Onterris, Inc. (ONT) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes and other information included in Item 8. “Financial Statements and Supplementary Data.” This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K. See “Forward-looking Statements.”

Overview

Since our inception in 2012, our mission has been to help clients and communities meet their environmental goals and needs. According to data derived from a 2022 Environmental Industry Study prepared by Environmental Business International, Inc., or EBI, which we commissioned, the global environmental industry is estimated to be approximately $1.44 trillion, with $494.0 billion concentrated in the United States.

Our Segments

We provide environmental services to our clients through three business segments—Assessment, Permitting and Response, Measurement and Analysis and Remediation and Reuse. For more information on each of our operating segments, see Item 1. “Business” and our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Assessment, Permitting and Response

Through our Assessment, Permitting and Response segment, we primarily provide scientific advisory and consulting services to support environmental assessments, environmental emergency response, and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. Our technical advisory and consulting offerings include regulatory compliance support and planning, environmental, ecosystem and toxicological assessments and support during responses to environmental disruption. We help clients navigate regulations at the local, state, provincial and federal levels.

Measurement and Analysis

Through our Measurement and Analysis segment, our highly credentialed teams test and analyze air, water and soil to determine concentrations of contaminants, as well as the toxicological impact of contaminants on flora, fauna and human health. Our offerings include source and ambient air testing and monitoring, leak detection and advanced analytical laboratory services such as air, storm water, wastewater and drinking water analysis.

Remediation and Reuse

Through our Remediation and Reuse segment, we provide clients with engineering, design, and implementation services, primarily to treat contaminated water, remove contaminants from soil or create biogas from waste. We do not own the properties or facilities at which we implement these projects or the underlying liabilities, nor do we own material amounts of the equipment used in projects; instead, we assist our clients in designing solutions, managing projects and mitigating their environmental risks and liabilities.

These operating segments have been structured and organized to align with how we view and manage the business with the full lifecycle of our clients’ targeted environmental concerns and needs in mind. Within each segment, we cover similar service offerings, regulatory frameworks, internal operating structures and client types. Corporate activities not directly related to segment performance, including general corporate expenses, interest and taxes, are reported separately.

Key Factors that Affect Our Business and Our Results

Our operating results and financial performance are influenced by a variety of internal and external trends and other factors. Some of the more important factors are discussed briefly below.

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Acquisitions

We have been, and expect to continue to be, an acquisitive company. Acquisitions have expanded our environmental service capabilities across all three segments, our access to technology, as well as our geographic reach in the United States, Canada, Europe and Australia. See Item 1. “Business—Strategic Acquisitions.” The table below sets forth the number of acquisitions completed in each of the last three fiscal years, fiscal year revenues generated by and the percentage of total annual revenues attributable to those acquisitions:

Revenues 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:

We expect that amortization of identifiable intangible assets and other acquisition-related costs, assuming we continue to acquire, will continue to be significant.

We made earn-out payments of $30.0 million and $50.0 million in March 2022 and April 2021, respectively, in connection with our CTEH acquisition. $25.0 million of the 2021 CTEH earn-out payment was made in the form of shares of our common stock. In connection with certain of our acquisitions, we may make up to $7.1 million in aggregate earn-out payments between the years 2024 and 2026, of which up to $1.5 million may be paid only in cash, up to $4.5 million may be paid only in common stock and up to $1.1 million may be paid, at our option, in cash or common stock. These amounts reflect a $1.5 million earn-out payment made in the first quarter of 2024 in connection with our Huco acquisition, $1.1 million of which was paid in shares of common stock and $0.4 million was paid in cash. See Note 8 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Organic Growth

We define organic growth as the change in revenues excluding revenues from i) our environmental emergency response business, ii) acquisitions for the first twelve months following the date of acquisition, and iii) businesses held for sale, disposed of or discontinued. As a result of the growth in CTEH non-emergency response work, which is similar to services provided in our advisory businesses, we are including CTEH revenues from non-emergency response work in organic growth. This change did not impact previously reported organic growth. Management uses organic growth as one of the means by which it assesses our results of operations. Organic growth is not, however, a measure of revenue growth calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should be considered in conjunction with revenue growth calculated in accordance with GAAP. We have grown organically over the long term and expect to continue to do so.

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Discontinued Service Lines and Contracts

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

As part of this evaluation, during the first quarter of 2023, we determined to discontinue one of our specialty service lines within the lab testing business, the Discontinued Specialty Lab, whose service offering was non-core to our business. On December 29, 2023, we sold the assets of the Discontinued Specialty Lab for a total sales price of $4.8 million. Proceeds from the sale were paid in cash of $0.5 million, and a promissory note receivable of $4.3 million. We recorded a gain on the sale of the assets of approximately $1.8 million and recorded a current expected loss of $2.2 million against the promissory note receivable. The Discontinued Specialty Lab, which was part of our Measurement and Analysis segment, generated revenues of $8.8 million, $17.0 million and $23.9 million in the years ended December 31, 2023, 2022 and 2021, respectively. The discontinuation of this specialty service line did not represent a strategic shift that had a major effect on our operations and financial results, therefore it did not meet the requirements to be classified as discontinued operations.

During the fourth quarter of 2022, we determined to exit our lab in Berkeley, California and terminate the related positions. This discontinued lab, which was included in our Measurement and Analysis segment, did not generate any material revenue during the years ended December 31, 2022 and 2021.

During the second quarter of 2022, we determined to exit all legacy water treatment and biogas operations and maintenance contracts, collectively, the Discontinued O&M Contracts. Revenue from our water treatment and biogas operations and maintenance contracts, which were included in the results of our Remediation and Reuse segment, were $3.6 million and $12.1 million in the years ended December 31, 2022 and 2021, respectively. This decision did not impact the Company’s specialized PFAS water treatment operations and maintenance contracts.

Revenue Mix

Our segments generate different levels of profitability and, accordingly, shifts in the mix of revenues between segments can impact our consolidated reported net income, net loss margin, Segment Adjusted EBITDA and Segment Adjusted EBITDA margin from quarter to quarter and year to year. Inter-company revenues between business lines within segments have been eliminated. See Note 19 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Financing Costs

On April 27, 2021, we entered into the 2021 Credit Facility and repaid all amounts outstanding under our prior credit facility. The 2021 Credit Facility consists of a $175.0 million term loan and a $125.0 million revolving credit facility. The revolving credit facility includes a $20.0 million sublimit for the issuance of letters of credit. The interest rate on the 2021 Credit Facility varies depending on leverage, which, prior to May 31, 2023, was a minimum of LIBOR plus 1.5% and a maximum of LIBOR plus 2.5%. We incurred debt extinguishment costs of $4.1 million in connection with this refinancing. Further, on May 31, 2023, we amended our 2021 Credit Facility to transition the reference rate from LIBOR to SOFR plus 0.10%. The transition to SOFR did not materially impact the interest rate we pay or change any material terms of the 2021 Credit Facility.

On May 30, 2023, we amended the interest rate swap transaction we entered into on January 27, 2022, to convert the floating component of the interest rate on $100.0 million of borrowings to 1-Month Term SOFR and a new coupon of 1.319% until January 27, 2025. Prior to the amendment, the floating component of the interest rate was 1.39%. Further, on May 30, 2023, we entered into a second interest rate swap transaction fixing the floating component of the interest rate on an additional $70.0 million of borrowings to 1-Month Term SOFR and a coupon of 3.88% until April 27, 2026.

Interest expense, net was $7.8 million, $5.2 million and $11.6 million (inclusive of the $4.1 million loss on extinguishment of the 2020 Credit Facility) in the years ended December 31, 2023, 2022 and 2021, respectively. We expect interest expense to remain a significant cost as we continue to leverage our credit facility to support our operations and future acquisitions.

See Note 13 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

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Corporate and Operational Infrastructure Investments

Our historical operating results reflect the impact of our ongoing investments in our corporate infrastructure to support our growth. We have made and expect to continue to make investments in our business platform that we believe have laid the foundation for continued growth. Investments in logistics, quality, risk management, sales and marketing, safety, human resources, research and development, finance and information technology and other areas enable us to support continued growth. These investments should allow us to improve our margins over time.

Seasonality

Due to the field-based nature of certain of our services, weather patterns generally impact our field-based teams’ ability to operate in the winter months. As a result, our operating results in our Measurement and Analysis segment and, following the acquisition of Matrix in Canada, the Remediation and Reuse segment, experience quarterly variability with generally lower revenues and lower earnings in the first and fourth quarters and higher overall revenues and earnings in the second and third quarters. As we continue to grow and expand into new geographies and service lines, quarterly variability in our Measurement and Analysis and Remediation and Reuse segments may deviate from historical trends.

Earnings Volatility

In addition to the impact of seasonality on earnings, the acquisition of CTEH exposes us to potentially significant revenue and earnings fluctuations tied both to the timing of large environmental emergency response projects following an incident or natural disaster, and the benefit from COVID-19 related work primarily in 2021. COVID-19 related revenue was $4.7 million, $65.2 million and $189.9 million in the years ended December 31, 2023, 2022 and 2021, respectively. During 2023, we have also seen significant revenue from emergency response services related to discrete events. Total revenue from emergency response related services, which include COVID-19 revenues, was $91.4 million, $88.0 million and $211.5 million in the in the years ended December 31, 2023, 2022 and 2021, respectively. Demand for environmental emergency response services remains difficult to predict and as a result, we may have experienced revenues and earnings in prior years that are not indicative of future results, making those periods particularly difficult comparisons for future periods. Earnings volatility is also driven by the timing of large projects, particularly in our Remediation and Reuse segment, and the impact of acquisitions. As a result of these factors, and because demand for environmental services is not driven by specific or predictable patterns in one or more fiscal quarters, our business is better assessed based on yearly results.

Cybersecurity

As previously disclosed, on June 11, 2022 we were the target of an organized ransomware attack on our IT systems that led to the temporary disruption of our regular operations. The Company's financial systems are cloud based and were not affected. We engaged third party experts, including cyber legal counsel and a cybersecurity firm, to perform a fulsome forensic investigation of this attack and we promptly notified federal law enforcement. Based on the results of the investigation, we do not believe there has been any misuse of confidential or sensitive client data, have made notifications to clients, and have proactively addressed client concerns regarding our security environment. Furthermore, we identified a limited number of individuals whose personally identifiable information may have been accessed from our systems and made appropriate notifications to such individuals and required regulators. The Company has insurance coverage, subject to a $0.3 million deductible, against recovery costs and business interruption resulting from cyber-attacks. In January 2023, the Company received $1.0 million in business interruption insurance proceeds related to the cyber-attack. This amount was recorded as insurance income within other income (expense) in the fourth quarter of 2022. These proceeds partially offset the estimated $1.5 million cost of the cyber-attack recognized in the second and third quarters of 2022.

COVID-19

To date, COVID-19 related adverse impacts have not had a material adverse effect on our reported results or our liquidity. On the other hand, we have seen benefits from COVID-19 given client demand for CTEH’s toxicology and response services, which represented a meaningful revenue stream, in 2021 and to a lesser extent, 2022, primarily as a result of COVID-19 response work performed by CTEH. COVID-19 revenues were negligible in the year ended December 31, 2023. Given the significance and non-recurring nature of our COVID-19 related revenues in prior periods, our historical results may not be comparable to future results.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was enacted. The CARES Act included several significant provisions for corporations, including those pertaining to net operating losses, interest deductions and payroll tax benefits. We utilized certain of these provisions in 2020, including the deferral of the employer side social security

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payments for payroll for the eligible portion of the year. In total, we deferred approximately $5.0 million of 2020 payments to 2021 and 2022, of which $2.5 million was repaid in December 2021 and the remaining amount was paid in the fourth quarter of 2022.

Results of Operations

Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Revenues

For the year ended December 31, 2023, we generated revenues of $624.2 million, an increase of $79.8 million or 14.7% from the year ended December 31, 2022. The period over period increase in revenues was primarily driven by $77.5 million from revenues pertaining to companies we acquired in 2023 and from a full year of revenue contribution from our 2022 acquisitions, strong organic growth in our Assessment, Permitting and Response segment and strong organic growth in our Measurement and Analysis segment, and an increase in environmental emergency response revenues. These increases were partially offset by lower revenues in the Discontinued Specialty Lab, the exiting of the Discontinued O&M Contracts in 2022, and lower ECT2 revenues due to the wind down of certain large PFAS projects, delays in the timing of EPA PFAS regulations and a strategic shift in our biogas business towards higher margin services. Revenue from our environmental emergency response business, including revenues from COVID-19 related work, was $91.4 million in the year ended December 31, 2023, compared to $88.0 million in the year ended December 31, 2022. Total revenue from COVID-19 related services was $4.7 million and $65.2 million in the years ended December 31, 2023 and December 31, 2022, respectively. Revenue from the Discontinued Specialty Lab was $8.8 million and $17.0 million in the years ended December 31, 2023 and December 31, 2022, respectively. The Discontinued O&M Contracts generated revenues of zero and $3.6 million in the years ended December 31, 2023 and December 31, 2022, respectively.

Revenue by segment, and as a percentage of total revenues, was as follows:

_________________________________

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(1) Includes revenue of $8.8 million and $17.0 million from the Discontinued Specialty Lab for the year ended December 31, 2023 and December 31, 2022, respectively. See “—Discontinued Service Lines and Contracts ” above.

See “—Segment Results of Operations” below.

Cost of Revenues

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

For the year ended December 31, 2023, cost of revenues was $383.9 million or 61.5% of revenues, and was comprised of direct labor of $187.0 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $95.3 million, field supplies, testing supplies and equipment rental of $66.9 million, project-related travel expenses of $21.7 million and other direct costs of $13.0 million.

For the year ended December 31, 2022, cost of revenues was $351.9 million or 64.6% of revenues, and was comprised of direct labor of $155.0 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $83.3 million, field supplies, testing supplies and equipment rental of $77.9 million, project-related travel expenses of $19.3 million and other direct costs of $16.4 million.

For the year ended December 31, 2023, cost of revenues as a percentage of revenue decreased 3.1% from the year ended December 31, 2022, primarily as a result of a $11.0 million decrease in field and testing supplies and equipment rental costs due to a decline in the percentage of total revenue from Remediation and Reuse projects, which tend to have higher cost of sales as a percentage of revenue, and a decrease of $9.5 million in direct labor attributable to a shift in roles and responsibilities as described under the Selling, General and Administrative Expense section below.

Selling, General and Administrative Expense

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

For the year ended December 31, 2023, selling, general and administrative expense was $222.9 million, an increase of $46.6 million or 26.4% versus the year ended December 31, 2022. This increase was primarily driven by an increase of approximately $9.5 million related to the impact of the shift of employee roles and responsibilities of certain employees from providing direct field support (and therefore included in cost of revenues in 2022), to providing more specialized, multi-location overhead support functions (such as accounting, HR and management) and therefore included in selling general and administrative expenses in the current year. The increase was also driven by acquisitions and by higher labor and medical benefit costs, primarily reflecting inflationary increases. Selling, general and administrative expense pertaining to companies we acquired in 2023 and from the inclusion of a full year of results from 2022 acquisitions accounted for $21.7 million of the increase. The year-over-year increase was also driven by a $5.0 million increase in acquisition-related costs, $4.2 million related to an increase in bad debt expense (which was a charge of $3.1 million in the current year, versus a credit of $(1.1) million in the prior year), $2.2 million related to an increase in the defined contribution plan, $2.1 million increase in stock-based compensation expense, and the timing of certain external expenditures, which occurred later in the year in 2022, partially offset by a gain on the sale of the assets of the Discontinued Specialty Lab of $1.8 million. See “—Key Factors that Affect Our Business and Our Results —Discontinued Service Lines and Contracts” and Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for additional information regarding the impact of inflation on our business.

For the year ended December 31, 2023, selling, general and administrative expense of $222.9 million was comprised of indirect labor of $114.0 million, stock-based compensation expense of $43.9 million, facilities costs of $23.0 million, acquisition-related costs of $6.9 million, bad debt expense of $3.1 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $32.0 million.

For the year ended December 31, 2022, selling, general and administrative expense of $176.3 was comprised of indirect labor of $80.6 million, stock-based compensation of $41.8 million, facilities costs of $18.2 million, acquisition-related costs of $1.9 million, a

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bad debt recovery of $(1.1) million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $34.9 million.

Fair Value Changes in Business Acquisition Contingencies

For the year ended December 31, 2023, fair value changes in business acquisition contingencies resulted in an expense of $0.1 million versus a gain of $3.2 million for the year ended December 31, 2022. The majority of the change in value in the year ended December 31, 2022, was attributable to a $3.5 million gain related to acquisitions' 338(h)(10) elections make-whole tax accruals. See “—Key Factors that Affect Our Business and Our Results —Acquisitions” and Notes 8 and 14 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Depreciation and Amortization

Depreciation and amortization expense for the year ended December 31, 2023, was $45.8 million and was comprised of amortization of finite lived intangibles of $30.1 million, arising as a result of our acquisition activity, depreciation of property and equipment of $10.3 million and finance leases right-of-use asset amortization of $5.4 million.

Depreciation and amortization expense for the year ended December 31, 2022, was $47.5 million and was comprised of amortization of finite lived intangibles of $36.1 million, arising as a result of our acquisition activity, depreciation of property and equipment of $7.2 million and finance leases right-of-use asset amortization of $4.2 million.

The decrease in amortization was primarily a result of the timing of when certain large value intangible assets became fully amortized during the year ended December 31, 2023 versus the year ended December 31, 2022. The increases in depreciation of property and equipment and the amortization of finance leases were primarily a result of higher property and equipment and right of use assets outstanding during the year ended December 31, 2023 when compared to the year ended December 31, 2022.

See Notes 6, 7, 8 and 9 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Other Income

Other income for the year ended December 31, 2023 of $4.4 million was driven by the fair value adjustment of the Series A-2 preferred stock conversion option of $6.7 million, partially offset by the fair value adjustment on our interest rate swap of $2.6 million.

Other income for the year ended December 31, 2022 of $3.7 million was driven by a gain related to the fair value adjustment on our interest rate swap of $6.0 million which was partially offset by an expense of $2.7 million related to the fair value adjustment of the Series A-2 preferred stock conversion option and $0.7 million impairment loss related to the decision to exit the Berkeley lab.

See Notes 7, 14 and 16 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Interest Expense, Net

Interest expense, net incurred in the year ended December 31, 2023, was $7.8 million, compared to $5.2 million for the year ended December 31, 2022. The increase in interest expense was primarily due to higher interest rates, an increase in interest expense as a result of the new aircraft loan, and lower interest income as a result of lower average cash balances, partially offset by the impact of the second interest rate swap transaction entered into on May 30, 2023. See “—Key Factors that Affect Our Business and Our Results—Financing Costs” and Note 7 and 13 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Income Tax (Benefit) Expense

Income tax (benefit) expense was $(1.0) million and $2.3 million for the years ended December 31, 2023 and 2022, respectively. The difference between our effective tax rate of 3.3% and the federal statutory rate of 21.0% is primarily attributable to items recorded for GAAP but permanently disallowed for U.S. federal income tax purposes, recognition of a U.S. federal and state valuation allowance of $24.0 million, state and foreign income tax provisions and Global Intangible Low Taxed Income.

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Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

Revenues

For the year ended December 31, 2022, revenues were $544.4 million, a decrease of $2.0 million or 0.4% from the year ended December 31, 2021. The period over period decrease in revenues was primarily driven by an expected reduction in revenue from environmental emergency responses due to lower demand for COVID-19 related services, of $123.5 million, and exiting the Discontinued O&M Contracts. The decrease was mostly offset by strong organic growth in our Measurement and Analysis and Remediation and Reuse operating segments, and the businesses in our Assessment, Permitting and Response operating segment other than environmental emergency responses, which contributed $121.1 million in organic revenue. The decrease was offset to a lesser extent by acquisitions completed in the year ended December 31, 2022, as well as by 2021 acquisitions prior to their one-year anniversary date, which performed well and captured revenue synergies as part of Montrose. In the aggregate, 2021 and 2022 acquisitions contributed revenues of $44.5 million. Revenue from our environmental emergency response business, which includes COVID-19 revenues, was $88.0 million in the year ended December 31, 2022 as compared to $211.5 million in the year ended December 31, 2021. Total revenue from COVID-19 related services was $65.2 million and $189.9 million in the years ended December 31, 2022 and 2021, respectively. Discontinued O&M Contracts generated revenues of $3.6 million and $12.1 million in the years ended December 31, 2022 and 2021, respectively.

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Revenue by segment, and as a percentage of total revenues, was as follows:

_________________________________

(1) Includes revenue of $17.0 million and $23.9 million from the Discontinued Specialty Lab for the year ended December 31, 2022 and 2021, respectively. See “—Discontinued Service Lines and Contracts ” above.

See “—Segment Results of Operations” below.

Cost of Revenues

For the year ended December 31, 2022, cost of revenues was $351.9 million or 64.6% of revenues, and was comprised of direct labor of $155.0 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $83.3 million, field supplies, testing supplies and equipment rental of $77.9 million, project-related travel expenses of $19.3 million and other direct costs of $16.4 million.

For the year ended December 31, 2021, cost of revenues was $369.0 million or 67.5% of revenues, and was comprised of direct labor of $147.3.0 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $143.3 million, field supplies, testing supplies and equipment rental of $50.2 million, project-related travel expenses of $17.8 million and other direct costs of $10.4 million.

For the year ended December 31, 2022, cost of revenues as a percentage of revenue decreased 2.9% from the year ended December 31, 2021, as a result of significantly lower outside service costs in 2022 when compared to 2021 driven primarily by a decrease in external lab expenses needed to support CTEH’s COVID-19 response work during 2022, partially offset by higher equipment costs primarily to support higher water treatment and biogas revenues.

Selling, General and Administrative Expense

For the year ended December 31, 2022, selling, general and administrative expense was $176.3 million, an increase of $58.6 million or 49.8% versus the year ended December 31, 2021. This increase was primarily driven by $33.0 million related to an increase in stock compensation expense primarily related to a one-time grant of restricted stock awards and stock appreciation rights to certain executives and selected employees (See Note 17 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”), $10.2 million from selling, general and administrative expense pertaining to companies we acquired in 2022 and from 2021 acquisitions prior to their one-year anniversary date, $5.4 million related to the higher labor and medical benefit costs, primarily reflecting inflationary increases, an increase in headcount to support growth in our PFAS water treatment business, and investments in corporate infrastructure (primarily administrative, marketing, finance, IT, legal and human resources) and $3.1 million was from an increase in the defined contribution plan employer contributions following the reinstatement of employer matching during the second quarter of 2021, as well as higher travel and office function expenses.

For the year ended December 31, 2022, selling, general and administrative expense of $176.3 was comprised of indirect labor of $80.6 million, stock-based compensation of $41.8 million, facilities costs of $18.2 million, acquisition-related costs of $1.9 million, a bad debt recovery of $(1.1) million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $34.9 million.

For the year ended December 31, 2021, selling, general and administrative expense of $117.7 million was comprised of indirect labor of $61.2 million, facilities costs of $14.7 million, stock-based compensation of $8.8 million, acquisition-related costs of $2.1 million, bad debt expense of $1.1 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $29.8 million.

Fair Value Changes in Business Acquisition Contingencies

For the year ended December 31, 2022, fair value changes in business acquisition contingencies resulted in a gain of $3.2 million versus an expense of $24.4 million for the year ended December 31, 2021. The majority of the change in value in the year

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ended December 31, 2022, was attributable to a $3.5 million gain related to acquisitions' 338(h)(10) elections make-whole tax accruals. The majority of the change in value in the year ended December 31, 2021 period was attributable to the CTEH earn-outs. See “—Key Factors that Affect Our Business and Our Results —Acquisitions” and Notes 8 and 14 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Depreciation and Amortization

Depreciation and amortization expense for the year ended December 31, 2022, was $47.5 million and was comprised of amortization of finite lived intangibles of $36.1 million, arising as a result of our acquisition activity, depreciation of property and equipment of $7.2 million and finance leases right-of-use asset amortization of $4.2 million.

Depreciation and amortization expense for the year ended December 31, 2021, was $44.8 million and was comprised of amortization of finite lived intangibles of $35.2 million, depreciation of property and equipment of $6.4 million and finance leases right-of-use asset amortization of $3.2 million.

The increase in amortization, depreciation of property and equipment and the amortization of finance leases right-of-use asset for the year ended December 31, 2022 versus the year ended December 31, 2021, was primarily a result of acquisitions. See Notes 6, 7, 8 and 9 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Other Income (Expense)

Other income for the year ended December 31, 2022 of $3.7 million was driven by a gain related to the fair value adjustment on our interest rate swap of $6.0 million which was partially offset by an expense of $2.7 million related to the fair value adjustment of the Series A-2 preferred stock conversion option and $0.7 million impairment loss related to the decision to exit the Berkeley lab. Other expense for the year ended December 31, 2021 of $2.5 million was driven primarily by fair value adjustments related to the Series A-2 preferred stock conversion option. See Notes 14, 16 and 19 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Interest Expense, Net

Interest expense, net incurred in the year ended December 31, 2022, was $5.2 million, compared to $11.6 million for the year ended December 31, 2021. The decrease in interest expense was driven by lower outstanding debt balances during the year ended December 31, 2022 when compared to the year ended December 31, 2021, as well as the $4.1 million loss on extinguishment of debt realized in the year ended December 31, 2021 in connection with the repayment in full of the 2020 Credit Facility. See Note 13 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Income Tax Expense

Income tax expense was $2.3 million for the year ended December 31, 2022, compared to an income tax expense of $1.7 million for the year ended December 31, 2021. The difference between our effective tax rate of 7.7% and the federal statutory rate of 21.0% is primarily attributable to items recorded for GAAP but permanently disallowed for U.S. federal income tax purposes, recognition of a U.S. federal and state valuation allowance of $30.6 million, state and foreign income tax provisions and Global Intangible Low Taxed Income.

Segment Results of Operations

Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

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(1)
For purposes of evaluating segment profit, the Company’s chief operating decision maker reviews Segment Adjusted EBITDA as a basis for making the decisions to allocate resources and assess performance. See Note 19 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

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

(3)
Includes revenue of $8.8 million and $17.0 million from the Discontinued Specialty Lab for the year ended December 31, 2023 and 2022, respectively. See “—Discontinued Service Lines and Contracts ” above.

(4)
Includes Adjusted EBITDA of $2.1 million from the Discontinued Specialty Lab. See “—Discontinued Service Lines and Contracts ” above.

(5)
Includes the add back of start-up losses and investment in new services of $2.3 million, which are not added-back in 2023. See Note 19 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Revenues

Assessment, Permitting and Response segment revenues for the year ended December 31, 2023 were $220.7 million, compared to $187.2 million for the year ended December 31, 2022. The increase was driven by organic growth of 24.3%, growth in revenues from environmental emergency responses, and revenues of $5.9 million from companies we acquired in 2023 and from a full year of revenue contribution from our 2022 acquisitions. Total revenue from environmental emergency response related services, which include COVID-19 revenues, was $91.4 million and $88.0 million in the years ended December 31, 2023 and 2022, respectively. Total revenue from COVID-19 related services was $4.7 million and $65.2 million in the years ended December 31, 2023 and 2022, respectively.

Measurement and Analysis segment revenues for the year ended December 31, 2023 were $197.1 million, an increase of $24.7 million or 14.3% compared to revenues for the year ended December 31, 2022 of $172.4 million. The increase was driven primarily by organic growth of 17.0%, as well as by revenues of $5.8 million from companies we acquired in 2023 and from a full year of revenue contribution from our 2022 acquisitions, partially offset by a decline of $8.2 million from the Discontinued Specialty Lab.

Remediation and Reuse segment revenues for the year ended December 31, 2023 were $206.4 million, an increase of $21.6 million or 11.7% compared to revenues for the year ended December 31, 2022 of $184.8 million. The increase was driven by revenues of $65.8 million from companies we acquired in 2023 and from a full year of revenue contribution from our 2022 acquisitions, partially offset by lower ECT2 revenues due to the wind down of certain large PFAS projects, delays in the timing of EPA PFAS regulations and a strategic shift in our biogas business towards higher margin services, as well as the exiting of Discontinued O&M Contracts in the second quarter of 2022, which generated revenues of zero and $3.6 million in the years ended December 31, 2023 and 2022, respectively.

Segment Adjusted EBITDA

Assessment, Permitting and Response Segment Adjusted EBITDA was $52.1 million for the year ended December 31, 2023, an increase of $14.6 million or 39.2%, compared to Segment Adjusted EBITDA of $37.5 million for the year ended December 31, 2022. For the years ended December 31, 2023 and 2022, Segment Adjusted EBITDA margin was 23.6% and 20.0% respectively. The increase in Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was primarily due to higher revenues primarily from organic growth, and favorable revenue mix, including the impact of higher margins generated on certain environmental emergency response services.

Measurement and Analysis Segment Adjusted EBITDA for the year ended December 31, 2023 was $37.2 million, an increase of $5.6 million or 17.8% compared to Segment Adjusted EBITDA for the year ended December 31, 2022 of $31.6 million. Excluding Adjusted EBITDA from the Discontinued Specialty Lab, Segment Adjusted EBITDA was $37.2 million and $29.5 million for the years ended December 31, 2023 and 2022, respectively, an increase of $7.7 million or 26.1%. For the year ended December 31, 2023, Segment Adjusted EBITDA margin was 18.9% compared to 18.3% in the prior year. The increase in Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was due to higher revenues primarily from organic growth, and favorable revenue mix. Excluding the Discontinued Specialty Lab, Segment Adjusted EBITDA margin for the years ended December 31, 2023 and 2022 was 19.8% and 19.0%, respectively.

Remediation and Reuse Segment Adjusted EBITDA for the year ended December 31, 2023 was $27.1 million, a decrease of $3.5 million or 11.5% compared to Segment Adjusted EBITDA for the year ended December 31, 2022 of $30.6 million. For the year ended December 31, 2023, Segment Adjusted EBITDA margin was 13.1% compared to 16.6% in the prior year. The decrease in Segment Adjusted EBITDA was primarily attributable to lower revenues in our ECT2 water and biogas business, which includes the planned shift away from lower margin services. Segment Adjusted EBITDA margin for the year ended December 31, 2023 was primarily impacted by the acquisition of Matrix in June 2023.

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Corporate and other costs were $37.9 million for the year ended December 31, 2023 compared to $31.2 million for the year ended December 31, 2022. Corporate costs as a percentage of revenues were 6.1% and 5.7% in the years ended December 31, 2023 and 2022, respectively. The increase in corporate costs and corporate costs as a percentage of revenues was primarily attributable to an increase in discretionary bonus expense of $5.5 million, which primarily reflects an outperformance in 2023 versus an underperformance in 2022.

Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

(1)
For purposes of evaluating segment profit, the Company’s chief operating decision maker reviews Segment Adjusted EBITDA as a basis for making the decisions to allocate resources and assess performance. See Note 19 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

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

(3)
Includes revenue of $17.0 million and $23.9 million from the Discontinued Specialty Lab for the year ended December 31, 2022 and 2021, respectively. See “—Discontinued Service Lines and Contracts ” above.

(4)
Includes Adjusted EBITDA of $2.1 million and $6.4 million from the Discontinued Specialty Lab for the year ended December 31, 2022 and December 31, 2021, respectively. See “—Discontinued Service Lines and Contracts ” above.

(5)
Includes the add back of start-up losses and investment in new services of $2.3 million and $4.4 million for the year ended December 31, 2022 and December 31, 2021, respectively. See Note 19 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Revenues

Assessment, Permitting and Response segment revenues for the year ended December 31, 2022 were $187.2 million, compared to $261.9 million for the year ended December 31, 2021. The decrease was driven by an expected $117.6 million decrease in environmental emergency response revenues in 2022 when compared to 2021, as a result of lower revenue from COVID-19 related services. The expected decrease in COVID-19 related revenues was partially offset by organic growth in our other service lines and revenues of $37.1 million from acquisitions completed during 2022 and revenues from 2021 acquisitions prior to their one year anniversary. Total revenues from emergency response related services, which include COVID-19 revenues, was $88.0 million and $211.5 million in the in the years ended December 31, 2022 and 2021, respectively. Total revenue from COVID-19 related services was $65.2 million and $189.9 million in the year ended December 31, 2022 and 2021, respectively.

Measurement and Analysis segment revenues for the year ended December 31, 2022 were $172.4 million, an increase of $19.2 million or 12.5% compared to revenues for the year ended December 31, 2021 of $153.2 million. The increase was driven primarily by organic growth, as well as by revenues of $6.1 million from acquisitions completed during 2022 and revenues from 2021 acquisitions prior to their one year anniversary.

Remediation and Reuse segment revenues for the year ended December 31, 2022 were $184.8 million, an increase of $53.5 million or 40.7% compared to revenues for the year ended December 31, 2021 of $131.3 million. The increase was driven primarily by organic growth related to increases in demand for our water treatment technology (PFAS removal) and waste-to-resources (agricultural waste to biogas) services, as well as by revenues of $1.2 million from acquisitions completed during 2022, partially offset by the impact of Discontinued O&M Contracts, which generated revenues of $3.6 million and $12.1 million in the years ended December 31, 2022 and 2021, respectively.

Segment Adjusted EBITDA

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Assessment, Permitting and Response Segment Adjusted EBITDA was $37.5 million for the year ended December 31, 2022, compared to $57.1 million for the year ended December 31, 2021. For the years ended December 31, 2022 and 2021, Segment Adjusted EBITDA margin was 20.0% and 21.8% respectively. The decrease in Segment Adjusted EBITDA was a result of an expected decrease in COVID-19 related revenues during the year ended December 31, 2022 when compared to the year ended December 31, 2021. The decrease in Segment Adjusted EBITDA margin was a result of acquisitions, which operate at lower margins, and business mix, partially offset by the impact of lower COVID-19 related work, which was at lower margins, in 2022 versus the prior year.

Measurement and Analysis Segment Adjusted EBITDA for the year ended December 31, 2022 was $31.6 million, an increase of $0.3 million compared to Segment Adjusted EBITDA for the year ended December 31, 2021 of $31.3 million. For the year ended December 31, 2022, Segment Adjusted EBITDA margin was 18.3% compared to 20.4% in the prior year. The increase in Segment Adjusted EBITDA was due to higher revenues, whereas the decrease in Segment Adjusted EBITDA margin was a result of business mix and the impact of the cyber-attack in June 2022, which temporarily disrupted certain of our labs’ ability to operate in July 2022.

Remediation and Reuse Segment Adjusted EBITDA for the year ended December 31, 2022 was $30.6 million, an increase of $11.3 million compared to Segment Adjusted EBITDA for the year ended December 31, 2021 of $19.3 million. For the year ended December 31, 2022, Segment Adjusted EBITDA margin was 16.6% compared to 14.7% in the prior year. The increase in both Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was a result of significantly higher revenues and business mix, partially offset by our continued investments in operating infrastructure in this segment that temporarily impact margins.

Corporate and other costs were $31.2 million for the year ended December 31, 2022 compared to $30.1 million for the year ended December 31, 2021. The cost increase was primarily driven by continued investment in corporate support functions. Corporate and other costs were 5.7% and 5.5% of revenues in the years ended December 31, 2022 and 2021, respectively.

Liquidity and Capital Resources

Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and other sources, including availability under our credit facility, and their sufficiency to fund our operating and investing activities.

Our principal sources of liquidity have been cash generated by operating activities, borrowings under our credit facilities, other borrowing arrangements, and proceeds from the issuance of common and preferred stock. Historically, we have financed our operations and acquisitions from a combination of cash generated from operations, periodic borrowings under senior secured credit facilities, and proceeds from the issuance of common and preferred stock. Our primary cash needs are for day to day operations, to fund working capital requirements, to fund our acquisition strategy and any related cash earn-out obligations, to pay interest and principal on our indebtedness and dividends on our Series A-2 preferred stock, and to make capital expenditures. Additionally, in connection with certain acquisitions, we agree to earn-out provisions and other purchase price adjustments that may require future payments. For example, the CTEH acquisition agreement included an earn-out provision that provided for the payment of contingent consideration based on CTEH’s results in excess of a specified target. CTEH fully achieved the target in 2021 and a $30.0 million earn-out payment was paid in cash in the first quarter of 2022. See Note 8 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data."

We may also make up to $7.1 million in aggregate earn-out payments between the years 2024 and 2026 in connection with certain of our acquisitions of which up to $1.5 million may be paid only in cash, up to $4.5 million may be paid only in common stock and up to $1.1 million may be paid in cash or, at our option, in common stock. These amounts reflect a $1.5 million earn-out payment made in the first quarter of 2024 in connection with our Huco acquisition, $1.1 million of which was paid in shares of common stock and $0.4 million was paid in cash. See Note 8 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

We expect to continue to finance our liquidity requirements, including any cash earn-out payments that may be required in connection with acquisitions, through cash generated from operations and borrowings under our credit facility. We believe these sources will be sufficient to fund our cash needs in the short-term and long-term.

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Cash Flows

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

Operating Activities

Cash flows from operating activities can fluctuate from period-to-period as earnings, working capital needs and the timing of payments for contingent consideration, taxes, bonus payments and other operating items impact reported cash flows.

For the year ended December 31, 2023, net cash provided by operating activities was $56.0 million compared to net cash provided by operating activities of $20.6 million for the year ended December 31, 2022. Cash provided by operating activities for the years ended December 31, 2023 and December 31, 2022, includes payment of contingent consideration of $0.6 million and $19.5 million, respectively. Excluding payment of contingent consideration, cash provided by operating activities was $56.6 million and $40.1 million in the years ended December 31, 2023 and December 31, 2022, respectively. The period-over-period increase of $16.5 million, excluding the impact of contingent consideration, was primarily due to a lower increase in working capital in the current period of $3.3 million versus an increase in working capital in the prior year period of $14.1 million, as well as higher earnings before non-cash items of $6.5 million.

Working capital increased by $3.3 million in the year ended December 31, 2023, primarily due to a decrease in accounts payable and other accrued liabilities of $8.9 million, an increase in accounts receivable and contract assets of $2.9 million and an increase in prepaid expenses and other current assets of $0.9 million, partially offset by an increase in accrued payroll and benefits of $9.5 million.

For the year ended December 31, 2022, net cash provided by operating activities was $20.6 million compared to net cash provided by operating activities of $37.6 million for the year ended December 31, 2021. Cash provided by operations includes payment of contingent consideration of $19.5 million and $15.6 million in the years ended December 31, 2022 and 2021, respectively. Excluding payment of contingent consideration, cash provided by operating activities was $40.1 million for the year ended December 31, 2022, compared to cash provided by operating activities of $53.2 million in the prior year, a decrease of $13.1 million. The period-over-period decrease, excluding the impact of contingent consideration, was primarily due to lower earnings before non-cash items, of $9.3 million, primarily due to expected lower revenue from COVID-19 services and an increase in working capital in 2022 of $14.1 million versus an increase in working capital in the prior year of $10.1 million.

Working capital increased by $14.1 million in the year ended December 31, 2022, primarily due to a decrease in accounts payable and other accrued liabilities of $9.9 million, as a result of lower contract liabilities due to the timing of project completion and the timing of vendor payments, a decrease in accrued payroll and benefits of $6.8 million, and an increase in prepaid expenses and other current assets of $1.8 million, partially offset by a decrease in accounts receivable and contract assets of $4.4 million.

Investing Activities

For the year ended December 31, 2023, net cash used in investing activities was $101.6 million, driven by cash paid for the acquisitions of Matrix, GreenPath, Vandrensning, Frontier and EAI, net of cash acquired, of $66.2 million, as well as $29.6 million in cash consideration for purchases of property and equipment (which included the purchase of a $12.2 million replacement aircraft for use in emergency responses following an aircraft crash in February 2023), $3.4 million in proprietary software development costs, $2.6 million related to the minority investment in certain companies and the payment of assumed purchase price obligations of $1.4 million, partially offset by proceeds received from the sale of property and equipment of $1.0 million.

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For the year ended December 31, 2022, net cash used in investing activities was $38.7 million, primarily driven by cash paid for the acquisitions of Environmental Standards, IAG, Triad, AirKinetics and Huco, net of cash acquired of $28.6 million and purchases of property and equipment for cash consideration of $9.6 million.

For the year ended December 31, 2021, net cash used in investing activities was $71.6 million, primarily driven by cash paid for the acquisitions of MSE, Vista, EI, Sensible, ECI and Horizon, net of cash acquired of $55.7 million, as well as payment of assumed purchase price obligations of $9.3 million and purchases of property and equipment for cash consideration of $6.7 million.

Financing Activities

For the year ended December 31, 2023, net cash used in financing activities was $20.1 million. Cash used in financing activities was driven by the payment of the quarterly dividends on the Series A-2 preferred stock of $16.4 million, amortization payments on the 2021 Credit Facility term loan and the aircraft loan of $12.2 million and $0.6 million, respectively, the repayment of finance leases of $4.6 million and the payment of acquisition-related contingent consideration of $1.9 million, partially offset by proceeds received from the aircraft loan of $10.9 and proceeds from the exercise of stock options of $4.7 million.

For the year ended December 31, 2022, net cash used in financing activities was $38.8 million. Cash used in financing activities was driven by the payment of the quarterly dividends on the Series A-2 preferred stock of $16.4 million, the payment of acquisition-related contingent consideration of $11.1 million, term loan amortization payments of $8.8 million related to our 2021 Credit Facility, and the repayment of finance leases of $4.0 million, partially offset by proceeds received from the exercise of stock options of $1.6 million.

For the year ended December 31, 2021, net cash provided by financing activities was $146.1 million. Cash provided by financing activities was driven by borrowings under the 2021 Credit Facility, consisting of $175.0 million under the term loan and $37.0 million under the revolver, net proceeds received from the follow-on offering of $169.3 million and proceeds received from the exercise of stock options of $7.2 million, partially offset by the use of proceeds from the 2021 Credit Facility to repay the $213.4 million outstanding under the 2020 Credit Facility, the payment of the quarterly dividend on the Series A-2 preferred stock of $16.4 million, the payment of acquisition-related contingent consideration of $9.9 million, and the repayment of finance leases of $2.7 million.

Credit Facilities

2021 Credit Facility

On April 27, 2021, we entered into a Senior Secured Credit Agreement, or the 2021 Credit Facility, providing for a $300.0 million credit facility comprised of a $175.0 million term loan and a $125.0 million revolving credit facility, and used a portion of the proceeds to repay all amounts outstanding under the prior credit facility. The 2021 revolving credit facility includes a $20.0 million sublimit for the issuance of letters of credit. Subject to certain exceptions, all amounts under the 2021 Credit Facility will become due on April 27, 2026. We have the option to borrow incremental term loans or request an increase in the aggregate commitments under the revolving credit facility up to an aggregate amount of $150.0 million subject to the satisfaction of certain conditions. In February 2024, we partially exercised this option, as discussed below. See Note 22 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

The 2021 Credit Facility term loan must be repaid in quarterly installments. Prior to May 31, 2023, the 2021 Credit Facility term loan and the revolver bore interest subject to the Company’s leverage ratio and LIBOR. On May 31, 2023, we amended our 2021 Credit Facility to transition the reference rate from LIBOR to SOFR plus 0.10%. The transition to SOFR did not materially impact the interest rate paid by the Company or change any material terms of the 2021 Credit Facility.

On May 30, 2023, we amended the 2022 Interest Rate Swap transaction we originally entered into on January 27, 2022, to convert the floating component of the interest rate on $100.0 million of borrowings to 1-Month Term SOFR and a new coupon of 1.319% until January 27, 2025. Prior to the amendment, the floating component of the interest rate was subject to LIBOR and a coupon of 1.39%. The transition to SOFR did not materially impact the interest rate we pay or change any material terms of the 2022 Interest Rate Swap.

On May 30, 2023, we entered into a second interest rate swap transaction fixing the floating component of the interest rate on an additional $70.0 million of borrowings to 1-Month Term SOFR and a coupon of 3.88% until April 27, 2026.

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Additionally, effective September 1, 2023, we updated our annual achievement of certain sustainability and environmental, social and governance related objectives as provided for in the 2021 Credit Facility, resulting in an interest rate reduction of 0.025% (compared to an interest rate reduction of 0.05% in the previous trailing twelve month period).

Our obligations under the 2021 Credit Facility are guaranteed by certain of our existing and future direct and indirect subsidiaries, and such obligations are secured by substantially all of our assets. The 2021 Credit Facility includes a number of covenants imposing certain restrictions on our business. The 2021 Credit Facility also includes financial covenants requiring us to remain below a maximum total net leverage ratio and a minimum fixed charge coverage ratio. As of December 31, 2023, our consolidated total leverage ratio was 1.9 times and we were in compliance with all covenants under the 2021 Credit Facility.

The weighted average interest rate on the 2021 Credit Facility for the years ended December 31, 2023 and 2022 was 6.7% and 3.5%, respectively, before the benefit of our interest rate swaps. Weighted average interest rates, net of the benefit of our interest rate swaps, as of December 31, 2023 and 2022 were 4.1% and 2.3%, respectively.

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

In February 2024, we partially exercised our option to access the $150.0 million accordion under our Senior Secured Credit Agreement, and as a result, the Senior Secured Credit Agreement was amended to provide for an additional $100.0 million credit availability under the 2021 Credit Facility, comprised of an additional $50.0 million term loan and $50.0 million revolving credit facility. Furthermore, we exercised our credit facility covenant holiday, increasing its leverage capacity from 3.75 times to 4.25 times for four quarters beginning with the first quarter of 2024.

See Note 13 and 22 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

2020 Credit Facility

On April 13, 2020, we entered into a Unitranche Credit Agreement, or the 2020 Credit Facility, providing for a $225.0 million credit facility comprised of a $175.0 million term loan and a $50.0 million revolving credit facility. The 2020 Credit facility was repaid in full in April 2021. The resulting loss on extinguishment upon repayment of the 2020 Credit Facility in April 2021, amounted to $4.1 million, of which $1.0 million was related to fees paid and $3.1 related to unamortized debt issuance costs. Total loss on extinguishment is recorded in interest expense-net within the consolidated statement of operations for the year ended December 31, 2021.

See Note 13 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Loan and Aircraft Security Agreement

On May 18, 2023, we entered into a Loan and Aircraft Security Agreement to finance $10.9 million of the purchase of a new aircraft, which must be repaid in 60 monthly consecutive installments, and all outstanding amounts will become due on May 18, 2028. The aircraft loan bears interest subject to 1-Month Term SOFR and a coupon of 1.86%. The entire principal balance may be prepaid in full subject to a 3.0%, 2.0% and 1.0% prepayment fee if paid prior to the first, second and third anniversary of the loan, respectively.

See Note 13 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Series A-2 Preferred Stock

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

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In January 2024, we repaid $60.0 million of the outstanding principal balance of the Series A-2 preferred stock.

See Note 16 and 22 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Critical Accounting Policies and Estimates

The Company's significant accounting policies and estimates are described in Notes 2 and 3 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” , which were prepared in accordance with U.S. GAAP. Critical accounting policies are those that we believe are both most important to the portrayal of our financial condition and results of operations, and require complex, subjective judgments, often as a result of the need to make estimates and assumptions about the effect of matters that are inherently uncertain. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances and judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. The Company considers the following policies and estimates to be the most critical in understanding the judgments that are involved in preparing its consolidated financial statements:

Use of Estimates

U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the audited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates inherent in the preparation of the audited consolidated financial statements include, but are not limited to, management’s forecast of future cash flows used as a basis to assess recoverability of long-lived assets, the allocation of purchase price to tangible and intangible assets, allowances for doubtful accounts, the estimated useful lives over which property and equipment is depreciated and intangible assets are amortized, subsequent measurement of goodwill, fair value of contingent consideration payables, fair value of embedded derivatives, equity-based compensation expense and deferred taxes. Actual results could materially differ from those estimates.

Revenue Recognition

Revenue is recognized in accordance with Financial Accounting Standards Board Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers. The following is considered in the recognition of revenue under ASC 606:

We account for individual promises in contracts as separate performance obligations if the promises are distinct. The assessment requires judgment. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Certain contracts in our Measurement and Analysis have multiple performance obligations, most commonly due to the contracts providing for multiple laboratory tests which are individual performance obligations.

For the Measurement and Analysis contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based on the relative standalone selling price of each performance obligation. The standalone selling price of each performance obligation is generally determined by the observable price of a service when sold separately.

On the majority of fixed fee contracts, we recognize revenue, over time, using either the proportion of actual costs incurred to the total costs expected to complete the contract performance obligation, or the cost to cost method, under the time-elapsed basis.

There are inherent uncertainties in the estimation process for cost to cost contracts, as the estimation of total contract costs and estimates to complete is complex, subject to many variables, and requires judgment. It is possible that estimates of costs to complete a performance obligation will be revised in the near-term based on actual progress and costs incurred. These uncertainties primarily impact our contracts in the Remediation and Reuse segment.

Time-and-materials contracts contain variable consideration. However, performance obligations qualify for the “Right to Invoice” Practical Expedient. Under this practical expedient, we are allowed to recognize revenue, over time, in the amount to which we have a right to invoice.

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Accounting for Acquisitions and Business Acquisition Contingencies

We account for acquisitions using the acquisition method of accounting. The most critical areas of judgment in applying the acquisition method include selecting the appropriate valuation techniques and assumptions that are used to measure the acquired assets and assumed liabilities at fair value, particularly for intangible assets, contingent consideration, acquired tangible assets such as property, plant and equipment. We may use independent valuation specialists to assist in determining the estimated fair values of assets acquired and liabilities assumed.

Subsequent changes in the fair value of contingent consideration are recognized as a gain or loss in our consolidated statements of operations. Payments of contingent consideration are reflected in financing activities in our consolidated statements of cash flows to the extent included as part of the initial purchase price, or in operating activities if the payment exceeds the amount included in the initial purchase price.

Impairments of Long Lived Assets and Goodwill

Certain events or changes in circumstances may indicate that the recoverability of the carrying amount of long lived assets should be assessed. When such events or changes in circumstances are present, we estimate the future cash flows expected to result from the use of the asset (or asset group) and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount, we recognize an impairment based on the fair value of such assets.

Goodwill is tested for impairment at least annually should an event or circumstances indicate that a reduction in fair value of the reporting unit may have occurred during the year, goodwill would also be tested at such occasion.

We use a two-step process to assess the realizability of goodwill. The first step (generally referred to as a "step 0" analysis) is a qualitative assessment that analyzes current economic indicators associated with a particular reporting unit. For example, we analyze changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there are indicators of a significant decline in the fair value of a particular reporting unit. If the qualitative assessment indicates a stable or improved fair value, no further testing is required. If a qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we will proceed to the quantitative second step (generally referred to as a "step 1" analysis) where the fair value of a reporting unit is calculated based on weighted income and market-based approaches. If the fair value of a reporting unit is lower than its carrying value, an impairment to goodwill is recorded, not to exceed the carrying amount of goodwill in the reporting unit.

Step 1 of the quantitative test requires comparison of the fair value of each of the reporting units to the respective carrying value. If the carrying value of the reporting unit is less than the fair value, no impairment exists. Otherwise, we would recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit.

Embedded Derivatives

Embedded derivatives that are required to be bifurcated from the underlying host instrument are accounted for and valued as a separate financial instrument. These embedded derivatives are bifurcated, accounted for at their estimated fair value, which is based on certain estimates and assumptions, and presented separately on the consolidated statements of financial position. Changes in fair value of the embedded derivatives are recognized as a component of other income/ expense on our consolidated statements of operations.

Stock-based Compensation

We sponsor stock incentive plans that allow for issuance of employee stock options and other forms of equity incentives.

Awards that are issued to non-employees in exchange for their services are accounted for under ASC 505, Equity-Based Payments to Non-Employees. ASC 505 requires that the fair value of the equity instruments issued to a non-employee be measured on the earlier of: (i) the performance commitment date or (ii) the date the services required under the arrangement have been completed.

Certain of the performance based restricted stock units will only meet the requirements for establishing a grant date when the final calculated financial performance metrics and the amount of awards have been approved by our Board of Directors, which will then trigger the service inception date, the fair value of the awards, and the associated expense recognition period.

The fair value of the remaining stock-based payment awards is expensed over the vesting period of each tranche on a straight-line basis. Any modification of an award that increases its fair value will require us to recognize additional expense. The fair value of

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stock options under its employee stock incentive plan are estimated as of the grant date using the Black-Scholes option valuation model, which is affected by its estimates of the risk-free interest rate, its expected dividend yield, expected term and the expected share price volatility of its common shares over the expected term. No dividend rates are used in the calculation as these are not applicable to us. Forfeitures are recognized as incurred. Employee options are accounted for in accordance with the guidance set forth by ASC 718.

The fair value of stock appreciation rights is estimated at the grant date using the geometric Brownian motion model.

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