MONTROSE ENVIRONMENTAL GROUP, INC. 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 byEnvironmental Business International, Inc. , or EBI, which we commissioned, the global environmental industry is estimated to be approximately$1.34 trillion , with$444.0 billion concentrated inthe 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 provide scientific advisory and consulting services to support environmental assessments, environmental emergency response, and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. Our technical advisory and consulting offerings include regulatory compliance support and planning, environmental, ecosystem and toxicological assessments and support during responses to environmental disruption. We help clients navigate regulations at the local, state, provincial and federal levels. In addition to environmental toxicology, 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 the COVID-19 pandemic.
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.
43
--------------------------------------------------------------------------------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 inthe United States ,Canada andAustralia . 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: Fiscal Year Percentage Revenues of Fiscal Acquisitions Attributable Year (revenues in thousands) Completed to Acquisitions Revenues Fiscal year 2022 5 $ 20,154 3.7 % Fiscal year 2021 6 33,738 6.2 % Fiscal year 2020 3 82,441 25.1 % 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) 2022 2021 2020 Amortization expense$ 36,053 $ 35,154 $ 28,871 Acquisition-related costs 1,891 2,088 4,344
Fair value changes in business acquisition
contingencies (3,227 ) 24,372
12,942
We expect that amortization of identifiable intangible assets and other acquisition-related costs, assuming we continue to acquire, will continue to be significant.
Additionally, we made earn-out payments of$30.0 million and$50.0 million inMarch 2022 andApril 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 our Vista, Sensible, Environmental Standards and Huco acquisitions, we may make up to$9.5 million in aggregate earn-out payments between the years 2023 and 2026, up to$4.0 million of which may be paid in cash. See Note 8 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data."
COVID-19
To date, COVID-19 related adverse impacts such as temporarily delayed project start dates, particularly within our Remediation and Reuse segment, exiting certain service lines and employee quarantines 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, particularly in the years endedDecember 31, 2021 and 2020, and a declining revenue stream in 2022 as the pandemic has subsided, and one that we may not be able to replace in future periods. Although many parts of our business saw some impact from COVID-19, in the aggregate, our overall business benefitted from COVID-19 during the years endedDecember 31, 2022 , 2021 and 2020, primarily as a result of COVID-19 response work performed by CTEH. COVID-19 has had an impact on our historical seasonality trends. OnMarch 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 44 -------------------------------------------------------------------------------- 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 inDecember 2021 and the remaining amount was paid in the fourth quarter of 2022. Organic Growth We define organic growth as the change in revenues excluding revenues from acquisitions for the first twelve months following the date of acquisition and excluding revenues from businesses disposed of or discontinued. As a result of the significance of CTEH toMontrose and the potential annual volatility in CTEH's revenues due to the emergency response aspect of their business, we also disclose organic growth without the annual organic revenue growth of CTEH. We expect to continue to disclose organic revenue growth with and without CTEH. 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 withU.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. The decision to exit the businesses outlined below were reached after careful consideration of the relevant risks and rewards associated with the particular business. As part of this evaluation, during the fourth quarter of 2022, we determined to exit our start-up lab in Berkley,California and terminate the related positions. This discontinued start-up, which was included in our Measurement and Analysis segment, did not generate any material revenue during the years endedDecember 31, 2022 , 2021 and 2020. We recognized an impairment loss of$0.7 million in connection with vacating the related real estate. See Note 7 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data." 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, as well as the related positions. The work associated with these contracts is non-specialized and commoditized, and it was determined that the risk of facility failure taken on by the Company as the O&M contractor no longer justified the low margins in these 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 ,$12.1 million and$13.3 million in the years endedDecember 31, 2022 , 2021 and 2020, respectively. This decision did not impact the Company's specialized PFAS water treatment operations and maintenance contracts. During the first quarter of 2020, we determined to scale back operations of our environmental lab inBerkeley, California , and to exit our non-specialized municipal water engineering service line and our food-waste biogas engineering service line, collectively, the Discontinued Service Lines. The factors underlying these decisions were accelerated and amplified by the COVID-19 pandemic, which for example, has made the collection of commercial food waste used in biodigesters less consistent and delayed the approval or initiation of certain projects dependent on municipal or state funding. As a part of discontinuing these service lines, a process which was completed in the second quarter of 2020, we eliminated select personnel and, in the first quarter of 2020, booked an additional bad debt reserve related to the increased uncertainty around the ability to collect on receivables related to these service lines. Revenue from our non-specialized municipal water engineering service line and our food-waste biogas engineering, which were included in the results of our Remediation and Reuse segment, were$1.4 million in the year endedDecember 31, 2020 . The revenues from ourBerkeley environmental lab related to the Discontinued Service Lines, which were included in the results of our Measurement and Analysis segment, were$2.4 million in the year endedDecember 31, 2020 . We no longer generate any revenues from these Discontinued Service Lines. 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 21 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data." 45 --------------------------------------------------------------------------------
Financing Costs
OnApril 13, 2020 , we entered into 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, and used the proceeds therefrom to repay in full all amounts outstanding under our prior senior secured credit facility. We incurred debt extinguishment costs of$1.4 million in connection with this refinancing. EffectiveOctober 6, 2020 , the Company amended its 2020 Credit Facility to provide for a reduction on the applicable interest rate on the term loan from LIBOR plus 5.0% with a 1.0% LIBOR floor to LIBOR plus 4.5% with a 1.0% LIBOR floor. The revolver interest rate remained unchanged. OnApril 27, 2021 , we entered into the 2021 Credit Facility and repaid all amounts outstanding under the 2020 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, with 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. Furthermore, effectiveJanuary 27, 2022 , we entered into an interest rate swap transaction fixing the floating component of the interest rate on$100.0 million of borrowings to 1.39% untilJanuary 27, 2025 . Interest expense, net was$5.2 million ,$11.6 million (inclusive of the$4.1 million loss on extinguishment of the 2020 Credit Facility) and$13.8 million (inclusive of the$1.4 million loss on extinguishment of the Prior Credit Facility) in the years endedDecember 31, 2022 , 2021 and 2020, 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 14 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 experience some 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 segment 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 more recently, the benefit from COVID-19 related work. The benefit from COVID-19 related work began in the third quarter of 2020, peaked in the first quarter of 2021 and has declined each subsequent quarter, although demand has continued throughDecember 31, 2022 . Demand for COVID-19 related or environmental emergency response services provided by CTEH remains difficult to predict and as a result, we may have experienced revenues and earnings in both 2022 and 2021 that are not indicative of future results, making those periods particularly difficult comparisons for future periods. We do however expect that a portion of expectedly declining COVID-19 response revenues will be offset by other CTEH service line revenues such as environmental emergency responses as internal resources are freed up from the COVID-19 response work. 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. 46 --------------------------------------------------------------------------------
Cybersecurity
As previously disclosed, onJune 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 most affected portion of the business was our Enthalpy lab network. Upon discovery of the attack, we immediately began restoration and remediation efforts. ByJune 30, 2022 , we had substantially restored our 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 have identified a limited number of individuals whose personally identifiable information may have been accessed from our systems and have 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. As ofDecember 31, 2022 , upon final agreement by the parties, the Company recorded an insurance claim receivable of$1.0 million . The insurance claim receivable was collected in full inJanuary 2023 . We believe that the impact on revenues was approximately$1.5 million and the net impact on income before tax in the year endedDecember 31, 2022 was approximately$0.5 million (net of insurance settlement).
Results of Operations
Year Ended
Year Ended December 31,
(in thousands except per share data) 2022 2021
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 income (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 ) 47
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Revenues
For the year endedDecember 31, 2022 , revenues were$544.4 million , a decrease of$2.0 million or 0.4% from the year endedDecember 31, 2021 . The period over period decrease in revenues was primarily driven by an expected reduction in revenue from CTEH due to lower demand for COVID-19 related services, of$117.6 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 then CTEH, which contributed$71.1 million in organic revenue. The decrease was offset to a lesser extent by acquisitions completed in the year endedDecember 31, 2022 , as well as by 2021 acquisitions prior to their one-year anniversary date, which performed well and captured revenue synergies as part ofMontrose . In the aggregate, 2021 and 2022 acquisitions contributed revenues of$44.5 million .
Including CTEH, our organic revenue declined 7% in the year ended
Revenue from CTEH was$113.9 million in the year endedDecember 31, 2022 as compared to$231.5 million in the year endedDecember 31, 2021 . Total revenue from COVID-19 related services was$65.2 million and$189.9 million in the years endedDecember 31, 2022 and 2021, respectively. Discontinued O&M Contracts generated revenues of$3.6 million and$12.1 million in the years endedDecember 31, 2022 and 2021, respectively.
Revenue by segment, and as a percentage of total revenues, was as follows:
Year Ended December 31,
% of Total % of Total
Revenues Revenues Revenues Revenues
(revenue in thousands) 2022 2021
Assessment, Permitting and Response $ 187,234 34.4 % $ 261,865 47.9 %
Measurement and Analysis 172,432 31.7 % 153,208 28.0 %
Remediation and Reuse 184,750 33.9 % 131,340 24.0 %
$ 544,416 $ 546,413 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 rental and other outside services, field and lab supplies, vehicle costs and travel-related expenses. Variable costs of revenues generally follow the same seasonality trends as revenue, while fixed costs tend to change primarily as a result of acquisitions and investments in business infrastructure.
For the year endedDecember 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 endedDecember 31, 2021 , cost of revenues was$369.0 million or 67.5% of revenues, and was comprised of direct labor of$147.3 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 endedDecember 31, 2022 , cost of revenues as a percentage of revenue decreased 2.9% from the year endedDecember 31, 2021 , as a result of significantly lower outside service costs in 2022 when compared to 2021 driven primarily by a 48 --------------------------------------------------------------------------------
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
Selling, general and administrative expenses consist of general corporate overhead, including executive, legal, finance, safety, risk management, human resource, marketing and information technology related costs, as well as indirect operational costs of labor, rent, insurance and stock-based compensation.
For the year endedDecember 31, 2022 , selling, general and administrative expense was$176.3 million , an increase of$58.6 million or 49.8% versus the year endedDecember 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 19 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. See Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" for additional information regarding the impact of inflation on our business.
For the year ended
For the year endedDecember 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 endedDecember 31, 2022 , fair value changes in business acquisition contingencies resulted in a gain of$3.2 million versus an expense of$24.4 million for the year endedDecember 31, 2021 . The majority of the change in value in the year endedDecember 31, 2022 , was attributable to a$ 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 endedDecember 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 15 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 endedDecember 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 endedDecember 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 endedDecember 31, 2022 versus the year endedDecember 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." 49 --------------------------------------------------------------------------------
Other Income (Expense)
Other income for the year endedDecember 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 Berkley lab. Other expense for the year endedDecember 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 7, 15 and 18 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 endedDecember 31, 2022 , was$5.2 million , compared to$11.6 million for the year endedDecember 31, 2021 . The decrease in interest expense was driven by lower outstanding debt balances during the year endedDecember 31, 2022 when compared to the year endedDecember 31, 2021 , as well as the$4.1 million loss on extinguishment of debt realized in the year endedDecember 31, 2021 in connection with the repayment in full of the 2020 Credit Facility. See "-Key Factors that Affect Our Business and Our Results-Financing Costs" and Note 14 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 endedDecember 31, 2022 , compared to an income tax expense of$1.7 million for the year endedDecember 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 forU.S. federal income tax purposes, recognition of aU.S. federal and state valuation allowance of$30.6 million , state and foreign income tax provisions and Global Intangible Low Taxed Income.
Year Ended
Year Ended December 31,
(in thousands except per share data) 2021 2020
Statements of operations data:
Revenues $ 546,413 $ 328,243
Cost of revenues (exclusive of depreciation and
amortization) 369,028
215,492
Selling, general and administrative expense 117,658
85,546
Fair value changes in business acquisition
contingencies 24,372
12,942
Depreciation and amortization 44,810 37,274 Loss from operations$ (9,455 ) $ (23,011 ) Other expense (2,546 ) (20,268 ) Interest expense, net (11,615 ) (13,819 ) Loss before income taxes (23,616 ) (57,098 ) Income tax expense 1,709 851 Net loss$ (25,325 ) $ (57,949 ) Accretion of redeemable preferred stock - (17,601 ) Series A-1 deemed dividend - (24,341 ) Series A-2 dividend payment (16,400 ) (6,970 ) Net loss attributable to common stockholders$ (41,725 ) $ (106,861 ) Weighted average number of shares (basic and diluted) 26,724
16,479
Loss per share - basic and diluted$ (1.56 ) $ (6.48 ) 50
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Revenues
For the year endedDecember 31, 2021 , we had revenues of$546.4 million , an increase of$218.2 million or 66.5% over the year endedDecember 31, 2020 . Excluding revenues from Discontinued Service Lines of zero and$3.8 million in the year endedDecember 31, 2021 andDecember 31, 2020 , respectively, revenues increased$ 222.0 million or 68.4%. The period over period increase in revenues was driven by significant growth and a full twelve-month period of results from CTEH, which was acquired in the second quarter of 2020, significant organic growth for the rest of the company (excluding CTEH) and acquisitions completed after the year endedDecember 31, 2020 , which contributed$33.7 million in revenues during the year endedDecember 31, 2021 . Organic growth for the year endedDecember 31, 2021 , was 37% including CTEH, and 17%, excluding CTEH. As was the case in the prior year, all segments continue to be impacted by COVID-19 in 2021, however, in the current year, COVID-19 related project delays and other impacts were more than offset by COVID-19 response work in our Assessment, Permitting and Response segment. Revenues from CTEH were$231.5 million in year endedDecember 31, 2021 as compared to$82.4 million in the year endedDecember 31, 2020 . Revenue by segment, and as a percentage of total revenues, was as follows: Year Ended December 31, (revenue in thousands) 2021 2020 % of Total % of Total Revenues Revenues Revenues Revenues Assessment, Permitting and Response$ 261,865 47.9 %$ 98,521 30.0 % Measurement and Analysis 153,208 28.0 151,557 46.2 Remediation and Reuse 131,340 24.0 78,165 23.8$ 546,413 $ 328,243
See "-Segment Results of Operations" below.
Cost of Revenues
For the year endedDecember 31, 2021 , cost of revenues was$369.0 million or 67.5% of revenues, and was comprised of direct labor of$147.3 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 endedDecember 31, 2021 , cost of revenues as a percentage of revenue increased 1.9% from the prior year, as a result of significantly higher outside service costs driven primarily by external lab expenses to support the increase in CTEH's COVID-19 revenues. The increase was partially offset by lower labor as a percentage of revenue primarily attributable to a shift in roles and responsibilities of certain employees from providing direct field support to providing more specialized, multi-location overhead support functions (such as accounting, HR and management) as result of acquisitions and growth in our business. These changes in employee roles resulted in a decrease in labor costs recorded as cost of revenues and a corresponding increase in labor costs recorded as selling, general and administrative expense in the current year. For the year endedDecember 31, 2020 , cost of revenues was$215.5 million or 65.7% of revenues, and was comprised of direct labor of$117.8 million , outside services (including contracted labor, laboratory, shipping and freight and other outside services) of$50.9 million , field supplies, testing supplies and equipment rental of$23.2 million , project-related travel expenses of$11.8 million and other direct costs of$11.8 million .
Selling, General and Administrative Expense
For the year endedDecember 31, 2021 , selling, general and administrative expense was$117.7 million , an increase of$32.2 million or 37.5% versus the prior year, of which$6.2 million was from selling, general and administrative expense pertaining to companies we acquired in 2021. The remaining$26.0 million increase was primarily due to an increase in stock-based compensation expense of$5.5 million , and an increase in public company related costs of$4.1 million , a full year of selling, general and administrative expenses for CTEH, which was acquired inApril 2020 , the impact of the shift of employee roles and responsibilities as described above, and an increase in investments in corporate infrastructure (primarily sales and marketing, finance, administrative, IT, legal and human resources). These increases were partially offset by a decrease in IPO-related costs of$6.9 million , a decrease in bad debt of$3.4 million , primarily related to the Discontinued Service Lines and a decrease in acquisition related costs of$2.3 million . As a percentage of revenue, selling, general and administrative expenses decreased to 21.5% in fiscal year 2021 from 26.1% in fiscal year 51 --------------------------------------------------------------------------------
2020.
For the year endedDecember 31, 2021 , selling, general and administrative expense 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 .
For the year ended
Fair Value Changes in Business Acquisition Contingencies
For the year endedDecember 31, 2021 , fair value changes in business acquisition contingencies were$24.4 million , an increase of$11.5 million versus$12.9 million for the year endedDecember 31, 2020 . The majority of the change in value in both periods was attributable to the achievement of the maximum 2020 and 2021 CTEH earn-outs, respectively. See Notes 8 and 15 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 endedDecember 31, 2021 , was$44.8 million and was comprised of amortization of finite lived intangibles of$35.2 million , arising as a result of our acquisition activity, depreciation of property and equipment of$6.4 million and finance leases right-of-use asset amortization of$3.2 million . Depreciation and amortization expense for the year endedDecember 31, 2020 , was$37.3 million and was comprised of amortization of finite lived intangibles of$28.9 million and depreciation of property and equipment of$8.4 million . The increase in amortization for the year endedDecember 31, 2021 versus the prior year is primarily a result of acquisitions. The decrease in depreciation of property and equipment, and the increase in amortization of finance leases right-of-use asset, is primarily a result of the adoption of Accounting Standard Codification ("ASC") 842, partially offset by the impact of acquisitions on depreciation. See Notes 7, 8 and 9 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data."
Other Expense
Other expense for the year endedDecember 31, 2021 of$2.5 million was driven primarily by fair value adjustments related to the Series A-2 preferred stock conversion option. Other expense for the year endedDecember 31, 2020 of$20.3 million was driven primarily by fair value adjustments related to (i) the Series A-1 preferred stock contingent put option, (ii) the Series A-2 embedded options, and (iii) the Series A-1 and A-2 preferred stock warrant options. See Notes 13, 15, 17 and 18 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data."
Interest Expense, Net
Interest expense, net incurred during the year endedDecember 31, 2021 was$11.6 million , compared to$13.8 million for the year endedDecember 31, 2020 . The decrease in interest expense was driven by lower average interest rates under the 2021 Credit Facility, partially offset by an increase in write-off of deferred debt issuance costs. Interest expense in the year endedDecember 31, 2021 includes$3.1 million from the write off of deferred debt issuance costs related to the repayment of our 2020 Credit Facility in April, 2021, whereas interest expense in the year endedDecember 31, 2020 includes$1.4 million expense from both payments made and the write off of deferred debt issuance costs related to the repayment of the Prior Credit Facility. See Note 14 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data."
Income Tax Expense
Income tax expense was
52
--------------------------------------------------------------------------------
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 $27.0 million , state and foreign income tax provisions
and Global Intangible Low Taxed Income.
Segment Results of Operations
Year Ended
Year Ended December 31,
2022 2021
Segment Segment
Segment Adjusted Segment Adjusted
(in thousands except Segment Adjusted EBITDA Segment Adjusted EBITDA
percentage data) Revenues EBITDA(1) Margin(2) Revenues EBITDA(1) Margin(2)
Assessment, Permitting
and Response $ 187,234 $ 37,458 20.0 % $ 261,865 $ 57,128 21.8 %
Measurement and Analysis 172,432 31,588 18.3 % 153,208 31,270 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 21 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.
Revenues
Assessment, Permitting and Response segment revenues for the year endedDecember 31, 2022 were$187.2 million , compared to$261.9 million for the year endedDecember 31, 2021 . The decrease was driven by an expected$117.6 million decrease in CTEH revenues in 2022 when compared to 2021, as a result of lower revenue from COVID-19 related services. The expected decrease in CTEH was partially offset by organic growth in non-CTEH service lines and revenues of$37.1 million from acquisitions completed during 2022 and revenues from 2021 acquisitions prior to their one year anniversary. CTEH revenues were$113.9 million in 2022 compared to$231.5 million in 2021. Total revenue from COVID-19 related services was$65.2 million and$189.9 million in the year endedDecember 31, 2022 and 2021, respectively. Measurement and Analysis segment revenues for the year endedDecember 31, 2022 were$172.4 million , an increase of$19.2 million or 12.5% compared to revenues for the year endedDecember 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 endedDecember 31, 2022 were$184.8 million , an increase of$53.5 million or 40.7% compared to revenues for the year endedDecember 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 endedDecember 31, 2022 and 2021, respectively.
Segment Adjusted EBITDA
Assessment, Permitting and Response Segment Adjusted EBITDA was$37.5 million for the year endedDecember 31, 2022 , compared to$57.1 million for the year endedDecember 31, 2021 . For the years endedDecember 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 CTEH COVID-19 related revenues during the year endedDecember 31, 2022 when compared to the year endedDecember 31, 2021 . The decrease in Segment Adjusted EBITDA margin was a result of recent acquisitions, which operate at lower margins, and business mix partially offset by higher CTEH margins, as a result of lower COVID-19 related work as a percentage of CTEH revenues in the current year versus the prior year. 53 -------------------------------------------------------------------------------- Measurement and Analysis Segment Adjusted EBITDA for the year endedDecember 31, 2022 was$31.6 million , an increase of$0.3 million compared to Segment Adjusted EBITDA for the year endedDecember 31, 2021 of$31.3 million . For the year endedDecember 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 inJune 2022 , which temporarily disrupted certain of our labs' ability to operate inJuly 2022 . Remediation and Reuse Segment Adjusted EBITDA for the year endedDecember 31, 2022 was$30.6 million , an increase of$11.3 million compared to Segment Adjusted EBITDA for the year endedDecember 31, 2021 of$19.3 million . For the year endedDecember 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 endedDecember 31, 2022 compared to$30.1 million for the year endedDecember 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 endedDecember 31, 2022 and 2021, respectively.
Year Ended
Year Ended December 31,
2021 2020
Segment Segment
Segment Adjusted Segment Adjusted
(in thousands except Segment Adjusted EBITDA Segment Adjusted EBITDA
percentage data) Revenues EBITDA(1) Margin(2) Revenues EBITDA(1) Margin(2)
Assessment, Permitting
and Response $ 261,865 $ 57,128 21.8 % $ 98,521 $ 24,208 24.6 %
Measurement and Analysis 153,208 31,270 20.4 % 151,557 39,386 26.0 %
Remediation and Reuse 131,340 19,326 14.7 % 78,165 8,938 11.4 %
Total Operating Segments $ 546,413 $ 107,724 19.7 % $ 328,243 $ 72,532 22.1 %
Corporate and Other (30,082 ) n/a (18,056 ) n/a
(1)
For purposes of evaluating segment profit, the Company's chief operating
decision maker reviews Segment Adjusted EBITDA as a basis for making the
decisions to allocate resources and assess performance. See Note 21 to our
audited consolidated financial statements included in Item 8. "Financial
Statements and Supplementary Data."
(2)
Represents Segment Adjusted EBITDA as a percentage of revenues.
Revenues
Assessment, Permitting and Response segment revenues for the year endedDecember 31, 2021 were$261.9 million , compared to$98.5 million for the year endedDecember 31, 2020 . The increase was primarily driven by the acquisition of CTEH in the second quarter of 2020, and the acquisitions of EI and Horizon in the second and third quarter of 2021, respectively. The impact of CTEH on the segment was due to two main factors: (i) CTEH and therefore, the segment, benefited from greater COVID-19 related response work in 2021 versus 2020 and (ii) CTEH impacted the segment in the full 2021 period compared to only nine months in 2020. Measurement and Analysis segment revenues for the year endedDecember 31, 2021 were$153.2 million , an increase of$1.6 million or 1.1% compared to revenues for the year endedDecember 31, 2020 of$151.6 million . The increase was driven by revenues of$4.9 million from the acquisitions of Vista, ECI and Sensible, partially offset by a decline in revenues from Discontinued Service Lines and the timing of projects. Revenues from Discontinued Service Lines in the Measurement and Analysis segment were zero and$2.4 million for the year endedDecember 31, 2021 and 2020. Remediation and Reuse segment revenues for the year endedDecember 31, 2021 were$131.3 million , an increase of$53.1 million or 68.0% compared to revenues for the year endedDecember 31, 2020 of$78.2 million . This revenue growth was primarily due to organic growth, driven by increases in demand for our water treatment technology (PFAS removal) and waste-to-resources (agricultural waste to biogas) services, and$16.1 million from the acquisition of MSE, partially offset by the loss of revenues from the Discontinued Service Lines. Revenues from Discontinued Service Lines were$1.4 million for the year endedDecember 31, 2020 . 54 --------------------------------------------------------------------------------
Segment Adjusted EBITDA
Assessment, Permitting and Response Segment Adjusted EBITDA was$57.1 million for the year endedDecember 31, 2021 , compared to$24.2 million for the year endedDecember 31, 2020 . For the years endedDecember 31, 2021 and 2020, Segment Adjusted EBITDA margin was 21.8% and 24.6%, respectively. The increase in Segment Adjusted EBITDA was primarily a result of significantly higher revenues. The decline in Segment Adjusted EBITDA margin is a result of an increase in lower margin COVID-19 response work performed by CTEH in 2021. Measurement and Analysis Segment Adjusted EBITDA for the year endedDecember 31, 2021 was$31.3 million , a decrease of$8.1 million compared to Segment Adjusted EBITDA for the year endedDecember 31, 2020 of$39.4 million . For the year endedDecember 31, 2021 , Segment Adjusted EBITDA margin was 20.4% compared to 26.0% in the prior year. The decline in Segment Adjusted EBITDA and segment adjusted EBITDA margin was primarily a result of business mix and the planned reversal of cost mitigation measures taken at the start of the COVID-19 pandemic in 2020. Remediation and Reuse Segment Adjusted EBITDA for the year endedDecember 31, 2021 was$19.3 million , an increase of$10.4 million compared to Segment Adjusted EBITDA for the year endedDecember 31, 2020 of$8.9 million . For the year endedDecember 31, 2021 , Segment Adjusted EBITDA margin was 14.7% compared to 11.4% in the prior year. The increase in both Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was primarily a result of higher revenues. Corporate and other costs were$30.1 million for the year endedDecember 31, 2021 compared to$18.1 million for the year endedDecember 31, 2020 . The cost increase was primarily driven by increased public company costs, higher software costs, and continued investment in corporate support functions to support anticipated future growth. Corporate and other costs were 5.5% of revenues in both the years endedDecember 31, 2021 andDecember 31, 2020 .
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and other sources, including availability under our credit facility, and their sufficiency to fund our operating and investing activities. Our principal sources of liquidity have been borrowings under our credit facilities, other borrowing arrangements, proceeds from the issuance of common and preferred stock and cash generated by operating activities. Historically, we have financed our operations and acquisitions from a combination of cash generated from operations, periodic borrowings under senior secured credit facilities, other prior secured borrowings and proceeds from the issuance of common and preferred stock. Our primary cash needs are for day to day operations, to fund working capital requirements, to fund our acquisition strategy 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 2021 results in an aggregate amount not to exceed$30.0 million , with the earn-out payment equal to a specified multiple of CTEH's EBITDA for 2021 in excess of a specified target. CTEH fully achieved the target in 2021 and the$30.0 million payment was paid in cash in the first quarter of 2022. We made a similar$50.0 million earn-out payment to CTEH in the second quarter of 2021 in respect of its 2020 EBITDA that was paid 50% in cash and 50% in stock. We may also be required to make up to$9.5 million in aggregate earn-out payments between the years 2023 and 2026 in connection with the acquisitions of Vista, Sensible, Environmental Standards, IAG and Huco, up to$4.0 million of which may be paid in cash. See Note 8 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data." We expect to continue to finance our liquidity requirements, including any cash earn-out payments that may be required in connection with acquisitions, through cash generated from operations and borrowings under our credit facility. We believe these sources will be sufficient to fund our cash needs in the short-term and long-term. 55 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes our cash flows for the periods presented:
Year Ended December 31,
(in thousands) 2022 2021
2020
Consolidated statement of cash flows data: Net cash provided by operating activities$ 20,649 $ 37,581 $ 1,850 Net cash used in investing activities (38,687 ) (71,641 ) (179,740 ) Net cash (used in) provided by financing activities (38,764 ) 146,103
205,902
Change in cash, cash equivalents and restricted cash$ (56,802 ) $ 112,043 $ 28,012 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 endedDecember 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 endedDecember 31, 2021 . Cash provided by operations includes payment of contingent consideration of$19.5 million and$15.6 million in the years endedDecember 31, 2022 and 2021, respectively. Excluding payment of contingent consideration, cash provided by operating activities was$40.1 million for the year endedDecember 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, primarily due to expected lower revenue from CTEH's COVID-19 services, of$9.3 million , and an increase in working capital in the current year 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 endedDecember 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 . For the year endedDecember 31, 2021 , net cash provided by operating activities was$37.6 million compared to net cash provided by operating activities of$1.9 million for the year endedDecember 31, 2020 . Cash provided by operations includes payment of contingent consideration of$15.6 million and$6.4 million in the year endedDecember 31, 2021 and 2020, respectively. Excluding payment of contingent consideration, cash provided by operating activities was$53.2 million , compared to cash provided by operating activities of$8.3 million in the year endedDecember 31, 2020 , an increase of$44.9 million . The period over-period increase was primarily due to higher earnings before non-cash items of$38.1 million and by an increase in working capital in the year endedDecember 31, 2021 of$10.1 million versus an increase in working capital in the year endedDecember 31, 2020 of$16.7 million . The increase in working capital of$10.1 million in the year endedDecember 31, 2021 , was driven by an increase in accounts receivable and contract assets of$36.2 million (as a result of significantly higher revenues when compared to the prior year), an increase in prepaid expenses and other current assets of$1.1 million , partially offset by an increase in accounts payable and other accrued liabilities of$24.0 million (as a result of higher contract liabilities due to the timing of project completion and the timing of vendor payments) and an increase in accrued payroll and benefits of$3.2 million .
Investing Activities
For the year endedDecember 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$10.0 million . For the year endedDecember 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$7.0 million . 56 -------------------------------------------------------------------------------- For the year endedDecember 31, 2020 , net cash used in investing activities was$179.7 million , primarily driven by cash paid for the acquisition of CTEH, net of cash acquired, of$171.6 million , as well as purchases of property and equipment for cash consideration of$7.8 million .
Financing Activities
For the year endedDecember 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 endedDecember 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 . For the year endedDecember 31, 2020 , net cash provided by financing activities was $????? million. Cash provided by financing activities was driven by IPO proceeds, net of underwriting fees, of$161.3 million , borrowings under the 2020 Credit Facility, consisting of$175.0 million under the term loan and$25.0 million under the revolver, as well as net proceeds of$173.7 million from the issuance of the Series A-2 preferred stock. Proceeds from the IPO were used primarily to repay the$131.8 million Series A-1 preferred stock (along with the issuance of shares of common stock), as well as to pay IPO offering costs of$4.2 million . Proceeds from the 2020 Credit Facility were used primarily to repay the$177.5 million outstanding under the Prior Credit Facility, whereas proceeds from the issuance of the Series A-2 preferred stock were used to finance the acquisition of CTEH. Cash from financing activities was also used to repay the$25.0 million outstanding revolver balance and to make payments of acquisition-related contingent consideration of$6.0 million , term loan amortization payments of$1.3 million and$1.0 million related to our Prior Credit Facility and 2020 Credit Facility, respectively, the payment of debt issuance and debt extinguishment costs of$5.2 million and the payment of the dividends on the Series A-2 preferred stock of$7.0 million .
Credit Facilities
2021 Credit Facility
OnApril 27, 2021 , we entered into a new Senior Secured Credit Agreement, or the 2021 Credit Facility, providing for a new$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 2020 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 onApril 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. The 2021 Credit Facility term loan must be repaid in quarterly installments. The 2021 Credit Facility term loan and the revolver bear interest subject to the Company's leverage ratio and LIBOR. OnJanuary 27, 2022 , we entered into an interest rate swap transaction fixing the floating component of the interest rate on$100.0 million of borrowings to 1.39% untilJanuary 27, 2025 . Additionally, effectiveSeptember 1, 2022 , we received an interest rate reduction of 0.05% under the 2021 Credit Facility based on the achievement of certain sustainability and environmental, social and governance related objectives as provided for in the 2021 Credit Facility. 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 ofDecember 31, 2022 , our consolidated total leverage ratio was 1.3 times and we were in compliance with all covenants under the 2021 Credit Facility. 57 --------------------------------------------------------------------------------
The weighted average interest rate on the 2021 Credit Facility for the years
ended
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.
See Note 14 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data."
2020 Credit Facility
OnApril 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 inApril 2021 . The resulting loss on extinguishment upon repayment of the 2020 Credit Facility inApril 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 endedDecember 31, 2021 .
See Note 14 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data."
Prior Credit Facility
Our Prior Credit Facility consisted of a$50.0 million term loan and a$130.0 million revolving credit facility. All amounts outstanding under the Prior Credit Facility were repaid onApril 13, 2020 with proceeds from the 2020 Credit Facility. The resulting loss on extinguishment amounted to$1.4 million , of which$0.4 million was related to fees paid and$1.0 million 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 endedDecember 31, 2020 .
See Note 14 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data."
Series A-1 Preferred Stock
OnOctober 19, 2018 , we issued 12,000 shares of our Series A-1 preferred stock. Before redemption, the Redeemable Series A-1 Preferred Stock accrued dividends quarterly at an annual rate of 15.0% with respect to dividends that were paid in cash and at an annual rate of 14.2% with respect to dividends that were accrued. OnJuly 27, 2020 , we redeemed in full the Series A-1 preferred stock, including the guaranteed minimum two-year dividend. We used$131.8 million of the IPO proceeds and 1,786,739 shares of common stock to redeem all outstanding shares of the Series A-1 preferred stock.
See Note 17 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data."
Series A-2 Preferred Stock
OnApril 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 shares of common stock with a ten-year exercise period, in exchange for$175.0 million . Prior to the completion of our IPO onJuly 27, 2020 , each share of Series A-2 preferred stock accrued dividends at the rate of 15.0% per annum with respect to dividends that were paid in cash, and 14.2% per annum, with respect to dividends that accrued and compounded, resulting in an annual dividend rate of 15.0%. Following the completion of our IPO, 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. Following the completion of our IPO and the redemption of our Series A-1 preferred stock onJuly 27, 2020 with a portion of the proceeds therefrom and newly issued shares of common stock, the Series A-2 58 -------------------------------------------------------------------------------- preferred stock dividend rate changed to 9.0% 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. With respect to any redemption of any share of the Series A-2 preferred stock prior toApril 13, 2023 , we are subject to a make whole penalty in which the holder is guaranteed at least three years of dividend payments on the redeemed amount.
See Note 18 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data."
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted inthe United States requires management to make estimates and assumptions about future events that affect amounts reported in our audited consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Management evaluated the development and selection of our critical accounting policies and estimates and believes that the following involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our audited consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More information on all of our significant accounting policies, as well as recently adopted and issued accounting pronouncements that may have an impact on these policies, can be found in Notes 2 and 3 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data." Use of Estimates The preparation of the audited consolidated financial statements in conformity withU.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, the fair value of warrants, fair value of embedded derivatives, fair value of common stock issued, stock-based compensation expense and deferred taxes. Actual results could materially differ from those estimates. Revenue Recognition Revenue is recognized in accordance withFinancial 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: Our 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 our time-and-materials contracts are subject to maximum contract amounts. The duration of our contracts ranges from less than one month to over a year, depending on the scope of services provided. 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. 59 -------------------------------------------------------------------------------- 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. Fixed fee contracts-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. We 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). We apply 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 our 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. We 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 our 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, we are allowed to recognize revenue, over time, in the amount to which we have a right to invoice. In addition, we are not required to estimate such variable consideration upon inception of the contract and reassess the estimate each reporting period. We determined that this method best represents the transfer of services as, upon billing, we have a right to consideration from a customer in an amount that directly corresponds with the value to the customer of our performance completed to date.
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, 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. Accounting for Acquisitions We account for acquisitions using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. The purchase price of acquisitions is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on estimated fair values, and any excess purchase price over the identifiable assets acquired and liabilities assumed is recorded as goodwill.Goodwill represents the premium we pay over the fair value of the net tangible and intangible assets acquired. We may use independent valuation specialists to assist in determining the estimated fair values of assets acquired and liabilities assumed, which could require certain significant management assumptions and estimates. 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.
Business Acquisition Contingencies
Some of our acquisition agreements include contingent consideration
arrangements, which are generally based on the achievement of future performance
thresholds. For each transaction, we estimate the fair value of contingent
consideration payments as part of the initial purchase price and record the
estimated fair value of contingent consideration as a liability. 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.
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--------------------------------------------------------------------------------Goodwill Impairment Analysis
Goodwill is not amortized but instead qualitatively or quantitively 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 perform the goodwill test at the reporting unit level. If necessary, the goodwill quantitative impairment test is performed onOctober 1 every year. 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 expense on our consolidated statements of operations.
Stock-based Compensation
We currently sponsor two stock incentive plans that allow for issuance of employee stock options and other forms of equity incentives. Under one of the plans, there are certain awards that were issued to non-employees in exchange for their services and are accounted for under ASC 505, Equity-Based Payments to Non-Employees. ASC 505 requires that the fair value of the equity instruments issued to a non-employee be measured on the earlier of: (i) the performance commitment date or (ii) the date the services required under the arrangement have been completed. 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. 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.
JOBS Act Accounting Election
We were an emerging growth company, as defined in the JOBS Act, through the end of the year endedDecember 31, 2021 . Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. While we were an emerging growth company, we elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. As a result, our financial statements for periods throughDecember 31, 2020 may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. 61
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