Montrose Environmental Group Inc

Previous wording

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

Current wording

Since our inception in 2012, our mission has been to help clients and communities meet their environmental goals and needs. According to data derived from a 2024 Environmental Industry Study prepared by Environmental Business International, Inc., or EBI, which we commissioned, the global environmental industry is estimated to be approximately $1.6 trillion, with $540.0 billion concentrated in the United States.

Previous wording

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

Current wording

Assessment, Permitting and Response segment provides scientific advisory and consulting services to support environmental assessments, environmental emergency response and recovery, toxicology consulting and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. We work closely with clients to navigate the regulatory process at the local, state, provincial and federal levels, identify the potential environmental and political impacts of their decisions and develop practical mitigation approaches, as needed. In addition to environmental toxicology, and given our expertise in helping businesses plan for and respond to disruptions, our scientists and response teams have helped clients navigate their preparation for and response to emergency response situations.

Previous wording

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

Current wording

Measurement and Analysis segment is one of the largest providers of environmental testing and laboratory services in North America. Our highly credentialed teams test and analyze air, water and soil to determine concentrations of contaminants, as well as the toxicological impact of contaminants on flora, fauna and human health. Our offerings include source and ambient air testing and monitoring, leak detection, and advanced multi-media laboratory services, including air, soil, stormwater, wastewater and drinking water analysis.

Previous wording

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

Current wording

Remediation and Reuse segment provides clients with engineering, design, and implementation services, primarily (i) treatment technologies which treat contaminated water or create renewable energy from waste, or (ii) soil remediation. Our employees, including engineers, scientists and consultants, provide these services to assist our clients in designing solutions, managing products and mitigating environmental risks and liabilities at their locations. We do not own the properties or facilities at which we implement these projects or the underlying liabilities, nor do we own material amounts of the equipment used in projects.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

We made earn-out payments of $1.5 million in March 2024 in connection with our acquisition of Huco Consulting, Inc. (Huco), of which, $0.4 million was paid in cash, and the remaining $1.1 million in the Company's common stock. In connection with certain of our acquisitions, we may make up to $57.6 million in aggregate earn-out payments between the years 2025 and 2026, of which up to $22.1 million may be paid only in cash, up to $13.6 million may be paid only in common stock and up to $21.9 million may be paid, at our option, in cash or common stock. See Note 8 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Previous wording

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

Current wording

We define organic growth as the change in revenues excluding revenues from i) our environmental emergency response business, ii) acquisitions for the first twelve months following the date of acquisition, and iii) businesses held for sale, disposed of or discontinued. Management uses organic growth as one of the means by which it assesses our results of operations. Organic growth is not, however, a measure of revenue growth calculated in accordance with

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

Interest expense, net was $15.9 million, $7.8 million and $5.2 million in the years ended December 31, 2024, 2023 and 2022, respectively. We expect interest expense to remain a significant cost as we continue to leverage the 2021 Credit Facility to support our operations, partially fund the redemption of the Series A-2 Preferred Stock, and to fund future acquisitions.

Previous wording

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

Current wording

In February 2025, we refinanced our 2021 Credit Facility and replaced it with a new 2025 Credit Facility. See Notes 13 and 22 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Previous wording

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

Current wording

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

Previous wording

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

Current wording

In addition to the impact of seasonality on earnings, our emergency response business exposes us to potentially significant revenue and earnings fluctuations tied to large environmental emergency response projects following an incident or natural disaster or more broad scale events such as the COVID-19 pandemic. Total revenue from emergency response related services was $48.0 million, $91.4 million, and $88.0 million in the years ended December 31, 2024, 2023 and 2022, respectively. Demand for environmental emergency response services remains difficult to predict and as a result, we may have experienced revenues and earnings in prior years that are not indicative of future results, making those periods particularly difficult comparisons for future periods. Earnings volatility is also driven by the timing of large projects, particularly in our Remediation and Reuse segment, and the impact of acquisitions. As a result of these factors, and because demand for environmental services is not driven by specific or predictable patterns in one or more fiscal quarters, our business is better assessed based on annual results.

Previous wording

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

Current wording

See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for additional information regarding the impact of inflation on our business and Note 17 to our audited consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data." for details on the SARs cancellation.

Previous wording

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

Current wording

For the year ended December 31, 2024, fair value changes in business acquisition contingencies resulted in an expense of $0.5 million versus a gain of $0.1 million for the year ended December 31, 2023.

Previous wording

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

Current wording

Other income for the year ended December 31, 2023 of $4.4 million was driven by a $6.7 million gain related to fair value adjustments on the Series A-2 Preferred Stock conversion option and a $0.3 million gain from other income, partially offset by a $2.6 million loss related to fair value adjustments on our interest rate swap.

Previous wording

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

Current wording

Interest expense, net incurred in the year ended December 31, 2024, was $15.9 million, compared to $7.8 million for the year ended December 31, 2023. The increase in interest expense was primarily due to higher interest rates and higher debt balance outstanding during the year.

Previous wording

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

Current wording

Income tax expense (benefit) was $8.0 million and $(1.0) million for the years ended December 31, 2024 and 2023, respectively. The difference between our effective tax rate and the federal statutory rate of 21.0% is primarily attributable to items recorded for GAAP but permanently disallowed for U.S. federal income tax purposes, change in valuation allowance, and state and foreign income tax provisions.

Previous wording

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

Current wording

Our principal sources of liquidity have been cash generated by operating activities, borrowings under our credit facilities, other borrowing arrangements, and proceeds from the issuance of common and our Series A-2 Preferred Stock. Historically, we have financed our operations and acquisitions from a combination of cash generated from operations, periodic borrowings under senior secured credit facilities, and proceeds from the issuance of common stock and our Series A-2 Preferred Stock. Our primary cash needs are for day-to-day operations, to fund working capital requirements, to fund our acquisition strategy and any related cash earn-out obligations, to pay interest and principal on our indebtedness and dividends on our Series A-2 Preferred Stock, and to make capital expenditures. Additionally, in connection with certain acquisitions, we agree to earn-out provisions and other purchase price adjustments that may require future payments. We may make up to $57.6 million in aggregate earn-out payments between the years 2025 and 2026 in connection with certain of our acquisitions of which up to $22.1 million may be paid only in cash, up to $13.6 million may be paid only in common stock and up to $21.9 million may be paid in cash or, at our option, in common stock. See Note 8 to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data." As of December 31, 2024, the Company had $149.8 million available under its 2021 Credit Facility (without giving effect to any outstanding letters of credit, and subject to borrowing base limitations), and $12.9 million of cash on hand. In February 2025, the Company refinanced its Credit Facility (2025 Credit Facility) bringing total available capacity under the 2025 Credit Facility to $283.8 million (without giving effect to any outstanding letters of credit, and subject to borrowing base limitations).

Previous wording

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

Current wording

Our obligations under the Senior Credit Facilities are guaranteed by certain of our existing and future direct and indirect subsidiaries, and such obligations are secured by substantially all of our assets. The Senior Credit Facilites includes a number of covenants imposing certain restrictions on our business. The Senior Credit Facilites also include financial covenants requiring us to remain below a maximum total net leverage ratio and a minimum fixed charge coverage ratio. As of December 31, 2024, our consolidated total leverage ratio as reported under our bank compliance certificate, which was delivered under our 2025 Credit Facility, was 2.1 times and we were in compliance with all covenants under the Senior Credit Facilites.

Previous wording

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

Current wording

The weighted average interest rate on the 2021 Credit Facility for the years ended December 31, 2024 and 2023 was 7.2% and 6.7%, respectively, before the benefit of our interest rate swaps. Weighted average interest rates, net of the benefit of our interest rate swaps, as of December 31, 2024 and 2023 were 5.8% and 4.1%, respectively.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

Embedded derivatives that are required to be bifurcated from the underlying host instrument are accounted for and valued as a separate financial instrument. These embedded derivatives are bifurcated, accounted for at their estimated fair value, which is based on certain estimates and assumptions, and presented separately on the consolidated statements of financial position. Our valuation of embedded derivatives follows the With and Without method of the income approach, where the value of the derivative is derived by comparing projected cash flows with and without the embedded feature. The discount rate reflects the level of risk associated with these cash flows and is determined based on and evaluation of the Company’s credit risk and market required yields for comparable securities with similar credit risk. To derive a credit rating indication, the Company utilizes the Synthetic Credit Rating Model, and the recovery rate method is employed to establish the Company’s discount rate. Changes in fair value of the embedded derivatives are recognized as a component of other income/ expense on our consolidated statements of operations.