# Onterris, Inc.: Form 10-Q for the period ended Mar 31, 2023

- Company: [Onterris, Inc.](/companies/ont.md) (CIK 1643615)
- Form: 10-Q
- Filed: 2023-05-10
- Accepted by EDGAR: May 10, 2023, 20:00 ET
- Period: 2023-03-31
- Accession: 0000950170-23-020477
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1643615/000095017023020477/meg-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1643615/000095017023020477/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $131.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-01-01 to 2023-03-31 | $81.6m | us-gaap:CostOfRevenue |
| Selling, general and administrative | 3 months, 2023-01-01 to 2023-03-31 | $49.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | −$10.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $1.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | −$14.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.63 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.63 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 29,857,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $3.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $4.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $4.1m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2023-03-31 | $76.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-03-31 | $231.0m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $783.2m | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $102.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $320.1m | us-gaap:Liabilities |
| Long-term debt | at 2023-03-31 | $149.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-03-31 | $13.1m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-03-31 | $310.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,459 characters.

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical audited and unaudited consolidated financial statements and related notes and other information included elsewhere in this filing and our other filings with the SEC, including our unaudited condensed consolidated financial statements and the accompanying notes as of and for the three months ended March 31, 2023 and March 31, 2022 included in Part I, Item 1. “Financial Statements” in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section entitled “Forward-Looking Statements”, and elsewhere in this filing and our other filings with the SEC, including in Item 1A. Risk Factors in the 2022 Form 10-K.*

### Overview

Since our inception in 2012, our mission has been to help clients and communities meet their environmental goals and needs. According to data derived from a 2022 Environmental Industry Study prepared by Environmental Business International, Inc., or EBI, which we commissioned, the global environmental industry is estimated to be approximately $1.34 trillion, with $444.0 billion concentrated in the United States.

### Our Segments

We provide environmental services to our clients through three business segments—Assessment, Permitting and Response, Measurement and Analysis and Remediation and Reuse. For more information on each of our operating segments, see Item 1. “Business” in the 2022 Form 10-K.

### 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.

### Acquisitions

We have been, and expect to continue to be, an acquisitive company. Acquisitions have expanded our environmental service capabilities across all three segments, our access to technology, as well as our geographic reach in the United States, Canada and Australia. The table below sets forth the number of acquisitions completed, revenues generated by and the percentage of total revenues attributable to those acquisitions completed during the three months ended March 31, 2023 and March 31, 2022:

*(Revenues in thousands)*

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Acquisitions completed | 2 | 2 |
| Revenues attributable to acquisitions in the period | $967 | $3,333 |
| Percentage of revenues | 0.7% | 2.5% |

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 7 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

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 three months ended March 31, 2023 and March 31, 2022, was:

*(in thousands)*

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Amortization expense | $7,240 | $9,419 |
| Acquisition-related costs | 775 | 467 |
| Fair value changes in business acquisition contingencies gain | (398) | (21) |

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 in March 2022 in connection with our CTEH acquisition. In connection with our Vista, Sensible, Environmental Standards, Huco and EAI acquisitions, we may make up to $9.5 million in aggregate earn-out payments between the years 2023 and 2026, of which up to $2.6 million may be paid only in cash, up to $5.5 million may be paid only in common stock and up to $1.5 million may be paid, at our option, in cash or common stock. See Note 7 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

### 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 year ended December 31, 2021 and, to a lesser extent, in 2022. COVID-19 revenues have continued to decline as the pandemic has subsided, which 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 three months ended March 31, 2023 and March 31, 2022, primarily as a result of COVID-19 response work performed by CTEH. COVID-19 has had an impact on our historical seasonality trends.

### Organic Growth

We define organic growth as the change in revenues excluding revenues from CTEH, from acquisitions for the first twelve months following the date of acquisition and excluding revenues from businesses held for sale, disposed of or discontinued. As a result of the potential annual volatility in CTEH’s revenues due to the emergency response aspect of their business, we will no longer be including CTEH revenues in the calculation of organic growth. Management uses organic growth as one of the means by which it assesses our results of operations. Organic growth is not, however, a measure of revenue growth calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should be considered in conjunction with revenue growth calculated in accordance with GAAP. We have grown organically over the long term and expect to continue to do so.

### Discontinued Operations

Periodically, or when circumstances warrant, we evaluate the performance of our business services to ensure that performance and outlook are consistent with expectations, and that the services offered are consistent with the Company’s mission.

As part of this evaluation, during the first quarter of 2023, we determined to sell one of our specialty service lines within our lab testing business, the Discontinuing Specialty Lab, whose service offering is non-core to the Company’s business. The Discontinuing Specialty Lab, which is part of our Measurement and Analysis segment, generated revenues of $1.4 million and $5.6 million in the three months ended March 31, 2023 and March 31, 2022, respectively. We expect the sale process to be completed around December 31, 2023. The discontinuation of this specialty service line did not represent a strategic shift that had (or will have) a major effect on the Company’s operations and financial results, therefore it did not meet the requirements to be classified as discontinued operations.

During the fourth quarter of 2022, we determined to exit our lab in 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 three months ended March 31, 2022.

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 $1.4 million in the three months ended March 31, 2022. This decision did not impact the Company’s specialized PFAS water treatment operations and maintenance contracts.

### Revenue Mix

Our segments generate different levels of profitability and, accordingly, shifts in the mix of revenues between segments can impact our consolidated reported net income, net loss margin, Segment Adjusted EBITDA and Segment Adjusted EBITDA margin from quarter to quarter and year to year. Inter-company revenues between business lines within segments have been eliminated. See Note 18 to our unaudited condensed consolidated financial statements included in Part 1, Item 1 “Financial Statements.”

### Financing Costs

On April 27, 2021, we entered into the 2021 Credit Facility and repaid all amounts outstanding under our prior credit facility. The 2021 Credit Facility consists of a $175.0 million term loan and a $125.0 million revolving credit facility. The revolving credit facility includes a $20.0 million sublimit for the issuance of letters of credit. The interest rate on the 2021 Credit Facility varies depending on leverage, with a minimum of LIBOR plus 1.5% and a maximum of LIBOR plus 2.5%. Effective January 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% until January 27, 2025.

Interest expense, net was $1.5 million and $1.1 million in the three months ended March 31, 2023 and March 31, 2022, 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 12 to our unaudited condensed consolidated financial statements included in Part 1, Item 1 “Financial Statements” and “Liquidity and Capital Resources.”

### 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 the benefit from COVID-19 related work. The benefit from COVID-19 related work peaked in the quarter ended March 31, 2021 and has declined in each subsequent quarter. COVID-19 related revenue was $3.8 million and $21.4 million in the quarter ended March 31, 2023 and March 31, 2022, respectively. Demand for environmental emergency response or, to a lesser extent, COVID-19 related services provided by CTEH remains difficult to predict and as a result, we may have experienced revenues and earnings in prior years that are not indicative of future results, making those periods particularly difficult comparisons for future periods. We do however expect that, looking forward, the expectedly declining COVID-19 response revenues as compared to prior year periods will continue to 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.

### Cybersecurity

As previously disclosed, on June 11, 2022 we were the target of an organized ransomware attack on our IT systems that led to the temporary disruption of our regular operations. The Company's financial systems are cloud based and were not affected. We engaged third party experts, including cyber legal counsel and a cybersecurity firm, to perform a fulsome forensic investigation of this attack and we promptly notified federal law enforcement. Based on the results of the investigation, we do not believe there has been any misuse of confidential or sensitive client data, have made notifications to clients, and have proactively addressed client concerns regarding our security environment. Furthermore, we 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. In January 2023, the Company received $1.0 million in business interruption insurance proceeds related to the cyber-attack. These proceeds partially offset the estimated $1.5 million cost of the cyber-attack recognized in the second and third quarter of 2022.

### Results of Operations

### For Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

*(in thousands, except per share data)*

| Statements of operations data: | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Revenues | $131,428 | $134,680 |
| Cost of revenues (exclusive of depreciation and amortization) | 81,633 | 88,386 |
| Selling, general and administrative expense | 49,613 | 41,807 |
| Fair value changes in business acquisition contingencies | (398) | (21) |
| Depreciation and amortization | 10,555 | 12,144 |
| **Loss from operations** | **$(9,975)** | **$(7,636)** |
| Other (expense) income | (1,836) | 2,461 |
| Interest expense, net | (1,541) | (1,092) |
| **Loss before income taxes** | **(13,352)** | **(6,267)** |
| Income tax expense | 1,367 | 1,269 |
| **Net loss** | **$(14,719)** | **$(7,536)** |
| Series A-2 dividend payment | (4,100) | (4,100) |
| **Net loss attributable to common stockholders** | **$(18,819)** | **$(11,636)** |
| Weighted average number of shares — basic and diluted | 29,857 | 29,662 |
| **Loss per share — basic and diluted** | **$(0.63)** | **$(0.39)** |

### Revenues

For the three months ended March 31, 2023, we generated revenues of $131.4 million, a decrease of $3.3 million, or 2.4% over the three months ended March 31, 2022. The period over period decrease in revenues was driven by expected and significantly lower revenue from COVID-19 related services from our CTEH business, lower revenues in the Discontinuing Specialty Lab, the exiting of the Discontinued O&M Contracts, and the timing of projects in our Remediation and Reuse segment. These decreases were partially offset by organic growth in our Assessment, Permitting and Response and Measurement and Analysis segments, an increase in CTEH environmental response revenues unrelated to COVID-19, and acquisitions completed subsequent to the quarter ended March 31, 2022, which contributed revenues of $2.9 million. Revenue from CTEH was $30.8 million in the three months ended March 31, 2023 compared to $29.9 million in the three months ended March 31, 2022. Total revenue from COVID-19 related services was $3.8 million and $21.4 million in the three months ended March 31, 2023 and March 31, 2022, respectively. Revenue from the Discontinuing Specialty Lab, was $1.4 million and $5.6 million in the three months ended March 31, 2023 and March 31, 2022, respectively. The Discontinued O&M Contracts generated revenues of zero and $1.4 million in the three months ended March 31, 2023 and March 31, 2022, respectively. Revenue by segment and as a percentage of total revenues was as follows:

*(Revenues in thousands)*

|  | Three Months Ended March 31, 2023 Revenues | % of Total Revenues | 2022 Revenues | % of Total Revenues |
| --- | ---: | ---: | ---: | ---: |
| Assessment, Permitting and Response | $52,214 | 39.7% | $45,600 | 33.9% |
| Measurement and Analysis(1) | 42,527 | 32.4 | 39,761 | 29.5 |
| Remediation and Reuse | 36,687 | 27.9 | 49,319 | 36.6 |
| Total | $131,428 |  | $134,680 |  |

(1) Includes revenue of $1.4 million and $5.6 million from the Discontinuing Specialty Lab, for the three months ended March 31, 2023 and March 31, 2022, respectively. See “—Discontinued Operations” above.

See “—Segment Results of Operations” below.

### Cost of Revenues

Cost of revenues consists of all direct costs required to provide services, including fixed and variable direct labor costs, equipment rental and other outside services, field and lab supplies, vehicle costs and travel-related expenses. Variable costs of revenues generally follow the same trends as revenue, while fixed costs tend to change primarily as a result of acquisitions.

For the three months ended March 31, 2023, cost of revenues was $81.6 million or 62.1% of revenues, and was comprised of direct labor of $42.6 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $16.0 million, field supplies, testing supplies and equipment rental costs of $13.5 million, project-related travel expenses of $4.8 million and other direct costs of $4.7 million.

For the three months ended March 31, 2022, cost of revenues was $88.4 million or 65.6% of revenues, and was comprised of direct labor of $38.8 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services)

of $19.1 million, field supplies, testing supplies and equipment rental costs of $21.8 million, project-related travel expenses of $4.0 million and other direct costs of $4.7 million.

For the three months ended March 31, 2023, cost of revenues as a percentage of revenue decreased 3.5% from the three months ended March 31, 2022, primarily as a result of a $8.3 million decrease in field and testing supplies and equipment rental costs due to a decline in the percentage of total revenue from certain large Remediation and Reuse projects and a decrease in direct labor attributable to a shift in roles and responsibilities as described under the Selling, General and Administrative Expense section below, partially offset by an increase in direct labor related to CTEH environmental response work unrelated to COVID-19 when compared to the prior year period.

### Selling, General and Administrative Expense

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

For the three months ended March 31, 2023, selling, general and administrative expense was $49.6 million, an increase of $7.8 million or 18.7% versus the three months ended March 31, 2022. This increase was primarily driven by an increase of approximately $4.4 million related to the impact of the shift of employee roles and responsibilities of certain employees from providing direct field support (and therefore included in cost of sales in 2022), to providing more specialized, multi-location overhead support functions (such as accounting, HR and management) and therefore included in selling general and administrative expenses in the current year. This change was driven by acquisitions and growth in our business. The increase was also driven by higher labor and medical benefit costs, primarily reflecting inflationary increases, an increase of $2.0 million in stock compensation expense, $1.0 million related to an increase in bad debt expense (which was a charge of $0.4 million in the current year, versus a credit of $0.6 million in the prior year), $0.5 million from selling, general and administrative expense pertaining to companies we acquired subsequent to the first quarter of 2022, $0.3 million related to an increase in the defined contribution plan, an increase in acquisition-related costs of $0.3 million, and the timing of certain external expenditures, which occurred later in the year in 2022. See Part I, Item 3. “Quantitative and Qualitative Disclosures About Market Risk” for additional information regarding the impact of inflation on our business.

For the three months ended March 31, 2023, selling, general and administrative expense of $49.6 million was comprised of indirect labor of $24.7 million, stock-based compensation of $12.1 million, facilities costs of $4.9 million, and other costs (including software, travel, insurance, legal, consulting, audit services, bad debt and acquisition-related costs) of $7.9 million.

For the three months ended March 31, 2022, selling, general and administrative expense of $41.8 million was comprised of indirect labor of $19.5 million, stock-based compensation of $10.1 million, facilities costs of $4.4 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $7.8 million.

### Fair Value Changes in Business Acquisition Contingencies

For the three months ended March 31, 2023, fair value changes in business acquisition contingencies resulted in a gain of $0.4 million. For the three months ended March 31, 2022, fair value changes in business acquisitions contingent consideration were not material.

See “—Key Factors that Affect Our Business and Our Results—Acquisitions” and Notes 7 and 13 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

### Depreciation and Amortization

Depreciation and amortization expense for the three months ended March 31, 2023, was $10.6 million and was comprised of amortization of finite lived intangibles of $7.2 million, arising as a result of our acquisition activity, depreciation of property and equipment of $2.2 million and finance leases right-of-use asset amortization of $1.2 million.

Depreciation and amortization expense for the three months ended March 31, 2022, was $12.1 million and was comprised of amortization of finite lived intangibles of $9.4 million, arising as a result of our acquisition activity, depreciation of property and equipment of $1.8 million and finance leases right-of-use asset amortization of $0.9 million.

The decrease in amortization was primarily a result of lower intangible assets outstanding during the three months ended March 31, 2023 when compared to the three months ended March 31, 2022. The increases in depreciation of property and equipment and the amortization of finance leases were primarily a result of higher property and equipment and right of use assets outstanding during the three months ended March 31, 2023 when compared to the three months ended March 31, 2022. See Notes 5 and 6 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”

### Other (Expense) Income

Other expense for the three months ended March 31, 2023 of $1.8 million was driven by a fair value adjustment on our interest rate swap of $1.0 million and by a fair value adjustment to the Series A-2 preferred stock conversion option of $0.9 million.

Other income of $2.5 million for the three months ended March 31, 2022 was driven by a gain related to the fair value adjustment on our interest rate swap of $3.0 million, which was partially offset by an expense of $0.6 million related to the fair value adjustment of the Series A-2 preferred stock conversion option.

See Notes 13 and 15 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”

### Interest Expense, Net

Interest expense, net incurred in the three months ended March 31, 2023, was $1.5 million, compared to $1.1 million for the three months ended March 31, 2022. The increase in interest expense was primarily due to the higher interest rate on the 2021 Credit Facility, partially offset by lower debt balances. Weighted average interest rates as of March 31, 2023 and March 31, 2022 were 6.1% and 1.8%, respectively. See “—Key Factors that Affect Our Business and Our Results—Financing Costs” and Notes 12 and 13 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

### Income Tax Expense

Income tax expense was $1.4 million and $1.3 million during the three months ended March 31, 2023 and March 31, 2022.

### Segment Results of Operations

### For Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

*(in thousands, except percentages)*

|  | Three Months Ended March 31, 2023 Segment Revenues |  | Segment Adjusted EBITDA (1) | Segment Adjusted EBITDA Margin(2) | 2022 Segment Revenues |  | Segment Adjusted EBITDA(1)(5) |  | Segment Adjusted EBITDA Margin(2) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Assessment, Permitting and Response | $52,214 |  | $14,266 | 27.3% | $45,600 |  | $9,623 |  | 21.1% |
| Measurement and Analysis | 42,527 | (3) | 6,387 | 15.0 | 39,761 | (3) | 6,322 | (4) | 15.9 |
| Remediation and Reuse | 36,687 |  | 5,278 | 14.4 | 49,319 |  | 7,993 |  | 16.2 |
| **Total Operating Segments** | **$131,428** |  | **$25,931** | 19.7% | **$134,680** |  | **$23,938** |  | 17.8% |
| Corporate and Other | — |  | (9,328) | n/a | — |  | (7,487) |  | 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 18 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

(2) Represents Segment Adjusted EBITDA as a percentage of segment revenues.

(3) Includes revenue of $1.4 million and $5.6 million from the Discontinuing Specialty Lab, for the three months ended March 31, 2023 and March 31, 2022, respectively. See “—Discontinued Operations” above.

(4) Includes Adjusted EBITDA of $1.3 million from the Discontinuing Specialty Lab. See “—Discontinued Operations” above.

(5) Includes the add back of start-up losses and investment in new services of $0.8 million. See Note 18 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

### Revenues

Assessment, Permitting and Response segment revenues for the three months ended March 31, 2023 were $52.2 million, an increase of $6.6 million or 14.5% compared to $45.6 million for the three months ended March 31, 2022. The increase was driven by organic growth, growth in environmental response revenues from CTEH unrelated to COVID-19 of $18.5 million, and revenues of $1.2 million from acquisitions completed subsequent to the quarter ended March 31, 2022, partially offset by expected significantly lower COVID-19 related services. CTEH revenues were $30.8 million in the three months ended March 31, 2023 compared to $29.9 million in the three months ended March 31, 2022. Total revenue from COVID-19 related services was $3.8 million and $21.4 million in the three months ended March 31, 2023 and March 31, 2022, respectively.

Measurement and Analysis segment revenues for the three months ended March 31, 2023 were $42.5 million, an increase of $2.7 million or 7.0% compared to revenues for the three months ended March 31, 2022 of $39.8 million. The increase was driven primarily by organic growth as a result of strong demand for our testing services, partially offset by a $4.1 million decline in revenues from the Discontinuing Specialty Lab.

Remediation and Reuse segment revenues for the three months ended March 31, 2023 were $36.7 million, a decrease of $12.6 million or 25.6% compared to revenues for the three months ended March 31, 2022 of $49.3 million. The expected decrease was a result of the timing of the completion of certain high dollar value projects throughout 2022 when compared to the 2023 period, as well as the exiting of Discontinued O&M Contracts in the second quarter of 2022, which generated revenues of $1.4 million in the three months ended March 31, 2022. The decrease was partially offset by $1.7 million in revenues from acquisitions completed subsequent to the quarter ended March 31, 2022.

### Segment Adjusted EBITDA

Assessment, Permitting and Response Segment Adjusted EBITDA was $14.3 million for the three months ended March 31, 2023, compared to $9.6 million for the three months ended March 31, 2022. For the three months ended March 31, 2023 and March 31, 2022, Segment Adjusted EBITDA margin was 27.3% and 21.1%, respectively. The increase in Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was primarily due to favorable revenue mix (e.g., CTEH environmental response revenues generate higher margins than COVID-19 related revenues, and select advisory services with higher margins and higher growth rates) during the three months ended March 31, 2023 when compared to the three months ended March 31, 2022.

Measurement and Analysis Segment Adjusted EBITDA, was $6.4 million for the three months ended March 31, 2023, an increase of $0.1 million compared to Segment Adjusted EBITDA of $6.3 million for the three months ended March 31, 2022. Excluding Adjusted EBITDA from the Discontinuing Specialty Lab, Segment Adjusted EBITDA was $6.4 million and $5.1 million for the three months ended March 31, 2023 and March 31, 2022, an increase of $1.3 million. For the three months ended March 31, 2023 and March 31, 2022 Segment Adjusted EBITDA margin was 15.0% and 15.9%, respectively. The increase in Segment Adjusted EBITDA was due to higher revenues and the margin benefit of higher pricing, whereas the decrease in Segment Adjusted EBITDA margin was due to a decrease in revenues and Adjusted EBITDA in the Discontinuing Specialty Lab. Excluding the Discontinuing Specialty Lab, Segment Adjusted EBITDA margin for the three months ended March 31, 2023 and March 31, 2022 was 15.6% and 14.9%, respectively, reflecting strong demand for our testing services and the benefit of pricing.

Remediation and Reuse Segment Adjusted EBITDA for the three months ended March 31, 2023 was $5.3 million, a decrease of $2.7 million compared to Segment Adjusted EBITDA for the three months ended March 31, 2022 of $8.0 million. For the three months ended March 31, 2023 and March 31, 2022 Segment Adjusted EBITDA margin was 14.4% and 16.2%, respectively. The decrease in Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was a result of expected lower revenues.

Corporate and other costs were $9.3 million for the three months ended March 31, 2023 compared to $7.5 million for the three months ended March 31, 2022. The cost increase was driven by higher investments in IT infrastructure and information security in the three months ended March 31, 2023, a $0.5 million credit for bad debt in the prior year period, and the timing of certain third-party expenses.

### 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, and proceeds from the issuance of common and preferred stock. Our primary cash needs are for day to day operations, to fund working capital requirements, to fund our acquisition strategy and any related cash earn-out obligations, to pay interest and principal on our indebtedness and dividends on our Series A-2 preferred stock, and to make capital expenditures. Additionally, in connection with certain acquisitions, we agree to earn-out provisions and other purchase price adjustments that may require future payments. For example, the CTEH acquisition agreement included an earn-out provision that provided for the payment of contingent consideration based on CTEH’s results in excess of a specified target. CTEH fully achieved the target in 2021 and the $30.0 million payment was paid in cash in the first quarter of 2022. We may also 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, Huco, and EAI, of which up to $2.6 million may be paid only in cash, up to $5.5 million may be paid only in common stock and up to $1.5 million may be paid in cash or, at our option, in common stock. See Note 7 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”

We expect to continue to fund 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 for the short- and long-term.

### Cash Flows

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

*(in thousands)*

| Consolidated Statement of Cash Flows Data: | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash provided by (used in) operating activities | $3,029 | $(18,328) |
| Net cash used in investing activities | (11,727) | (15,005) |
| Net cash used in financing activities | (4,654) | (19,715) |
| **Change in cash and cash equivalents** | **$(13,352)** | **$(53,048)** |

### 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 three months ended March 31, 2023, net cash provided by operating activities was $3.0 million compared to net cash used in operating activities of $18.3 million for the three months ended March 31, 2022. Cash used in operating activities for the three months ended March 31, 2022 includes payment of contingent consideration of $19.5 million. Excluding payment of contingent consideration, cash provided by operating activities was $1.2 million in the prior year period. The period-over-period increase of $1.8 million, excluding the impact of contingent consideration, was primarily due to an increase in working capital in the current period of $9.7 million versus an increase in working capital in the prior year period of $12.5 million, partially offset by lower earnings before non-cash items of $0.9 million.

Working capital increased by $9.7 million in the three months ended March 31, 2023, primarily due to a decrease in accounts payable and other accrued liabilities of $11.6 million, (primarily as a result of lower contract liabilities due to the timing of project completion), a decrease in accrued payroll and benefits of $4.4 million, and an increase in prepaid expenses and other current assets of $3.4 million, partially offset by a decrease in accounts receivable and contract assets of $9.6 million.

### Investing Activities

For the three months ended March 31, 2023, net cash used in investing activities was $11.7 million, primarily driven by cash paid for the acquisitions of Frontier and EAI, net of cash acquired, of $6.5 million, as well as purchases of property and equipment for cash consideration and proprietary software development of $4.8 million and payment of assumed purchase price obligations of $0.5 million.

For the three months ended March 31, 2022, net cash used in investing activities was $15.0 million, primarily driven by cash paid for the acquisitions of Environmental Standards and IAG, net of cash acquired, of $14.3 million, as well as payment of assumed purchase price obligations of $0.6 million.

### Financing Activities

For the three months ended March 31, 2023, net cash used in financing activities was $4.7 million. Cash used in financing activities was driven by the quarterly dividends on the Series A-2 preferred stock of $4.1 million, the term loan amortization payments of $2.2 million related to our 2021 Credit Facility, and the repayment of finance leases of $1.0 million, partially offset by proceeds received from the exercise of stock options of $2.7 million.

For the three months ended March 31, 2022, net cash used in financing activities was $19.7 million. Cash used in financing activities was driven by the payment of acquisition-related contingent consideration of $10.5 million, term loan amortization payments of $4.4 million related to our 2021 Credit Facility, the payment of the quarterly dividend on the Series A-2 preferred stock of $4.1

million, and the repayment of finance leases of $0.9 million, partially offset by proceeds received from the exercise of stock options of $0.4 million.

### Credit Facilities

### 2021 Credit Facility

On April 27, 2021, we entered into a Senior Secured Credit Agreement, or the 2021 Credit Facility, providing for a $300.0 million credit facility comprised of a $175.0 million term loan and a $125.0 million revolving credit facility, and used a portion of the proceeds to repay all amounts outstanding under the prior credit facility. The 2021 revolving credit facility includes a $20.0 million sublimit for the issuance of letters of credit. Subject to certain exceptions, all amounts under the 2021 Credit Facility will become due on April 27, 2026. We have the option to borrow incremental term loans or request an increase in the aggregate commitments under the revolving credit facility up to an aggregate amount of $150.0 million subject to the satisfaction of certain conditions.

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. The Company is currently in discussions regarding the transition of LIBOR to an adjusted benchmark rate to be effective on or before June 30, 2023. The transition to an adjusted interest rate is not expected to materially impact the interest rate paid by the Company.

On January 27, 2022, the Company entered into an interest rate swap transaction fixing the floating component of the interest rate on $100.0 million of borrowings to 1.39% until January 27, 2025. Additionally, effective September 1, 2022, the Company received an interest rate reduction of 0.05% under the 2021 Credit Facility based on the Company’s achievement of certain sustainability and environmental, social and governance related objectives as provided for in the 2021 Credit Facility.

Our obligations under the 2021 Credit Facility are guaranteed by certain of our existing and future direct and indirect subsidiaries, and such obligations are secured by substantially all of our assets. The 2021 Credit Facility includes a number of covenants imposing certain restrictions on our business. The 2021 Credit Facility also includes financial covenants requiring us to remain below a maximum total net leverage ratio and a minimum fixed charge coverage ratio. As of March 31, 2023 and March 31, 2022, our consolidated total leverage ratio was 1.4 times and 1.8 times, respectively, and we were in compliance with all covenants under the 2021 Credit Facility.

The weighted average interest rate on the 2021 Credit Facility for the three months ended March 31, 2023 and March 31, 2022 was 6.1% and 1.8%, respectively.

The 2021 Credit Facility contains a mandatory prepayment feature upon a number of events, including with the proceeds of certain asset sales and proceeds from the issuance of any debt.

See Note 12 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

### Series A-2 Preferred Stock

On April 13, 2020, we issued 17,500 shares of the Series A-2 preferred stock with a par value of $0.0001 per share and a warrant to purchase common stock, in exchange for $175.0 million. The Series A-2 preferred stock does not mature or have a cash repayment obligation; however, it is redeemable at our option. The Series A-2 preferred stock becomes convertible into our common stock beginning on the four-year anniversary of the Series A-2 preferred stock issuance. Upon the four-year anniversary of the issuance, holders of Series A-2 preferred stock may convert up to $60.0 million of such shares into our common stock at a conversion rate discounted to 85.0% of the volume weighted average trading value, with the permitted amount of Series A-2 preferred stock to be converted increasing at each subsequent anniversary of the issuance until the sixth anniversary, after which all of the Series A-2 preferred stock may be converted at the holder’s option. The Series A-2 preferred stock is subject to a 9.0% interest rate per annum with required quarterly cash payments. If permitted under our existing debt facilities, we must pay the Series A-2 preferred stock dividend in cash each quarter.

With respect to any redemption of any share of the Series A-2 preferred stock prior to April 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 15 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

### Critical Accounting Policies and Estimates

Our 2022 Form10-K includes a summary of the critical accounting policies and estimates we believe are the most important to aid in understanding our financial results. There have been no material changes to those critical accounting policies and estimates as disclosed therein, other than as described in Note 2 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

## Market risk

As filed, 1,910 characters.

### Interest Rate Risk

We have market risk exposure arising from changes in interest rates on our credit facility, which bears interest at rates that are benchmarked subject to the Company’s leverage ratio and LIBOR. Based on our overall interest rate exposure to variable rate debt outstanding as of March 31, 2023, which factors in our interest rate swap on $100.0 million of debt, a 1.0% increase or decrease in interest rates on the term loan and revolver would increase annual income (loss) before income taxes by approximately $0.6 million.

### Inflation Risk

We experienced higher labor and significantly higher travel and other direct costs in the fiscal year ended December 31, 2022 as a result of inflation, particularly in our Measurement and Analysis and Remediation and Reuse segments. We believe we have successfully raised prices in businesses with short term contracts to offset these inflationary effects. We also have and are continuing to raise prices on medium term (one to four quarter) contracts as these contracts are renewed or new contracts are won, but the timing of these price increases has lagged behind our cost increases due to the longer term nature of these contracts. We expect to continue to raise prices if direct costs continue to increase. Although inflation has increased our Selling, general and administrative expense, impacting margins and Segment Adjusted EBITDA, in the three months ended March 31, 2023, we do not believe over a longer period of time that inflation will have a material effect on our business, financial condition or results of operations. If our costs were to become subject to additional and unanticipated significant sustained inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.

## Controls and procedures

As filed, 2,557 characters.

### Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of March 31, 2023, the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2023, the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level.

### Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our system of internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed or operated, can provide only reasonable, but not absolute, assurance that the objectives of the system of internal control are met. The design of our control system reflects the fact that there are resource constraints, and that the benefits of such control system must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control failures and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the intentional acts of individuals, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurance that the design of any particular control will always succeed in achieving its objective under all potential future conditions.

## Risk factors

As filed, 479 characters.

There have been no material changes to our risk factors from the risk factors disclosed in our 2022 Form 10-K. The risks described in our 2022 Form 10-K, in addition to the other information set forth in this Quarterly Report on Form 10-Q, are not the only risks facing we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Filed May 10, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-020477. Last ingested by Listed: Oct 24, 2026, 15:14 ET. No prices; not investment advice.