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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, 2022
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
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) | |
Floor |
||
(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 | ||
The |
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 Yes ☒ No ☐
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). 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 | ☐ | ☒ | ||||
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 4, 2022 was 143,603,681 shares.
Table of Contents
TABLE OF CONTENTS
| Page | ||||||
| 6 | ||||||
| ITEM 1. |
6 | |||||
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
33 | ||||
| ITEM 3. |
54 | |||||
| ITEM 4. |
54 | |||||
| 55 | ||||||
| ITEM 1. |
55 | |||||
| ITEM 1A. |
55 | |||||
| ITEM 2. |
55 | |||||
| ITEM 3. |
56 | |||||
| ITEM 4. |
56 | |||||
| ITEM 5. |
56 | |||||
| ITEM 6. |
56 | |||||
| 57 | ||||||
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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. |
| • | “D3” refers to cellulosic biofuel with a 60% GHG reduction requirement. |
| • | “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. |
| • | “FERC” refers to the U.S. Federal Energy Regulatory Commission. |
| • | “GHG” refers to greenhouse gases. |
| • | “JSE” refers to the Johannesburg Stock Exchange. |
| • | “LCFS” refers to Low Carbon Fuel Standard. |
| • | “LFG” refers to landfill gas. |
| • | “MMBtu” refers to Metric Million British Thermal Unit. |
| • | “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. |
| • | “RVOs” refers to renewable volume obligations. |
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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,” “strive,” “aim,” “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 expected benefits of the Pico feedstock amendment and the Montauk Ag project in North Carolina, the anticipated completion of the Raeger capital improvement project, the resolution of gas collection issues at the McCarty facility, our estimated and projected costs, expenditures, and growth rates, our plans and objectives for future operations, growth, or 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:
| • | our ability to develop and operate new renewable energy projects, including with livestock farms, and related challenges associated with new projects, such as identifying suitable locations and potential delays in acquisition financing, construction, and development; |
| • | reduction or elimination of government economic incentives to the renewable energy market; |
| • | the inability to complete strategic development opportunities; |
| • | deterioration in general economic conditions outside our control including the impacts of supply chain disruptions, inflationary cost increases, and other macroeconomic factors; |
| • | continued inflation could raise our operating costs or increase the construction costs of our existing or new projects; |
| • | rising interest rates could increase the borrowing costs of future indebtedness; |
| • | the potential failure to retain and attract qualified personnel of the Company or a possible increased reliance on third-party contractors as a result; |
| • | the impact of the ongoing COVID-19 pandemic on our business, financial condition and results of operations; |
| • | 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 and our landfill operations; |
| • | the quantity, quality and consistency of our feedstock volumes from both landfill and livestock farm operations; |
| • | 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 Raeger capital improvement project, Pico feedstock amendment and the Montauk Ag project in North Carolina; |
| • | potential benefits associated with the combustion-based oxygen removal condensate neutralization technology; |
| • | resolution of gas collection issues at the McCarty facility; |
| • | concentration of revenues from a small number of customers and projects; |
| • | 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; |
4
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| • | existing regulations and changes to regulations and policies that effect our operations; |
| • | expected benefits from the extension of the Production Tax Credit under the Inflation Reduction Act of 2022; |
| • | decline in public acceptance and support of renewable energy development and projects; |
| • | our expectations regarding Environmental Attribute volume requirements and prices and commodity prices; |
| • | our expectations regarding the period during which we qualify as an emerging growth company under the Jumpstart Our Business Startups 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 and the impact of any related hedging activity; |
| • | regulatory changes in federal, state and international environmental attribute programs and the need to obtain and maintain regulatory permits, approvals, and consents; |
| • | profitability of our planned livestock farm projects; |
| • | sustained demand for renewable energy; |
| • | security threats, including cyber-security attacks; |
| • | 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; |
| • | 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
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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, 2022 |
As of December 31, 2021 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | $ | ||||||
Accounts and other receivables |
||||||||
Related party receivable |
||||||||
Current portion of derivative instrument |
||||||||
Prepaid expenses and other current assets |
||||||||
Assets held for sale |
||||||||
Total current assets |
$ | $ | ||||||
Restricted cash—non-current |
$ | $ | ||||||
Property, plant and equipment, net |
||||||||
Goodwill and intangible assets, net |
||||||||
Deferred tax assets |
||||||||
Non-current portion of derivative instrument |
||||||||
Operating lease right-of-use |
||||||||
Finance lease right-of-use |
||||||||
Other assets |
||||||||
Total assets |
$ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | $ | ||||||
Accrued liabilities |
||||||||
Income tax payable |
||||||||
Current portion of derivative instrument |
||||||||
Current portion of operating lease liability |
||||||||
Current portion of finance lease liability |
||||||||
Current portion of long-term debt |
||||||||
Total current liabilities |
$ | $ | ||||||
Long-term debt, less current portion |
$ | $ | ||||||
Non-current portion of derivative instrument |
||||||||
Non-current portion of operating lease liability |
||||||||
Non-current portion of finance lease liability |
||||||||
Asset retirement obligation |
||||||||
Other liabilities |
||||||||
Total liabilities |
$ | $ | ||||||
STOCKHOLDERS’ EQUITY |
||||||||
Common stock, $ 2021, respectively |
$ | $ | ||||||
Treasury stock, at cost, |
( |
) | ( |
) | ||||
Additional paid-in capital |
||||||||
Retained earnings (deficit) |
( |
) | ||||||
Total stockholders’ equity |
$ | $ | ||||||
Total liabilities and stockholders’ equity |
$ | $ | ||||||
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 for share and per share data):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Total operating revenues |
$ | $ | $ | $ | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Operating and maintenance expenses |
$ | $ | $ | $ | ||||||||||||
| General and administrative expenses |
||||||||||||||||
| Royalties, transportation, gathering and production fuel |
||||||||||||||||
| Depreciation, depletion and amortization |
||||||||||||||||
| Gain on insurance proceeds |
( |
) | ( |
) | ( |
) | ||||||||||
| Impairment loss |
||||||||||||||||
| Transaction costs |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total operating expenses |
$ | $ | $ | $ | ||||||||||||
| Operating income (loss) |
$ | $ | $ | $ | ( |
) | ||||||||||
| Other expenses (income): |
||||||||||||||||
| Interest expense |
$ | $ | $ | $ | ||||||||||||
| Other (income) expense |
( |
) | ( |
) | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total other (income) expense |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Income (loss) before income taxes |
$ | $ | $ | ( |
) | |||||||||||
| Income tax expense (benefit) |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net income (loss) |
$ | $ | $ | $ | ( |
) | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Earnings (loss) per share: |
||||||||||||||||
| Basic |
$ | $ | $ | $ | ( |
) | ||||||||||
| Diluted |
$ | $ | $ | $ | ( |
) | ||||||||||
| Weighted-average common shares outstanding: |
||||||||||||||||
| Basic |
||||||||||||||||
| Diluted |
||||||||||||||||
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’ EQUITY
(Unaudited)
(in thousands, except share data):
Common Stock |
Treasury Stock |
Additional Paid-in Capital |
Retained Earnings |
Total Equity |
||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||||||||
Balance at June 30, 2022 |
$ |
$ |
( |
) |
$ |
$ |
$ |
|||||||||||||||||||||
Net income |
— | — | — | — | — | |||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Balance at September 30, 2022 |
$ |
$ |
( |
) |
$ |
$ |
$ |
|||||||||||||||||||||
Common Stock |
Treasury Stock |
Additional Paid-in Capital |
Retained Earnings (Deficit) |
Total Equity |
||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||||||||
Balance at June 30, 2021 |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||
Net income |
— | — | — | — | — | |||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Balance at September 30, 2021 |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||
Common Stock |
Treasury Stock |
Additional Paid-in Capital |
Retained Earnings (Deficit) |
Total Equity |
||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||||||||
Balance at December 31, 2021 |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||
Vesting of stock awards |
— |
— |
— |
— |
— |
|||||||||||||||||||||||
Treasury stock |
— | — | ( |
) | — | — | ( |
) | ||||||||||||||||||||
Net income |
— | — | — | — | — | |||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Balance at September 30, 2022 |
$ |
$ |
( |
) |
$ |
$ |
$ |
|||||||||||||||||||||
Common Stock |
Treasury Stock |
Members’ Equity |
Additional Paid-in Capital |
Retained Earnings (Deficit) |
Total Equity |
|||||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||||||||||||
Balance at December 31, 2020 |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||||||||
Effect of reorganization transactions |
— |
— |
( |
) |
— |
— |
||||||||||||||||||||||||||
IPO common stock |
— | — | — | — | ||||||||||||||||||||||||||||
Treasury stock |
— | — | $ | ( |
) | — | — | — | ( |
) | ||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | ( |
) | ( |
) | ||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | — | ||||||||||||||||||||||||||
Balance at September 30, 2021 |
$ | $ | ( |
) | $ | ( |
) | $ |
||||||||||||||||||||||||
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, |
||||||||
2022 |
2021 |
|||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | $ | ( |
) | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Depreciation, depletion and amortization |
||||||||
Provision for deferred income taxes |
||||||||
Stock-based compensation |
||||||||
Derivative mark-to-market |
( |
) | ( |
) | ||||
Gain on property insurance proceeds |
( |
) | ( |
) | ||||
Earn out increase (decrease) |
( |
) | ||||||
Net (gain) loss on sale of assets |
( |
) | ||||||
Accretion of asset retirement obligations |
||||||||
Amortization of debt issuance costs |
||||||||
Impairment loss |
||||||||
Changes in operating assets and liabilities: |
||||||||
Accounts and other receivables and other current assets |
( |
) | ( |
) | ||||
Accounts payable and other accrued expenses |
||||||||
Net cash provided by operating activities |
$ | $ | ||||||
Cash flows from investing activities |
||||||||
Capital expenditures |
$ | ( |
) | $ | ( |
) | ||
Asset acquisition |
( |
) | ||||||
Cash collateral deposits |
||||||||
Proceeds from sale of assets |
||||||||
Proceeds from insurance recovery |
||||||||
Net cash used in investing activities |
$ | ( |
) | $ | ( |
) | ||
Cash flows from financing activities: |
||||||||
Repayments of long-term debt |
$ | ( |
) | $ | ( |
) | ||
Proceeds from initial public offering |
||||||||
Treasury stock purchase |
( |
) | ( |
) | ||||
Loan to Montauk Holdings Limited |
( |
) | ||||||
Finance lease payments |
( |
) | ||||||
Net cash used in financing activities |
$ | ( |
) | $ | ( |
) | ||
Net increase (decrease) in cash and cash equivalents and restricted cash |
$ | $ | ||||||
Cash and cash equivalents and restricted cash at beginning of period |
$ | $ | ||||||
Cash and cash equivalents and restricted cash at end of period |
$ | $ | ||||||
Reconciliation of cash, cash equivalents, and restricted cash at end of period: |
||||||||
Cash and cash equivalents |
$ | $ | ||||||
Restricted cash and cash equivalents - current |
||||||||
Restricted cash and cash equivalents - non-current |
||||||||
$ |
$ |
|||||||
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
10
MONTAUK RENEWABLES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except
per-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.
Two of the Company’s key revenue drivers are sales of captured gas and sales 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. Another key revenue driver is the sale 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”). The Company’s largest electric facility, located in California, receives revenue for the monetization of RECs as a part of a purchase power agreement.
Collectively, the Company benefits from federal and state 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.
11
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 (“JSE”) under the trading symbol “MKR”.
On January 26, 2021, the Company entered into a Loan Agreement and Secured Promissory Note (as amended on February 22, 2021 and December 22, 2021) with MNK pursuant to which the Company advanced a cash loan 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 terms of the loan following the amendments are substantially similar to the initial loan agreement and were primarily entered into to increase the principal amount outstanding under the loan to $8,940 in the aggregate, in accordance with Montauk Renewables’ obligations set forth in the Transaction Implementation Agreement. 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. See Note 17 for more information.
MNK was delisted from the JSE on January 26, 2021. MNK is expected to be liquidated within 24 months of the Distribution.
12
COVID-19
In March 2020, the World Health Organization classified the outbreak of ”) to lead the development and implementation of Montauk Renewables’ Infectious Disease and Response Plan and to oversee the company’s response to any infectious disease event. These measures resulted in additional costs, which is expected to continue in order to address employee safety.
COVID-19
as a pandemic and recommended containment and mitigation measures worldwide. In response to the COVID-19
pandemic and related mitigation measures, the Company established the Infectious Disease and Response Committee (the “IDRC
The Company has not experienced any material disruptions in its ability to continue business operations nor did the Company experience material negative impacts to the financial results due to the
COVID-19
pandemic for the year ended December 31, 2021 and the nine months ended September 30, 2022. The situation surrounding the
COVID-19
pandemic remains uncertain. The extent to which the COVID-19
pandemic may affect the Company’s operating results, financial condition, or liquidity in the future will depend on future developments, including the duration of the pandemic, the emergence of more contagious or virulent strains of the virus, travel restrictions, business and workforce disruptions, the availability, uptake and efficacy of vaccines, and the effectiveness of actions taken to contain and treat the disease. Even after the COVID-19
pandemic has subsided, the Company may experience materially adverse impacts to the business due to any resulting supply chain disruptions or economic downturn. Furthermore, the impacts of potential worsening of global economic conditions, inflation, and continued disruptions to and volatility in the financial markets remain unknown. 13
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, 2021 included in the Company’s Annual Report on Form 10-K
filed with the SEC on March 16, 2022 (the “2021 Annual Report”). The results of operations for the three months and nine months ended September 30, 2022 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, 2021, has been derived from the audited financial statements as of that date. For further information, refer to the Company’s audited financial statements and notes thereto included for the year ended December 31, 2021 in the 2021 Annual Report. Retrospective Presentation
As discussed in Note 1, as a result of the Reorganization Transactions, the Company acquired the assets and entities (excluding Montauk USA) that 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. This pro rata distribution resulted in the ownership of the Company after the Reorganization Transactions being identical to the ownership of MNK prior to the Reorganization Transactions 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 1:1 distribution ratio, as if such pro rata distribution occurred as of all
pre-IPO
periods presented. Segment Reporting
The Company reports segment information in three segments: RNG, Renewable Electricity Generation and Corporate. This is consistent with the internal reporting provided to the chief operating decision maker who evaluates operating results and performance. The aforementioned business services and offerings described in Note 1 are grouped and defined by management as two distinct operating segments: RNG and Renewable Electricity Generation. Below is a description of the Company’s operating segments and other activities.
The RNG segment represents the sale of gas sold at fixed-price contracts, counterparty share RNG volumes and applicable Environmental Attributes. This business unit represents the majority of the revenues generated by the Company. The Renewable Electricity Generation segment represents the sale of captured electricity and applicable Environmental Attributes. Corporate & Other relates to additional discrete financial information for the corporate function. It is primarily used as a shared service center for maintaining functions such as executive, accounting, treasury, legal, human resources, tax, environmental, engineering and other operations functions not otherwise allocated to a segment. As such, the corporate entity is not determined to be an operating segment but is discretely disclosed for purposes of reconciliation to the Company’s consolidated financial statements.
14
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 expens
e
s during the reporting
period.
Actual results could differ from thos
e estimates. Equity-Based Compensation
The Company accounts for equity-based compensation under the provisions of Accounting Standards Codification (“ASC”) 718, , (“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 per share of the stock on the date of the grant.
Compensation—Stock Compensation
Recently Issued Accounting Standards
In September 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) . 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.
No. 2016-13,
Financial Instruments—Credit Losses
In August 2020, the FASB issued ASU , 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 ASU does not have a material impact on the Company’s consolidated financial statements or related financial statement disclosures.
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)
In March 2020, the FASB issued ASU , 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’s current debt agreement bears interest at the Bloomberg Short-Term Bank Yield Index Rate plus an applicable margin. LIBOR is no longer utilized as a reference rate.
No. 2020-04,
Reference Rate Reform (Topic 848)
NOTE 3 – ASSET IMPAIRMENT
The Company recorded $2,273 and $0 in impairment losses for the three months ended September 30, 2022 and 2021, respectively and $2,393 and $626 for the nine months ended September 30, 2022 and 2021, respectively. The 2022 impairment primarily related to a REG site ($2,133 ) wherein the forecasted future cash flows did not exceed the carrying value of the
site’s
long lived assets. 191 ), an amended customer contract ($27 ) and miscellaneous capital assets no longer in use under current operations ($42 ). The 2021 impairment was due to a notice received from a landfill host in February 2021 amending the underlying gas rights agreement to remove and begin decommissioning activities related to one of the Company’s renewable electric generation sites.
Additional
impairments were recorded for computer software and hardware no longer being utilized ($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, 2022 and 2021:
Three months ended September 30, 2022 |
||||||||||||
Goods transferred at a point in time |
Goods transferred over time |
Total |
||||||||||
| Major goods/Service line: |
||||||||||||
| Natural gas commodity |
$ | $ | $ | |||||||||
| Natural gas environmental attributes |
— | |||||||||||
| Electric commodity |
— | |||||||||||
| Electric environmental attributes |
— | |||||||||||
| |
|
|
|
|
|
|||||||
| $ | $ | $ | ||||||||||
| |
|
|
|
|
|
|||||||
| Operating segment: |
||||||||||||
| RNG |
$ | $ | $ | |||||||||
| REG |
||||||||||||
| |
|
|
|
|
|
|||||||
| $ | $ | $ | ||||||||||
| |
|
|
|
|
|
|||||||
15
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 |
$ | $ | $ | |||||||||
| Natural gas environmental attributes |
— | |||||||||||
| Electric commodity |
— | |||||||||||
| Electric environmental attributes |
— | |||||||||||
| |
|
|
|
|
|
|||||||
| $ | $ | $ | ||||||||||
| |
|
|
|
|
|
|||||||
| Operating Segment: |
||||||||||||
| RNG |
$ | $ | $ | |||||||||
| REG |
||||||||||||
| |
|
|
|
|
|
|||||||
| $ | $ | $ | ||||||||||
| |
|
|
|
|
|
|||||||
Nine months ended September 30, 2022 |
||||||||||||
Goods transferred at a point in time |
Goods transferred over time |
Total |
||||||||||
| Major goods/Service line: |
||||||||||||
| Natural gas commodity |
$ | $ | $ | |||||||||
| Natural gas environmental attributes |
— | |||||||||||
| Electric commodity |
— | |||||||||||
| Electric environmental attributes |
— | |||||||||||
| |
|
|
|
|
|
|||||||
| $ | $ | $ | ||||||||||
| |
|
|
|
|
|
|||||||
| Operating Segment: |
||||||||||||
| RNG |
$ | $ | $ | |||||||||
| REG |
||||||||||||
| |
|
|
|
|
|
|||||||
| $ | $ | $ | ||||||||||
| |
|
|
|
|
|
|||||||
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 |
$ | $ | $ | |||||||||
| Natural gas environmental attributes |
— | |||||||||||
| Electric commodity |
— | |||||||||||
| Electric environmental attributes |
— | |||||||||||
| |
|
|
|
|
|
|||||||
| $ | $ | $ | ||||||||||
| |
|
|
|
|
|
|||||||
| Operating Segment: |
||||||||||||
| RNG |
$ | $ | $ | |||||||||
| REG |
||||||||||||
| |
|
|
|
|
|
|||||||
| $ | $ | $ | ||||||||||
| |
|
|
|
|
|
|||||||
16
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 condensed consolidated statements of operations. For the three and nine months ended September 30, 2022 and 2021, there were no
Accounts and other receivables consist of the following as of September 30, 2022 and December 31, 2021:
September 30, 2022 |
December, 31 2021 |
|||||||
| Accounts receivables |
$ | $ | ||||||
| Other receivables |
||||||||
| Reimbursable expenses |
||||||||
| |
|
|
|
|||||
| Accounts and other receivables |
$ | $ | ||||||
| |
|
|
|
|||||
NOTE 6 – ASSETS HELD FOR SALE
In 2021, the Company initiated a plan to sell nitrogen oxide (“NOx”) emissions allowances credits. The Company concluded that it met the criteria under applicable guidance for a long-lived asset to be held for sale, and accordingly reclassified the emissions allowances of $777 as current assets held for sale on the Consolidated Balance Sheet at December 31, 2021. The Company estimated the fair value of these assets and concluded that the fair value exceeded the carrying value and no impairment was recorded by the Company for the year ended December 31, 2021. In March 2022, the NOx emissions allowances credits were sold for $1,088 . A $311 gain on sale of intangible assets was recorded for the nine months ended September 30, 2022.
17
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following as of September 30, 2022 and December 31, 2021:
September 30, 2022 |
December 31, 2021 |
|||||||
| Land |
$ | $ | ||||||
| Buildings and improvements |
||||||||
| Machinery and equipment |
||||||||
| Gas mineral rights |
||||||||
| Construction work in progress |
||||||||
| |
|
|
|
|||||
| Total |
||||||||
| Less: Accumulated depreciation and amortization |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Property, plant & equipment, net |
$ | $ | ||||||
| |
|
|
|
|||||
Depreciation expense for property plant and equipment was $4,808 and $4,839 for the three months ended September 30, 2022 and 2021, respectively, and $14,407 and $14,637 for the nine months ended September 30, 2022 and 2021, respectively. Amortization expense for gas mineral rights was $129 and $446 for the three months ended September 30, 2022 and 2021, respectively, and $385 and $1,382
for the nine months ended September 30, 2022 and 2021, respectively. During the third quarter of 2022, the company performed a recoverability test for one REG site when it was determined that it was more likely than not the carrying value of the long-lived assets would not be recoverable. The results of the testing indicated that the site had carrying values in excess of the asset group’s fair value. As a result of the analysis, the company recorded an impairment totaling
$2,089
in property, plant and equipment for the three and nine months ended September 30, 2022. Additional property, plant and equipment impairments recorded in 2022 included computer software and hardware no longer being utilized
($191 ) and miscellaneous capital assets no longer in use under current operations ($42 ). 626 impairment was recorded 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.
In 2021, a
$NOTE 8 – GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill and Intangible assets consist of the following as of September 30, 2022 and December 31, 2021:
September 30, 2022 |
December 31, 2021 |
|||||||
| Goodwill |
$ | $ | ||||||
| Intangible assets with indefinite lives: |
||||||||
| Land use rights |
||||||||
| Intangible assets with finite lives: |
||||||||
| Interconnections, net of accumulated amortization of $ |
$ | $ | ||||||
| Customer contracts, net of accumulated amortization of $ |
$ | $ | ||||||
| |
|
|
|
|||||
| Total intangible assets with finite lives: |
$ | $ | ||||||
| |
|
|
|
|||||
| Total Goodwill and Intangible assets |
$ |
$ |
||||||
| |
|
|
|
|||||
The weighted average remaining useful life of the customer contracts and interconnection is approximately 16 230 and $381 for the three months ended September 30, 2022 and 2021, respectively, and $661 and $1,043
for the nine months ended September 30, 2022 and 2021, respectively. Impairments related to intangibles totaled $71 for the nine months ended September
30, 2022
, including
$44 related to one REG site discussed in note 7 and $27 related to an RNG site associated with the early termination of a customer contract.
18
NOTE 9 – ASSET RETIREMENT OBLIGATIONS
The following table summarizes the activity associated with asset retirement obligations of the Company as of September 30, 2022 and December 31, 2021:
Nine months ended September 30, 2022 |
Year ended December 31, 2021 |
|||||||
Asset retirement obligations - beginning of period |
$ | $ | ||||||
Accretion expense |
( |
) | ||||||
Decommissioning |
( |
) | ( |
) | ||||
Asset retirement obligations - end of period |
$ | $ | ||||||
19
NOTE 10 – DERIVATIVE INSTRUMENTS
To mitigate market risk associated with fluctuations in energy commodity prices (natural gas) and interest rates, the Company utilizes various derivative contracts to secure energy commodity pricing and interest rates under a board-approved program. The Company does not apply hedge accounting to any of its derivative instruments, and all realized and unrealized gains and losses from changes in derivative values are recognized in earnings each period. As a result of the economic hedging strategies employed, the Company had the following realized and unrealized gains and losses in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021:
Three months ended |
||||||||
Derivative Instrument |
September 30, 2022 |
September 30, 2021 |
||||||
Commodity contracts: |
||||||||
Realized natural gas |
$ | ( |
) | $ | ||||
Unrealized natural gas |
||||||||
Interest rate swaps |
||||||||
Net gain (loss) |
$ | ( |
) | $ | ||||
Nine months ended |
||||||||
Derivative Instrument |
September 30, 2022 |
September 30, 2021 |
||||||
Commodity contracts: |
||||||||
Realized natural gas |
$ | ( |
) | $ | ||||
Unrealized natural gas |
( |
) | ||||||
Interest rate swaps |
||||||||
Net gain (loss) |
$ | ( |
) | $ | ||||
20
NOTE 11 – 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, 2022 and December 31, 2021, set forth by level, within the fair value hierarchy:
September 30, 2022 |
||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
Commodity derivative liability |
$ | ( |
) | $ | ( |
) | ||||||||||
Interest rate swap derivative asset |
||||||||||||||||
Asset retirement obligations |
( |
) | ( |
) | ||||||||||||
Earn-out liability |
( |
) | ( |
) | ||||||||||||
| $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | |||||||
December 31, 2021 |
||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
Interest rate swap derivative liability |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
Asset retirement obligations |
( |
) | ( |
) | ||||||||||||
Earn-out liability |
( |
) | ( |
) | ||||||||||||
| $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||
A summary of changes in the fair values of the Company’s Level 3 instruments, attributable to asset retirement obligations, for the nine months ended September 30, 2022 and the year ended December 31, 2021 is included in Note 9. 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 values are determined to be less than its carrying value. See Note 3 for additional information. NOTE 12 – ACCRUED LIABILITIES
The Company’s accrued liabilities consists of the following as of September 30, 2022 and December 31, 2021:
September 30, 2022 |
December 31, 2021 |
|||||||
Accrued expenses |
$ | $ | ||||||
Payroll and related benefits |
||||||||
Royalty |
||||||||
Utility |
||||||||
Other |
||||||||
Accrued liabilities |
$ | $ | ||||||
NOTE 13 – DEBT
The Company’s debt consists of the following as of September 30, 2022 and December 31, 2021:
September 30, 2022 |
December 31, 2021 |
|||||||
Term loans |
$ | $ | ||||||
Less: current principal maturities |
( |
) | ( |
) | ||||
Less: debt issuance costs (on long-term debt) |
( |
) | ( |
) | ||||
Long-term debt |
$ | $ | ||||||
Current portion of long- term debt |
||||||||
$ |
$ |
|||||||
21
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 August 28, 2019 the Company received a temporary waiver for an anticipated Event of Default (as defined in the Credit Agreement) for the consecutive three-month period ended on August 31, 2019 (the “Specified Event of Default”). The Specified Event of Default was waived through October 1, 2019. On September 12, 2019, the Company 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, the Company paid down the outstanding term loan by $38,250 and the resulting quarterly principal installments were reduced to $2,500 .
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.
On December 21, 2021, MEH entered into the Fourth Amendment to the Credit Agreement (the “Fourth Amendment”). The current credit agreement, which is secured by a lien on substantially all assets of the Company and certain of its subsidiaries, provides for a $80,000 term loan and a $120,000 revolving credit facility. The term loan amortizes in quarterly installments of $2,000 through 2024, then increases to $3,000 from 2025 to 2026, with a final payment of $32,000 in late 2026.
As of September 30, 2022, $74,000 was outstanding under the term loan. In addition, the Company had $3,905 of outstanding letters of credit as of September 30, 2022. Amounts available under the revolving credit facility are reduced by any amounts outstanding under letters of credit. As of September 30, 2022, the Company’s capacity available for borrowing under the revolving credit facility was $116,095 . Borrowings of the term loans and revolving credit facility bear interest at the Bloomberg Short-Term Bank Yield Index Rate plus an applicable margin. Interest rates as of September 30, 2022 and December 31, 2021 were 3.28 % and 2.91 %, respectively.
The Company accounted for the Fourth Amendment as both a debt modification and debt extinguishment in accordance with ASC 470, (“ASC 470”). In connection with the Credit Agreement, the Company paid $2,027 in fees. Of this amount, $326 was expensed and $1,701 was capitalized and will be amortized over the life of the Credit Agreement. Amortized debt issuance expense was $102 and $123 for the three months ended September, 2022 and 2021, respectively, and $314 and $395 for the nine months ended September 30, 2022 and 2021, respectively, and was recorded within interest expense on the condensed consolidated statement of operations.
Debt
As of September 30, 2022, the Company was in compliance with all applicable financial covenants under the Credit Agreement.
22
NOTE 14 – 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 in which they occur. For the three months ended September 30, 2022, the Company utilized full year pre-tax
income and calculated an estimated effective tax rate. The Company utilized an estimated effective tax rate for the nine months ended September 30, 2022. 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, 2022 |
September 30, 2021 |
|||||||
| Provision (benefit) for income taxes |
$ | $ | ( |
) | ||||
| Effective tax rate |
% | ( |
)% | |||||
Nine Months Ended |
||||||||
September 30, 2022 |
September 30, 2021 |
|||||||
| Provision for income taxes |
$ | $ | ||||||
| Effective tax rate |
% | ( |
)% | |||||
The effective
tax rate of 19 % for the three months ended September 30, 2022 was higher than the rate for the three months ended September 30, 2021 of (64 )% primarily due to the current year permanent disallowance of officers’ compensation being less than the prior year permanent disallowance of officers’ compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).
The effective tax rate of 19 % for the nine months ended September 30, 2022 was higher than the effective rate for the nine months ended September 30, 2021 of (15 )% primarily due to the use of year to date
pre-tax
income used to complete the effective tax rate calculation and a required Code section 162(m) executive compensation limitation permanent adjustment. NOTE 15 – 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 consolidated statements of operations 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 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 over the requisite vesting period, and such awards will be settled in shares of common stock of Montauk Renewables.
non-qualified
stock options, restricted stock units and restricted stock awards to the employees of Montauk Renewables and its subsidiaries in January 2021. In connection with the restricted stock awards, the officers of the Company made elections under Section 83(b) of the Code. Pursuant to such elections, the Company withheld 23
In connection with a May 2021 asset acquisition, 1,250,000 restricted stock awards (“RS Awards”) were granted to two
employees that were hired by the Company in connection with such acquisition. The RS Awards were to vest over a five-year period and subject to the achievement of time and performance-based vesting criteria over such period. In May 2022, the RS Awards were amended to remove the performance-based vesting criteria and will only be subject to time-based vesting requirements over a five-year period. The awards were revalued at
$15,500 . Stock compensation expense related to the two awards were $1,227 and 1,636 for the three and nine months ended September 30, 2022, respectively. The amended awards vest through 2026.
As of September 30, 2022, unrecognized MRI EICP compensation expense for awards the Company expects to vest approximated $20,381
and will be recognized though 2026 for all awards granted under the MRI EICP.
Restricted stock, restricted stock unit and option awards are subject to various vesting schedules 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 granted in January 2021, 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 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 associated with the January 2021 restricted stock awards.
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 date the award was granted and the exercise and settlement of options into shares as of the exercise date. The fair value of the MRI EICP options were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions (no dividends were expected):
Grant Date |
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| Risk-free interest rate |
% | |||
| Expected volatility |
% | |||
| Expected option life (in years) |
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| Grant-date fair value |
$ | |||
24
The following table summarizes the restricted shares, restricted stock units and options outstanding under the MRI EICP as September 30, 2022 and September 30, 2021, respectively:
&#