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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2024

OR

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

For the transition period from to

Commission File Number: 001-39394

 

Montrose Environmental Group, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

46-4195044

( State or other jurisdiction of

incorporation or organization)

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

5120 Northshore Drive,

North Little Rock, Arkansas

72118

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (501) 900-6400

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.000004 per share

 

MEG

 

The New York Stock Exchange

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

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

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of May 3, 2024, the registrant had 34,081,219 shares of common stock, $0.000004 par value per share, outstanding.

 

 


 

Table of Contents

 

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

1

Unaudited Condensed Consolidated Statements of Financial Position

1

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

2

Unaudited Condensed Consolidated Statements of Convertible and Redeemable Series A-2 Preferred Stock and Stockholders’ Equity

3

 

Unaudited Condensed Consolidated Statements of Cash Flows

4

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

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

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

37

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3.

Defaults Upon Senior Securities

38

Item 4.

Mine Safety Disclosures

38

Item 5.

Other Information

38

Item 6.

Exhibits

39

Signatures

40

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MONTROSE ENVIRONMENTAL GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(In thousands, except share data)

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash, cash equivalents and restricted cash

 

$

9,486

 

 

$

23,240

 

Accounts receivable, net

 

 

104,734

 

 

 

112,360

 

Contract assets

 

 

73,466

 

 

 

51,629

 

Prepaid and other current assets

 

 

16,752

 

 

 

13,695

 

Total current assets

 

 

204,438

 

 

 

200,924

 

Non-current assets:

 

 

 

 

 

 

Property and equipment, net

 

 

59,745

 

 

 

56,825

 

Operating lease right-of-use asset, net

 

 

32,869

 

 

 

32,260

 

Finance lease right-of-use asset, net

 

 

14,588

 

 

 

13,248

 

Goodwill

 

 

463,450

 

 

 

364,449

 

Other intangible assets, net

 

 

134,424

 

 

 

140,813

 

Other assets

 

 

8,584

 

 

 

8,267

 

Total assets

 

$

918,098

 

 

$

816,786

 

Liabilities, Convertible and Redeemable Series A-2 Preferred Stock and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and other accrued liabilities

 

$

58,645

 

 

$

59,920

 

Accrued payroll and benefits

 

 

24,125

 

 

 

34,660

 

Business acquisitions contingent consideration, current

 

 

11,782

 

 

 

3,592

 

Current portion of operating lease liabilities

 

 

10,074

 

 

 

9,963

 

Current portion of finance lease liabilities

 

 

4,155

 

 

 

3,956

 

Current portion of long-term debt

 

 

16,715

 

 

 

14,196

 

Total current liabilities

 

 

125,496

 

 

 

126,287

 

Non-current liabilities:

 

 

 

 

 

 

Business acquisitions contingent consideration, long-term

 

 

28,679

 

 

 

2,448

 

Other non-current liabilities

 

 

6,309

 

 

 

6,569

 

Deferred tax liabilities, net

 

 

5,849

 

 

 

6,064

 

Conversion option

 

 

19,037

 

 

 

19,017

 

Operating lease liability, net of current portion

 

 

25,459

 

 

 

25,048

 

Finance lease liability, net of current portion

 

 

8,921

 

 

 

8,185

 

Long-term debt, net of deferred financing fees

 

 

280,948

 

 

 

148,988

 

Total liabilities

 

$

500,698

 

 

$

342,606

 

Commitments and contingencies

 

 

 

 

 

 

Convertible and redeemable series A-2 preferred stock $0.0001 par value

 

 

 

 

 

 

Authorized, issued and outstanding shares: 11,667 and 17,500 at March 31, 2024 and December 31, 2023, respectively; aggregate liquidation preference of $122.2 million and $182.2 million at March 31, 2024 and December 31, 2023, respectively

 

 

92,928

 

 

 

152,928

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.000004 par value; authorized shares: 190,000,000 at March 31, 2024 and December 31, 2023; issued and outstanding shares: 30,617,862 and 30,190,231 at March 31, 2024 and December 31, 2023, respectively

 

 

 

 

 

 

Additional paid-in-capital

 

 

548,443

 

 

 

531,831

 

Accumulated deficit

 

 

(223,713

)

 

 

(210,356

)

Accumulated other comprehensive (loss) income

 

 

(258

)

 

 

(223

)

Total stockholders’ equity

 

 

324,472

 

 

 

321,252

 

Total liabilities, convertible and redeemable series A-2 preferred stock and stockholders’ equity

 

$

918,098

 

 

$

816,786

 

 

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

1


 

MONTROSE ENVIRONMENTAL GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2024

 

 

2023

 

Revenues

 

$

155,325

 

 

$

131,428

 

Cost of revenues (exclusive of depreciation and amortization shown below)

 

 

96,557

 

 

 

81,633

 

Selling, general and administrative expense

 

 

57,074

 

 

 

49,613

 

Fair value changes in business acquisition contingencies

 

 

106

 

 

 

(398

)

Depreciation and amortization

 

 

11,653

 

 

 

10,555

 

Loss from operations

 

 

(10,065

)

 

 

(9,975

)

Other expense

 

 

 

 

 

 

Other income (expense), net

 

 

507

 

 

 

(1,836

)

Interest expense, net

 

 

(3,306

)

 

 

(1,541

)

Total other income (expense), net

 

 

(2,799

)

 

 

(3,377

)

Loss before expense from income taxes

 

 

(12,864

)

 

 

(13,352

)

Income tax expense

 

 

493

 

 

 

1,367

 

Net loss

 

$

(13,357

)

 

$

(14,719

)

 

 

 

 

 

 

Equity adjustment from foreign currency translation

 

 

(35

)

 

 

12

 

Comprehensive loss

 

 

(13,392

)

 

 

(14,707

)

Convertible and redeemable series A-2 preferred stock dividend

 

 

(2,814

)

 

 

(4,100

)

Net loss attributable to common stockholders

 

 

(16,171

)

 

 

(18,819

)

Weighted average common shares outstanding— basic and diluted

 

 

30,381

 

 

 

29,857

 

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

 

$

(0.53

)

 

$

(0.63

)

 

 

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

2


 

MONTROSE ENVIRONMENTAL GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE AND REDEEMABLE SERIES A-2 PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Convertible and Redeemable

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

 

Series A-2 Preferred Stock

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Stockholders'

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Income (Loss)

 

Equity

 

Balance at December 31, 2022

 

 

17,500

 

$

152,928

 

 

29,746,793

 

$

 

$

492,676

 

$

(179,497

)

$

8

 

$

313,187

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(14,719

)

 

 

 

(14,719

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

13,035

 

 

 

 

 

 

13,035

 

Dividend payment to the Series A-2 preferred stockholders

 

 

 

 

 

 

 

 

 

 

(4,100

)

 

 

 

 

 

(4,100

)

Common stock issued

 

 

 

 

 

 

214,571

 

 

 

 

2,690

 

 

 

 

 

 

2,690

 

Accumulated other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

12

 

Balance at March 31, 2023

 

 

17,500

 

$

152,928

 

 

29,961,364

 

$

 

$

504,301

 

$

(194,216

)

$

20

 

$

310,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Convertible and Redeemable

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

 

Series A-2 Preferred Stock

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Stockholders'

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Income (Loss)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2023

 

 

17,500

 

$

152,928

 

 

30,190,231

 

$

 

$

531,831

 

$

(210,356

)

$

(223

)

$

321,252

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(13,357

)

 

 

 

(13,357

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

11,272

 

 

 

 

 

 

11,272

 

Redemption of Series A-2 preferred stock

 

 

(5,833

)

 

(60,000

)

 

 

 

 

 

 

 

 

 

 

 

 

Dividend payment to the Series A-2 preferred stockholders

 

 

 

 

 

 

 

 

 

 

(2,814

)

 

 

 

 

 

(2,814

)

Common stock issued

 

 

 

 

 

 

427,631

 

 

 

 

8,154

 

 

 

 

 

 

8,154

 

Accumulated other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35

)

 

(35

)

Balance at March 31, 2024

 

 

11,667

 

$

92,928

 

 

30,617,862

 

$

 

$

548,443

 

$

(223,713

)

$

(258

)

$

324,472

 

 

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

3


 

MONTROSE ENVIRONMENTAL GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Operating activities:

 

 

 

 

 

 

Net loss

 

$

(13,357

)

 

$

(14,719

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

(Recovery) provision for credit loss

 

 

(886

)

 

 

444

 

Depreciation and amortization

 

 

11,653

 

 

 

10,555

 

Amortization of right-of-use asset

 

 

2,625

 

 

 

2,491

 

Stock-based compensation expense

 

 

11,272

 

 

 

13,035

 

Fair value changes in financial instruments

 

 

(297

)

 

 

1,873

 

Fair value changes in business acquisition contingencies

 

 

106

 

 

 

(398

)

Deferred income taxes

 

 

(414

)

 

 

1,367

 

Other

 

 

(91

)

 

 

458

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Accounts receivable and contract assets

 

 

(9,093

)

 

 

9,615

 

Prepaid expenses and other current assets

 

 

(2,538

)

 

 

(3,363

)

Accounts payable and other accrued liabilities

 

 

(7,824

)

 

 

(11,643

)

Accrued payroll and benefits

 

 

(10,000

)

 

 

(4,350

)

Change in operating leases

 

 

(3,177

)

 

 

(2,336

)

Net cash (used in) provided by operating activities

 

 

(22,021

)

 

 

3,029

 

Investing activities:

 

 

 

 

 

 

Proceeds from corporate owned and property insurance

 

 

40

 

 

 

75

 

Purchases of property and equipment

 

 

(5,979

)

 

 

(4,134

)

Proprietary software development and other software costs

 

 

(1,300

)

 

 

(638

)

Purchase price true ups

 

 

320

 

 

 

(505

)

Cash paid for acquisitions, net of cash acquired

 

 

(58,119

)

 

 

(6,525

)

Net cash used in investing activities

 

 

(65,038

)

 

 

(11,727

)

Financing activities:

 

 

 

 

 

 

Proceeds from line of credit

 

 

166,995

 

 

 

 

Repayment of the line of credit

 

 

(78,799

)

 

 

 

Repayment of aircraft loan

 

 

(261

)

 

 

 

Proceeds from term loan

 

 

50,000

 

 

 

 

Repayment of term loan

 

 

(3,281

)

 

 

(2,188

)

Payment of contingent consideration and other purchase price true ups

 

 

(363

)

 

 

(27

)

Repayment of finance leases

 

 

(1,083

)

 

 

(1,029

)

Payments of deferred financing costs

 

 

(348

)

 

 

 

Proceeds from issuance of common stock for exercised stock options

 

 

487

 

 

 

2,690

 

Dividend payment to the series A-2 stockholders

 

 

 

 

 

(4,100

)

Repayment to the series A-2 stockholders

 

 

(60,000

)

 

 

 

Net cash provided by (used in) financing activities

 

 

73,347

 

 

 

(4,654

)

Change in cash, cash equivalents and restricted cash

 

 

(13,712

)

 

 

(13,352

)

Foreign exchange impact on cash balance

 

 

(42

)

 

 

318

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

Beginning of year

 

 

23,240

 

 

 

89,828

 

End of period

 

$

9,486

 

 

$

76,794

 

Supplemental disclosures of cash flows information:

 

 

 

 

 

 

Cash paid for interest

 

$

3,098

 

 

$

1,347

 

Cash paid for income tax

 

$

292

 

 

$

155

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

Accrued purchases of property and equipment

 

$

163

 

 

$

3,096

 

Property and equipment purchased under finance leases

 

$

2,058

 

 

$

2,405

 

Common stock issued to acquire new businesses

 

$

6,580

 

 

$

 

Acquisitions unpaid contingent consideration

 

$

40,461

 

 

$

7,855

 

Acquisitions contingent consideration paid in common stock

 

$

1,087

 

 

$

 

Accrued dividend payment

 

$

2,814

 

 

$

 

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

4


 

MONTROSE ENVIRONMENTAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except where otherwise indicated)

1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Description of the Business— Montrose Environmental Group, Inc. (“Montrose” or the “Company”) is a corporation formed on November 2013, under the laws of the State of Delaware. The Company has approximately 120 offices across the United States, Canada, Australia and Europe and approximately 3,200 employees as of March 31, 2024.

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 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. The Company works 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 the Company's expertise in helping businesses plan for and respond to disruptions, the Company's scientists and response teams have helped clients navigate their preparation for and response to emergency response situations.

Measurement and Analysis segment is one of the largest providers of environmental testing and laboratory services in North America. The Company's 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. The Company's 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.

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. The Company's team, including engineers, scientists and consultants, provides these services to assist clients in designing solutions, managing products and mitigating environmental risks and liabilities at their locations. The Company does not own the properties or facilities at which it implements these projects or the underlying liabilities, nor does the Company own material amounts of the equipment used in projects.

Basis of Presentation—The unaudited condensed consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries. These unaudited condensed consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The unaudited condensed consolidated financial statements include all accounts of the Company and, in the opinion of management, include all recurring adjustments and normal accruals necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the dates and periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2023. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. All intercompany transactions, accounts and profits, have been eliminated in the unaudited condensed consolidated financial statements.

2. SUMMARY OF NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("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. ASU 2023-07 is effective for the Company's fiscal year beginning January 1, 2024 and requires the use of a retrospective approach to all prior periods presented. The Company adopted the standard on January 1, 2024, and plans to adopt the standard for interim periods beginning January 1, 2025, with early adoption permitted. The Company is evaluating the potential impact of its adoption of ASU 2023-07 on the Company's audited Consolidated Financial Statements but does not anticipate that such an adoption will have a material impact.

5


 

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2023, the FASB issued ASU 2023-05, 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 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.

3. REVENUES AND ACCOUNTS RECEIVABLE

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

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

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

Remediation and Reuse Revenues—Remediation and Reuse revenues are generated from 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 18 - 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 unaudited condensed consolidated statements of financial position. Amounts are generally billed at periodic intervals (e.g. weekly, bi-weekly or monthly) as work progresses in accordance with agreed-upon contractual terms. The Company utilizes the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component as the period between when the Company transfers services to a customer and when the customer pays for those services is one year or less. Amounts recorded as unbilled receivables are generally for services the Company is not entitled to bill based on the passage of time. Under certain contracts, billing occurs subsequent to revenue recognition, resulting in contract assets. The Company sometimes receives advances or deposits from customers before revenue is recognized, resulting in contract liabilities.

The following table presents the Company’s contract balances:

 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Contract assets

 

$

73,466

 

 

$

51,629

 

Contract liabilities

 

 

10,016

 

 

 

8,132

 

Contract assets acquired through business acquisitions were $0.3 million and $2.2 million as of March 31, 2024 and December 31, 2023, respectively. No material contract liabilities were acquired through business acquisitions as of March 31, 2024 and December 31, 2023.

Revenue recognized during the three months ended March 31, 2024, included in the contract liabilities balance at the beginning of the year was $4.5 million. The revenue recognized from the contract liabilities consisted of the Company satisfying performance obligations during the normal course of business.

6


 

Remaining Unsatisfied Performance Obligations—Remaining unsatisfied performance obligations represent the total dollar value of work to be performed on contracts awarded and in progress. The amount of remaining unsatisfied performance obligations increases with new contracts or additions to existing contracts and decreases as revenue is recognized on existing contracts. Contracts are included in the amount of remaining unsatisfied performance obligations when an enforceable agreement has been reached. As of March 31, 2024 and December 31, 2023, the estimated revenue expected to be recognized in the future related to unsatisfied performance obligations was approximately $83.8 million and $81.9 million, respectively. As of March 31, 2024, the Company expected to recognize approximately 70% of this amount as revenue within a year, and the remaining 30% to be recognized as revenue beyond one year.

Accounts Receivable, Net—The Company extends non-interest-bearing trade credit to its customers in the ordinary course of business. Accounts receivable, net consisted of the following:

 

 

 

 

 

 

 

 

 

March 31,
2024

 

 

December 31,
2023

 

Accounts receivable, invoiced

 

$

106,870

 

 

$

115,064

 

Accounts receivable, other

 

 

483

 

 

 

20

 

Allowance for doubtful accounts

 

 

(2,619

)

 

 

(2,724

)

   Accounts receivable, net

 

$

104,734

 

 

$

112,360

 

The Company did not have any customers that exceeded 10.0% of its gross receivables as of March 31, 2024 and December 31, 2023 and did not have any customers that exceed 10% of its revenue for the three months ended March 31, 2024 and 2023.

The allowance for doubtful accounts consisted of the following:

 

 

 

Beginning Balance

 

 

Bad Debt (Recovery) Expense

 

 

Charged to Allowance

 

 

Ending Balance

 

Three months ended March 31, 2024

 

$

2,724

 

 

$

(886

)

 

$

781

 

 

$

2,619

 

Year ended December 31, 2023

 

 

1,915

 

 

 

3,142

 

 

 

(2,333

)

 

 

2,724

 

 

4. PREPAID AND OTHER CURRENT ASSETS

Prepaid and other current assets consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Deposits

 

$

1,756

 

 

$

1,764

 

Prepaid expenses

 

 

11,992

 

 

 

8,112

 

Supplies

 

 

3,004

 

 

 

3,819

 

   Prepaid and other current assets

 

$

16,752

 

 

$

13,695

 

 

5. PROPERTY AND EQUIPMENT, NET

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

7


 

Property and equipment, net, consisted of the following:

 

 

Estimated

 

March 31,

 

 

December 31,

 

 

 

Useful Life

 

2024

 

 

2023

 

Lab and test equipment

 

7 years

 

$

20,823

 

 

$

20,341

 

Vehicles

 

5 years

 

 

6,063

 

 

 

6,033

 

Equipment

 

3-7 years

 

 

52,324

 

 

 

50,387

 

Furniture and fixtures

 

7 years

 

 

2,961

 

 

 

2,963

 

Leasehold improvements

 

7 years

 

 

11,845

 

 

 

10,808

 

Aircraft

 

10-20 years

 

 

12,312

 

 

 

12,312

 

Building

 

39 years

 

 

5,748

 

 

 

5,748

 

 

 

 

 

112,076

 

 

 

108,592

 

Land

 

 

 

 

1,089

 

 

 

1,089

 

Construction in progress

 

 

 

 

6,147

 

 

 

3,956

 

Less accumulated depreciation

 

 

 

 

(59,567

)

 

 

(56,812

)

Total property and equipment, net

 

 

 

$

59,745

 

 

$

56,825

 

Total depreciation expense included in the unaudited condensed consolidated statements of operations was $2.9 million and $2.2 million for the three months ended March 31, 2024 and 2023, respectively.

6. LEASES

Leases are classified as either finance leases or operating leases based on criteria in ASC 842. The Company has finance leases for its vehicle and equipment leases and operating leases for its real estate space and office equipment leases. The Company’s operating and finance leases generally have original lease terms between 1 year and 15 years, and in some instances include one or more options to renew. The Company includes options to extend the lease term if the options are reasonably certain of being exercised. The Company currently considers some of its renewal options to be reasonably certain to be exercised. Some leases also include early termination options, which can be exercised under specific conditions. The Company does not have material residual value guarantees or restrictive covenants associated with its leases.

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 does 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 ("ROU") 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 ROU 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 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.

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The components of lease expense were as follows:

 

 

For the Three Months Ended March 31,

 

 

Statement of Operations Location

2024

 

 

2023

 

Operating lease cost

 

 

 

 

 

 

Lease cost

Selling, general and administrative expense

$

2,994

 

 

$

2,741

 

Variable lease cost

Selling, general and administrative expense

 

456

 

 

 

326

 

   Total operating lease cost

 

 

3,450

 

 

 

3,067

 

 

 

 

 

 

 

Finance lease cost

 

 

 

 

 

 

Amortization of ROU assets

Depreciation and amortization

 

1,278

 

 

 

1,154

 

Interest on lease liabilities

Interest expense—net

 

189

 

 

 

130

 

Total finance lease cost

 

 

1,467

 

 

 

1,284

 

   Total lease cost

 

$

4,917

 

 

$

4,351

 

 

 

 

 

 

 

 

Supplemental cash flow information related to leases was as follows:

 

 

 

For the Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows used in operating leases

 

$

3,158

 

 

$

2,557

 

Operating cash flows used in finance leases

 

 

189

 

 

 

130

 

Financing cash flows used in finance leases

 

 

1,085

 

 

 

1,029

 

 

 

 

 

 

 

 

Lease liabilities arising from new ROU assets:

 

 

 

 

 

 

Operating leases

 

 

3,111

 

 

 

7,999

 

Finance leases

 

 

2,066

 

 

 

2,405

 

Weighted average remaining lease terms and weighted average discount rates were:

 

 

 

March 31, 2024

 

 

 

Operating Leases

 

 

Finance Leases

 

Weighted average remaining lease term (years)

 

4.31

 

 

 

3.56

 

Weighted average discount rate

 

 

4.42

%

 

 

6.44

%

 

 

 

 

 

 

 

 

 

March 31, 2023

 

 

 

Operating Leases

 

 

Finance Leases

 

Weighted average remaining lease term (years)

 

4.62

 

 

 

3.43

 

Weighted average discount rate

 

 

3.31

%

 

 

5.57

%

The following is a schedule by year of the maturities of lease liabilities with original terms in excess of one year:

 

 

Operating Leases

 

 

Finance Leases

 

Remainder of 2024

 

$

8,760

 

 

$

3,772

 

2025

 

 

9,617

 

 

 

3,989

 

2026

 

 

7,441

 

 

 

3,346

 

2027

 

 

5,120

 

 

 

2,344

 

2028

 

 

3,928

 

 

 

1,139

 

2029 and thereafter

 

 

4,293

 

 

 

99

 

Total undiscounted future minimum lease payments

 

 

39,159

 

 

 

14,689

 

Less imputed interest

 

 

(3,626

)

 

 

(1,613

)

Total discounted future minimum lease payments

 

$

35,533

 

 

$

13,076

 

 

9


 

 

7. BUSINESS ACQUISITIONS

In line with the Company’s strategic growth initiatives, the Company acquired certain businesses during the three months ended March 31, 2024 and during the year ended December 31, 2023. The results of each of those acquired businesses are included in the unaudited condensed consolidated financial statements beginning on the respective acquisition date. Each transaction qualified as an acquisition of a business and was accounted for as a business combination. All acquisitions resulted in the recognition of goodwill. The Company paid these premiums resulting in such goodwill for a number of reasons, including expected synergies from combining operations of the acquiree and the Company while also growing the Company’s customer base, acquiring assembled workforces, expanding its presence in certain markets and expanding and advancing its product and service offerings. The Company recorded the assets acquired and liabilities assumed at their acquisition date fair value, with the difference between the fair value of the net assets acquired and the acquisition consideration reflected as goodwill.

The identifiable intangible assets for acquisitions are valued using the excess earnings method discounted cash flow approach for customer relationships, the relief from royalty method for trade names, the patent and external proprietary software 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 unaudited condensed consolidated statements of financial position in accounts payable and other accrued liabilities, other non-current liabilities or accounts receivable-net in the case of working capital deficits. Contingent consideration outstanding from acquisitions are included on the unaudited condensed consolidated statements of financial position in business acquisition contingent consideration, current or in business acquisitions contingent consideration, long-term. 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 $40.4 million in aggregate earn-out payments between the years 2024 and 2026 in connection with certain of its business acquisitions, of which up to $14.2 million may be paid only in cash, up to $13.1 million may be paid only in common stock and up to $13.1 million may be paid, at the Company’s option, in cash or common stock.

Transaction costs related to business combinations totaled $2.5 million and $0.8 million for the three months ended March 31, 2024 and March 31, 2023, respectively. These costs are expensed within selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations.

Acquisitions Completed During the Three Months Ended March 31, 2024

Epic Environmental Pty LTD (“EPIC”) —In January 2024, the Company completed the acquisition of EPIC by acquiring 100% of its common stock. EPIC is an environmental science and engineering consultancy, based in Brisbane, Australia, and serving clients across Australia.

Two Dot Consulting, LLC. (“2DOT”)—In February 2024, the Company completed the acquisition of 2DOT by acquiring 100% of its ownership interest. 2DOT is a leading environmental consultancy specializing in regulatory services to the oil and gas, and renewable sectors in the Rocky Mountain and adjacent regions, and is based in Denver, Colorado.

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