Montauk Renewables, Inc. - Quarter Report: 2021 March (Form 10-Q)

 

 

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 March 31, 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 Organization)				(IRS Employer Identification No.)
680 Andersen Drive, 5th 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 April 30, 2021 was 142,157,835 shares.

 

 

 

TABLE OF CONTENTS

 

				Page
PART I FINANCIAL INFORMATION					4
ITEM 1.		FINANCIAL STATEMENTS			4
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			21
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			34
ITEM 4.		CONTROLS AND PROCEDURES			34
PART II OTHER INFORMATION					35
ITEM 1.		LEGAL PROCEEDINGS			35
ITEM 1A.		RISK FACTORS			35
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			35
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES			36
ITEM 4.		MINE SAFETY DISCLOSURES			36
ITEM 5.		OTHER INFORMATION			36
ITEM 6.		EXHIBITS			36
SIGNATURES					38

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.

 

•

“EIA” refers to the U.S. Energy Information Administration.

 

•

“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.

 

•

“LNG” refers to liquefied natural 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.

 

 

 

1

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” 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 our 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 dairy;

 

•

the length of development 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;

 

•

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 the period during which we qualify as an emerging growth company under the JOBS Act;

 

•

our expectations regarding future capital expenditures;

 

•

our expectations regarding the use of net operating losses before expiration;

 

•

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;

 

 

 

 

2

•

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;

 

•

an active trading market for our common stock may not develop;

 

•

our belief that we are taking appropriate measures to remediate the material weakness identified in 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.

 

 

 

 

 

3

PART I FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

		Page
Montauk Renewables, Inc.
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March  31, 2021 and December 31, 2020			5
Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and March 31, 2020			6
Condensed Consolidated Statements of Stockholders’ and Members’ Equity for the three months ended March 31, 2021 and March 31, 2020			7
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and March 31, 2020			8
Notes to Condensed Consolidated Financial Statements			9

 

 

 

 

 

 

 

 

4

MONTAUK RENEWABLES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data):

 

		As of March 31, 2021				As of December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents		$	22,643			$	20,992
Accounts and other receivables, net			6,905				5,449
Prepaid expenses and other current assets			1,901				6,044
Total current assets		$	31,449			$	32,485
Restricted cash - non-current		$	572			$	567
Property, plant and equipment, net			182,309				187,046
Related party receivable			7,140				—
Goodwill and intangible assets, net			13,742				14,033
Deferred tax assets			13,756				14,822
Operating lease right-of-use assets			515				586
Other assets			3,879				3,817
Total assets		$	253,362			$	253,356
LIABILITIES AND STOCKHOLDERS’ AND MEMBERS’ EQUITY
Current liabilities:
Accounts payable		$	5,520			$	5,964
Accrued liabilities			9,555				11,539
Current portion of lease liability			284				282
Income taxes payable			75				—
Current portion of derivative instruments			1,061				1,185
Current portion of long-term debt			9,536				9,492
Total current liabilities		$	26,031			$	28,462
Long-term debt, less current portion		$	53,863			$	56,268
Non-current portion of lease liability			249				320
Non-current portion of derivative instruments			781				1,075
Asset retirement obligation			5,783				5,689
Other liabilities			1,920				1,920
Total liabilities		$	88,627			$	93,734
STOCKHOLDERS’ AND MEMBERS’ EQUITY
Members’ equity		$	—			$	159,622
Common stock, $0.01 par value, authorized 690,000,000 shares; 142,157,835 shares issued at March 31, 2021; 141,015,213 shares outstanding at March 31, 2021			1,410				—
Treasury stock, at cost, 950,214 shares at March 31, 2021			(10,813	)			—
Additional paid-in capital			188,403				—
Retained deficit			(14,265	)			—
Total stockholders’ and members’ equity		$	164,735			$	159,622
Total liabilities and stockholders’ and members’ equity		$	253,362			$	253,356

The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.

 

5

MONTAUK RENEWABLES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data):

 

		Three Months Ended March 31,
		2021				2020
Total operating revenues		$	31,447			$	18,403
Operating expenses:
Operating and maintenance expenses		$	10,612			$	9,836
General and administrative expenses			20,452				3,439
Royalties, transportation, gathering and production fuel			6,218				2,941
Depreciation, depletion and amortization			5,737				5,348
Gain on insurance proceeds			(82	)			(656	)
Impairment loss			626				278
Transaction costs			88				—
Total operating expenses		$	43,651			$	21,186
Operating loss		$	(12,204	)		$	(2,783	)
Other expenses (income):
Interest expense		$	646			$	2,214
Other expense (income)			33				(26	)
Total other expenses		$	679			$	2,188
Loss before income taxes		$	(12,883	)		$	(4,971	)
Income tax expense (benefit)			1,382				(10,787	)
Net income (loss)		$	(14,265	)		$	5,816
Loss per share:
Basic		$	(0.10	)
Diluted		$	(0.10	)
Weighted-average common shares outstanding:
Basic			141,015,213
Diluted			141,015,213

The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.

 

6

MONTAUK RENEWABLES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ AND MEMBERS’ EQUITY

 

(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 December 31, 2019			—			$	—				—			$	—			$	154,257			$	—			$	—			$	154,257
Net income			—				—				—				—				5,816				—				—				5,816
Stock-based compensation			—				—				—				—				230				—				—				230
Balance at March 31, 2020			—			$	—				—			$	—			$	160,303			$	—			$	—			$	160,303
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			—				—				—				—				—				—				(14,265	)			(14,265	)
Stock-based compensation			—				—				—				—				—				14,598				—				14,598
Balance at March 31, 2021			141,015,213			$	1,410				950,214			$	(10,813	)		$	—			$	188,403			$	(14,265	)		$	164,735

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 CASH FLOWS

(Unaudited)

(in thousands):

 

		Three Months Ended March 31,
		2021				2020
Cash flows from operating activities:
Net income (loss)		$	(14,265	)		$	5,816
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization			5,737				5,334
Provision (benefit) for deferred income taxes			1,066				(10,787	)
Stock-based compensation			14,598				230
Related party receivables			—				164
Derivative mark-to-market and settlements			(418	)			1,801
Gain on property insurance proceeds			(82	)			—
Accretion of asset retirement obligations			138				84
Amortization of debt issuance costs			137				187
Impairment loss			626				278
Changes in operating assets and liabilities:
Accounts and other receivables and other current assets			2,634				735
Accounts payable and other accrued expenses			(2,402	)			(2,674	)
Net cash provided by operating activities		$	7,769			$	1,168
Cash flows from investing activities
Capital expenditures		$	(1,335	)		$	(5,204	)
Proceeds from insurance recovery			82				—
Net cash used in investing activities		$	(1,253	)		$	(5,204	)
Cash flows from financing activities:
Borrowings of long-term debt		$	—			$	8,500
Repayments of long-term debt			(2,500	)			(2,500	)
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		$	(4,860	)		$	6,000
Net increase in cash and cash equivalents and restricted cash		$	1,656			$	1,964
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		$	23,215			$	12,325
Reconciliation of cash, cash equivalents, and restricted cash at end of period:
Cash and cash equivalents		$	22,643			$	11,738
Restricted cash and cash equivalents - current			—				20
Restricted cash and cash equivalents - non-current			572				567
		$	23,215			$	12,325

The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.

 

8

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 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.”

 

 

 

9

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 all of the Company’s directors and certain of the Company’s 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. 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 or local jurisdictions in which we operate. 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.

Although the Company has not experienced any material disruptions in its ability to continue its business operations or a material impact to its financial results to date due to COVID-19, the potential future impact cannot be predicted with certainty. Although the Company is unable to predict the ultimate effects of the COVID-19 pandemic, the pandemic has adversely affected the Company’s business, financial condition and results of operations. The spread of COVID-19 has disrupted certain aspects of the Company’s operations, including commissioning of development sites which were delayed up to five months in 2020 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 have contributed to reduced needs for transportation fuels, which has lowered and could continue to lower state-based environmental premiums. During 2020, the Company also faced a reduction in RINs pricing due to the outbreak of COVID-19. During the first quarter of 2021, RIN pricing recovered and increased from the temporary reduction experienced in 2020.

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 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 months ended March 31, 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 our historical financial statements following the IPO. Certain historical financial information included relates to periods prior to the Reorganization Transactions.

Retrospective Presentation of Ownership Exchange

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 exchange 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 exchange 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 1:1 ratio, as if such pro rata exchange occurred as of all pre-IPO periods presented, including periods presented on the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Consolidated Statements of Stockholders’ and Members’ Equity and notes to the Condensed Consolidated Financial Statements contained herein.

 

 

 

10

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 the grant.

Recently Issued Accounting Standards

In June 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 is 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 is currently assessing the impact this standard will have 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 impact to have a material effect on our agreements, but is working with the administrative agent during the LIBOR transition.

NOTE 3 – ASSET IMPAIRMENT

The Company recorded an impairment loss of $626 for the three months ended March 31, 2021 in the Renewable Electricity Generation segment. The 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. For the three months ended March 31, 2020, the Company calculated and recorded an impairment loss of $278. The loss was due to a termination of a development agreement. The Company evaluated and concluded that no other triggering events were indicated during the period that suggested long-lived assets may not be recoverable.

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 months ended March 31, 2021 and 2020:

 

		Three Months Ended March 31, 2021
		Goods transferred at a point in time				Goods transferred over time				Total
Major Goods/Service Line:
Natural Gas Commodity		$	3,976			$	6,695			$	10,671
Natural Gas Environmental Attributes			17,452				—				17,452
Electric Commodity			—				2,273				2,273
Electric Environmental Attributes			1,051				—				1,051
		$	22,479			$	8,968			$	31,447
Operating Segment:
RNG		$	21,428			$	6,695			$	28,123
REG			1,051				2,273				3,324
		$	22,479			$	8,968			$	31,447

 

 

11

		Three Months Ended March 31, 2020
		Goods transferred at a point in time				Goods transferred over time				Total
Major Goods/Service Line:
Natural Gas Commodity		$	1,476			$	5,245			$	6,721
Natural Gas Environmental Attributes			7,024				—				7,024
Electric Commodity			—				2,753				2,753
Electric Environmental Attributes			1,743				—				1,743
		$	10,243			$	7,998			$	18,241
Operating Segment:
RNG		$	8,500			$	5,245			$	13,745
REG			1,743				2,753				4,496
		$	10,243			$	7,998			$	18,241

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. For the three months ended March 31, 2021 and 2020, there were no reserves for uncollectible accounts.

Accounts and other receivables consist of the following as of March 31, 2021 and December 31, 2020:

 

		March 31,				December, 31
		2021				2020
Accounts receivables		$	6,691			$	5,264
Other receivables			179				164
Reimbursable expenses			35				21
Accounts and Other Receivables, Net		$	6,905			$	5,449

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consists of the following as of March 31, 2021 and December 31, 2020:

 

		March 31,				December, 31
		2021				2020
Buildings and improvements		$	28,070			$	28,065
Machinery and equipment			246,448				246,874
Gas mineral rights			34,551				34,551
Construction work in progress			5,565				4,485
Total			314,634				313,975
Less: Accumulated depreciation and amortization			(132,325)				(126,929	)
Property, Plant & Equipment, Net		$	182,309			$	187,046

Depreciation expense for property plant and equipment was $4,955 and $4,484 and amortization expense for gas mineral rights was $491 and $491 for the three months ended March 31, 2021 and 2020, respectively.

 

 

 

 

 

12

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS, NET

Intangible assets consist of the following as of March 31, 2021 and December 31, 2020:

 

		March 31,				December 31,
		2021				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 $2,446 and $2,329		$	11,834			$	11,951
Customer contracts, net of accumulated amortization of $16,541 and $16,367		$	742			$	916
Total intangible assets with finite lives:		$	12,576			$	12,867
Total Goodwill and Intangible Assets		$	13,742			$	14,033

The weighted average remaining useful life of the customer contracts and interconnection is approximately 5 years and 17 years, respectively. Amortization expense was $291 and $374 for the three months ended March 31, 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 March 31, 2021 and December 31, 2020:

 

		Three Months Ended March 31, 2021				Year Ended December 31, 2020
Asset retirement obligations - beginning of period		$	5,689			$	5,928
Accretion expense			119				320
New asset retirement obligations			—				350
Decommissioning			(25	)			(909	)
Asset retirement obligations - end of period		$	5,783			$	5,689

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 for the three months ended March 31, 2021 and 2020:

 

						Three Months Ended
Derivative Instrument		Location				March 31, 2021				March 31, 2020
Commodity Contracts:
Realized Natural Gas			Gas commodity sales			$	—			$	551
Unrealized Natural Gas			Other income				—				(388	)
Interest Rate Swaps			Interest expense				418				(1,413	)
Net gain (loss)						$	418			$	(1,250	)

 

13

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 March 31, 2021 and December 31, 2020, set forth by level, within the fair value hierarchy:

 

		March 31, 2021
		Level 1				Level 2				Level 3				Total
Interest rate swap derivative liabilities		$	—			$	(1,842	)		$	—			$	(1,842	)
Asset retirement obligations			—				—				(5,783	)			(5,783	)
Pico earn-out liability			—				—				(1,920	)			(1,920	)
		$	—			$	(1,842	)		$	(7,703	)		$	(9,545	)
		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, for the three months ended March 31, 2021 and 2020 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.

NOTE 11 – ACCRUED LIABILITIES

The Company’s accrued liabilities consists of the following as of March 31, 2021 and December 31, 2020:

 

		March 31, 2021				December 31, 2020
Accrued expenses		$	3,613			$	4,975
Payroll and related benefits			1,543				2,341
Royalty			2,705				2,620
Utility			1,063				1,147
Other			631				456
Accrued Liabilities		$	9,555			$	11,539

NOTE 12 – DEBT

The Company’s debt consists of the following as of March 31, 2021 and December 31, 2020:

 

		March 31, 2021				December 31, 2020
Term Loans		$	27,500			$	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)			(334	)			(429	)
Long-term Debt		$	53,863			$	56,268
Current Portion of Long- term Debt			9,536				9,492
		$	63,399			$	65,760

 

 

 

14

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) replaces 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, which is secured by a lien on substantially all assets of the Company and certain of its subsidiaries, provides for a $95,000 term loan and a $90,000 revolving credit facility. The term loan amortizes in quarterly installments of $2,500 and has a final maturity of December 12, 2023 with an interest rate of 2.926% and 2.961% at March 31, 2021 and December 31, 2020, respectively.

As of March 31, 2021, $27,500 was outstanding under the term loan and $36,697 was outstanding under the revolving credit facility. In addition, the Company had $5,765 of outstanding letters of credit as of March 31, 2021. Amounts available under the revolving credit facility are reduced by any amounts outstanding under letters of credit. As of March 31, 2021, the Company’s capacity available for borrowing under the revolving credit facility was $37,537. Borrowings of the term loans 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.

The Company accounted for the Third Amendment 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 in the amount of $137 and $187 for the three months ended March 31, 2021 and 2020, respectively, was recorded in the interest expense on the statement of operations.

As of March 31, 2021, the Company was in compliance with all applicable financial covenants under the Credit Agreement.

Capitalized Interest

Capitalized interest was $0 and $361 for the three months ended March 31, 2021 and March 31, 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.

 

 

 

 

15

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. In the first quarter of 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 year to date ended March 31, 2021 as the Company’s best estimate for the first quarter of 2021.

 

		Three Months Ended
		March 31, 2021				March 31, 2020
Provision for income taxes		$	1,382			$	(10,787	)
Effective tax rate			(10.7	)%			217.0	%

Income tax expense for the three months ended March 31, 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.

The effective tax rate of (10.7)% for the three months ended March 31, 2021 was lower than the rate for the three months ended March 31, 2020 primarily due to the income tax benefit that increased the 2020 effective tax rate in connection with the January 1, 2020 dissolution of the MEC partnership which allows all entities under Montauk Energy Capital (“MEC”) to file as part of our consolidated federal tax group.

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 are 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 $82 and $230 of SAR Plan compensation expense incurred in January 2021, prior to the cancellation, and the three months ended March 31, 2020, respectively, and $2,050 of accelerated compensation expense in its condensed consolidated statements of operations within general and administrative expenses in connection with the cancellation of the options under the SAR Plan for the three months ended March 31, 2021.

The board of directors of Montauk Renewables adopted in January 2021 the Montauk Renewables, Inc. Equity and Incentive Compensation Plan (“MRI EICP”). Following the closing of the IPO, the board of directors of Montauk Renewables approved in January 2021 the grant of non-qualified stock options, and restricted stock unit and restricted stock awards to the employees of Montauk Renewables and its subsidiaries. In connection with the grants of the restricted stock, the officers of the Company made elections under Section 83(b) of the Internal Revenue Code of 1986, as amended (the “Code”). In connection with 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 exercised, in the case of options, such awards are settled in shares of common stock of Montauk Renewables. As of March 31, 2021, unrecognized MRI EICP compensation expense for awards the Company expects to vest approximated $14,900 and will be recognized over approximately 5 years. The Company recognized $1,654 of MRI EICP compensation expense in its condensed consolidated statements of operations within general and administrative expenses for the three months ended March 31, 2021.

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 within general and administrative expenses for the three months ended March 31, 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 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):

 

		March 31, 2021
Risk-free interest rate			0.5	%
Expected volatility			32.0	%
Expected option life (in years)			5.5
Grant-date fair value		$	3.44

 

 

 

16

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.

The following table summarizes the options, restricted stock and restricted stock units outstanding under the MRI EICP as of March 31, 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			2,092,836				11.38				29,568				11.38				950,214				11.38
Vested			(950,214	)			11.38				—				—				—				—
Forfeited			—				—				(792	)			11.38				—				—
Exercised			—				—				—				—				—				—
End of period – March 31, 2021			1,142,622			$	11.38				28,776			$	11.38				950,214			$	11.38

The following table summarizes the options and restricted stock under the SAR Plan as of March 31, 2020:

 

		Options								Restricted Stock
		Number of Shares				Weighted Average Exercise Price				Number of Shares				Weighted Average Grant Date Fair Value
End of period - December 31, 2019			1,872,534			$	1.18				1,939,200			$	0.95
Beginning of period - January 1, 2020			1,872,534			$	1.18				1,939,200			$	0.95
Granted			—				—				—				—
Forfeited			—				—				—				—
Exercised			(50,000	)			0.44				—				—
End of period – March 31, 2020			1,822,534			$	1.20				1,939,200			$	0.95

NOTE 15 – DEFINED CONTRIBUTION PLAN

The Company maintains a 401(k) defined contribution plan for eligible employees. The Company matches 50% of an employee’s deferrals up to 4%. The Company also contributes 3% of eligible employee’s compensation expense as a safe harbor contribution. The matching contributions vest ratably over four years of service, while the safe harbor contributions vest immediately. Incurred expense related to the 401(k) plan was approximately $135 and $108 for the three months ended March 31, 2021 and 2020, respectively.

NOTE 16 – SEGMENT INFORMATION

The Company’s reportable segments for the three months ended March 31, 2021 and 2020 are Renewable Natural Gas and Renewable Electricity Generation. Renewable Natural Gas includes the production of RNG. Renewable Electricity Generation includes generation of electricity at biogas-to-electricity plants. The corporate entity is not determined to be an operating segment but is discretely disclosed for purposes of reconciliation of the Company’s condensed consolidated financial statements. The following tables are consistent with the manner in which the chief operating decision maker evaluates the performance of each segment and allocates the Company’s resources. In the following tables “RNG” refers to Renewable Natural Gas and “REG” refer to Renewable Electricity Generation.

 

		Three Months Ended March 31, 2021
		RNG				REG				Corporate				Total
Total Revenue		$	28,123			$	3,324			$	—			$	31,447
Net Income (Loss)			10,561				(2,241	)			(22,585	)			(14,265	)
EBITDA			14,779				(765	)			(20,514	)			(6,500	)
Adjusted EBITDA (1)			14,779				(139	)			(20,426	)			(5,786	)
Total Assets			157,436				50,156				45,770				253,362
Capital Expenditure			1,306				23				6				1,335

(1) First quarter of 2021 EBITDA Reconciliation

 

 

 

 

17

The following table is a reconciliation of the Company’s reportable segments’ net income from continuing operations to Adjusted EBITDA for the three months ended March 31, 2021:

 

		Three Months Ended March 31, 2021
		RNG				REG				Corporate				Total
Net Income (loss)		$	10,561			$	(2,241	)		$	(22,585	)		$	(14,265	)
Depreciation and amortization			4,218				1,474				45				5,737
Interest expense			—				—				646				646
Income tax expense (benefit)			—				2				1,380				1,382
EBITDA		$	14,779			$	(765	)		$	(20,514	)		$	(6,500	)
Impairment loss			—				626				—				626
Transaction costs			—				—				88				88
Adjusted EBITDA		$	14,779			$	(139	)		$	(20,426	)		$	(5,786	)
		Three Months Ended March 31, 2020
		RNG				REG				Corporate				Total
Total Revenue		$	13,425			$	4,496			$	482			$	18,403
Net Income (Loss)			1,158				(519	)			5,177				5,816
EBITDA			4,628				1,318				(3,355	)			2,591
Adjusted EBITDA (1)			4,628				1,596				(2,967	)			3,257
Total Assets			137,268				81,809				36,713				255,790
Capital Expenditure			4,105				1,060				39				5,204

(1) First quarter of 2020 EBITDA Reconciliation

The following table is a reconciliation of the Company’s reportable segments’ net income from continuing operations to Adjusted EBITDA for the three months ended March 31, 2020:

 

		Three Months Ended March 31, 2020
		RNG				REG				Corporate				Total
Net Income (loss)		$	1,158			$	(519	)		$	5,177			$	5,816
Depreciation and amortization			3,470				1,835				43				5,348
Interest expense			—				—				2,214				2,214
Income tax expense (benefit)			—				2				(10,789	)			(10,787	)
EBITDA		$	4,628			$	1,318			$	(3,355	)		$	2,591
Impairment loss			—				278				—				278
Non-cash hedging charges			—				—				388				388
Adjusted EBITDA		$	4,628			$	1,596			$	(2,967	)		$	3,257

For the three months ended March 31, 2021 and 2020, four and three customers, respectively, made up greater than 10% of our total revenues.

 

		Three Months Ended March 31, 2021
		RNG				REG				Corporate				Total
Customer A			13.1	%			—				—				13.1	%
Customer B			10.0	%			—				—				10.0	%
Customer C			11.0	%			—				—				11.0	%
Customer D			26.2	%			—				—				26.2	%
		Three Months Ended March 31, 2020
		RNG				REG				Corporate				Total
Customer A			—				20.6	%			—				20.6	%
Customer B			18.6	%			—				—				18.6	%
Customer C			15.7	%			—				—				15.7	%

 

18

NOTE 17 – LEASES

The Company leases office space and other office equipment under operating lease arrangements (with initial terms greater than twelve months), expiring in various years through 2024. These leases have been entered into to better enable the Company to conduct business operations. Office space is leased to provide adequate workspace for all employees in Pittsburgh, Pennsylvania and Houston, Texas.

The Company determines if an arrangement is, or contains, a lease at inception based on whether that contract conveys the right to control the use of an identified asset in exchange for consideration for a period of time. For all operating lease arrangements, the Company presents at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

The Company has elected, as a practical expedient, not to separate non-lease components from lease components, and instead account for each separate component as a single lease component for all lease arrangements, as lessee. In addition, the Company has elected, as a practical expedient, not to apply lease recognition requirements to short-term lease arrangements, generally those with a lease term of less than twelve months, for all classes of underlying assets. In determination of the lease term, the Company considers the likelihood of lease renewal options and lease termination provisions.

The Company uses its incremental borrowing rate as the basis to calculate the present value of future lease payments at lease commencement. The incremental borrowing rate approximates the rate to borrow funds on a collateralized basis over a similar term and in a similar economic environment.

As of March 31, 2021, there were no leases entered into which have not yet commenced and that would entitle the Company to significant rights or create additional obligations.

Supplemental information related to operating lease arrangements was as follows:

 

		Three Months Ended March 31,
		2021				2020
Cash paid for amounts included in the measurement of operating lease liabilities		$	76			$	75
Weighted average remaining lease term (in years)			1.51				1.61
Weighted average discount rate			5.00	%			5.00	%

Future minimum lease payments for the three months ending March 31, are as follows:

 

		Amount
Year Ending
Remainder of 2021		$	227
2022			317
2023			8
2024			1
Interest			(20	)
Total		$	533

NOTE 18 – LOSS PER SHARE

Basic loss per share were computed using the following common share data for the three months ended March 31:

 

		Three Months Ended March 31, 2021
Net loss		$	(14,265	)
Basic weighted-average shares outstanding			141,015,213
Dilutive effect of share-based awards			—
Diluted weighted-average shares outstanding			141,015,213
Basic loss per share		$	(0.10	)
Diluted loss per share		$	(0.10	)

 

 

 

 

 

19

As a result of incurring a net loss for the three months ended March 31, 2021, potential common shares of 2,121,612 were excluded from diluted loss per share because the effect would have been antidilutive.

NOTE 19 – RELATED PARTY TRANSACTIONS

In connection with the Distribution, the Company loaned MNK $7,140, which is recorded in the condensed consolidated balance sheet within related party receivable, for its dividends tax liability arising under the South African Income Tax Act, 1962, as amended. As security for this loan, MNK has pledged certain of its shares in the Company to Montauk and agreed to use the proceeds from the sale of such shares to repay this loan.

NOTE 20 – SUBSEQUENT EVENTS

The Company evaluated its March 31, 2021 condensed consolidated financial statements through May 14, 2021, the date the financial statements were issued. The Company is not aware of any subsequent events which would require disclosure in the consolidated financial statements, except for the matters discussed below.

On May 10, 2021, the Company, through a newly formed wholly-owned subsidiary, Montauk Swine Ag, LLC (“Montauk Swine”), announced the acquisition of the technology and certain assets of a business (the “Acquisition”) that specializes in developing technology to recover, refine, and recycle natural resources from waste streams of modern agriculture through proprietary and other processes in order to produce high quality renewable natural gas, bio-oil and biochar (the “Business”). The assets acquired include real-property, intellectual property, mobile equipment, and other equipment related to operating the Business. The purchase price for the Business and related assets consisted of approximately (i) $3,797 paid in cash at closing and (ii) two restricted stock awards, in equal amounts, granted under the MRI EICP.

 

20

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. The historical consolidated financial data discussed below reflects the historical results of operations and financial position of Montauk USA. The consolidated financial statements of Montauk USA, our predecessor for accounting purposes, became our historical financial statements following the IPO. Certain historical financial data discussed below relates to periods prior to the Reorganization Transactions. Throughout this section, dollar amounts are expressed in thousands, except for per share amounts and MMBTU and RIN pricing amounts and unless otherwise indicated.

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Cautionary Note Regarding Forward-Looking Statements,” “Item 1A.–Risk Factors” and elsewhere in this report.

Overview

Montauk Renewables is a renewable energy company specializing in the recovery and processing of biogas from landfills and other non-fossil fuel sources for beneficial use as a replacement to fossil fuels. We develop, own, and operate RNG projects, using proven technologies that supply RNG into the transportation industry and use RNG to produce Renewable Electricity. We are one of the largest U.S. producers of RNG, having participated in the industry for over 30 years. We established our operating portfolio of 12 RNG and three Renewable Electricity projects through self-development, partnerships, and acquisitions that span six states.

Biogas is produced by microbes as they break down organic matter in the absence of oxygen (during a process called anaerobic digestion). Our two current sources of commercial scale biogas are LFG and ADG, which is produced inside an airtight tank used to breakdown organic matter, such as livestock waste. We typically secure our biogas feedstock through long-term fuel supply agreements and property lease agreements with biogas site hosts. Once we secure long-term fuel supply rights, we design, build, own, and operate facilities that convert the biogas into RNG or use the processed biogas to produce Renewable Electricity. We sell the RNG and Renewable Electricity through a variety of short-, medium-, and long-term agreements. Because we are capturing waste methane and making use of a renewable source of energy, our RNG and Renewable Electricity generate valuable Environmental Attributes, which we are able to monetize under U.S. federal and state initiatives.

Factors Affecting Revenue

Our total operating revenues include renewable energy and related sales of Environmental Attributes. Renewable energy sales primarily consist of the sale of biogas, including LFG and ADG, which is either sold or converted to Renewable Electricity. Environmental Attributes are generated and monetized from the renewable energy.

 

 

 

 

21

We report revenues from two operating segments: Renewable Natural Gas and Renewable Electricity Generation. Corporate relates to additional discrete financial information for the corporate function; primarily used as a shared service center for maintaining functions described below and 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.

 

•

Renewable Natural Gas Revenues: We record revenues from the production and sale of RNG and the generation and sale of the Environmental Attributes derived from RNG, such as RINs and LCFS credits. Our RNG revenues from Environmental Attributes are recorded net of a portion of Environmental Attributes shared with off-take counterparties as consideration for such counterparties using the RNG as a transportation fuel. We monetize a portion of our RNG production under fixed-price and counterparty sharing agreements, which provide floor prices in excess of commodity indices and sharing percentages of the monetization of Environmental Attributes. Under these sharing arrangements, we receive a portion of the profits derived from counterparty monetization of the Environmental Attributes in excess of the floor prices. We commissioned our Pico RNG facility in August 2020 and began reporting it within our RNG segment beginning October 2020. We commissioned Coastal RNG facility in September 2020. While these sites will contribute to improved volumes, we expect facilities to go through optimization periods after commissioning prior to meeting budget expectations.

 

•

Renewable Electricity Generation Revenues: We record revenues from the production and sale of Renewable Electricity and the generation and sale of the Environmental Attributes, such as RECs, derived from Renewable Electricity. All of our Renewable Electricity production is monetized under fixed-price PPAs from our existing operating projects.

 

•

Corporate Revenues: Corporate reports realized and unrealized gains or losses under our gas hedge programs. Corporate also relates to additional discrete financial information for the corporate function; 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.

Our revenues are priced based on published index prices which can be influenced by factors outside our control, such as market impacts on commodity pricing and regulatory developments. With our royalty payments structured as a percentage of revenue, royalty payments fluctuate with changes in revenues. Due to these factors, we place a primary focus on managing production volumes and operating and maintenance expenses as these factors are more controllable by us.

RNG Production

Our RNG production levels are subject to fluctuations based on numerous factors, including:

 

•

Disruptions to Production: Disruptions to waste placement operations at our active landfill sites, severe weather events, failure or degradation of our or a landfill operator’s equipment or interconnection or transmission problems could result in a reduction of our RNG production. We strive to proactively address any issues that may arise through preventative maintenance, process improvement and flexible redeployment of equipment to maximize production and useful life. In November 2019, our McCarty facility lost production capacity of one of its engines due to its failure. Production was not restored until March 2020 when a replacement was commissioned. Our first quarter of 2021 volumes improved approximately 29.1% from the first quarter of 2020 due mainly to the commissioning of this engine in the prior year period. In October 2020, California wildfires forced our Bowerman facility to temporarily shut down. While production resumed in November 2020, our first quarter of 2021 revenues related to the Bowerman facility were approximately 18.9% lower than the prior year period, related in part to these wildfires.

 

•

Recent historical cold weather impacted our Atascocita, Galveston, McCarty, and Coastal Plains facilities located in Texas during February 2021. Production at these facilities was temporarily idled due to the loss of power from February 14 through February 20, 2021 and force majeure events were declared by certain of our counter-parties or by us for the period February 12 through February 22, 2021 related to these weather events. Operations at these facilities have subsequently resumed, but related to arrangements we have with certain of our utility suppliers, we were able to divert utilities back into the grid. Due mainly to these agreements, our utility costs within our RNG segment were approximately 54.9% lower in the first quarter of 2021 as compared to the first quarter of 2020. Our utility costs normalized during the second quarter of 2021.

 

•

Quality of Biogas: We are reliant upon the quality and availability of biogas from our site partners. The quality of the waste at our landfill project sites is subject to change based on the volume and type of waste accepted. Variations in the quality of the biogas could affect our RNG production levels. At three of our projects, we operate the wellfield collection system, which allows greater control over the quality and consistency of the collected biogas. At two of our projects, we have operating and management agreements by which we earn revenue for managing the wellfield collection systems. Additionally, our dairy farm project benefits from the consistency of feedstock and controlled environment of collection of waste to improve biogas quality.

 

•

RNG Production from Our Growth Projects: We anticipate increased production at certain of our existing projects as open landfills continue to take in additional waste and the amount of gas available for collection increases. Delays in commencement of production or extended commissioning issues at a new project or a conversion project would delay any realization of production from that project.

 

 

 

 

 

22

Pricing

Our Renewable Natural Gas and Renewable Electricity Generation segments’ revenues are primarily driven by the prices under our off-take agreements and PPAs and the amount of RNG and Renewable Electricity that we produce. We sell the RNG produced from our projects under a variety of short-term and medium-term agreements to counterparties, with contract terms varying from three years to five years. Our contracts with counterparties are typically structured to be based on varying natural gas price indices for the RNG produced. All of the Renewable Electricity produced at our biogas-to-electricity projects is sold under long-term contracts to creditworthy counterparties, typically under a fixed price arrangement with escalators.

The pricing of Environmental Attributes, which accounts for a substantial portion of our revenues, is subject to volatility based on a variety of factors, including regulatory and administrative actions and commodity pricing.

Our dairy farm project is expected to be awarded a more attractive CI by CARB, thereby generating LCFS credits at a multiple of those generated by our landfill projects. This information is expected to become known in 2022.

The sale of RINs, which is subject to market price fluctuations, accounts for a substantial portion of our revenues. We manage against the risk of these fluctuations through forward sales of RINs, although currently we generally only sell RINs in the calendar year they are generated. In the fourth quarter of 2020, due to the uncertainty regarding the outcome of the 2020 US Presidential election, we entered into forward commitments of approximately 50% of our expected 2021 RIN generation. These forward commitments were based on D3 RIN index prices at the time of the commitment, therefore our realized average RIN price in the first quarter of 2021 of approximately $1.91 was below the D3 RIN index of approximately $2.54. The remaining forward commitments will only be monetized throughout 2021. Realized prices for Environmental Attributes monetized in a year may not correspond directly to index prices in the current or following year due to the forward selling of commitments.

Factors Affecting Operating Expenses

Our operating expenses include royalties, transportation, gathering and production fuel expenses, project operating and maintenance expenses, general and administrative expenses, depreciation and amortization, net loss (gain) on sale of assets, impairment loss and transaction costs.

 

•

Project Operating and Maintenance Expenses: Operating and maintenance expenses primarily consist of expenses related to the collection and processing of biogas, including biogas collection system operating and maintenance expenses, biogas processing, operating and maintenance expenses, and related labor and overhead expenses. At the project level, this includes all labor and benefit costs, ongoing corrective and proactive maintenance, project level utility charges, rent, health and safety, employee communication, and other general project level expenses. Scheduled timing of proactive maintenance can be based on equipment usage and, as equipment ages, these costs may not be linear as compared to prior years.

 

•

Royalties, Transportation, Gathering and Production Fuel Expenses: Royalties represent payments made to our facility hosts, typically structured as a percentage of revenue. Transportation and gathering expenses include capacity and metering expenses representing the costs of delivering our RNG and Renewable Electricity production to our customers. These expenses include payments to pipeline operators and other agencies that allow for the transmission of our gas and electricity commodities to end users. Production fuel expenses generally represent alternative royalty payments based on quantity usage of biogas feedstock.

 

•

General and Administrative Expenses: General and administrative expenses primarily consist of corporate expenses and unallocated support functions for our operating facilities, including personnel costs for executive, finance, accounting, investor relations, legal, human resources, operations, engineering, environmental registration and reporting, health and safety, IT and other administrative personnel and professional fees and general corporate expenses. In connection with the consummation of the IPO and the Reorganization Transactions, stock options issued under MNK’s SAR Plan were canceled. Under ASC 718, the Company accelerated all previously unvested stock-based compensation expense of approximately $2,050 in January 2021. The Company’s board of directors approved grants of restricted stock, non-qualified stock option, and restricted stock unit awards under the MRI EICP on January 28, 2021. The Company accounted for stock-based compensation related to these equity awards under ASC 718 and recognized approximately $1,654 in stock-based compensation related to these awards in the first quarter of 2021. The Company currently expects this amount to reflect the quarterly expense for each of the remaining quarters in 2021 as the other share-based compensation expense in the first quarter of 2021 was a one-time expense related to the cancellation and replacement of the SAR Plan with the MRI EICP. Finally, in connection with restricted stock awarded, the recipients made elections under 83(b) of the Code and we withheld a portion of the restricted stock awarded. In accordance with ASC 718, the Company recognized accelerated stock-based compensation expense related to the shares and we recorded approximately $10,813 in stock-based compensation in the first quarter of 2021. In the aggregate, we recognized approximately $14,598 in stock-based compensation in the first quarter of 2021. For more information, see Note 1 to our audited consolidated financial statements.

 

•

Depreciation and Amortization: Expenses related to the recognition of the useful lives of our intangible and fixed assets. We spend significant capital to build and own our facilities. In addition to development capital, we annually reinvest to maintain these facilities.

 

 

 

23

•

Impairment Loss: Expenses related to reductions in the carrying value(s) of fixed and/or intangible assets based on periodic evaluations whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

•

Transaction Costs: Transaction costs primarily consist of expenses incurred for due diligence and other activities related to potential acquisitions and other strategic transactions.

Key Operating Metrics

Total operating revenues reflect both sales of renewable energy and sales of related Environmental Attributes. As a result, our revenues are primarily affected by unit production of RNG and Renewable Electricity, production of Environmental Attributes, and the prices at which we monetize such production. Set forth below is an overview of these key metrics:

 

•

Production volumes: We review performance by site based on unit of production calculations for RNG and Renewable Electricity, measured in terms of MMBtu and MWh, respectively. While unit of production measurements can be influenced by schedule facility maintenance schedules, the metric is used to measure the efficiency of operations and the impact of optimization improvement initiatives. We monetize a majority of our RNG commodity production under variable-price agreements, based on indices. A portion of our Renewable Natural Gas segment commodity production is monetized under fixed-priced contracts. Our Renewable Electricity Generation segment commodity production is primarily monetized under fixed-priced PPAs.

 

•

Production of Environmental Attributes: We monetize Environmental Attributes derived from our production of RNG and Renewable Electricity. We carry-over a portion of the RINs generated from RNG production to the following year and monetize the carried over RINs in such following calendar year. A majority of our Renewable Natural Gas segment Environmental Attributes are self-monetized, though a portion are generated and monetized by third parties under counterparty sharing agreements. A majority of our Renewable Electricity Generation segment Environmental Attributes are monetized as a component of our fixed-price PPAs.

 

•

Average realized price per unit of production: Our profitability is highly dependent on the commodity prices for natural gas and electricity, and the Environmental Attribute prices for RINs, LCFS credits, and RECs. Realized prices for Environmental Attributes monetized in a year may not correspond directly with that year’s production as attributes may be carried over and subsequently monetized. Realized prices for Environmental Attributes monetized in a year may not correspond directly to index prices due to the forward selling of commitments.

The following table summarizes the key operating metrics described above, which metrics we use to measure performance.

 

(in thousands, unless otherwise indicated)		Three Months Ended March 31,
		2021				2020				Change				Change %
Revenues
Renewable Natural Gas Total Revenues		$	28,123			$	13,889			$	14,234				102.5	%
Renewable Electricity Generation Total Revenues		$	3,324			$	4,461			$	(1,137	)			(25.5	)%
RNG Metrics
CY RNG production volumes (MMBtu)			1,348				1,389				(41	)			(3.0	)%
Less: Current period RNG volumes under fixed/floor-price contracts			(453	)			(554	)			(101	)			(18.2	)%
Plus: Prior period RNG volumes dispensed in current period			353				267				86				32.2	%
Less: Current period RNG production volumes not dispensed			(350	)			(374	)			(24	)			(6.4	)%
Total RNG volumes available for RIN generation (1)			898				728				170				23.4	%
RIN Metrics
Current RIN generation ( x 11.727) (2)			10,534				8,538				1,996				23.4	%
Less: Counterparty share (RINs)			(1,147	)			(921	)			226				24.5	%
Plus: Prior period RINs carried into CY			110				1,330				(1,220	)			(91.7	)%
Less: CY RINs carried into next CY			—				—				—				—
Total RINs available for sale (3)			9,497				8,947				550				6.1	%
Less: RINs sold			(8,875	)			(7,835	)			1,040				13.3	%
RIN Inventory			622				1,112				(490	)			(44.1	)%
RNG Inventory (volumes not dispensed for RINs) (4)			350				374				(24	)			(6.4	)%
Average Realized RIN price		$	1.91			$	0.76			$	1.15				151.3	%
Operating Expenses
Renewable Natural Gas Operating Expenses		$	13,134			$	9,415			$	3,719				39.5	%
Operating Expenses per MMBtu (actual)		$	9.74			$	6.78			$	2.96				43.7	%
Renewable Electricity Generation Operating Expenses		$	3,393			$	2,957			$	436				14.7	%
$/MWh (actual)		$	71.70			$	56.50			$	15.20				26.9	%
Other Metrics
Renewable Electricity Generation Volumes Produced (MWh)			47				52				(5	)			(9.6	)%
Average Realized Price $/MWh (actual)		$	70.24			$	85.24			$	(15.00	)			(17.6	)%

 

24