California). (a)
10.29#
Form of Confidential Information, Non-Solicitation and Non-Compete Agreement (Ohio). (a)
10.30#
Montrose Environmental Group, Inc. Executive Severance Policy. (a)
10.31#
Form of Grant Notice and Standard Terms and Conditions for Performance-Based Stock Appreciation Rights under the Montrose Environmental Group, Inc. Amended and Restated 2017 Stock Incentive Plan.(g)
10.32#
Form of Grant Notice and Standard Terms and Conditions for Restricted Stock Units under the Montrose Environmental Group, Inc. Amended and Restated 2017 Stock Incentive Plan. (g)
10.33
Second Amendment to Credit Agreement, dated as of May 26, 2023, by and among Montrose Environmental Group, Inc., the Lenders party thereto, and BMO Harris Bank, N.A., as successor in interest to Bank of the West, as Administrative Agent. (i)
10.34*
Third Amendment to Credit Agreement and Lender Joinder Agreement, dated January 2, 2024, among Montrose Environmental Group, Inc., Montrose Environmental Group Ltd., the Guarantors (defined therein) party thereto, each financial institution party thereto, and BMO N.A. and Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer.
21.1*
Subsidiaries of the Registrant.
23.1*
Consent of Deloitte & Touche LLP.
31.1*
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
97.1*
Policy relating to recovery of erroneously awarded compensation, as required by applicable listing standards adopted pursuant to 17 CFR 240.10D-1
101.INS*
Inline XBRL Instance Document
101.SCH*
Inline XBRL Taxonomy Extension Schema With Embedded Linkage Documents
104*
Cover Page Interactive Data File - The cover page from the Company’s Quarterly Report on Form 10-K for the fiscal year ended December 31, 2023 is formatted in Inline XBRL (included as Exhibit 101)
# Denotes management compensatory plan or arrangement.
* Filed herewith.
** Furnished herewith.
(a)Previously filed on June 29, 2020 as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-239542) and incorporated herein by reference.
(b)Previously filed on July 14, 2020 as an exhibit to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-239542) and incorporated herein by reference.
(c)Previously filed on October 7, 2020 as an exhibit to the Company’s Current Report on Form 8-K and incorporated herein by reference.
(d)Previously filed on March 24, 2021 as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and incorporated herein by reference.
(e)Previously filed on April 29, 2021 as an exhibit to the Company’s Current Report on Form 8-K and incorporated herein by reference.
(f)Previously filed on March 1, 2023 as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and incorporated herein by reference.
(g)Previously filed on December 21, 2021 as an exhibit to the Company’s Current Report on Form 8-K and incorporated herein by reference.
(h)Previously filed on March 1, 2022 as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and incorporated herein by reference.
(i)Previously filed on August 9, 2023 as an exhibit to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023. and incorporated herein by reference.