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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to                
Commission File Number:
001-39919
 
 
MONTAUK RENEWABLES, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
85-3189583
(State or Other Jurisdiction of Incorporation or
 
(IRS Employer Identification No.)
Organization)
   
   
680 Andersen Drive, 5
th
Floor Pittsburgh
,
Pennsylvania
 
15220
(Address of Principal Executive Offices)
 
(Zip Code)
(412)
747-8700
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
MNTK
 
The Nasdaq Capital Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes
  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes
  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act:
 
Large accelerated filer      Accelerated filer  
       
Non-accelerated filer      Smaller reporting company  
       
         Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  
The number of outstanding shares of the registrant’s common stock on November 
11
, 2021 was 143,584,827 shares.
 
 
 

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       48  
     
ITEM 3.
       49  
     
ITEM 4.
       49  
     
ITEM 5.
       49  
     
ITEM 6.
       49  
   
     51  
 

Glossary of Key Terms
This Quarterly Report on Form
10-Q
uses several terms of art that are specific to our industry and business. For the convenience of the reader, a glossary of such terms is provided here. Unless we otherwise indicate, or unless the context requires otherwise, any references in this Quarterly Report on Form
10-Q
to:
 
   
ADG
” refers to anaerobic digested gas.
 
   
CARB
” refers to the California Air Resource Board.
 
   
CNG
” refers to compressed natural gas.
 
   
CI
” refers to carbon intensity.
 
   
CWCs
” refers to cellulosic waiver credits.
 
   
D3
” refers to cellulosic biofuel with a 60% GHG reduction requirement.
 
   
D5
” refers to advanced biofuels with a 50% GHG reduction requirement.
 
   
EHS
” refers to environment, health and safety.
 
   
EPA
” refers to the U.S. Environmental Protection Agency.
 
   
Environmental Attributes
” refer to federal, state and local government incentives in the United States, provided in the form of RINs, RECs, LCFS credits, rebates, tax credits and other incentives to end users, distributors, system integrators and manufacturers of renewable energy projects, that promote the use of renewable energy.
 
   
GHG
” refers to greenhouse gases.
 
   
JSE
” refers to the Johannesburg Stock Exchange.
 
   
LCFS
” refers to Low Carbon Fuel Standard.
 
   
LFG
” refers to landfill gas.
 
   
PPAs
” refers to power purchase agreements.
 
   
RECs
” refers to Renewable Energy Credits.
 
   
Renewable Electricity
” refers to electricity generated from renewable sources.
 
   
RFS
” refers to the EPA’s Renewable Fuel Standard.
 
   
RINs
” refers to Renewable Identification Numbers.
 
   
RNG
” refers to renewable natural gas.
 
   
RPS
” refers to Renewable Portfolio Standards.
 
   
RVOs
” refers to renewable volume obligations.
 
   
WRRFs
” refers to water resource recovery facilities.
 
3

Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form
10-Q
contains “forward-looking statements” within the meaning of U.S. federal securities laws that involve substantial risks and uncertainties. All statements other than statements of historical or current fact included in this report are forward-looking statements. Forward-looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance, and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “assume,” “believe,” “can have,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “likely,” “may,” “might,” “objective,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “would,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operational performance or other events. For example, all statements we make relating to future results of operations, financial condition, expectations and plans of the Company, including the expected benefits of the Pico amendment and the North Carolina acquisition, the anticipated completion of engine repairs at the Security facility, estimated and projected costs, expenditures, growth rates, and our plans and objectives for future operations, growth, initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expect and, therefore, you should not unduly rely on such statements. The risks and uncertainties that could cause those actual results to differ materially from those expressed or implied by these forward-looking statements include but are not limited to:
 
   
the impact of the ongoing
COVID-19
pandemic on our business, financial condition and results of operations;
 
   
our ability to develop and operate new renewable energy projects, including livestock farms;
 
   
reduction or elimination of government economic incentives to the renewable energy market;
 
   
delays in acquisition, financing, construction and development of new projects, including expansion plans into new areas such as agricultural waste;
 
   
the length of development and optimization cycles for new projects, including the design and construction processes for our renewable energy projects;
 
   
dependence on third parties for the manufacture of products and services;
 
   
identifying suitable locations for new projects;
 
   
reliance on interconnections to distribution and transmission products for our Renewable Natural Gas and Renewable Electricity Generation segments;
 
   
our projects not producing expected levels of output;
 
   
the anticipated benefits of the Pico feedstock amendment and the North Carolina acquisition;
 
   
concentration of revenues from a small number of customers and projects;
 
   
dependence on our landfill operators;
 
   
our outstanding indebtedness and restrictions under our credit facility;
 
   
our ability to extend our fuel supply agreements prior to expiration;
 
   
our ability to meet milestone requirements under our PPAs;
 
   
existing regulations and changes to regulations and policies that effect our operations;
 
   
decline in public acceptance and support of renewable energy development and projects;
 
   
our expectations regarding Environmental Attribute and commodity prices;
 
   
our expectations regarding the period during which we qualify as an emerging growth company under the Jumpstart Our Business Startup Act (“JOBS Act”);
 
   
our expectations regarding future capital expenditures, including for the maintenance of facilities;
 
   
our expectations regarding the use of net operating losses before expiration;
 
   
our expectations regarding more attractive CI scores by regulatory agencies for our livestock farm projects;
 
   
market volatility and fluctuations in commodity prices and the market prices of Environmental Attributes;
 
   
profitability of our planned livestock farm projects;
 
   
sustained demand for renewable energy;
 
   
security threats, including cyber-security attacks;
 
4

   
the need to obtain and maintain regulatory permits, approvals and consents;
 
   
potential liabilities from contamination and environmental conditions;
 
   
potential exposure to costs and liabilities due to extensive environmental, health and safety laws;
 
   
impacts of climate change, changing weather patterns and conditions, and natural disasters;
 
   
failure of our information technology and data security systems;
 
   
increased competition in our markets;
 
   
continuing to keep up with technology innovations;
 
   
our belief that the measures taken to remediate the material weakness identified in our internal control over financial reporting will improve our internal control over financial reporting;
 
   
concentrated stock ownership by a few stockholders and related control over the outcome of all matters subject to a stockholder vote; and
 
   
other risks and uncertainties detailed in the section titled “Risk Factors” in our latest Annual Report on Form
10-K.
We make many of our forward-looking statements based on our operating budgets and forecasts, which are based upon detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.
All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in our other Securities and Exchange Commission (“SEC”) filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties. See the “Risk Factors” section in our latest Annual Report on Form
10-K.
We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.
 
5

PART I FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
 
    
Page
 
Montauk Renewables, Inc
.
  
Unaudited Condensed Consolidated Financial Statements
  
     7  
     8  
     9  
     10  
     11  
 
6

MONTAUK RENEWABLES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data):
 
 
  
As of September 30,
2021
 
  
As of December 31,
2020
 
ASSETS
  
     
  
     
Current assets:
  
     
  
     
Cash and cash equivalents
   $ 20,892      $ 20,992  
Restricted cash - current
 
 
118
 
 
 
—  
 
Accounts and other receivables, net
     15,308        5,449  
Prepaid expenses and other current assets
     3,045        6,044  
    
 
 
    
 
 
 
Total current assets
   $ 39,363      $ 32,485  
Restricted cash -
non-current
   $ 573      $ 567  
Property, plant and equipment, net
     179,307        186,401  
Related party receivable
     7,140        —    
Goodwill and intangible assets, net
     15,033        14,678  
Deferred tax assets
     13,697        14,822  
Operating lease
right-of-use
assets
     378        586  
Other assets
     4,254        3,817  
    
 
 
    
 
 
 
Total assets
  
$
259,745
 
  
$
253,356
 
    
 
 
    
 
 
 
LIABILITIES AND STOCKHOLDERS’ AND MEMBERS’ EQUITY
                 
Current liabilities:
                 
Accounts payable
   $ 5,800      $ 5,964  
Accrued liabilities
     12,441        11,539  
Current portion of lease liability
     294        282  
Current portion of derivative instruments
     841        1,185  
Current portion of long-term debt
     9,633        9,492  
    
 
 
    
 
 
 
Total current liabilities
   $ 29,009      $ 28,462  
Long-term debt, less current portion
   $ 49,023      $ 56,268  
Non-current
portion of lease liability
     102        320  
Non-current
portion of derivative instruments
     408        1,075  
Asset retirement obligation
     5,883        5,689  
Other liabilities
     1,226        1,920  
    
 
 
    
 
 
 
Total liabilities
   $ 85,651      $ 93,734  
    
 
 
    
 
 
 
STOCKHOLDERS’ AND MEMBERS’ EQUITY
                 
Members’ equity
   $ —        $ 159,622  
Common stock, $0.01 par value, authorized 690,000,000 shares; 143,584,827 shares issued at September 30, 2021; 141,015,213 shares outstanding at September 30, 2021
     1,410        —    
Treasury stock, at cost, 950,214 shares at September 30, 2021
     (10,813 )      —    
Additional
paid-in
capital
     193,518        —    
Retained deficit
     (10,021 )      —    
    
 
 
    
 
 
 
Total stockholders’ and members’ equity
   $ 174,094      $ 159,622  
    
 
 
    
 
 
 
Total liabilities and stockholders’ and members’ equity
  
$
259,745
 
  
$
253,356
 
    
 
 
    
 
 
 
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
 
7

MONTAUK RENEWABLES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data):
 
 
  
Three Months Ended

September 30,
 
 
Nine Months Ended
September 30,
 
 
  
2021
 
 
2020
 
 
2021
 
 
2020
 
Total operating revenues
   $ 39,749     $ 28,250     $ 102,872     $ 74,563  
Operating expenses:
                                
Operating and maintenance expenses
   $ 13,123     $ 11,320     $ 36,954     $ 31,281  
General and administrative expenses
     7,520       4,131       35,280       11,336  
Royalties, transportation, gathering and production fuel
     6,636       5,189       18,840       13,376  
Depreciation, depletion and amortization
     5,666       5,470       17,062       16,120  
Gain on insurance proceeds
     (157     (2,694     (238     (3,444
Impairment loss
     —         —         626       278  
Transaction costs
     232       —         357       —    
    
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   $ 33,020     $ 23,416     $ 108,881     $ 68,947  
Operating income (loss)
   $ 6,729     $ 4,834     $ (6,009   $ 5,616  
Other expenses:
                                
Interest expense
   $ 697     $ 436     $ 2,064     $ 3,510  
Other expense
     617       216       662       250  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total other expenses
   $ 1,314     $ 652     $ 2,726     $ 3,760  
Income (loss) before income taxes
   $ 5,415       4,182     $ (8,735   $ 1,856  
Income tax (benefit)
 expense
     (3,481     6,266       1,286       (291
    
 
 
   
 
 
   
 
 
   
 
 
 
Net income (loss)
   $ 8,896     $ (2,084   $ (10,021   $ 2,147  
    
 
 
   
 
 
   
 
 
   
 
 
 
         
Income (loss) per share:
                                
Basic
   $ 0.06             $ (0.07        
Diluted
   $ 0.06             $ (0.07        
Weighted-average common shares outstanding:
                                
Basic
     141,015,213               141,015,213          
Diluted
     141,048,006               141,015,213          
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
 
8

MONTAUK RENEWABLES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ AND MEMBERS’ EQUITY
(Unaudited)
(in thousands, except share data):
 
                                                                                                                                                                                                         
    
Common Stock
    
Treasury Stock
   
Members’
Equity
    
Additional
Paid-in

Capital
    
Retained
Earnings
(Deficit)
   
Total
Equity
 
    
Shares
    
Amount
    
Shares
    
Amount
 
Balance at June 30, 2021
  
 
141,015,213
 
  
$
1,410
 
  
 
950,214
 
  
$
(10,813
 
 
—  
 
  
$
190,944
 
  
$
(18,917
 
$
162,624
 
Net income
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
—  
 
  
 
8,896
 
 
 
8,896
 
Stock-based compensation
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
2,574
 
  
 
—  
 
 
 
2,574
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 
Balance at September 30, 2021
  
 
141,015,213
 
  
$
1,410
 
  
 
950,214
 
  
$
(10,813
 
$
—  
 
  
$
193,518
 
  
$
(10,021
 
$
174,094
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 
 
                                                                                                                                                                                                         
    
Common Stock
    
Treasury Stock
    
Members’
Equity
   
Additional
Paid-in

Capital
    
Retained
Earnings
(Deficit)
    
Total
Equity
 
    
Shares
    
Amount
    
Shares
    
Amount
 
Balance at June 30, 2020
  
 
—  
 
  
$
—  
 
  
 
—  
 
  
$
—  
 
  
$
158,729
 
 
$
—  
 
  
$
—  
 
  
$
158,729
 
Net loss
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
(2,084
 
 
—  
 
  
 
—  
 
  
 
(2,084
Stock-based compensation
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
224
 
 
 
—  
 
  
 
—  
 
  
 
224
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Balance at September 30, 2020
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
$
156,869
 
 
 
—  
 
  
 
—  
 
  
$
156,869
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
 
                                                                                                                                                                                                         
    
Common Stock
    
Treasury Stock
   
Members’
Equity
   
Additional
Paid-in

Capital
    
Retained
Earnings
(Deficit)
   
Total
Equity
 
    
Shares
    
Amount
    
Shares
    
Amount
 
Balance at December 31, 2020
  
 
—  
 
  
$
—  
 
  
 
—  
 
  
$
—  
 
 
 
159,622
 
 
 
—  
 
  
 
—  
 
 
$
159,622
 
Effect of reorganization transactions
  
 
138,312,713
 
  
 
1,383
 
  
 
—  
 
  
 
—  
 
 
 
(159,622
 
 
158,239
 
  
 
—  
 
 
 
—  
 
IPO common stock
  
 
2,702,500
 
  
 
27
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
 
 
15,566
 
  
 
—  
 
 
 
15,593
 
Treasury stock
  
 
—  
 
  
 
—  
 
  
 
950,214
 
  
 
(10,813
 
 
—  
 
 
 
—  
 
  
 
—  
 
 
 
(10,813
Net loss
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
 
 
—  
 
  
 
(10,021
 
 
(10,021
Stock-based compensation
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
 
 
19,713
 
  
 
—  
 
 
 
19,713
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Balance at September 30, 2021
  
 
141,015,213
 
  
$
1,410
 
  
 
950,214
 
  
$
(10,813
 
$
—  
 
 
$
193,518
 
  
$
(10,021
 
$
174,094
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
 
                                                                                                                                                                                                         
    
Common Stock
    
Treasury Stock
    
Members’
Equity
    
Additional
Paid-in

Capital
    
Retained
Earnings
(Deficit)
    
Total
Equity
 
    
Shares
    
Amount
    
Shares
    
Amount
 
Balance at December 31, 2019
  
 
—  
 
  
$
—  
 
  
 
—  
 
  
$
—  
 
  
$
154,257
 
  
$
—  
 
  
$
—  
 
  
$
154,257
 
Net income
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
2,147
 
  
 
—  
 
  
 
—  
 
  
 
2,147
 
Stock-based compensation
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
465
 
  
 
—  
 
  
 
—  
 
  
 
465
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Balance at September 30, 2020
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
$
156,869
 
  
 
—  
 
  
 
—  
 
  
$
156,869
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
 
9

MONTAUK RENEWABLES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands):
 
 
  
Nine Months Ended

September 30,
 
 
  
2021
 
 
2020
 
Cash flows from operating activities:
  
     
 
     
Net (loss) income
   $ (10,021   $ 2,147  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
                
Depreciation, depletion and amortization
     17,062       16,120  
Provision (benefit) for deferred income taxes
     1,124       (372
Stock-based compensation
     19,713       465  
Related party receivables
     —         164  
Derivative
mark-to-market
adjustments and settlements
     (1,011     1,381  
Gain on property insurance proceeds
     (238     (1,169
Gain on Pico
earn-out
liability reduction
     (694    
 
 
 
Net loss on sale of assets
     822       —    
Accretion of asset retirement obligations
     304       108  
Amortization of debt issuance costs
     395       532  
Impairment loss
     626       278  
Changes in operating assets and liabilities:
                
Accounts and other receivables and other current assets
     (7,272     695  
Accounts payable and other accrued expenses
     488       2,287  
    
 
 
   
 
 
 
Net cash provided by operating activities
   $ 21,298     $ 22,636  
Cash flows from investing activities
                
Capital expenditures
   $ (7,702   $ (14,911
Asset acquisition
     (4,142     —    
Cash collateral deposits, net
     118           
Proceeds from sale of assets
     74       —    
Proceeds from insurance recovery
     238       1,169  
    
 
 
   
 
 
 
Net cash used in investing activities
   $ (11,414   $ (13,742
Cash flows from financing activities:
                
Borrowings of long-term debt
   $ —       $ 8,500  
Repayments of long-term debt
     (7,500     (7,500
Proceeds from initial public offering
     15,593       —    
Treasury stock purchase
     (10,813     —    
Loan to Montauk Holdings Limited
     (7,140     —    
    
 
 
   
 
 
 
Net cash (used in) provided by financing activities
   $ (9,860   $ 1,000  
Net increase in cash and cash equivalents and restricted cash
   $ 24     $ 9,894  
Cash and cash equivalents and restricted cash at beginning of period
   $ 21,559     $ 10,361  
    
 
 
   
 
 
 
Cash and cash equivalents and restricted cash at end of period
   $ 21,583     $ 20,255  
    
 
 
   
 
 
 
Reconciliation of cash, cash equivalents, and restricted cash at end of period:
                
Cash and cash equivalents
   $ 20,892     $ 19,537  
Restricted cash and cash equivalents - current
    
118
      151  
Restricted cash and cash equivalents -
non-current
     573       567  
    
 
 
   
 
 
 
    
$
21,583
 
 
$
20,255
 
    
 
 
   
 
 
 
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
 
10

MONTAUK RENEWABLES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share amounts)
NOTE 1 – DESCRIPTION OF BUSINESS
Operations and organization
Montauk Renewables’ Business
Montauk Renewables, Inc. (the “Company” or “Montauk Renewables”) is a renewable energy company specializing in the management, recovery and conversion of biogas into Renewable Natural Gas (“RNG”). The Company captures methane, preventing it from being released into the atmosphere, and converts it into either RNG or electrical power for the electrical grid (“Renewable Electricity”). The Company, headquartered in Pittsburgh, Pennsylvania, has more than 30 years of experience in the development, operation and management of landfill methane-fueled renewable energy projects. The Company has current operations at 15 operating projects located in California, Idaho, Ohio, Oklahoma, Pennsylvania, North Carolina and Texas. The Company sells RNG and Renewable Electricity, taking advantage of Environmental Attribute premiums available under federal and state policies that incentivize their use.
One of the Company’s key revenue drivers is the selling of captured gas and the selling of Renewable Identification Numbers (“RINs”) to fuel blenders. The Renewable Fuel Standard (“RFS”) is an Environmental Protection Agency (“EPA”) administered federal law that requires transportation fuel to contain a minimum volume of renewable fuel. RNG derived from landfill methane, agricultural digesters and wastewater treatment facilities used as a vehicle fuel qualifies as a D3 (cellulosic biofuel with a 60% greenhouse gas reduction requirement) RIN. The RINs are compliance units for fuel blenders that were created by the RFS program in order to reduce greenhouse gases and imported petroleum into the United States.
An additional program utilized by the Company is the Low Carbon Fuel Standard (“LCFS”). This is state specific and is designed to stimulate the use of
low-carbon
fuels. To the extent that RNG from the Company’s facilities is used as a transportation fuel in states that have adopted an LCFS program, it is eligible to receive an Environmental Attribute additional to the RIN value under the federal RFS.
The second primary revenue driver is the selling of captured electricity and the associated environmental premiums related to renewable sales. The Company’s electric facilities are designed to conform to and monetize various state renewable portfolio standards requiring a percentage of the electricity produced in that state to come from a renewable resource. Such premiums are in the form of Renewable Energy Credits (“RECs”). All three of the Company’s electric facilities receive revenue for the monetization of RECs either as a part of a power sales agreement or separately.
Collectively, the Company benefits from federal, state and local government incentives in the United States, provided in the form of RINs, RECs, LCFS credits, rebates, tax credits and other incentives to end users, distributors, system integrators and manufacturers of renewable energy projects, that promote the use of renewable energy, as Environmental Attributes.
Background and Reorganization Transactions
On January 4, 2021, the Company, Montauk Holdings Limited (“MNK”) and Montauk Holdings USA, LLC (a direct wholly-owned subsidiary of MNK at the time, “Montauk USA”) entered into a series of transactions, including an equity exchange and a distribution collectively referred to as the “Reorganization Transactions,” that resulted in the Company owning all of the assets and entities (other than Montauk USA) previously owned by Montauk USA, and Montauk Renewables became a direct wholly-owned subsidiary of MNK. Prior to the Reorganization Transactions, MNK’s business and operations were conducted entirely through Montauk USA and its U.S. subsidiaries, and MNK held no substantial assets other than equity of Montauk USA. The Company had no significant operations or assets prior to January 4, 2021 when it engaged in the equity exchange with Montauk USA and MNK.
After completion of the Reorganization Transactions, (i) Montauk USA ceased to own any substantial assets and (ii) all entities through which MNK’s business and operations were conducted became owned, directly or indirectly, by the Company. MNK adopted a plan contemporaneously with the completion of the Reorganization Transactions that authorized the liquidation and dissolution of MNK.
On January 15, 2021, MNK sold the membership interest of Montauk USA to a third party. On January 26, 2021, MNK distributed all of the outstanding shares of the Company’s common stock as a pro rata dividend to the holders of MNK’s ordinary shares (the “Distribution”), subject to any tax withholding obligations under applicable South African law. Each ordinary share of MNK outstanding on January 21, 2021, the record date for the Distribution (the “Record Date”), entitled the holder thereof to receive one share of the Company’s common stock.
On January 26, 2021, the Company closed the initial public offering of its common stock on the Nasdaq Capital Market (the “IPO”) with the shares traded under the symbol “MNTK.” Montauk Renewables issued 2,702,500 shares at $8.50 per share and received gross proceeds of $22,971. The Company’s common stock was also secondarily listed on the Johannesburg Stock Exchange under the trading symbol “MKR.”
 
11

On January 26, 2021, the Company entered into a Loan Agreement and Secured Promissory Note (the “Initial Promissory Note”) with MNK. MNK is currently an affiliate of the Company and certain of the Company’s directors and executive officers are also directors and executive officers of MNK. Pursuant to the Initial Promissory Note, the Company advanced a cash loan of $5,000 to MNK for MNK to pay its dividends tax liability arising from the Reorganization Transactions under the South African Income Tax Act, 1962 (Act No. 58 of 1962), as amended (the “South African Income Tax Act”). On February 22, 2021, the Company and MNK entered into an Amended and Restated Promissory Note (the “Amended Promissory Note”) to increase the principal amount of the loan to a total of $7,140, in the aggregate, in accordance with the Company’s obligations set forth in the Transaction Implementation Agreement entered into by and among the Company, MNK and the other party thereto, dated November 6, 2020, and amended on January 14, 2021.
MNK was delisted from the JSE on January 26, 2021. MNK will be liquidated within 24 months of the Distribution.
COVID-19
In March 2020, the World Health Organization classified the outbreak of
COVID-19
as a pandemic and recommended containment and mitigation measures worldwide. The Company is considered an essential company under the U.S. Federal Cybersecurity and Infrastructure Security Agency guidance and various state and/or local jurisdictions in which it operates. In response to the
COVID-19
pandemic, the Infectious Disease and Response Plan was activated to lead the development and response to any infectious disease event.
While the Company has not experienced any material disruptions in its ability to continue business operations or experienced a material negative impact to its financial results due to
COVID-19
for the nine months ended September 30, 2021, certain aspects of the Company’s business, financial condition and results of operations were negatively impacted during the nine months ended September 30, 2020. These disruptions included the delay of commissioning of development sites for up to five months resulting in delays to registrations and qualifications necessary for EPA pathways and delays in revenue streams from these facilities, contract cancellations, and a decrease in operational efficiency in maintenance and operations. State and local mitigation protocols contributed to reduced needs for transportation fuels, which lowered state-based environmental premiums. The Company also faced a reduction in RINs pricing due to the outbreak of
COVID-19.
The potential future impact of
COVID-19
cannot be predicted with certainty, because new information may emerge concerning the severity and extent of future surges and strains, vaccine distribution and other actions to contain the virus or treat its impact, among other reasons. Future negative impacts could include, but are not limited to, contract cancellations, supply chain disruptions, registration delays with local, state and federal agencies, Environmental Attribute premiums uncertainty, and a demand decrease in transportation fuels.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions of the SEC on Form
10-Q
and Rule
10-01
of Regulation
S-X.
Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2020 included in the Company’s Annual Report on Form
10-K
filed with the SEC on March 31, 2021 (the “2020 Annual Report”). The results of operations for the three and nine months ended September 30, 2021 in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The balance sheet at December 31, 2020 has been derived from the audited financial statements as of that date. For further information, refer to our audited financial statements and notes thereto included for the year ended December 31, 2020 in the 2020 Annual Report.
The historical consolidated financial information included reflects the historical results of operations and financial position of Montauk USA. The consolidated financial statements of Montauk USA became the Company’s historical financial statements following the IPO. Certain historical financial information included relates to periods prior to the Reorganization Transactions.
Retrospective Presentation of Ownership Related to the Reorganization Transactions
As discussed in Note 1, as a result of the Reorganization Transactions, the Company acquired the assets and entities (excluding Montauk USA) which were previously owned by MNK. As part of the Reorganization Transactions, a 1:1 pro rata distribution of shares of the Company’s common stock was made to holders of MNK’s ordinary shares. The Reorganization Transactions resulted in a pro rata distribution whereby the ownership of the Company after the Reorganization Transactions was identical to the ownership of MNK prior to the Reorganization Transaction and was therefore akin to a common control transaction. All members’ equity in the financial statements and notes have been retrospectively adjusted to give effect to the Distribution, as if such pro rata distribution on a 1:1 basis occurred as of all
pre-IPO
periods presented, including periods presented on the Condensed Consolidated Balance Sheets (Unaudited), Condensed Consolidated Statements of Operations (Unaudited), Condensed Consolidated Statements of Stockholders’ and Members’ Equity (Unaudited) and notes to the Unaudited Condensed Consolidated Financial Statements contained herein.
 
12

Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. The effect of the reclassifications in the December 31, 2020 condensed consolidated balance sheet is a
$645
 
decrease of property, plant & equipment, net and a
$645
 
increase to goodwill and intangibles, net, as of December 31, 2020. The effect of the reclassifications for the nine months ended September 30, 2020 condensed consolidated statement of operations is a $996 decrease of operating revenues, a $397 increase in operating and maintenance expenses and a
$1,393
 
decrease in royalties, transportation, gathering and production fuel.
Use of Estimates
The preparation of financial statements, in conformity with 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Equity-Based Compensation
The Company accounts for equity-based compensation under the provisions of ASC 718,
Compensation – Stock Compensation
, (“
ASC 718
”). ASC 718 requires compensation costs related to share-based payment transactions, measured based on the fair value of the instruments issued, be recognized in the consolidated financial statements over the requisite service period of the award. Stock options are initially measured on the grant date using the Black-Scholes valuation model, which requires the use of subjective assumptions related to the expected stock price volatility, term, risk-free interest rate and dividend yield. For restricted stock and restricted stock units, the Company determines the grant date fair value based on the closing market price of the stock on the date of grant.
Recently Issued Accounting Standards
In September 2016, the FASB issued ASU
No. 2016-13,
Financial Instruments –
Credit Losses
. The new guidance changes how entities measure credit losses on financial instruments and the timing of when such losses are recorded. The new standard is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU
2020-06,
Debt: Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging
– Contracts in Entity’s Own Equity (Subtopic
815-40)
, which simplifies the accounting for convertible instruments and contracts in an entity’s own
equity. This guidance is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those years, with early adoption permitted only as of annual reporting periods beginning after December 15, 2020. The Company currently does not anticipate this ASU will have a material impact on its consolidated financial statements or related financial statement disclosures.
In March 2020, the FASB issued ASU
No. 2020-04,
Reference Rate Reform (Topic 848)
, which provides optional expedients and exceptions to the current guidance on contract modifications and hedging relationships to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company does not currently anticipate this ASU to have a material effect on its agreements and is working with the administrative agent, Comerica Bank, during the LIBOR transition.
NOTE 3 – ASSET IMPAIRMENT
The Company recorded no impairment losses for the three months ended September 30, 2021 and 2020. Impairment losses of $626 and $278 were recorded for the nine months ended September 30, 2021 and 2020, respectively. The 2021 impairment loss was due to a notice received from a landfill host in February 2021 amending the underlying gas rights agreement to remove and begin decommissioning activities related to one of the Company’s renewable electric generation sites. The 2020 impairment loss was due to a termination of a development agreement. The Company evaluated and concluded that no other events or conditions existed during the period that suggested long-lived assets may not be recoverable.
 
13

NOTE 4 – REVENUES FROM CONTRACTS WITH CUSTOMERS
The following tables display the Company’s revenue by major source, excluding realized and unrealized gains or losses under the Company’s gas hedge program, based on product type and timing of transfer of goods and services for the three and nine months ended September 30, 2021 and 2020:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Three Months Ended September 30,
2021
 
    
Goods
transferred at
a point in time
    
Goods
transferred
over time
    
Total
 
                      
Major Goods/Service Line:
                          
Natural Gas Commodity
   $ 2,983      $ 8,570      $ 11,553  
Natural Gas Environmental Attributes
     24,223        —          24,223  
Electric Commodity
     —          2,305        2,305  
Electric Environmental Attributes
     1,668        —          1,668  
    
 
 
    
 
 
    
 
 
 
     $ 28,874      $ 10,875      $ 39,749  
    
 
 
    
 
 
    
 
 
 
Operating Segment:
                          
RNG
   $ 27,206      $ 8,570      $ 35,776  
REG
     1,668        2,305        3,973  
    
 
 
    
 
 
    
 
 
 
     $ 28,874      $ 10,875      $ 39,749  
    
 
 
    
 
 
    
 
 
 
 
 
  
Three Months Ended September 30,
2020
 
 
  
Goods
transferred at
a point in time
 
  
Goods
transferred
over time
 
  
Total
 
 
  
 
 
  
 
 
  
 
 
Major Goods/Service Line:
  
     
  
     
  
     
                      
Natural Gas Commodity
   $ 1,594      $ 5,951      $ 7,545  
Natural Gas Environmental Attributes
     16,470        —          16,470  
Electric Commodity
     —          2,492        2,492  
Electric Environmental Attributes
     1,743        —          1,743  
    
 
 
    
 
 
    
 
 
 
     $ 19,807      $ 8,443      $ 28,250  
    
 
 
    
 
 
    
 
 
 
Operating Segment:
                          
RNG
   $ 18,064      $ 5,951      $ 24,015  
REG
     1,743        2,492        4,235  
    
 
 
    
 
 
    
 
 
 
     $ 19,807      $ 8,443      $ 28,250  
    
 
 
    
 
 
    
 
 
 
 
 
  
Nine Months Ended September 30, 2021
 
 
  
Goods
transferred at
a point in time
 
  
Goods
transferred
over time
 
  
Total
 
 
  
 
 
  
 
 
  
 
 
Major Goods/Service Line:
  
     
  
     
  
     
Natural Gas Commodity
   $ 13,293      $ 21,620      $ 34,913  
Natural Gas Environmental Attributes
     56,297        —          56,297  
Electric Commodity
     —          7,150        7,150  
Electric Environmental Attributes
     4,512        —          4,512  
    
 
 
    
 
 
    
 
 
 
       
     $ 74,102      $ 28,770      $ 102,872  
    
 
 
    
 
 
    
 
 
 
Operating Segment:
                          
RNG
   $ 69,590      $ 21,620      $ 91,210  
REG
     4,512        7,150        11,662  
    
 
 
    
 
 
    
 
 
 
       
     $ 74,102      $ 28,770      $ 102,872  
    
 
 
    
 
 
    
 
 
 
 
14

 
  
Nine Months Ended September 30, 2020
 
 
  
Goods
transferred at
a point in time
 
  
Goods
transferred
over time
 
  
Total
 
 
  
 
 
  
 
 
  
 
 
Major Goods/Service Line:
  
     
  
     
  
     
Natural Gas Commodity
   $ 4,683      $ 16,958      $ 21,641  
Natural Gas Environmental Attributes
     39,498        —          39,498  
Electric Commodity
     —          8,035        8,035  
Electric Environmental Attributes
     5,226        —          5,226  
    
 
 
    
 
 
    
 
 
 
     $ 49,407      $ 24,993      $ 74,400  
    
 
 
    
 
 
    
 
 
 
Operating Segment:
                          
RNG
   $ 44,181      $ 16,958      $ 61,139  
REG
     5,226        8,035        13,261  
    
 
 
    
 
 
    
 
 
 
     $ 49,407      $ 24,993      $ 74,400  
    
 
 
    
 
 
    
 
 
 
NOTE 5 – ACCOUNTS AND OTHER RECEIVABLES
The Company extends credit based
 
upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. Reserves for uncollectible accounts, if any, are recorded as part of general and administrative expenses in the Consolidated Statements of Operations (Unaudited). For the three and nine months ended September 30, 2021 and 2020, there were no reserves for uncollectible accounts.
Accounts and other receivables consist of the following as of September 30, 2021 and December 31, 2020:
 
    
September 30,
2021
    
December 31
,

2020
 
               
Accounts receivables
   $ 15,188      $ 5,264  
Other receivables
     94        164  
Reimbursable expenses
     26        21  
    
 
 
    
 
 
 
Accounts and other receivables, net
   $ 15,308      $ 5,449  
    
 
 
    
 
 
 
 
15

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following as of September 30, 2021 and December 31, 2020:
 
    
September 30,
2021
   
December 31
,

2020
 
              
Buildings and improvements
   $ 28,251     $ 28,065  
Machinery and equipment
     249,337       246,874  
Gas mineral rights
     34,551       34,551  
Construction work in progress
     8,612       3,840  
    
 
 
   
 
 
 
Total
     320,751       313,330  
Less: Accumulated depreciation and amortization
     (141,444     (126,929
    
 
 
   
 
 
 
Property, plant & equipment, net
   $ 179,307     $ 186,401  
    
 
 
   
 
 
 
Depreciation expense for property plant and equipment was $4,839 and $4,623 for the three months ended September 30, 2021 and 2020, respectively, and $14,637 and $13,582 for the nine months ended September 30, 2021 and 2020, respectively. Amortization expense for gas mineral rights was $446 and $491 for the three months ended September 30, 2021 and 2020, respectively, and $1,382 and $1,473 for the nine months ended September 30, 2021 and 2020, respectively.
In May 2021, the Company completed a series of transactions (the “Asset Acquisition”) with a privately-held entity. The Company paid $4,142, including $341 in acquisition costs, for land, building, mobile equipment and other property, plant and equipment. The Asset Acquisition was accounted for as an asset purchase in accordance with ASC 805,
Business Combinations
, and the purchase price and direct transaction costs have been allocated to the individual assets obtained. Machinery and
e
quipment comprise $
835
of the asset purchase price, with the remaining balance classified as construction work in progress as of September 30, 2021.
 
16

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS, NET
Intangible assets consist of the following as of September 30, 2021 and December 31, 2020:
 
    
September 30,
2021
    
December 31,
2020
 
               
Goodwill
   $ 60      $ 60  
Intangible assets with indefinite lives:
                 
Emissions allowances
   $ 777      $ 777  
Land use rights
     329        329  
    
 
 
    
 
 
 
Total intangible assets with indefinite lives:
   $ 1,106      $ 1,106  
    
 
 
    
 
 
 
Intangible assets with finite lives:
                 
Interconnection, net of accumulated amortization of $2,835 and $2,329
   $ 12,488      $ 12,596  
Customer contracts, net of accumulated amortization of $16,904 and $16,367
     1,379        916  
    
 
 
    
 
 
 
Total intangible assets with finite lives:
   $ 13,867      $ 13,512  
    
 
 
    
 
 
 
Total Goodwill and Intangible Assets
  
$
15,033
 
  
$
14,678
 
    
 
 
    
 
 
 
The weighted average remaining useful life of the customer contracts and interconnection is approximately 8 years and 16 years, respectively. Amortization expense was $381 and $356 for the three months ended September 30, 2021 and 2020, respectively, and $1,043 and $1,065 for the nine months ended September 30, 2021 and 2020, respectively.
NOTE 8 – ASSET RETIREMENT OBLIGATIONS
The following table summarizes the activity associated with asset retirement obligations of the Company as of September 30, 2021 and December 31, 2020:
 
    
Nine Months Ended
September 30,
2021
   
Year Ended
December 31,
2020
 
              
Asset retirement obligations - beginning of period
   $ 5,689     $ 5,928  
Accretion expense
     304       320  
New asset retirement obligations
              350  
Decommissioning
     (110     (909
    
 
 
   
 
 
 
Asset retirement obligations - end of period
   $ 5,883     $ 5,689  
    
 
 
   
 
 
 
 
17

NOTE 9 – DERIVATIVE INSTRUMENTS
To mitigate market risk associated with fluctuations in energy commodity prices (natural gas) and interest rates, the Company utilizes various hedges to secure energy commodity pricing and interest rates under a board-approved program. As a result of the hedging strategy employed, the Company had the following realized and unrealized gains and losses in the Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2021 and 2020:
 
 
  
 
 
  
Three Months Ended
 
Derivative Instrument
  
Location
 
  
September 30,
2021
 
 
 
September 30,
2020
 
 
  
 
 
  
 
 
  
 
 
Interest rate swaps
     Interest expense
 
 
 
 
 
       287        393   
             
 
 
    
 
 
 
Net gain (loss)
            $ 287      $ 393  
             
 
 
    
 
 
 
 
           
Nine Months Ended
 
Derivative Instrument
  
Location
    
September 30,
2021
    
September 30,
2020
 
Commodity contracts:
                          
Realized natural gas
     Gas commodity sales      $         $ 551  
Unrealized natural gas
     Other income                  (388 )
Interest rate swaps
     Interest expense        1,011        (993
             
 
 
    
 
 
 
Net gain (loss)
            $ 1,011      $ (830
             
 
 
    
 
 
 
NOTE 10 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s assets and liabilities that are measured at fair value on a recurring basis include the following as of September 30, 2021 and December 31, 2020, set forth by level, within the fair value hierarchy:
 
    
September 30, 2021
 
    
Level 1
    
Level 2
   
Level 3
   
Total
 
                           
Interest rate swap derivative liabilities
   $         $ (1,249   $        $ (1,249
Asset retirement obligations
                        (5,883     (5,883
Pico
earn-out
liability
                        (1,226     (1,226
    
 
 
    
 
 
   
 
 
   
 
 
 
     $         $ (1,249   $ (7,109   $ (8,358
    
 
 
    
 
 
   
 
 
   
 
 
 
 
 
  
December 31, 2020
 
 
  
Level 1
 
  
Level 2
 
 
Level 3
 
 
Total
 
 
  
 
 
  
 
 
 
 
 
 
 
 
Interest rate swap derivative liabilities
   $         $ (2,260   $        $ (2,260
Asset retirement obligations
                        (5,689     (5,689
Pico
earn-out
liability
                        (1,920     (1,920
    
 
 
    
 
 
   
 
 
   
 
 
 
     $         $ (2,260   $ (7,609   $ (9,869
    
 
 
    
 
 
   
 
 
   
 
 
 
A summary of changes in the fair values of the Company’s Level 3 instruments, attributable to asset retirement obligations is included in Note
8
. In addition, certain assets are measured at fair value on a
non-recurring
basis when an indicator of impairment is identified and the assets’ fair value is determined to be less than its carrying value. See Note 3 for additional information.
The purchase agreement for the 2018 acquisition of Pico Energy, LLC (“Pico”) included an
earn-out
provision dependent on, and calculated as a factor of, achieving certain levels of EBITDA and production volumes (each as determined under such agreement) during the term of the related gas rights agreement. The results of the Company’s risk adjusted analysis of the assessment of the obligation of the Pico
earn-out
liability resulted in a $694 decrease for the three months and nine months ended September 30, 2021. The Company estimates future EBITDA and production levels over the gas rights agreement and applies discount rates to assess this obligation. This adjustment has been included within the RNG segment and reported in Royalties, transportation, gathering and production fuel in the Consolidated Statement of Operations. No adjustments were made during the three and nine months ended September 30, 2020.
 
18

NOTE 11 – ACCRUED LIABILITIES
The Company’s accrued liabilities consist of the following as of September 30, 2021 and December 31, 2020:
 
    
September 30, 2021
    
December 31, 2020
 
               
Accrued expenses
   $ 4,710      $ 4,975  
Payroll and related benefits
     2,204        2,341  
Royalty
     4,044        2,620  
Utility
     1,059        1,147  
Other
     424        456  
    
 
 
    
 
 
 
Accrued Liabilities
   $ 12,441      $ 11,539  
    
 
 
    
 
 
 
NOTE 12 – DEBT
The Company’s debt consists of the following as of September 30, 2021 and December 31, 2020:
 
    
September 30, 2021
   
December 31, 2020
 
              
Term loan
   $ 22,500     $ 30,000  
Revolving credit facility
     36,697       36,697  
Less: current principal maturities
     (10,000     (10,000
Less: debt issuance costs (on long-term debt)
     (174     (429
    
 
 
   
 
 
 
Long-term debt
     49,023       56,268  
Current portion of long-term debt
     9,633       9,492  
    
 
 
   
 
 
 
    
$
58,656
 
 
$
65,760
 
    
 
 
   
 
 
 
Amended Credit Agreement
On December 12, 2018, Montauk Energy Holdings LLC (“MEH”) entered into the Second Amended and Restated Revolving Credit and Term Loan Agreement (as amended, “Credit Agreement”), by and among MEH, the financial institutions from time to time party thereto as lenders and Comerica Bank, as the administrative agent, sole lead arranger and sole bookrunner (“Comerica”). The Credit Agreement (i) amended and restated in its entirety MEH’s prior revolving credit and term loan facility, dated as of August 4, 2017, as amended, with Comerica and certain other financial institutions and (ii) replaced in its entirety the prior credit agreement, dated as of August 4, 2017, as amended, between Comerica and Bowerman Power LFG, LLC, a wholly-owned subsidiary of MEH.
On March 21, 2019, MEH entered into the first amendment to the Credit Agreement (the “First Amendment”), which clarified a variety of terms, definitions and calculations in the Credit Agreement. The Credit Agreement requires the Company to maintain customary affirmative and negative covenants, including certain financial covenants, which are measured at the end of each fiscal quarter.
On September 12, 2019, MEH entered into the second amendment to the Credit Agreement (the “Second Amendment”). Among other matters, the Second Amendment redefined the Fixed Charge Coverage Ratio (as defined in the Credit Agreement), reduced the commitments under the revolving credit facility to $80,000, redefined the Total Leverage Ratio (as defined in the Credit Agreement) and eliminated the RIN Floor (as defined in the Second Amendment) as an Event of Default. In connection with the Second Amendment, MEH paid down the outstanding term loan by $38,250 and the resulting quarterly principal installments were reduced to $2,500. The maturity date of the Credit Agreement was not changed by the Second Amendment and remains December 12, 2023.
In connection with the completion of the Reorganization Transactions and the IPO, the Company entered into the third amendment to the Credit Agreement (the “Third Amendment”). This amendment permitted the Change of Control provisions, as defined in the underlying agreement, to permit the Reorganization Transactions and IPO to be completed. The amendment also added LIBOR cessation fallback language for a transition to specified alternative SOFR-based rates, or, if those alternatives cannot be determined, to another rate selected by the administrative agent and the borrower under the Amended Credit Agreement as well as provisions that allow one or more parties to transition in advance of the dates set forth above where specified conditions are met.
The Credit Agreement is secured by a lien on substantially all assets of the Company and certain of its subsidiaries and provides for a $95,000 term loan and a $80,000 revolving credit facility. The term loan amortizes in quarterly installments of $2,500 and has a final maturity of December 12, 2023 with interest rates of 2.855% and 2.961% at September 30, 2021 and December 31, 2020, respectively.
As of September 30, 2021, $22,500 was outstanding under the term loan and $36,697 was outstanding under the revolving credit facility. In addition, the Company had $3,905 of outstanding letters of credit as of September 30, 2021. Amounts available under the revolving credit facility are reduced by any amounts outstanding under letters of credit. As of September 30, 2021, the Company’s capacity available for borrowing under the revolving credit facility was $39,397. Borrowings of the term loan and revolving credit
 
facility bear interest at the LIBOR rate plus an applicable margin or the Prime Reference Rate plus an applicable margin, as elected by the Company.
 
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The Company accounted for the Credit Agreement as a debt modification in accordance with ASC 470,
Debt
. In connection with the Credit Agreement, the Company paid a total of $1,821 in new debt issuance costs comprised of $836 in costs paid to the lenders and $985 in costs paid as arranger fees. Of this amount, $364 was expensed and $1,457 was capitalized and will be amortized over the life of the Credit Agreement. The Company also incurred $59 in legal fees associated with the Credit Agreement. Amortized debt issuance expense was $123 and $169 for the three months ended September 30, 2021 and 2020, respectively, and $395 and $532 for the nine months ended September 30, 2021 and 2020, respectively, and was recorded within interest expense on the condensed consolidated statement of operations.
As of September 30, 2021, the Company was in compliance with all applicable financial covenants under the Credit Agreement as amended.
Capitalized Interest
Capitalized interest was $0 and $322 for the three months ended September 30, 2021 and 2020, respectively, and $0 and $1,056 for the nine months ended September 30, 2021 and 2020, respectively. Interest is capitalized using the borrowing rate for the assets being constructed. Interest capitalized during 2020 was for the construction of two
LFG-to-energy
projects.
NOTE 13 – INCOME TAXES
The Company’s provision for income taxes in interim periods is typically computed by applying the estimated annual effective tax rates to income or loss before income taxes for the period. In addition,
non-recurring
or discrete items are recorded during the period(s) in which they occur. For the
nine
 
months ended September 30, 2021, the Company calculated an unusually high estimated annual effective tax rate such that a reliable estimate of the annual effective tax rate could not be made. As such, the Company utilized the actual effective tax rate
for the three and nine months ended
 
September 30, 2021.
 
    
Three Months Ended
 
    
September 30, 2021
   
September 30, 2020
 
Provision (benefit) for income taxes
   $ (3,481   $ 6,266  
Effective tax rate
     (64%     150
 
 
  
Nine Months Ended
 
 
  
September 30, 2021
 
 
September 30, 2020
 
Provision (benefit) for income taxes
   $ 1,286     $ (291
Effective tax rate
     (15 %)      (16 %) 
Income tax expense for the three and nine months ended September 30, 2021 was calculated using the actual year to date effective tax rate. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the current year permanent disallowance of officers’ compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), of $4,381, partially offset by the favorable impact of the production tax credit of $(1,623). When the net tax expense (benefit) for the three and nine months ended September 30, 2021 is compared to the
pre-tax
book loss for the respective periods, it results in a negative effective tax rate.
The effective tax rate of (64%) for the three months ended September 30, 2021 was lower than the rate for the three months ended September 30, 2020 of 150% primarily due to the current year disallowance of officers’ compensation under Section 162(m) of the Code. The Company utilized a year to date effective tax rate for tax expense calculated for the three months ended September 30, 2021, which when applied to year to date
pre-tax
book loss and layering in nominal discrete events, resulted in a (64%) effective tax rate for the three months ended September 30, 2021. The 150% effective tax rate for the three months ended September 30, 2020 was a result of the third quarter
pre-tax
book income applied to the estimated annual effective tax rate, with no significant discrete events in that quarter.
The effective tax rate of (15%) for the nine months ended September 30, 2021 was higher than the rate for the nine months ended September 30, 2020 of (16%). The September 30, 2021 rate of (15%) is calculated based on tax expense that is driven by the 162(m) unfavorable permanent adjustment (which was not applicable in the quarter ended September 30, 2020) compared to a
pre-tax
book loss position. Alternatively, the September 30, 2020 rate of (16%) is calculated based on income tax benefit generated i
n
 
connection with the January 1, 2020 dissolution of the Montauk Energy Capital (“MEC”) partnership, which allows all entities under MEC to file as part of the Company’s consolidated federal tax group compared to a pre-tax book income position.
 
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NOTE 14 – SHARE-BASED COMPENSATION
In January 2021, Montauk Renewables undertook the Reorganization Transactions which resulted in the Company owning all of the assets and entities (excluding Montauk USA) through which MNK’s business and operations were conducted. As a result of the Distribution, the options outstanding under MNK’s Employee Share Appreciation Rights Scheme (the “SAR Plan”) were cancelled. The Company recorded $2,050 of accelerated compensation expense in its condensed consolidated statements of operations (unaudited) within general and administrative expenses in connection with the cancellation of the options under the SAR Plan for the nine months ended September 30, 2021.
The board of directors of Montauk Renewables adopted the Montauk Renewables, Inc. Equity and Incentive Compensation Plan (“MRI EICP”) in January 2021. Following the closing of the IPO, the board of directors of Montauk Renewables approved the grant of
non-qualified
stock options, restricted stock unit and restricted stock awards to the employees of Montauk Renewables and its subsidiaries in January 2021. In connection with the restricted stock grants the officers of the Company made elections under Section 83(b) of the Code . Pursuant to such elections, the Company withheld 950,214 shares of common stock from such awards at a price of $11.38 per share from such awards. The Company records and reports share-based compensation for stock options, restricted stock, and restricted stock units when vested, in the case of restricted stock and restricted stock units, and when exercised, in the case of options, and such awards
will be
 settled in shares of common stock of Montauk Renewables. As of September 30, 2021, unrecognized MRI EICP compensation expense for awards the Company expects to vest approximated $11,432 and will be recognized over approximately 5 years. Stock based compensation expense was $2,574 and $224 for three months ended September 30, 2021 and 2020, respectively and $6,768 and $465 for the nine months ended September 30, 2021 and September 30, 2020, respectively. The Company recognizes stock based compensation in its condensed consolidated statements of operations within general and administrative expenses.
In connection with the May 2021 Asset Acquisition, 1,250,000 restricted stock awards (“RS Awards”) were granted to two employees of the Company in connection with their respective employment. The RS Awards vest over a five-year period and are subject to the achievement of time and performance based vesting criteria over such period. The performance targets in the RS Awards relate to the attainment of three EBITDA goals as defined in the underlying agreements beginning on or after the third anniversary of the grant date. The Company completed its assessment and no compensation expense for the RS Awards has been recorded for the three and nine months ended September 30, 2021. The grant date fair value of the RS Awards is $11,300.
The restricted stock, restricted stock unit and option awards are subject to vesting schedules that commence or conclude, in the case of the option and restricted stock unit awards, on the
one-year
anniversary of the grant date and are subject to the terms and conditions of the MRI EICP and related award agreements including, in the case of the restricted stock awards, each officer having made an election under Section 83(b) of the Code. The Company recorded $10,813 of compensation expense in its condensed consolidated statements of operations (unaudited) within general and administrative expenses for the nine months ended September 30, 2021 in connection with the withheld 950,214 shares associated with the Section 83(b) elections.
Options granted under the MRI EICP allow the recipient to receive the Company’s common stock equal to the appreciation in the fair market value of the Company’s common stock between the grant date and the exercise and settlement of options into shares as of the exercise date(s). The fair value of the MRI EICP options was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions (no dividends were expected):
 
    
  Grant Date  
 
Risk-free interest rate
     0.5
Expected volatility
     32.0
Expected option life (in years)
     5.5  
Grant-date fair value
   $ 3.44  
The risk-free interest rate was based on United States Treasury yields in effect at the time of the grant for notes with terms comparable to the awards. The expected option life represents an estimate of the period of time options are expected to remain outstanding based on the
mid-point
of the exercisable period to account for the possibility of early exercise or maturity. As the
 
Company recently completed its IPO in January 2021, there is no sufficient stock volatility historical data. The expected volatility was based on the average historical stock price volatility of comparable publicly-traded companies in its industry peer group.
 
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The following table summarizes the options, restricted stock and restricted stock units outstanding under the MRI EICP as of September 30, 2021:
 
    
Restricted Shares
    
Restricted Stock Units
    
Options
 
    
Number of
Shares
   
Weighted Average
Grant Date
Fair Value
    
Number
of
Shares
   
Weighted Average
Grant Date
Fair Value
    
Number
of Shares
    
Weighted Average
Exercise Price
 
End of period - December 31, 2020
  
 
—  
 
 
$
—  
 
  
 
—  
 
 
$
—  
 
  
 
—  
 
  
$
—  
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Beginning of period - January 1, 2021
            $                  $                   $     
Granted
     3,519,827       10.43        29,304       11.38        950,214        11.38  
Vested
     (950,214     11.38        —         —                        
Forfeited
     —         —          (1,056     11.38                      
Exercised
     —         —          —         —          —          —