Charah Solutions, Inc. - Annual Report: 2022 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 001-38523
CHARAH SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 82-4228671 | ||||
State or other jurisdiction of incorporation or organization | I.R.S. Employer Identification No. | ||||
12601 Plantside Drive Louisville, KY 40299 (Address of principal executive offices) | 40299 (Zip Code) | ||||
(Registrant’s telephone number, including area code: (502) 245-1353
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 | CHRA | OTC Markets* | ||||||
| 8.50% Senior Notes due 2026 | CHRB | OTC Markets* | ||||||
*On April 3, 2023, Charah Solutions, Inc. common stock and 8.50% Senior Notes due 2026 were suspended from trading on The New York Stock Exchange. On April 4, 2023, Charah Solutions, Inc. common stock and 8.50% Senior Notes due 2026 began trading on the OTC Markets operated by the OTC Markets Group, Inc., under the trading symbols CHRA and CHRB, respectively.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x
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 x
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 x
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 x | 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes ☐ No x
As of June 30, 2022, the aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant was $65,662,181. The registrant has no non-voting stock.
As of May 15, 2023, the registrant had 3,402,624 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
CHARAH SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2022
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information in this Annual Report on Form 10‑K (this “Annual Report”) includes “forward‑looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, included in this Annual Report regarding our strategy, future operations, financial position, estimated revenue and losses, projected costs, prospects, plans and objectives of management are forward‑looking statements. When used in this Annual Report, the words "may," “will,” “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward‑looking statements. However, not all forward‑looking statements contain such identifying words. These forward‑looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.
Forward‑looking statements may include statements about:
•the impacts of the COVID-19 pandemic on the Company's business;
•our business strategy;
•our operating cash flows, the availability of capital and our liquidity;
•our future revenue, income and operating performance;
•our ability to sustain and improve our utilization, revenue and margins;
•our ability to maintain acceptable pricing for our services;
•our future capital expenditures;
•our ability to finance equipment, working capital and capital expenditures;
•competition and government regulations;
•our ability to obtain permits and governmental approvals;
•pending legal or environmental matters or liabilities;
•environmental hazards;
•industrial accidents;
•business or asset acquisitions;
•general economic conditions;
•credit markets;
•our ability to successfully develop our research and technology capabilities and to implement technological developments and enhancements;
•uncertainty regarding our future operating results;
•our ability to obtain additional financing on favorable terms, if required, to fund the operations and growth of our business;
•our ability to successfully consummate the transaction contemplated in the merger agreement with SER Capital Partners as discussed herein;
•timely review and approval of permits, permit renewals, extensions and amendments by regulatory authorities;
•our ability to comply with certain debt covenants;
•our expectations relating to dividend payments and our ability to make such payments, if any; and
•plans, objectives, expectations and intentions contained in this Annual Report that are not historical.
We caution you that these forward‑looking statements are subject to risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, the risks described under “Item 1A. Risk Factors” in this Annual Report. Should one or more of the risks or uncertainties described occur or underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward‑looking statements.
All forward‑looking statements, expressed or implied, included in this Annual Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent forward-looking written or oral statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward‑looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Annual Report.
PART I
Item 1. Business
Our Company
Charah Solutions, Inc. (together with its subsidiaries, “Charah Solutions,” the “Company,” “we,” “us,” or “our”) is a leading national service provider of mission-critical environmental services and byproduct recycling to the power generation industry. We offer a suite of remediation and compliance services, byproduct services, raw material sales and Environmental Risk Transfer (“ERT”) services. We also design and implement solutions for complex environmental projects (such as coal ash pond closures) and facilitate coal ash recycling through byproduct marketing and other beneficial use services. We believe we are a partner of choice for the power generation industry due to our quality, safety, domain experience and compliance record, all of which are key criteria for our customers. In 2022, we performed work at more than 40 coal-fired generation sites nationwide.
Charah Solutions, Inc. was incorporated in Delaware in 2018 in connection with our initial public offering in June 2018 and, together with its predecessors, has been in business since 1987. Since our founding, we have continuously worked to anticipate our customers’ evolving environmental needs, increasing the number of services we provide through our embedded presence at their power generation facilities. Our multi-service platform allows customers to efficiently source multiple required offerings from a single, trusted partner compared to service providers with a more limited scope.
We operate as a single operating segment, reflecting the suite of end-to-end services we offer our utility partners and how our chief operating decision maker reviews consolidated financial information to evaluate results of operations, assess performance and allocate resources for these services. We provide the following services through our one segment: remediation and compliance services, byproduct services, raw material sales and ERT services. Remediation and compliance services are associated with our customers’ need for multi-year environmental improvement and sustainability initiatives, whether driven by regulatory requirements, power generation customer initiatives or consumer expectations and standards. Byproduct services consist of recurring and mission-critical coal ash management and operations for coal-fired power generation facilities while also supporting both our power generation customers’ desire to recycle their recurring and legacy volumes of coal combustion residuals (“CCRs”), commonly known as coal ash, and our ultimate end customers’ need for high-quality, cost-effective supplemental cementitious materials (“SCMs”) that provide a sustainable, environmentally-friendly substitute for Portland cement in concrete. Our raw materials sales provide customers with the raw materials that are essential to their business while also providing the sourcing, logistics, and management needed to facilitate these raw materials transactions around the globe. ERT services represent an innovative solution designed to meet utility customers' evolving and increasingly complex plant closure and environmental remediation needs. These customers need to retire and decommission older or underutilized assets while maximizing the asset's value and improving the environment. Our ERT services manage the sites' environmental remediation requirements, benefiting the communities and lowering the utility customers' costs.
As a result of our comprehensive offerings, the embedded nature of our on-site presence, our domain experience, and our track record of successful execution, we have built long-term relationships with leading U.S. regulated utilities and independent power producers, including Dominion Energy, Inc., Duke Energy Corporation, Dynegy Inc., PPL Corporation, The Southern Company, and Consumers Energy, among others. These relationships have spanned more than 20 years in some cases. Our operational footprint's national scale is also a key competitive differentiator, as many competitors are localized, focusing on a single geographic area (sometimes isolated to a single plant). We operate in more than 20 states, resulting in an overall footprint and density in key markets that we believe are difficult to replicate. We believe our national reach enables us to successfully pursue new business within our existing customer base and attract new customers while providing consistent quality, safety, and compliance standards.
Our services platform is led by a senior executive team with deep industry experience and is supported by a highly skilled labor force. The nature of our work requires employees to have specialized skills, training, and certifications for them to be allowed on-site at our customers’ facilities. Collectively, our focus on human capital management enables us to maintain and develop a labor force of highly qualified, well-trained personnel capable of handling our customers’ needs.
Market Opportunity
The U.S. power generation industry is composed of critical infrastructure providing essential electric power to communities nationwide. According to the U.S. Energy Information Administration (the “EIA”), as of 2022, there were approximately 500 large-scale facilities in the United States with generation capabilities of at least 250 megawatts, including more than 150 coal-fired power plants. With near-constant demand from consumers and industry, these facilities' continuous operation is critical given potentially high economic and reputational costs of downtime. These complex facilities have specialized and recurring environmental and compliance service needs to maintain continuous operations throughout their lifecycles. These service needs are particularly significant for coal-fired plants due to the increasing demands of environmental
regulation, the aging nature of the installed base, and the feedstock characteristics required to power such facilities. Due to the breadth and scope of these service needs, power plant operators typically do not possess the necessary capabilities internally and instead outsource these mission-critical and often regulatory-driven requirements to a fragmented set of service providers. Many significant dynamics support the continuing need for these specialized services.
Coal-Fired Power Plants Have Significant and Recurring Environmental Management Needs Associated with Their Waste Byproducts
Coal-fired power plants consistently generate various waste byproducts throughout the power generation process. The primary type of these waste byproducts is CCRs. CCRs come in multiple forms, including fly ash, bottom ash, and boiler slag, and are collected throughout the coal burning process. Although not considered a hazardous waste under the Resource Conservation and Recovery Act, as amended (the “RCRA”), utilities have significant regulatory and reputational risks associated with the handling and disposal of coal ash. According to the American Coal Ash Association, approximately 77 million tons of coal ash were produced in 2021, the latest year for which data is available. Coal ash management is mission-critical to coal-fired power plants' daily operations as they generally have on-site storage capacity for only three to four days of CCR waste accumulation. This limited coal ash storage capacity requires continuous daily monitoring, handling, transportation, and disposal to enable ongoing power plant operation. The U.S. Environmental Protection Agency (the “EPA”) has estimated that coal-fired utilities spend approximately $2.9 billion per year on coal ash management. Power plant operators typically engage specialized service providers to conduct this critical recurring activity on-site alongside their plant personnel.
Large Installed Base of Legacy Coal Ash Disposal Ponds That Require Remediation
Collected coal ash is disposed of or beneficially used (recycled) in a range of applications. According to the American Coal Ash Association, utilities disposed of approximately 40% of coal ash produced in the United States during 2021. According to EPA data published, of the CCRs generated that were not beneficially used, approximately 80% were disposed in on-site disposals units, with the balance transported and disposed of off-site at third-party landfills. For many years, coal-fired power plants relied on ash ponds as the primary disposal locations for CCRs. The vast majority of these older inactive and older existing ash ponds were constructed without the design standards now mandated by regulation to prevent harm to the environment, and those ponds will require remediation or closure in the future. The EPA estimated that there are more than 1,000 active and inactive on-site landfill and surface impoundments, substantially all of which will require remediation or closure. These sites will require significant capital expenditures from their owners and specialized environmental expertise to monitor them on an ongoing basis, remediate and relocate the waste, or completely close.
Power Plant Operators Are Increasingly Focused on Environmental Stewardship and Regulatory Compliance
Power plant operators face increasing pressure from regulators, advocacy groups, and their communities to manage the environmental risks associated with their operations. Therefore, the industry is increasingly focused on environmental stewardship. Due to the potentially considerable consequences of environmental liabilities, spending on environmental liability management has increased over time and is expected to increase in the future.
Additionally, power plants are highly regulated by environmental authorities at the federal, state, and local government levels, which have recently added compliance requirements. An example is the Disposal of Coal Combustion Residuals From Electric Utilities; Final Rule (the “CCR Rule”). The EPA enacted the CCR Rule in April 2015 in response to two significant coal ash spills in Kingston, Tennessee and Eden, North Carolina, that caused widespread environmental damage. The CCR Rule regulates the disposal of coal ash as a solid waste. It established new requirements for the closure and remediation of existing coal ash ponds and restrictions on the location of new ash ponds. The CCR Rule will result in significant incremental environmental management costs for many industry participants. Also, the power generation industry is proactively implementing environmental best practices across their assets, even when not yet required by law.
Recycling Waste Byproducts Is a Critical Component of the Coal Ash Value Chain
Coal ash can be recycled to produce positive environmental, economic, and performance benefits, such as lower greenhouse gas (“GHG”) emissions, reduced use of other natural resources and improved strength and durability of materials. According to the American Coal Ash Association, approximately 47 million tons, or 60%, of coal ash produced in the United States was beneficially used in 2021. The leading beneficial use of coal ash is as a direct and more economical substitute for cement during the production of concrete (12.6 million tons of CCRs production and use in 2021). There are many good reasons to view coal combustion residuals as a resource rather than a waste. Recycling them conserves natural resources and saves energy.
In many cases, products made with CCRs perform better than products made without them. For instance, coal fly ash makes concrete stronger and more durable. It also reduces the need to manufacture Portland cement, resulting in approximately 12 million tons of greenhouse gas emissions reductions each year. An economic analysis by the American Road and
Transportation Builders Association estimates that coal fly ash used in roads and bridges saves approximately $5.2 billion per year in U.S. construction costs. Additionally, technologies currently available, including our EnviroSourceTM multi-process ash beneficiation technology, improve the characteristics of certain types of coal ash, making them more viable for recycling purposes and ultimately increasing the addressable market of recyclable coal ash.
Coal Power Generation Remains an Important Energy Source
According to the EIA, while renewable energy and natural gas sources are expected to provide an increasing share of U.S. domestic energy production, coal-fired power generation is expected to remain a key baseload energy source for decades, providing at least 0.9 trillion kilowatt-hours of energy production annually through 2050. In 2022, coal power generation accounted for approximately 20% of domestic U.S. energy generation. Coal power generation is projected to decrease to 18% between 2022 and 2023, due to increases in solar and wind projects coming online this year. Although these other energy generation sources are expected to make moderate gains on a percentage contribution basis, we believe the aggregate demand for coal power generation will remain consistent as the installed base of coal plants is deeply entrenched throughout the U.S. national power grid.
The Power Generation Industry Increasingly Requires Larger Scale Environmental Service Providers
The mounting burden of environmental compliance, the constant need to maintain aging facilities, and the focus on continuous and safe plant operations have the power generation industry, particularly the coal-fired energy producers, increasingly seeking to partner with outsourced service providers having a larger and broader scale that can provide a range of services on their behalf. Most prospective service providers either have narrow service offerings or a highly localized geographic focus (sometimes limited to a single plant). Few service providers can offer broad service capabilities with a track record of quality service, exceptional safety, exacting environmental standards, and a reliable labor force like Charah Solutions.
According to the EIA, after substantial retirements of U.S. coal-fired electric generating capacity from 2015 to 2020 that averaged 11.0 GW a year, coal capacity retirement slowed to less than 5.0 GW in 2021. However, the retirement of coal-fired generators increased in 2022 and operators plan to retire 8.9 GW of coal capacity in 2023, or 4.5% of the coal-fired generating capacity.
U.S. coal plants are retiring as the coal fleet ages and as coal-fired generators face increasing competition from natural gas and renewables. According to the EIA, power plant owners and operators have reported that they plan to retire 28%, or approximately 59.0 GW, of the coal-fired capacity currently operating in the United States by 2035. Since 2002, around 100 GW of coal capacity has retired in the United States, and the capacity-weighted average age at retirement was 50 years. As of September 2021, 212 GW of utility-scale coal-fired electric-generating capacity was operating in the United States, most of which was built in the 1970s and 1980s.
After a coal-fired plant is retired, the site will undergo a multi-year decommissioning, remediation and closure process. Remediation of CCRs is the main focus of coal plant decommissioning. Depending on the facility, CCRs are disposed of in on-site landfills or coal ash ponds or are beneficially reused in other products.
Many utilities are experiencing an increased need to retire and decommission older or less economically viable generating assets while minimizing costs and maximizing the asset's value and improving the environment. Our ERT services allow these partners to remove the environmental risk and insurance obligations and place control and oversight with a company specializing in these complex remediation and reclamation projects. We believe our broad set of service capabilities, track record of quality service and safety, exacting environmental standards, and a dependable and experienced labor force is a significant competitive advantage. Our work, mission and culture are directly aligned with meeting environmental, social, and governance (“ESG”) standards and providing innovative services to solve our utility customers’ most complex environmental challenges. We have a proven track record of quality, safety, and compliance, and we are committed to reducing greenhouse gas emissions and preserving our environment for a cleaner energy future.
Our Strengths
We believe our company has become a leader in providing mission-critical environmental services to the power generation industry. Our strengths that support our leading position include:
Outstanding Quality, Safety, and Compliance
We believe we are a partner of choice for our customers due to our reputation as a leader in quality, safety, and compliance. Utilities and independent power producers are generally risk-averse and focus on environmental and safety considerations as crucial factors for awarding on-site service provider contracts. We believe our reputation for and dedication to quality, outstanding safety record, and adherence to environmental compliance standards provide a distinct competitive advantage and differentiate us from many of our competitors. We believe we have developed trusted relationships and
credibility with regulatory agencies supported by our team of in-house compliance experts. We pride ourselves on being a reliable partner to our customers, consistently delivering high-quality, efficient, and on-time service.
These attributes are vital contributors to our leading market share positions. Our leading capabilities position us well for potential new business as customers recognize the value of engaging a proven service partner.
Broad Platform of Mission-Critical Environmental Services
Our broad platform of essential environmental services has enabled us to become a leading service provider to our power generation customers. In our end markets, we are a leading national service provider offering a suite of remediation and compliance services, byproduct services, raw material sales and ERT services. Our multi-service platform allows customers to gain efficiencies from sourcing multiple required offerings from a single, trusted partner compared to service providers with a more limited scope.
The national scale of our operational footprint is also a key differentiator, as many of our competitors are localized, focusing on a single geographic area (sometimes isolated to a single plant). We operate in more than 20 states across the country, resulting in an overall footprint and density in key markets that we believe are difficult to replicate. Our national reach enables us to successfully pursue new business within our existing customer base and attract new customers while providing consistent quality, safety, and compliance standards.
Long-Term Partnerships with Leading Power Generators
Our customers are some of the largest power generation companies in the United States, including Dominion Energy, Inc., Duke Energy Corporation, Dynegy Inc., PPL Corporation, The Southern Company and Consumers Energy. Given our services' essential nature, our on-site personnel becomes integrated into each facility's daily procedures, seamlessly working with utility employees to provide uninterrupted continuous operations. Our co-location and integration into our customers’ daily operations result in direct relationships with key decision-makers at every level of our customers’ organizations. We believe this embedded partnership deepens customer connectivity and drives longer customer tenure. In some cases, these relationships have spanned more than 20 years. For example, LG&E and KU Energy LLC, which PPL Corporation currently owns, have been customers for more than 20 years. We have also demonstrated the ability to grow our service offerings with a single customer. We first provided Duke Energy Corporation with byproduct services in 2001 at two plants, and we now provide all of our coal-related services across seven of their plants. We believe these long-term relationships are critical for renewing existing contracts, winning incremental business from existing customers at new sites, and adding new customers.
Innovative Solutions to Our Customers’ Environmental Challenges
Our customers regularly face complex, large-scale environmental challenges that require bespoke, technical solutions. We believe we have a proactive and differentiated approach to solving these challenges. Our internal technical and engineering experts have developed in-depth domain knowledge and capabilities in environmental remediation and the beneficial use of coal ash due to our long-term and significant experience in the sector. We believe this credibility, combined with an entrepreneurial mindset, enables us to source market opportunities not readily available to our competitors.
For example, we demonstrated this innovative approach for a major reclamation project at the Asheville Regional Airport in North Carolina. In the course of remediating an on-site ash pond at a nearby coal power plant, we had the vision to beneficially use that ash as structural fill to support a newly constructed taxiway at the airport. Our engineers designed a state-of-the-art, highly engineered structural fill system to capture the ash in an environmentally sound way. Asheville Regional Airport saved approximately $12 million by using coal ash instead of traditional materials, and approximately 4 million cubic yards of coal ash from an ash pond were beneficially used. We believe this innovative approach, coupled with new technologies and processes, generates additional value for our customers and stockholders.
Furthermore, our ERT turnkey project for Consumers Energy in Michigan is another example of our creative solutions to a complex problem. Remediating the existing ash ponds at the B.C. Cobb facility was part of the site's post-closure regulation requirements and sustainability objectives. Additionally, the utility and the community wished to further advance the wetlands along the eastern shore of Lake Michigan. We provided Consumers with a cost-effective proposal to meet these goals, provide remediation of the ponds and repurpose the site to natural wetlands.
We further demonstrated our innovative approach to customer’s environmental challenges through our turnkey ERT services in acquiring the Texas Municipal Power Agency's Gibbons Creek Steam Electric Station and Reservoir in Grimes County, Texas. As part of the asset purchase agreement, the Company, through one of its subsidiaries, acquired the 6,166-acre area that included the closed power station and adjacent property, the 3,500-acre reservoir, dam and spillway and assumed responsibility for the shutdown and decommissioning of the coal power plant as well as the performance of all environmental remediation work for the site landfills and ash ponds. As a sustainability leader in utility services, the Company is redeveloping the property in an environmentally conscious manner designed to expand economic activity and benefit the surrounding
communities through job creation, promotion of industry, support of the tax base, as well as restoring the property to a state that will enable it to be put to its best potential use.
Entrepreneurial Management Team Supported by Highly Skilled Labor Force
We are led by an experienced management team with an entrepreneurial mindset and a keen focus on safety and customer service. Our senior executive team consists of industry veterans with deep industry experience, helping us provide high-quality operational execution and solidify long-term customer relationships. In addition to a commitment to developing internal talent, we have made key strategic external hires to deepen our expertise further. Our entrepreneurial mindset drives us to continually search for new ways to maximize customer relevance and develop innovative solutions.
Our customers have unique certification and training requirements for the service providers they allow on-site. Our ability to hire, develop, and retain a highly-skilled labor force with specialized skills, training, and certifications is a critical differentiator in the sector. We also have a dedicated team of in-house professionals that focus exclusively on training, certification, and mentorship. As part of our commitment to safety and compliance, each of our on-site employees must complete a unique, rigorous training program. We train our managers to lead from the front line and share, involve, and support their teams. Our ability to staff large-scale projects rapidly is also critical. Collectively, our human capital management allows us to maintain and develop a labor force of highly qualified, well-trained personnel capable of handling our customers’ needs.
Our Growth Strategy
Expand Market Share by Capitalizing on the Significant Needs of Power Generation Customers
We have a substantial growth opportunity in the near term as U.S. coal-fired power generation facilities continue to remediate and close coal ash ponds and landfills. These projects are triggered as coal power plant operators preemptively manage environmental liabilities, comply with regulatory requirements (at the local, state, and federal levels), and work to meet consumer standards for environmental sustainability. We believe there are $75 billion in coal ash remediation opportunities in the United States, driving a need for creative remediation solutions, including the beneficiation of ash. We estimate there are more than 1,000 active and inactive landfills and surface impoundments, substantially all of which will require remediation or closure. We expect that customer spending for our core services, including ash pond and landfill remediation, will increase significantly over the next three to five years in response to these remediation requirements. We believe spending on coal ash management will increase due to our customers’ increased focus on environmental stewardship.
Continue to Grow On-Site Services Revenue by Expanding Our Offerings
We believe our broad platform of services is a competitive differentiator and, therefore, continuing to enhance the breadth of services offered to our existing customers is a key growth opportunity. We are a trusted partner and our team is embedded with the customer on-site to handle its most critical operational needs. As a result, we are well-positioned to identify relevant, attractive service offerings to add to our portfolio. We believe significant opportunities exist in remediation and compliance services and byproduct services across our platform. We have earned our reputation as the premier one-stop solution to the power generation industry for ash pond remediation and compliance, environmentally friendly ash recycling and daily ash operations. We believe our customers will continue to find value in a full-service platform and source incremental services from us as an existing, on-site, trusted partner.
Leverage New and Existing Customer Relationships to Maximize Fleet-Wide Opportunities
The trend among our customers is to consolidate service providers. Given the breadth of our service offerings and our access to our customers’ senior decision-makers, we believe we are well-positioned to deepen our relationship with current customers by providing our services to other coal-fired power plants within their fleets. We see an opportunity to increase this percentage meaningfully. We will also seek to generate business with new utility customers and compete fleet-wide across their power plant footprints. We see similar opportunities in international geographies.
Invest in Innovative Technologies, Processes, and Solutions
We believe investments in new technology and processes present opportunities to provide higher-margin offerings while improving the environment. Our operations' embedded nature gives us a superior understanding of unique customer problems allowing us to deploy innovative solutions. We believe there are opportunities for technological innovation in environmental compliance and stewardship. For example, our EnviroSourceTM ash beneficiation technology provides an innovative new proprietary thermal process for fly ash beneficiation. This technology converts previously unusable coal ash into consistent, high-quality fly ash that meets industry specifications, increasing marketable fly ash supply to concrete producers nationwide. We expect these innovative technologies will allow us to optimize our traditional fly ash sales and distribution, enter new markets for our products, and provide cleaner, environmentally friendly solutions to our customers. We intend to continue to invest in new technologies and other processes that expand our portfolio of solutions and further establish us as an innovator in our industry.
Our Services
We deliver services and solutions to the power generation industry through one reportable segment. We have over 30 years of experience constructing, operating, and managing structural fill projects for coal-fired utilities and assisting coal-fired utilities in beneficially using waste byproducts. We offer a suite of end-to-end services providing remediation and compliance services, byproduct services, raw material sales and ERT services. Our remediation and compliance services primarily include environmental management of landfills for coal-fired power generation facilities and new and existing active pond management, including closure by removal, cap-in-place, and design and construction of new ponds. Additional service offerings include all aspects of landfill development, construction, and management. Our remediation and compliance services teams can also provide site evaluation and characterization; preliminary design and cost estimates with life-cycle analysis; hydrogeological assessments; groundwater and containment modeling; permit application and processing for expansions and greenfield sites; design engineering; construction of landfills and cap and cover systems; conversion of impoundments to landfill sites; quality assurance and quality control and documentation; engineered fills (off-site) and other related services.
Our byproduct services offerings include recycling recurring and contracted volumes of coal-fired power generation waste byproducts, such as bottom ash, fly ash, and gypsum byproducts, as sustainable and environmentally-friendly construction materials. These byproducts can be used for various industrial purposes, including producing concrete products as a replacement for Portland cement. Our dedicated sales and marketing team has a national presence, and it works with many of the nation’s largest power generators to identify opportunities to improve each customer’s long-term position in the market while providing concrete producers with the consistent fly ash sourcing they need. With various coal sources being utilized across the power generation industry, we evaluate, process, and market the different bottom ash products to achieve the highest value for a given market area. Our byproduct services offerings also include coal ash management, which is mission-critical to the daily operations of power plants as they generally only have on-site storage capacity for three to four days of CCR waste accumulation. These services offerings focus on recurring and daily onsite management operations for coal-fired power generation facilities to fulfill our customers' environmental service needs in handling their waste byproducts. These services include silo management, on-site ash transportation and capture and disposal of ash byproducts from coal power operations. Our operations cover the management of a wide variety of combustion byproducts, including bottom ash, flue gas desulfurization ("FGD") gypsum disposal, Pozatec/fixated scrubber sludge disposal, and fluidized bed combustion fly ash disposal. We coordinate all aspects of the ash management operation, from processing and screening for sales to facilitating economical disposal.
Our raw materials sales provide customers with the raw materials that are essential to their business while also providing the sourcing, logistics, and management needed to facilitate these raw materials transactions around the globe.
Our ERT services represent an innovative solution designed to meet the utility customers' evolving and increasingly complex plant closure and environmental remediation needs. These customers need to retire and decommission older or underutilized assets while maximizing the asset's value and improving the environment. Our ERT services manage the sites' environmental remediation requirements benefiting the communities and lowering utility customers' costs. We provide a custom, environmentally-friendly approach to these large-scale projects that removes the liability from the utility through the acquisition of the property. We then provide environmental remediation of the ash ponds and landfills to meet all local, state and federal regulations. We will then redevelop the property upon project completion for public use, which typically includes natural habitat restoration for marine and other wildlife.
Safety Record
Utilities and independent power producers are focused on environmental and safety considerations as crucial factors for awarding on-site service provider contracts. We believe our strong safety record provides a distinct competitive advantage. We believe we have developed trusted relationships and credibility with regulatory agencies and utilities over the past 30 years due to our long-standing safety record supported by an experienced team of in-house safety and regulatory compliance professionals.
Safety is integral to our culture and our results, and it is one of our core values. We believe we operate under the strictest safety standards, and we are committed to maintaining a safe working environment. Our dedicated in-house team of safety professionals develops and trains our employees and subcontractors to perform their jobs safely and proactively contribute to a safe workplace. This expert team includes highly trained professionals who are accredited Occupational Safety and Health Administration trainers, along with full-time transportation specialists in both over-the-road and rail operations.
We recognize the unique safety issues related to working with our utility industry partners. Our Engineering, Environmental, and Quality Group has the expertise and experience to ensure our operations are compliant with local, state, and federal regulations and exceed our industry's customary safety standards.
Sales and Marketing
Our MultiSource® materials network is a unique distribution system of nearly 40 locations serving the United States, Mexico, and Canada with sourcing, transportation modes, and distribution options that ensure a steady and reliable supply of supplementary cementitious materials (“SCMs”). The MultiSource® materials network provides SCMs to markets where they are needed and sufficient storage to level out seasonal supply and demand fluctuations. Logistics support must include an established network of transportation options, including truck, rail, and barge, as well as sufficient storage and supply capabilities to meet the on-time delivery requirements of customers. By combining the strengths of our EnviroSourceTM ash beneficiation technology, the proven MultiSource® network, and strategic investment in logistics infrastructure, we can meet demand in regions not previously attainable while maintaining a competitive price, consistent quality and supply for concrete producers.
Our dedicated sales and marketing team has built successful and long-term relationships with the nation’s largest power generators. We think we can leverage the deep connections and strong operational track record we have built to broaden our on-site presence and deepen client partnerships. We also seek to grow our business with new power generation customers and compete enterprise-wide across their power plant footprints. Through close connections with utility management and personal relationships developed daily by our network of embedded field teams of regional managers and site managers, we believe we understand our customers’ needs and that we can quickly respond to their project requirements and provide creative solutions. Our team includes professional engineers, experienced site managers, and seasoned estimators who strive to be detailed, accurate, and upfront, enabling us to minimize contract modifications after the work begins. We employ what we refer to as a “zippered” organizational approach to customer service and marketing, leveraging relationships up and down the organization. By structuring our organization around our customers’ needs through this unique network of regional field operations managers, we ensure that projects are completed on time and within budget. Additionally, we can quickly recognize opportunities to cross-sell and market our services.
Customers
We have developed our long-term, committed relationships to become a preferred provider to many of the largest power generation companies in the United States. In 2022, we performed work at more than 40 plants for more than 20 “blue-chip” entities, including Ameren Corporation, Big Rivers Electric Corporation, Consumers Energy, Dominion Energy, Inc., Duke Energy Corporation, Hoosier Energy Rural Electric Cooperative, Inc., NRG Energy, Inc., PPL Corporation, The Southern Company and Vistra Corp. The majority of our power generation clients have investment-grade credit ratings. During the year ended December 31, 2022, one customer accounted for $64,484 of total consolidated revenue. As of December 31, 2022, this customer accounted for 28.9% of total consolidated trade accounts receivable, net. If a major customer decided to stop purchasing our services, revenue could decline, and our operating results and financial condition could be adversely affected.
Award Status
In 2022, we won $247 million in contracted new awards, as compared to $840 million and $715 million in 2021 and 2020, respectively. Though the timing of future awards is difficult to determine, we believe we are well-positioned to capture a significant portion of a large and growing addressable market.
Joint Ventures and Contractual Arrangements
A portion of our byproduct services was provided through the following two joint ventures:
Ash Venture Joint Venture
In December 2013, we formed Ash Venture LLC, a North Carolina limited liability company (“Ash Venture”), which provided ash management and marketing services to the utility industry. Ash Venture was a joint venture between Charah, LLC, a Kentucky limited liability company and our wholly-owned subsidiary (“Charah”), and Titan America, LLC, an unrelated third party. Charah owned 67% of Ash Venture, and the third party owned 33%. During the year ended December 31, 2021, the agreement to provide ash management and marketing services with the third-party utility partner came to its conclusion, and the joint venture began settling its remaining current assets and liabilities through the normal course of business. The joint venture was dissolved during the year ended December 31, 2022.
Equity Method Investment
In January 2016, we formed CV Ash, a joint venture with VHSC Holdings, LLC, an unrelated third party, which marketed and sold fly ash to the ready-mix concrete market. We accounted for the joint venture under the equity method. Charah and the third party each owned 50% of the joint venture. During the first quarter of 2021, the CV Ash joint venture relationship ended, and the joint venture began settling its remaining current assets and liabilities through the normal course of business. The joint venture was dissolved during the year ended December 31, 2022.
Competition
The power and environmental services industries are highly fragmented across regional competitors. A limited subset of competitors provides a national presence, few of which offer the same spectrum of services we provide. Our competitors consist of a mix of large environmental and waste management businesses that do not specialize in ash management services and hundreds of regional and local companies with limited-service areas, typically servicing only one to three sites each. The highly fragmented and regional nature of our industry has produced a limited number of competitors with a national scope.
We are a leading national service provider offering a suite of coal ash management and recycling services to the power generation industry. While some competitors are significantly engaged in one of the core areas in the power or environmental services value chain, many have limited or no engagement in most of our core areas.
Seasonality
Based on historical trends, we expect our operating results to vary seasonally due to demand within our industry as well as weather conditions. For additional information on the effects of seasonality on our operating results, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Business and Financial Statements—Seasonality of Business.”
Risk Management and Insurance
The nature of our business exposes us to liabilities arising out of our operations, including possible damages to the environment. Such potential liabilities could involve, for example, claims for remediation costs, personal injury, property damage, and damage to the environment, including natural resources, claims of employees, customers, or third parties for personal injury or property damage occurring in the course of our operations, or claims alleging negligence or other wrongdoing in the planning or performance of work. We could also be subject to fines, civil and criminal penalties and other sanctions in connection with alleged violations of regulatory requirements that could be significant. We maintain general liability, contractor’s pollution liability policies (as well as additional pollution and remediation policies as needed), vehicle liability, employment practices liability, fiduciary liability, directors’ and officers’ liability, workers’ compensation, property, and employer’s liability coverages. We also maintain umbrella liability policies to provide excess coverage over the underlying limits contained in these primary policies.
Regulation
Our coal-based generation utility customers are subject to various federal, state, and local environmental laws and regulations. Our operations and services for these utility customers are subject to many of the same environmental laws and regulations that govern the host utility site. These environmental laws and regulations, among other things, impose limits on the discharge of pollutants into the air and water, and they establish requirements for the treatment, storage, and disposal of solid and hazardous materials, remediation of releases of hazardous substances, and reclamation of land. Compliance with applicable environmental laws and regulations adds to the cost of doing business. Moreover, to establish and operate power plants and collect, transport, and manage CCRs, our customers and we have obtained various federal, state, and local environmental permits. We must comply with these permits or processes and procedures approved by regulatory authorities. Any failure to comply with these laws or regulations, permits, or processes and procedures could result in the issuance of substantial fines and penalties or other sanctions and may cause us (or our customers) to incur environmental or reclamation liabilities or subject us (or our customers) to third-party claims.
We generally perform our remediation and compliance and byproduct service offerings on-site at the host utility power plant. As such, the utility holds permits for our operational activities performed on-site. We secure any necessary permits at facilities that we own or lease.
Despite the safeguards we follow, our operations entail risks of regulatory noncompliance or releases of hazardous substances that could create an environmental liability.
Regulations Affecting the Company
Our service offerings are subject to environmental laws and regulations that can increase operating costs and give rise to increased risk of regulatory noncompliance and environmental liabilities.
• Resource Conservation and Recovery Act. RCRA Subtitle C regulates the handling, transporting, and disposing of hazardous waste. RCRA Subtitle D regulates non-hazardous wastes and delegates authority to states to develop solid waste programs. In 1991, the EPA issued final regulations under RCRA Subtitle D, which set forth minimum federal performance and design criteria for municipal solid waste garbage landfills. In 2015, the EPA published regulations under RCRA Subtitle D for CCRs generated by the electric utility industry. Subtitle D municipal solid waste regulations are implemented by the states, although states can impose more stringent
requirements than the Subtitle D standards. The CCR Rule regulates the disposal of CCRs under RCRA Subtitle D as non-hazardous wastes, as discussed below.
• EPA CCRs Rule. As a CCR, coal ash had previously mainly been exempted from regulation under the RCRA by the “Bevill amendment” and, therefore, was subject to state-level solid waste regulations. However, after a major spill at a Tennessee Valley Authority site in Tennessee in 2008, the EPA began a rulemaking process to regulate CCRs. That process ended with the publication in April 2015 of the CCR Rule to regulate the disposal of CCRs, including fly ash, bottom ash, and flue gas desulfurization products generated at coal-fired power plants. The CCR Rule (which became effective October 17, 2015), among other things, regulates CCRs as non-hazardous waste and imposes new standards for location, groundwater monitoring, and dam stability on surface impoundments and requires long-term monitoring of existing and new surface impoundments and landfill facilities. The CCR Rule also preserves an exemption for CCRs when used for beneficial purposes.
•CCR Rule Litigation and Amendments. In March 2018, the EPA issued proposed “Phase 1” rules to reconsider certain sections of the CCR Rule (including provisions remanded back to EPA by the D.C. Circuit Court of Appeals in June 2016). In July 2018, the EPA issued a final “Phase 1, Part 1” rule that modified the CCR Rule to allow the application of certain alternative performance standards by states with EPA-approved CCR permit programs under the Water Infrastructure Improvements for the Nation Act (the “WIIN Act”). The Phase 1, Part 1 rule also established Groundwater Protection Standards for certain chemical constituents under the CCR Rule and provided additional time (until October 31, 2020) for certain non-compliant CCR surface impoundments to cease receipt of waste and begin closure. (EPA has stated its intent to issue a Phase 1, Part 2 rule in the future to address elements of the Phase 1 proposal not finalized in the Part 1 rule.) In August 2018, the U.S. Court of Appeals for the D.C. Circuit vacated and remanded portions of the CCR Rule to EPA for further rulemaking, including a finding that unlined (including clay-lined) CCR surface impoundments must be closed under the rule. In August 2020, EPA finalized its Holistic Approach to Closure Part A regulation, which, among other things, requires: the closure of unlined CCR surface impoundments (including clay-lined impoundments) (pursuant to the D.C. Circuit decision of August 2018); established a deadline of April 11, 2021 for such unlined CCR surface impoundments to cease receipt of waste and commence closure; established a process whereby affected owners/operators could request additional time to cease receipt of waste and commence closure based on the unavailability of alternative CCR disposal capacity; and amended and expanded the annual Groundwater Monitoring and Corrective Action reporting requirements under the CCR Rule. EPA also finalized part of its Holistic Approach to Closure Part B regulation in November 2020, which established an option for certain CCR surface impoundments to continue operation based on an alternative liner demonstration.
• WIIN Act. In December 2016, Congress passed the WIIN Act, which, among other things, establishes an option for states to assume primacy in permitting and enforcement of the CCR Rule. The WIIN Act directed the EPA to provide guidance to states on issuing state regulations to manage the CCR program. The EPA published the Coal Combustion Residuals State Permit Program Guidance Document (Interim Final) in August 2017. States may now submit their CCR regulatory programs to the EPA and receive EPA approval provided they are equivalent to or more stringent than federal guidelines. As noted above, the rule finalized by the EPA in July 2018 further implements the WIIN Act's objectives by allowing states or the EPA to incorporate flexibilities into their coal ash permit programs. On February 20, 2020, EPA published a proposed rule in the Federal Register that would establish a federal CCR permit program administered by EPA (in the absence of an approved state permitting program), pursuant to its authority under the WIIN Act. EPA has stated that it intends to issue a final federal CCR permitting rule in July 2023. In February 2023, the EPA announced a $2 billion infrastructure law grant for participating states and territories to address contaminants in drinking water under the WIIN Act.
•Groundwater Protection. On January 11, 2022, the EPA made a series of announcements concerning the agency’s interpretation and enforcement of the CCR Rule, which EPA said were designed to expand and strengthen the regulation of coal ash and groundwater protection at regulated CCR surface impoundments and landfills. First, EPA announced proposed decisions (three denials and one conditional approval) for four of the 57 “Part A Demonstrations” submitted to EPA pursuant to the Holistic Approach to Closure Part A rule. In those proposed decisions, EPA stated, among other things, that CCR surface impoundments and landfills cannot be closed with coal ash in contact with groundwater. EPA has subsequently issued additional proposed decisions on Part A Demonstrations and has finalized several of those decisions. In those decisions, EPA has provided its interpretations on a number of regulatory issues, including remediation and closure criteria for leaking ash ponds, all of which are likely to increase environmental management costs for many industry participants. Several legal actions are pending that challenge EPA’s Part A interpretations. In EPA’s January 2022 announcements, the agency also stated that it had sent letters to certain other facilities noting concerns with their CCR Rule
compliance and that it intended to move forward with rulemaking for a federal CCR permit program and a CCR “legacy impoundment” rule (see below).
•Legacy Impoundments. On October 14, 2020, EPA issued an advanced notice of proposed rulemaking seeking input on inactive CCR surface impoundments at inactive electric utilities, referred to as “legacy CCR surface impoundments.” The notice was in response to an August 21, 2018 court decision that vacated and remanded the provision that exempted inactive impoundments at inactive electric utilities from the 2015 CCR rule. EPA has stated its intent to publish a proposed rule to regulate “legacy CCR surface impoundments” in June 2023. This rule has the potential to require investigation, remediation and/or closure activities at numerous additional former CCR surface impoundments.
The CCR Rule affirms that beneficial uses of CCRs remain exempt from federal waste regulation under the RCRA’s “Bevill amendment.” The regulation defines beneficial use as where CCRs provide a functional benefit, substitute for the use of virgin material, meet the product specifications, follow established specifications for use, and are environmentally equivalent to the material that they substitute for or are below all thresholds for safety and environmental impact. In February 2014, the EPA released a report determining that the use of fly ash in concrete constitutes a beneficial use, and the CCR Rule notes explicitly that the incorporation of fly ash in concrete, as a replacement for Portland cement, is one of “the most widely recognized beneficial applications” of CCRs. The CCR Rule indicates that the use of CCRs in applications such as road base generally would qualify as beneficial use, so long as relevant regulations and guidelines are followed.
In September 2016, the U.S. Commission on Civil Rights (the “Civil Rights Commission”) issued a report which determined that CCR disposal facilities can negatively impact environmental justice communities. While the Civil Rights Commission cannot require changes to EPA regulations, environmental organizations may seek to use the Civil Rights Commission’s report to spur the EPA to make regulatory changes.
Regulations Affecting the Coal Industry
The services offerings are dependent upon managing CCRs produced by our customers, typically coal-fired power plants. Coal-fired power plants and the coal industry are generally highly regulated under federal and state law. Regulation affecting this industry is ever-evolving, including the following:
• Clean Air Act. The federal Clean Air Act of 1970 and subsequent amendments, particularly the Clean Air Act Amendments of 1990 (as amended, the "CAA"), and corresponding state laws and EPA regulations (discussed below), regulate the emission of air pollutants such as SOx, NOx, particulate matter (“PM”), and ozone. The EPA finalized more stringent ambient air quality standards for fine PM in January 2013 and ozone in October 2015 and issued a final policy assessment for NOx in April 2017 and a draft policy assessment for SOx in August 2017. The EPA concluded that the current primary NOx standard is adequate, but has not taken additional steps concerning the SOx standards. Utilities have been required to make changes, such as changing fuel sources, installing expensive pollution control equipment, and, in some cases, shutting down plants to meet EPA emissions limits. On January 20, 2021, the current administration issued an executive order directing all federal agencies to review and take action to address any federal regulations, orders, guidance documents, policies and any similar agency actions promulgated during the prior administration that may be inconsistent with the administration’s policies. As a result, the degree to which certain recent regulatory developments may be modified or rescinded is unclear. The executive order also established an Interagency Working Group on the Social Cost of Greenhouse Gases (“Working Group”), which is called on to, among other things, develop methodologies for calculating the “social cost of carbon,” “social cost of nitrous oxide” and “social cost of methane.” The Working Group filed its final recommendations on January 25, 2022. with the public comment period ending on February 15, 2022. The recommendations are currently undergoing external scientific peer review managed by a contractor of the EPA. A meeting of the expert panel peer reviewing EPA's "Report on the Social Cost of Greenhouse Gases: Estimates Incorporating Recent Scientific Advances" occurred on March 29, 2023. Further regulation of air emissions and uncertainty regarding the future course of regulation could eventually reduce the coal demand.
•National Ambient Air Quality Standards. The CAA requires the EPA to set National Ambient Air Quality Standards (“NAAQS”) for six pollutants considered harmful to public health and the environment (“criteria pollutants”). Areas that are not in compliance with these standards are considered “non-attainment areas.” In recent years, the EPA has adopted more stringent NAAQS for these criteria pollutants that could directly or indirectly impact coal plants by designing new non-attainment areas. This could prompt local changes to permitting or emissions control requirements, as prescribed by federally mandated state implementation plans that require emission source identification and emission reduction plans. Final rules may require significant investment in emissions control technologies by our customers in the electric power generation industry and could affect coal demand. For example, in 2015, the EPA finalized the NAAQS for ozone pollution and reduced the limit to 70
parts per billion (ppb) from the previous 75 ppb standard. The final rule was challenged in the D.C. Circuit. On April 7, 2017, the EPA advised the D.C. Circuit that it intended to reconsider the final rule, and the Court subsequently stayed the litigation pending further action by the EPA. In August 2018, the EPA ultimately decided not to revisit the rule. As a result, the D.C. Circuit lifted its stay of the 2015 ozone NAAQS rule imposing the 70 ppb ambient air quality standard while the EPA reviews the standards under an expedited review process. On October 31, 2019, the EPA published a draft policy assessment recommending that the 70 ppb ozone NAAQS be retained. In December 2020, the EPA retained without changes these current NAAQS standards. However, as noted above, on January 20, 2021, the current administration issued an executive order directing federal agencies to review and take action to address any federal regulations or similar agency actions promulgated during the prior administration that may be inconsistent with the current administration’s stated priorities. On October 29, 2020, the EPA determined that California, Connecticut, New York, Pennsylvania, and Texas did not submit a State Implementation Plan (SIP) revision which satisfied the CAA’s reasonably available control technology (RACT) requirements with regard to ozone standards. The EPA’s findings trigger a 24-month deadline for the EPA approve the respective SIP or finalize a Federal Implementation plan which addresses the deficiencies. In January 2023, EPA issued a proposed reconsideration for the PM2.5 NAAQS, proposing to lower the current annual standard from 12 ug/m3 to a level between 9 and 10 ug/m3. EPA is expected to issue a final PM NAAQS rule in the summer 2023. In March 2023, EPA’s Clean Air Scientific Advisory Committee discussed an ozone NAAQS in the range of 55 ppb to 60 ppb, in addition to a more stringent secondary ozone standard. EPA is expected to issue a proposed ozone NAAQS rule in spring 2024. In January 2023, EPA issued a proposed reconsideration for the PM2.5 NAAQS, proposing to lower the current annual standard from 12ug/m3 to a level between 9 and 10 ug/m3. EPA is expected to issue a final PM NAAQS rule in the summer of 2023. In March 2023, EPA's Clean Air Scientific Advisory Committee discussed an ozone NAAQS in the range of 55 ppb to 60 ppb, in addition to a more stringent secondary ozone standard. EPA is expected to issue a proposed ozone NAAQS rule in spring 2024.
• Cross-State Air Pollution Rule. In July 2011, the EPA adopted the Cross-State Air Pollution Rule (the “CSAPR”), a cap-and-trade type program requiring utilities to make substantial reductions in SO2 and NOx and emissions that contribute to ozone and in fine PM emissions to reduce interstate transport of such pollution. The CSAPR was challenged and vacated by the D.C. Circuit Court of Appeals in August 2012, but the U.S. Supreme Court reversed that decision in April 2014. The D.C. Circuit has since lifted its stay on the CSAPR and ruled in favor of the EPA on the remaining significant issues. In January 2016, the EPA filed a brief with the D.C. Circuit addressing the remaining legal challenges left undecided by the U.S. Supreme Court’s 2014 decision. Conforming with a court-ordered schedule, the EPA implemented the first phase of the CSAPR in 2015 and 2016 and the second phase in 2017. In November 2014 and January 2015, the EPA issued notices of data availability outlining emission allowance allocations for existing generating units that began operating before and after 2010. In September 2016, the EPA finalized a rule updating the CSAPR to maintain 2008 ozone emission limitations in downwind states by addressing summertime (May-September) transport of ozone pollution (the "CSAPR Update"). The CSAPR Update, which commenced in May 2017, sets stricter NOx ozone season emission budgets in 22 states and could affect up to 886 coal-fired facilities. For both NOx and SO2, these emission control requirements can impact the quantity and quality of CCRs produced at a power plant, add to the costs of operating a power plant, and make coal a less attractive fuel alternative in the planning and building of utility power plants. On December 6, 2018, the EPA issued the CSAPR “Close-Out” Rule, a final determination that the CSAPR achieves concerning the 2008 ground-level ozone NAAQS in 20 states. Accordingly, those states will not be required to impose requirements for further reduction in transported ozone pollution. The covered states do not need to submit state implementation plans to establish additional requirements beyond the existing CSAPR Update. Several states and other entities challenged the CSAPR Close-Out Rule in the D.C. Circuit. In a September 13, 2019 ruling, the D.C. Circuit remanded the CSAPR Update to the EPA, finding that rule is inconsistent with the CAA. In a subsequent October 1, 2019 ruling, the CSAPR Close-Out Rule was vacated. On March 15, 2021, the EPA finalized its Revised CSAPR Update Rule to address 21 states’ outstanding interstate pollution transport obligations for the 2008 NAAQS. Starting in the 2021 ozone season, the rule requires additional emissions reductions of NOx from power plants in 12 states. In March 2023, EPA finalized the Good Neighbor Plan for 2015 ozone NAAQS, which requires significant reductions of NOx from power plants and industrial sources in 23 states. The CSAPR Update Rule and Good Neighbor Plan will affect the demand for coal.
• Comprehensive Environmental Response, Compensation and Liability Act. Certain environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act (the “CERCLA”) and similar state laws, impose strict, joint and several liability on responsible parties for the investigation and remediation of regulated materials at contaminated sites, including our sites, customer sites, and sites to which we sent wastes,
including CCRs. CCRs may contain materials such as metals that are regulated materials under these laws. Management of CCRs can give rise to liability under the CERCLA and similar laws.
• Mercury and Air Toxics Standards for Power Plants. In February 2012, under its Mercury and Air Toxics Standards ("MATS") for Power Plants rule, the EPA promulgated final limits on mercury and other toxic chemicals from new and modified power plants. In June 2015, the U.S. Supreme Court ordered the EPA to undertake a cost-benefit analysis when promulgating mercury and air toxics standards. In April 2016, the EPA published a supplemental finding pursuant to the U.S. Supreme Court’s directive, that was challenged in the D.C. Circuit. In April 2017, the D.C. Circuit granted the EPA’s motion to stay the litigation while the EPA reconsiders its finding that the rule is “appropriate and necessary” as required under the Clean Air Act. In March 2023, EPA issued a final rule reaffirming that it remains appropriate and necessary to regulate mercury and other hazardous air pollutants from power plants, revoking a 2020 finding that it was not appropriate and necessary. In April 2023, EPA issued a new proposed MATS rule to strengthen and update the standards. If finalized and upheld, requirements to control mercury emissions could result in the implementation of additional technologies at power plants that could negatively affect fly ash quality.
• GHG Emissions. Some states and regions have adopted legislation and regulatory programs to reduce GHG emissions, either directly or through mechanisms such as renewable portfolio standards for electric utilities. These programs require electric utilities to increase their use of renewable energy, such as solar and wind power. Federal GHG legislation appears unlikely in the near term. The EPA has initiated a review of rules finalized in August 2015 for GHG emissions from new and existing fossil fuel-fired electric power plants and for carbon emissions from existing sources in the power sector (the latter being known as the “Clean Power Plan”). The Clean Power Plan establishes state-specific, rate-based reduction goals for carbon emissions and calls on the power sector to reduce carbon emissions to 32% below 2005 levels by 2030.
On June 19, 2019, the EPA finalized the Affordable Clean Energy ("ACE") rule to replace the Clean Power Plan. The ACE rule establishes emission guidelines for states to develop plans to address greenhouse gas emissions from existing coal-fired power plants. The ACE rule has several components: a determination of the best system of emission reduction for greenhouse gas emissions from coal-fired power plants, a list of “candidate technologies” states can use when developing their plans, a new preliminary applicability test for determining whether a physical or operational change made to a power plant may be a “major modification” triggering New Source Review, and new implementing regulations for emission guidelines under Clean Air Act section 111(d). In January 2021, the ACE rule was vacated by the D.C. Circuit. In June 2022, the U.S. Supreme Court in West Virginia v. EPA held that "generation shifting" represents a "major question" where Congress must give clear authority, and that the EPA lacked that authority. EPA intends to issue a new GHG power plant rule in 2023.
In December 2015, 195 nations (including the United States) signed the Paris Agreement, a long-term, international framework convention designed to address climate change over the next several decades. This agreement entered into force in November 2016 after more than 70 countries, including the United States, ratified or otherwise agreed to be bound by the agreement. The United States was among the countries that submitted its declaration of intended greenhouse gas reductions in early 2015, stating its intention to reduce U.S. greenhouse gas emissions by 26-28% by 2025 compared to 2005 levels. Whether and to what extent the United States meets its stated intention likely depends on several factors, including whether the ACE rule is implemented. In June 2017, the Trump administration announced the United States' intention to withdraw from the Paris Agreement. In November 2019, the Trump administration formally initiated the withdrawal process and formally exited the Agreement on November 4, 2020. In January 2021, the current administration issued an executive order commencing the process to reenter the Paris Agreement, although the emissions pledges connected with that effort have not yet been updated. Regardless of the extent to which the United States ultimately participates in these reductions, participation in the Paris Agreement framework could reduce the overall demand for coal over the long term. On February 19, 2021, the current administration rejoined the Paris Agreement. Regardless of the extent to which the United States ultimately participates in these reductions, participation in the Paris Agreement framework could reduce the overall demand for coal over the long term.
Several U.S. states have enacted legislation establishing greenhouse gas emissions reduction goals or requirements or joined regional greenhouse gas reduction initiatives. Some states have also enacted legislation or regulations requiring electricity suppliers to use renewable energy sources to generate a certain percentage of power or that provide financial incentives to electricity suppliers to use renewable energy sources. For example, eleven northeastern states are current members of the Regional Greenhouse Gas Initiative, a mandatory cap-and-trade program established in 2005 to cap regional carbon dioxide emissions from power plants. Six Midwestern states and one Canadian province entered into the Midwestern Regional Greenhouse Gas Reduction Accord to establish
voluntary regional greenhouse gas reduction targets and develop a voluntary multi-sector cap-and-trade system to help meet the targets. However, it has been reported that the members no longer are actively pursuing the group’s activities. Lastly, California and Quebec remain members of the Western Climate Initiative, formed in 2008 to establish a voluntary regional greenhouse gas reduction goal and develop market-based strategies to achieve emissions reductions. Those two jurisdictions have adopted their own greenhouse gas cap-and-trade regulations. Several states and provinces that initially were members of these organizations and some current members have joined the new North America 2050 initiative, which seeks to reduce greenhouse gas emissions and create economic opportunities aside from cap-and-trade programs. Any particular state, or any of these or other regional groups, may have or adopt future rules or policies that cause some coal users to switch from coal to a lower carbon fuel. There can be no assurance at this time that a carbon dioxide cap-and-trade-program, a carbon tax or other regulatory or policy regime, if implemented by any one or more states or regions in which our customers operate or at the federal level, will not affect the future market for coal in those states or regions and lower the overall demand for coal.
• EPA Water Quality Regulations. The EPA is addressing water quality impacts from coal-fired power plants and coal mining operations. To obtain a permit for certain coal mining activities, including the construction of coal refuse areas and slurry impoundments that may result in impacts to “waters of the United States,” an operator may need to obtain a permit for the discharge of fill material from the U.S. Army Corps of Engineers (“ACOE”) under Section 404 of the Clean Water Act (CWA), as well as a corresponding permit (“water quality certification”) from the state regulatory authority under Section 401 of the CWA. All permits associated with the placement of dredged or fill material that meet certain minimum thresholds require appropriate mitigation. Permit holders must receive explicit authorization from the ACOE before proceeding with mining activities. The definition of waters of the United States (“WOTUS”) has been in flux for many years, with the Obama Administration adopting the so-called Clean Water Rule in 2015, with the effect of dramatically increasing the scope of waters considered to be WOTUS and therefore expanding the reach of the CWA permitting program. On February 28, 2017, President Trump issued an executive order prompting the EPA and ACOE to consider replacing the Clean Water Rule. Pursuant to that direction, EPA and the ACOE subsequently stated their intent to propose a new regulation, known as the Navigable Waters Protection Rule (“NWPR”), that again reduced the scope of waterbodies subject to federal jurisdiction. A final rule repealing the 2015 definition of “waters of the United States” became effective in late 2019. The Trump Administration subsequently issued and finalized the NWPR in 2020, which substantially reduced the scope of waters that fell within the Clean Water Act’s jurisdiction, in part by excluding ephemeral streams, which potentially qualified as “waters of the United States” under the 2015 Clean Water Rule. The Biden Administration subsequently revoked the Trump NWPR, reinstating the WOTUS regulatory regime that existed prior to the 2015 Obama rule (effective March 2023) and promising to update the WOTUS regulations in a subsequent rulemaking. The Biden rule reinstating the previous regulatory regime has been challenged in numerous courts and has been suspended in over 25 states. The outcome of these rulemakings and litigation is in doubt and will continue to create uncertainty in the permitting of coal mining activities in the coming years.
In September 2015, the EPA finalized new effluent limitations guidelines (the "Steam Electric ELGs") under the Clean Water Act for steam electric power generating facilities. The ELGs place minimum standards on discharges of pollutants in wastewater from steam electric power plants. The final rule generally required coal plant operators with a generating capacity of over 50 megawatts to cease discharging wastewater containing pollutants from fly ash and bottom ash, resulting in the need to cease transporting CCR via water and to dispose of CCR in dry landfills rather than containment ponds/surface impoundments. Approximately 12% of coal plants were estimated to be affected, and some marginal operations may shut down rather than face the expense of complying with the Steam Electric ELGs. The EPA finalized amendments to the Steam Electric ELGs in October 2020, which revised the requirements for two waste streams (flue gas desulfurization (FGD) wastewater and bottom ash (BA) transport water); revised the voluntary incentives program for FGD wastewater; added subcategories; and established new compliance dates. And in March 2023, EPA issued a Notice of Proposed Rulemaking to update the Steam Electric ELGs again to make certain discharge limits applicable to BA transport water, FGD wastewater, legacy wastewater, and combustion residual leachate more stringent, and to update the deadline for utilities to opt into a voluntary retirement provision under the Steam Electric ELGs. These updates to the ELGs continue to place more stringent limits on electric utilities who burn coal, thereby potentially making the combustion of coal to generate electricity more costly and less desirable.
In April 2020, the U.S. Supreme Court issued a decision finding that point source discharges to navigable waters through groundwater are subject to regulation under the Clean Water Act. The U.S. Supreme Court specifically
held that the Clean Water Act requires a permit if the addition of the pollutants through groundwater is the “functional equivalent” of a direct discharge from the point source into navigable waters.
As a result of such recent developments, substantial uncertainty exists regarding the scope of waters protected under the Clean Water Act and the discharges to such waters that are subject to permit requirements. These more stringent regulations of coal-fired power plants and coal mining operations could increase the costs for utilities and, thus, indirectly impact the availability and cost of fly ash for our CCR activities.
Increasingly strict requirements, such as those described above, will generally increase the cost of doing business and may make burning coal less attractive for utilities. Faced with the prospect of more stringent regulations, litigation by environmental groups, and the relatively low cost of natural gas, an increasing number of electric utilities are reducing their portfolio of coal-fired power plants. For example, in recent years, multiple companies have closed coal-fired power plant units or plants or dropped plans to open new coal-fired plants, citing the cost of compliance with pending or new environmental regulations and the relatively low cost of natural gas. The potential negative impact on job prospects in the utility and mining industries has prompted considerable concern in Congress, leading to calls to restrict the EPA’s regulatory authority and prompting the EPA to reconsider the same. The outcome of these developments cannot be predicted. If the rate of coal-fired power plant closures increases, our business, financial condition and results of operations may be adversely affected. Nevertheless, we believe that reliance on coal for a substantial amount of power generation in the United States is likely to continue for the foreseeable future.
Motor Carrier Operations
Through the services we provide, we operate as a motor carrier and are subject to regulation by the U.S. Department of Transportation (the “DOT”) and various state agencies. These regulatory authorities exercise broad powers governing activities, such as the authorization to engage in motor carrier operations; regulatory safety; hazardous materials labeling, placarding, and marking; financial reporting; and certain mergers, consolidations, and acquisitions. Additional regulations specifically relate to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the industry's economics by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations that govern the amount of time a driver may drive in any specific period, and requiring onboard black box recorder devices or limits on vehicle weight and size.
Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. Intrastate motor carrier operations are subject to safety requirements that often mirror federal regulations. Such matters as weight and dimension of equipment are also subject to federal and state regulations. DOT regulations also mandate drug testing of drivers. From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted.
Human Capital Resources
As of December 31, 2022, we had 599 total employees, of which 593 were full-time employees, of which 88 of our employees were covered by collective bargaining agreements. We believe we have good relations with our employees. We have 47 employees (7.8% of all employees) with ten or more years of seniority working at the Company.
The Company is an Equal Opportunity Employer. We will consider all qualified applicants for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, or protected veteran status, and we will not discriminate against any qualified candidate based on disability.
Each eligible employee receives a comprehensive benefits package that includes full healthcare coverage, 100% paid preventive care, dental, vision, life insurance, short- and long-term disability, paid time off, and 401(k) with company contribution. We understand the importance of keeping our employees safe and healthy.
Health and Safety
Safety is one of our core values. We are dedicated to maintaining a safe working environment and training our employees and subcontractors to perform their jobs safely and proactively contribute to a safe workplace.
A vital principle of the Charah Way involves actively caring for those around us and working together as one team. Caring for our coworkers and acting as a team is a crucial part of working safely. It requires us to coach and be coached when unsafe behaviors are identified or observed. Safety is not one person’s responsibility; we believe safety is everyone’s responsibility as well as being there for one another in times of crisis.
Charah Solutions has worked more than 450,000 person-hours without an Occupational Safety and Health Administration (“OSHA”) recordable incident. Charah Solutions achieved another significant milestone, operating without a lost-time event since April 17, 2019, while logging more than 4.3 million person-hours. These significant achievements result from all personnel's commitment to putting safety first.
Our record in safety excellence also includes the following achievements:
•We accomplished a 0.55 Recordable Incident Rate in 2022 with no lost time injuries in comparison to the most recent industry Recordable Incident Rate industry average of 3.1;
•An impressive three-year average Experience Modification Rate (“EMR”) of less than 0.56;
•Charah Solutions employees are five times less likely to suffer a recordable injury than the industry average.
Our Managers and Safety Specialists team utilize an advanced predictive analytics tool to document, monitor, and track behaviors and conditions. This tool utilizes observations, incidents, and historical event data to provide valuable information that we thoroughly assess. We provide our site, regional, and executive leadership "dashboards" that detail incident and observation data from the previous week, month, and year and identify particular trends in that data. We use this information to customize plans to mitigate hazards and reverse any negative trends aggressively. We also use this data, along with other analytical data at the project level to compare statistical data across regions and job sites. Over the last five years, our team has completed over 50,000 inspections and 2.5 million observations, with more than 35,000 opportunities for improvement identified.
Recent award recognition for our focus on Safety Leadership includes:
•AGC Willis Towers Watson Construction Safety Excellence Award for the fifth straight year, including being named the winner of the award in 2022
•Crystal Eagle Excellence in Safety Award from the Coalition for Construction Safety (CCS) during that organization's 29th Anniversary and Awards Celebration
•Four Employee Gold-Level Certificates of Safety Achievement from the North Carolina Department of Labor
Training and development
We strive to educate, advance and promote our talent internally. Career training such as our “Leading from the Frontline” program combines management education and leadership training so that all of our employees understand the importance and impact of leadership in our organization, and we pride ourselves in providing reimbursement for continuing education.
We provide career skills education to support our construction trade employees in mastering current skill areas and future areas of development. These programs include direct sessions with team leaders in safety protocol, specified skills, hands-on training sessions, equipment know-how, heavy equipment training and certification, and sessions on emerging trends impacting and changing the construction skill sets of the future. We offer construction trade professionals an attractive pathway for career advancement, with the potential to work on different projects and locations.
Exchange Act Reports
We make available free of charge through our website, www.charah.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statement and all amendments to these reports. These reports are available on the investor relations portion of our website, ir.charah.com, as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). We use the investor relations portion of our website to distribute company information, including as a means of disclosing material, non-public information and for complying with our disclosure obligations under Regulation FD. We routinely post and make accessible financial and other information regarding the Company on our website's investor relations area. Accordingly, investors should monitor the investor relations portion of our website and follow our press releases, SEC filings, public conference calls and webcasts. The information provided on our website is not part of this Annual Report and is not incorporated herein by reference.
The SEC also maintains a website, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Item 1A. Risk Factors
Risks Related to Our Business
A decline in the production of CCRs by our coal-fired utility industry customers due to environmental regulations or otherwise could negatively impact our profitability and hinder our growth.
Many of our services are dependent upon the production of CCRs by our coal-fired utility industry customers. The coal-fired utility industry faces several new and pending initiatives by regulatory authorities seeking to address air and water pollution, GHG emissions, and the management and disposal of CCRs. In recent years, federal and state environmental regulations have imposed more stringent requirements regarding the emission of air pollutants and other toxic chemicals, reduction of GHG emissions, and water quality impacts from coal operations. Adoption of more stringent regulations governing coal combustion, water discharges, or air emissions may decrease the amount of CCRs produced by our customers and, as a result, the demand for our services. Faced with the prospect of more stringent regulations, litigation by environmental groups, and the relatively low cost of natural gas, an increasing number of electric utilities are reducing their portfolio of coal-fired power plants. The pace of the reduction may increase due to changes in the U.S. executive administration, Congressional leadership and regulatory agency leadership. This reduction could cause states to substitute electricity generation from higher-emitting coal plants with low-emitting coal and natural gas plants and zero-emitting renewable sources. See “Item 1. Business—Regulation.”
Increasingly strict requirements generally will increase the cost of doing business and may make burning coal less attractive for utilities. In recent years, multiple companies have announced plans to close coal-fired power plant units or plants or dropped plans to open new plants, citing the cost of compliance with pending or new environmental regulations and the relatively low cost of natural gas. A reduction in coal use as fuel would cause a decline in the production and availability of CCRs, which would adversely affect our byproduct services offerings and result in reduced revenue. The outcome of these developments cannot be predicted but could have a material adverse effect on our business, results of operation, financial condition, and cash flows.
Our business, financial condition and results of operations depend on the award of new contracts and the timing of the performance of these contracts.
We derive our revenue from the performance of customer contracts which itself is dependent on new contract awards. Reductions in the number and amounts of new awards, delays in the timing of the awards, or potential cancellations of such awards resulting from economic conditions, material and equipment pricing, and availability or other factors could adversely impact our business, financial condition and results of operations. It is particularly difficult to predict whether or when we will be awarded large-scale projects as these contracts frequently involve a lengthy and complex bidding and selection process that is affected by market conditions as well as regulatory requirements. We have experienced difficulty in the timely award of new projects and may again in the future. Because we generate our revenue from such projects, our results of operations and cash flows can fluctuate significantly from quarter to quarter depending on the timing of our contract awards and the commencement and progress of work under awarded contracts. Also, many of these contracts are subject to financing contingencies. As a result, we are subject to the risk that the customer will not be able to secure the necessary financing for a project to proceed. If we are unable to secure the awards of new contracts, our business, financial condition and results of operations will be adversely affected.
We may lose existing contracts through competitive bidding or early termination.
Many of our contracts are for a specified term and are subject to competitive rebidding after the term for such contract expires. Although we intend to bid to extend expiring contracts, we may not always be successful. Also, some or all of our customers may terminate their contracts with us before their scheduled expiration dates. If we are not able to replace lost revenue resulting from unsuccessful competitive bidding, early termination, or the renegotiation of existing contracts with other revenue within a reasonable period, our business, financial condition and results of operations could be adversely affected.
We could be precluded from entering into or maintaining permits or certain contracts if we are unable to obtain sufficient third-party financial assurance or adequate insurance coverage.
Our operations sometimes require us to obtain performance or surety bonds, letters of credit, or other means of financial assurance to secure our contractual performance. We currently obtain performance and surety bonds from multiple financial institutions; however, if we are unable to obtain financial assurance in the future in sufficient amounts from appropriately rated sureties or on acceptable terms, we could be precluded from entering into certain additional contracts or from obtaining or retaining landfill management or other contracts or operating permits. Any future difficulty in obtaining insurance could also impair our ability to secure future contracts conditioned upon having adequate insurance coverage.
Unsatisfactory service and safety performance may negatively affect our customer relationships and, to the extent we fail to retain existing customers or attract new customers, adversely impact our revenue.
Our ability to retain existing customers and attract new business is dependent on many factors, including our ability to demonstrate that we can reliably and safely operate our business in a manner that is consistent with our customers’ standards of service as well as applicable laws, rules, and permits, which are subject to change. Existing and potential customers consider the safety and service record of their third-party service providers to be of high importance in their decision to engage such providers. The power generation industry generally emphasizes safety and service over cost due to economic and reputational risk associated with operations at their facilities.
We may experience multiple or particularly severe accidents in the future, causing our safety record to deteriorate. This possibility may be more likely as we continue to grow, if we experience high employee turnover or a labor shortage or hire inexperienced personnel to support our staffing needs. If one or more accidents were to occur while we are providing services to our customers, or if we were unable to maintain the level of safety and service our customers require, the affected customer may seek to terminate our services and may be less likely to use our services in the future, which could adversely affect our business, financial condition and results of operations. Furthermore, our ability to attract new customers may be impaired if they view our safety or service record as unacceptable.
Our ERT services will require us to acquire significant real property and assume liabilities that could adversely impact our future results.
As part of our ERT services, we will purchase real and personal property and assume environmental liabilities. We will plan to sell these acquired assets to third parties. However, the timing of these future dispositions is difficult to predict, and we may not be able to realize the gains on sales as anticipated. If we cannot sell these assets, the assets may be written down to their fair value, with the impairment loss recognized as a non-cash charge in the consolidated statement of operations. Furthermore, these services will require us to assume environmental liabilities with long-term monitoring requirements. If actual costs exceed our cost estimates, we may incur future additional liabilities, which could adversely impact our results of operations.
The loss of a large customer may adversely affect our revenue and operating results.
We will likely continue to derive a significant portion of our revenue from a relatively small number of customers in the future. If a major customer fails to pay us promptly or at all, our revenue would be negatively impacted, and our operating results, financial condition and cash flows could be materially adversely affected. Additionally, if we were to lose any material customer, such loss would have a material adverse effect on our business and results of operations.
If we are unable to accurately estimate the overall risks, revenues or costs on our projects, we may incur contract losses or achieve lower profits than anticipated.
Pricing on fixed unit price contracts is based on approved quantities irrespective of our actual costs, and contracts with a fixed total price require that the work be performed for an agreed-upon price irrespective of our actual costs. We only generate profits on fixed unit price and fixed total price contracts when our revenues exceed our actual costs, which requires us to estimate our costs accurately, control our actual costs and avoid cost overruns. If our cost estimates are too low or we do not perform the contract within our cost estimates, then cost overruns may cause us to incur a loss or cause the contract not to be as profitable as we expected. As a result, these types of contracts could negatively affect our cash flow, earnings and financial position.
The costs incurred and profit realized, if any, on our contracts can vary, sometimes substantially, from our original projections due to a variety of factors, including, but not limited to:
•onsite conditions that differ from those assumed in the original bid or contract;
•failure to include required materials or work in a bid, or the failure to estimate properly the quantities or costs needed to complete a lump sum contract;
•delays caused by weather conditions or otherwise failing to meet scheduled acceptance dates;
•contract or project modifications creating unanticipated costs not covered by change orders or contract price adjustments;
•changes in availability, proximity and costs of materials, including steel, concrete, aggregates and other construction materials (such as stone, gravel, sand and oil for asphalt paving), as well as fuel and lubricants for our equipment;
•higher than anticipated costs to lease, acquire and maintain equipment;
•availability and skill level of workers in the geographic location of a project;
•rapidly increasing labor costs;
•the failure of our suppliers, subcontractors, designers, engineers or customers to perform their obligations;
•fraud, theft or other improper activities by our suppliers, subcontractors, designers, engineers, customers or our personnel;
•mechanical problems with our machinery or equipment;
•citations issued by a government authority, including OSHA;
•difficulties in obtaining required government permits or approvals;
•changes in applicable laws and regulations;
•uninsured claims or demands from third parties for alleged damages arising from the design, construction or use and operation of a project of which our work is part; and
•delays in quickly identifying and taking measures to address issues that arise during the execution of a project.
We and our customers operate in industries subject to significant environmental regulation, and compliance with changes in, or liabilities under, such regulations could add significantly to the costs of conducting business.
Our operations and the operations of our customers are subject to federal, state, and local environmental laws and regulations that, among other matters, impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage, and disposal of solid, hazardous, and radioactive waste materials, the remediation of releases of hazardous substances, and the reclamation of land. We and our customers have obtained various federal, state, and local environmental permits to conduct our operations, and we must comply with these permits and processes and procedures regulatory authorities have approved. Any failure to comply with these environmental requirements could give rise to sanctions, including, but not limited to: i) the cessation of all or part of our operations, ii) substantial fines and penalties, iii) environmental or reclamation liabilities, which liabilities may be strict and joint and several and iv) damages, including natural resource damages in connection with our sites, customer sites, or sites to which we sent wastes, including CCRs, and third-party claims. Moreover, changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly environmental requirements could require our customers or us to make significant expenditures to attain and maintain compliance. New regulations, failure to comply with existing regulations, or environmental liabilities arising thereunder could have a material adverse effect on our business, results of operation, financial condition, and cash flows.
Success by environmental groups in convincing the EPA to restrict beneficial uses of CCRs, or to regulate CCRs as hazardous waste, may have an adverse effect on our business.
In April 2015, the EPA published the CCR Rule to regulate the disposal of CCRs, including fly ash and bottom ash generated at coal-fired power plants, as non-hazardous waste under Subtitle D of the RCRA and to distinguish the beneficial use of CCRs from disposal, which became effective in October 2015. The CCR Rule establishes national minimum criteria for CCR landfills and impoundments consisting of location restrictions, design and operating criteria, groundwater monitoring and corrective action, closure requirements, post-closure care, recordkeeping and reporting and other requirements, and requires closure of facilities unable to comply with these criteria within prescribed periods of as little as six months in some cases. The CCR Rule has increased the complexity and cost of managing and disposing of CCRs and remediating existing ash ponds and landfills. Also, Congress passed the WIIN Act in December 2016, which, among other things, authorizes state permit programs to manage CCRs in place of the CCR Rule, provided those programs are as stringent as the CCR Rule. The WIIN Act also gives the EPA the authority to regulate coal ash and implement a federal CCR permitting program in states that choose not to implement state permitting programs and in states whose permitting programs are determined to be inadequate by the EPA. In July 2018, the EPA issued a final rule taking further steps under the WIIN Act by granting states with approved CCR permit programs (or the EPA where it is the permitting authority) the ability to set specific alternative performance standards. The rule also addressed certain matters remanded to the EPA by the D.C. Circuit Court of Appeals in June 2016, including clarifying corrective action triggers and requirements. In August 2018, the D.C. Circuit Court of Appeals vacated and remanded portions of the CCR Rule to EPA for further rulemaking; among other things, the court ruled that unlined CCR surface impoundments must be closed and that clay-lined impoundments must be considered unlined under the CCR Rule. In August 2020, EPA finalized its Holistic Approach to Closure Part A regulation, which, among other things, requires: the closure of unlined CCR surface impoundments (including clay-lined impoundments); established a deadline of April 11, 2021 for such unlined CCR surface impoundments to cease receipt of waste and commence closure; established a process whereby affected owners/operators could request additional time to cease receipt of waste and commence closure based on the unavailability of alternative CCR disposal capacity; and amended and expanded the annual Groundwater Monitoring and Corrective Action
reporting requirements under the CCR Rule. EPA also finalized part of its Holistic Approach to Closure Part B regulation in November 2020, which established an option for certain CCR surface impoundments to continue operation based on an alternative liner demonstration. On February 20, 2020, EPA published a proposed rule in the Federal Register that would establish a federal CCR permit program administered by EPA (in the absence of an approved state permitting program), pursuant to its authority under the WIIN Act. EPA has stated that it intends to issue a final federal CCR permitting rule in July 2023. On October 14, 2020, EPA issued an advanced notice of proposed rulemaking seeking input on inactive CCR surface impoundments at inactive electric utilities, referred to as “legacy CCR surface impoundments.” The notice was in response to the August 2018 D.C. Circuit Court decision that vacated and remanded the provision that exempted inactive impoundments at inactive electric utilities from the 2015 CCR rule. EPA has stated its intent to publish a proposed rule to regulate “legacy CCR surface impoundments” in June 2023. This rule has the potential to require investigation, remediation and/or closure activities at numerous additional former CCR surface impoundments. EPA also announced several novel interpretations of the CCR Rule beginning in January 2022 that could make compliance with the monitoring, corrective action, and beneficial use requirements of the CCR Rule more difficult, and more susceptible to citizen legal challenges, in the coming years.
While the CCR Rule affirms that beneficial uses of CCR remain exempt from regulation under the RCRA “Bevill Amendment,” some environmental groups continue to urge the EPA to restrict certain beneficial uses of CCRs, such as in concrete, road base, and soil stabilization, alleging contaminants may leach into the environment. The CCR Rule created a definition of “beneficial use” that includes uses in concrete and road base, but changes in the definition could reduce the demand for fly ash and other CCRs, which would have an adverse effect on our revenue. Moreover, if the EPA were to regulate CCRs as hazardous waste, we, together with CCR generators, could be subject to environmental cleanup, personal injury, and other possible claims and liabilities that could result in significant additional costs. Any such changes in or new regulations or indemnity obligations could have a material adverse effect on our business, results of operation, financial condition, and cash flows.
We may be adversely affected by uncertainty in the global financial markets and the deterioration of our customers' financial condition. If any of our customers suffer financial difficulties affecting their credit risk, our operating results could be negatively impacted.
Our future results of operations may be affected by the uncertainty caused by an economic downturn, natural disaster, pandemic, volatility or deterioration in the capital markets or credit markets, inflation, deflation, or other adverse economic conditions that may negatively affect us or parties with whom we do business, resulting in a reduction in our customers’ spending and their nonpayment or inability to perform obligations owed to us, such as the failure of customers to honor their commitments. Additionally, downturns in U.S. construction could lower the demand for our byproduct services and raw material sales offerings.
We also provide service to power generators. To the extent these entities suffer significant financial difficulties, they could be unable to pay amounts owed to us or to renew contracts with us on attractive terms. Our customers' inability, particularly larger customers, to pay us promptly or to pay increased rates could negatively affect our business, financial condition and results of operations. In addition, in the course of our business, we hold accounts receivable from our customers. In the event of the customer's financial distress or bankruptcy, we could lose all or a portion of such outstanding accounts receivable associated with that customer. Further, if a customer was to enter bankruptcy, it could result in the cancellation of all or a portion of our service contracts with that customer at significant expense or loss of expected revenue.
Increases in labor costs or our ability to find, employ and deploy technically skilled labor could impact our financial results.
Our continued success will depend on our ability to attract and retain qualified personnel. We compete with other businesses in our markets for qualified employees. From time to time, the labor supply is tight in some of our markets. Labor is a primary component of operating our business. A number of factors may adversely affect the labor force available to us or increase labor costs from time to time, including high employment levels, federal unemployment subsidies, including unemployment benefits offered in response to the COVID-19 pandemic, and other government regulations.
Although we have not experienced any material disruptions due to labor shortages to date, we have observed an overall tightening and increasingly competitive labor market. A sustained labor shortage or increased turnover rates within our employee base, whether caused by COVID-19 or as a result of general macroeconomic factors, could lead to increased costs, such as increased overtime to meet demand and increased wage rates to attract and retain employees, and could negatively affect our ability to complete our construction projects according to the required schedule or otherwise efficiently operate our business. If we are unable to hire and retain employees capable of performing at a high level, or if mitigation measures we may take to respond to a decrease in labor availability, such as overtime and third-party outsourcing, have unintended negative effects, our business could be adversely affected. In addition, we dispose of CCRs and distribute our raw material sales offerings to customers primarily by truck. Reduced availability of trucking capacity due to shortages of drivers, primarily as a
result of the COVID-19 pandemic, has caused an increase in the cost of transportation for us and our suppliers. An overall labor shortage, lack of skilled labor, increased turnover or labor inflation, caused by COVID-19 or as a result of general macroeconomic factors, could have a material adverse impact on our operations, results of operations, liquidity or cash flows.
Dependence on third-party subcontractors and equipment manufacturers could adversely affect our profits.
We rely on third-party subcontractors and equipment manufacturers to complete many of our projects. We could experience losses to the extent that we cannot engage subcontractors or acquire equipment or materials or if the amount we are required to pay for these goods or services exceeds the amount we have estimated in bidding for fixed-price contracts in the performance of these contracts. Also, if a subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason including, but not limited to, the deterioration of its financial condition, we may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the expected profit or result in a loss on a project, negatively impacting our business, financial condition and results of operations.
We service a significant portion of our contracts with our own construction equipment and finance leased equipment rather than rented equipment. To the extent that we are unable to procure construction equipment necessary for our needs, either due to a lack of available funding or equipment shortages in the marketplace, we may be forced to rent equipment on a short-term basis, which could increase the costs of performing our contracts.
The property, plants and equipment needed to produce our products and provide our services can be very expensive. We must spend a substantial amount of capital to purchase and maintain such assets. Although we believe our current cash balance, along with our projected internal cash flows and available financing sources, will provide sufficient cash to support our currently anticipated operating and capital needs, if we are unable to generate sufficient cash to purchase and maintain the property, plants and equipment necessary to operate our business, or if the timing of payments on our receivables is delayed, we may be required to reduce or delay planned capital expenditures or to incur additional indebtedness. In addition, due to the level of fixed and semi-fixed costs associated with our business, volume decreases could have a material adverse effect on our financial condition, results of operations or liquidity.
Supply chain issues, including shortages of equipment, vehicles and construction supplies, could increase our costs or cause delays in our ability to complete our projects, which could have an adverse impact on our business and our relationships with customers.
We rely on our supply chain for equipment, vehicles and construction supplies in order to complete our projects. A reduction or interruption in supply, including disruptions due to the COVID-19 pandemic, a significant natural disaster, shortages in global freight capacity, significant increases in the price of critical components, a failure to appropriately forecast or adjust our requirements based on our business needs, or volatility in demand for our products and services could materially adversely affect our business, operating results, and financial condition and could materially damage customer relationships. Our vendors and subcontractors also may be unable to meet our demand, significantly increase lead times for deliveries or impose significant price increases that we are unable to offset through alternate sources of supply, price increases to our customers or increased productivity in our operations. In some cases, we procure certain inputs and services from single or limited suppliers or subcontractors. In the event of supply disruptions from these suppliers or subcontractors, we may not be able to diversify our resources for such materials or services in a timely manner or may experience quality issues with alternate sources. Our growth and ability to meet customer demand depend in large part on our ability to obtain timely deliveries of equipment and vehicles from our suppliers, and significant disruptions in their supply could materially adversely affect our business, operating results, and financial condition and could materially damage customer relationships.
Our employees perform services that involve certain risks, including risks of accident, and a failure to maintain a safe work site could result in significant losses.
Safety is a primary focus of our business and is critical to our reputation. Our services can place our employees and others in challenging environments near large equipment, dangerous processes and highly toxic or caustic materials. Our operations involve risks, such as truck accidents, equipment defects, malfunctions and failures, and natural disasters, which could potentially result in releases of CCR materials, injury or death of employees and others, or a need to shut down or reduce the operation of our customers’ facilities while we undertake remedial actions. We are responsible for safety on the sites where we work, and these risks expose us to potential liability for pollution and other environmental damages, personal injury, loss of life, business interruption, and property damage or destruction. Unsafe work conditions also can increase employee turnover, increase costs and raise our operating costs. If we fail to implement appropriate safety procedures and/or our procedures fail, our employees or others may suffer injuries.
Although we maintain functional groups whose primary purpose is to implement effective health, safety, and environmental procedures throughout our company, the failure to comply with such procedures, client contracts, or applicable
regulations could subject us to losses and liability and the potential loss of customers. If we were to incur substantial liabilities above any applicable insurance, our business, results of operations, and financial condition could be adversely affected.
Our financial results may fluctuate from quarter to quarter due to seasonal weather patterns and other factors, making it difficult to predict our future performance.
Consumption of energy is seasonal, and any variation from normal weather patterns, including due to unseasonably cooler or warmer weather, can have a significant impact on energy demand. Additionally, adverse weather conditions, such as hurricanes, tropical storms, and severe cold weather, may interrupt or curtail our operations or our customers’ operations and result in a loss of revenue and damage to our equipment and facilities, which may or may not be insured.
Our byproduct services and raw material sales offerings are also subject to quarterly fluctuations from time to time. For these reasons, comparing our financial results on a period-to-period basis may not be meaningful, and our past results should not be relied on as an indication of our future performance. Our future quarterly and annual expenses as a percentage of our revenue may be significantly different from those we have recorded in the past or which we expect for the future. Our financial results in some quarters may fall below expectations. Changes in cost estimates relating to our services, which under the cost-to-cost input method of accounting principles could lead to significant fluctuations in revenue or changes in the timing of our recognition of revenue from such services, could cause our stock price to fall.
We operate in a highly competitive industry and may not be able to compete effectively with larger and better-capitalized companies.
While no specific company provides the range of services that we offer, the industries in which we operate are highly competitive and require substantial labor and capital resources. Some of the markets in which we compete or plan to compete are served by one or more large national companies and regional and local companies of varying sizes and resources, some of which may have accumulated a substantial reputation in their markets. Some of our competitors may also be better capitalized than we are, have greater name recognition than we do, or provide or be willing to bid their services at a lower price than we may be willing to offer. Our inability to compete effectively could hinder our growth or adversely impact our business, financial condition and results of operations.
We are vulnerable to significant fluctuations in our liquidity or capital requirements that may vary substantially over time.
Our operations require us to utilize large sums of working capital from time to time, sometimes on short notice and sometimes without assurance of recovery of the expenditures. Environmental liabilities could result in significant cash outflows, including those arising from various customer contracts and acquisition agreements that require us to indemnify for certain environmental liabilities, litigation risks, unexpected costs or losses resulting from acquisitions, contract initiation or completion delays, political conditions, client payment problems and professional liability claims.
We rely on technology in our business, and any technology disruption or delay in implementing new technology could adversely affect our business, financial condition, results of operation and cash flows.
We invest in new technology and processes to provide higher-margin offerings for our customers while limiting and managing our environmental risk. We also depend on digital technologies to process and record financial and operating data, and we rely on sophisticated information technology systems and infrastructure to support our business, including process control technology. The failure of our technology initiatives and systems to perform as we anticipate or a delay in implementing new technology could adversely affect our business, financial condition, results of operations and cash flows. For example, the roll-out of our technology initiatives, including our EnviroSourceTM ash beneficiation technology, has been slower than previously anticipated, resulting in lower than expected contribution to operating results.
Additionally, if competitors implement new technologies before we do, allowing such competitors to provide lower-priced or enhanced services of superior quality compared to those we provide, this could have an adverse effect on our financial condition, results of operations and cash flows.
If we are unable to protect the confidentiality of our trade secrets fully, or if competitors are able to replicate our technology or services, we may suffer a loss in our competitive advantage or market share.
Though we do not have patents or patent applications relating to many of our key processes and technology, if we cannot maintain our trade secrets' confidentiality, or if our competitors replicate our technology or services, our competitive advantage would be diminished. Further, our competitors may develop or employ comparable technologies or processes.
In addition, third parties, from time to time, may initiate litigation against us by asserting that the conduct of our business infringes, misappropriates, or otherwise violates intellectual property rights. If we are sued for infringement and lose, we could be required to pay substantial damages and/or be enjoined from using or selling the infringing products or technology.
Any legal proceeding concerning intellectual property could be protracted and costly regardless of the merits of any claim, is inherently unpredictable, and could have a material adverse effect on our financial condition, irrespective of its outcome.
Additionally, we currently license certain third-party intellectual property in connection with our business, and the loss of any such license could adversely impact our financial condition and results of operations.
We may be unable to make attractive acquisitions, integrate acquired businesses successfully or successfully complete divestitures, and any inability to do so may disrupt our business and hinder our growth.
From time to time, we may consider opportunities to acquire or make investments in other businesses and business lines that could enhance our technical capabilities, complement our current services, or expand the breadth of our markets. Any completed acquisition's success will depend on our ability to integrate the acquired business into our existing operations effectively. The process of integrating acquired businesses or dispositions may involve unforeseen difficulties or liabilities and may require a disproportionate amount of our managerial and financial resources. Also, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. No assurance can be given that we will be able to identify suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms, or successfully acquire identified targets. Our failure to achieve consolidation savings, integrate the acquired businesses and assets into our existing operations successfully or minimize any unforeseen operational difficulties or liabilities could have a material adverse effect on our business, financial condition and results of operations.
We may be unable to obtain or maintain sufficient bonding capacity, which could preclude us from bidding on certain projects.
A significant number of our contracts require performance and payment bonds. Sureties typically issue or continue bonds on a project-by-project basis, and they can decline to do so at any time or require the posting of additional collateral as a condition thereto. Our ability to obtain performance and payment bonds primarily depends on our capitalization, working capital, past performance, management expertise, reputation and certain external factors, including the overall capacity of the surety market. Events that adversely affect the insurance and bonding markets generally may result in bonding becoming more difficult or costly to obtain in the future. If we are unable to obtain or renew a sufficient level of bonding, or if bonding costs were to increase, we may be precluded from bidding on certain projects or successfully contracting with certain customers, which could limit the aggregate dollar amount of contracts that we are able to pursue. In addition, even if we are able to successfully renew or obtain performance or payment bonds, we may be required to post letters of credit in connection with such bonds, which could negatively affect our liquidity and results of operations.
Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations.
Our debt consists primarily of our borrowings under the Company’s 8.50% Senior Notes due 2026 (the “Notes”) and for equipment financing through notes payables and lease obligations. As of December 31, 2022, the Company had total indebtedness of $204.4 million, excluding debt issuance costs of $10.0 million. A significant portion of our cash flow is required to pay interest and principal on our outstanding indebtedness, and we may be unable to generate sufficient cash flow from operations or have future borrowings available to enable us to repay our indebtedness or to fund other liquidity needs.
Our indebtedness could have significant consequences, including the following:
•require us to use a significant percentage of our cash flow from operations for debt service and the satisfaction of repayment obligations, and not for other purposes;
•limit our ability to borrow money or issue equity to fund our working capital, capital expenditures, acquisitions and debt service requirements;
• limit our flexibility in planning for, and reacting to, changes in our business;
• place us at a competitive disadvantage if we are more leveraged than our competitors;
• limit our ability to deduct our interest expense;
• make us more vulnerable to adverse economic and industry conditions; and
• limit our ability to exploit business opportunities.
To the extent that we incur new debt in addition to our current debt levels, the leverage risks described above would increase.
We are subject to cyber security risks and interruptions or failures in our information technology systems. A cyber incident could occur and result in information theft, data corruption, operational disruption, and/or financial loss.
We depend on digital technologies to process and record financial and operating data, and we rely on sophisticated information technology systems and infrastructure to support our business, including process control technology. At the same time, cyber incidents, including deliberate attacks, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber-security threats. Our technologies, systems, and networks and those of our vendors, suppliers and other business partners may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of proprietary and other information, or other disruption of business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Despite our considerable expenditures and efforts to secure our systems, our systems for protecting against cyber security risks may not be sufficient. As the sophistication of cyber incidents continues to evolve, we will likely be required to expend additional resources to continue modifying or enhancing our protective measures or investigate and remediate any vulnerability to cyber incidents. Additionally, these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, cyber-attacks, or other security breaches or similar events. The failure of any of our information technology systems may cause disruptions in our operations, which could adversely affect our revenue and profitability.
In the normal course of business, we may be subject to judicial, administrative, or other third-party proceedings that could materially and adversely affect our reputation, business, financial condition, results of operations, and liquidity.
We have in the past been, and may in the future be, named as a defendant in lawsuits, claims, and other legal proceedings during the ordinary course of our business. In the future, individuals, citizen groups, trade associations, community groups, or environmental activists may bring actions against us in connection with our operations that could interrupt or limit the scope of our business. Many of these proceedings could raise difficult and complicated factual and legal issues and are subject to uncertainties and complexities. These proceedings may seek, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination, breach of contract, property damage, punitive damages, civil penalties, or other losses, consequential damages, or injunctive or declaratory relief. Also, under our service agreements, we generally indemnify our customers for claims related to our conduct and the services we provide thereunder.
With respect to all such proceedings, we have and will, when warranted in the future, accrue expenses in accordance with accounting principles generally accepted in the United States (“GAAP”). If such actions or indemnities are ultimately resolved unfavorably at amounts exceeding our accrued expenses or at material amounts, the outcome could materially and adversely affect our reputation, business, financial condition, and results of operations. In addition, payments of significant amounts, even if reserved, could adversely affect our liquidity position.
We recognize revenue from construction contracts using the cost-to-cost input method; therefore, variations of actual results from our assumptions may reduce our profitability.
We recognize revenue from construction contracts using the cost-to-cost input method permitted under GAAP, under which we measure the percentage of revenue to be recognized in a given period by the percentage of costs incurred to date on the contract to the total estimated costs for the contract. The cost-to-cost input method, therefore, relies on estimates of total expected contract costs. Contract revenue and total cost estimates are reviewed and revised on an ongoing basis as the work progresses. Adjustments arising from changes in the estimates of contracts revenue or costs are reflected in the fiscal period in which such estimates are revised. Estimates are based on management’s reasonable assumptions, judgment and experience but are subject to the risks inherent in estimates, including unanticipated delays or technical complications. Variances in actual results from related estimates on a large project or on several smaller projects could be material to our results of operations. The full amount of an estimated loss on a contract is recognized in the period such a loss is identified. Such adjustments and accrued losses could reduce profitability, which could negatively impact our financial condition and results of operations.
Our balance sheet includes a significant amount of goodwill which has been subject to impairment. A decline in our reporting unit's estimated fair value could result in impairment charges, which would be recorded as a non-cash expense in our consolidated statement of operations.
Goodwill must be tested for impairment no less than annually. The fair value of the goodwill assigned to our reporting unit could decline if projected revenue or cash flows were to be lower in the future due to the timing of new awards or other causes.
As of December 31, 2022, we had $62.2 million of goodwill on our balance sheet, which represents 18% of our total assets. No impairment charges to goodwill were identified during the year ended December 31, 2022. However, changes in our
operations' future outlook could result in impairment charges, which could have a material adverse effect on our results of operations and financial condition.
There is substantial doubt about our ability to continue as a going concern. If we are unable to successfully implement our business plans and strategies, including the consummation of the transactions contemplated in the Merger Agreement with SER Capital (the "Merger") as discussed herein, our consolidated results of operations, financial position, liquidity and ability to continue as a going concern could be negatively affected. We cannot be sure if or when the Merger will be completed.
The consummation of the Merger is subject to the satisfaction or waiver of various conditions, including the authorization of the Merger by our stockholders. We cannot guarantee that the closing conditions set forth in the Merger Agreement will be satisfied. If we are unable to satisfy the closing conditions in SER Capital Partners’ favor or if other mutual closing conditions are not satisfied, SER Capital Partners will not be obligated to complete the Merger. Under certain circumstances, we would be required to pay SER Capital Partners a termination fee of $3.5 million.
If the Merger is not completed, our board of directors, in discharging its fiduciary obligations to our stockholders, will evaluate other strategic alternatives or financing options that may be available, which alternatives may not be as favorable to our stockholders as the Merger. Any future sale or merger, financing or other transaction may be subject to further stockholder approval. We may also be unable to find, evaluate or complete other strategic alternatives, which may have a materially adverse effect our business.
Our efforts to complete the Merger could cause substantial disruptions in, and create uncertainty surrounding, our business, which may materially adversely affect our results of operation and our business. Uncertainty as to whether the Merger will be completed may affect our ability to retain and motivate existing employees. A substantial amount of our management’s and employees’ attention is being directed toward the completion of the Merger, and thus is being diverted from our day-to-day operations. Uncertainty as to our future could adversely affect our business and our relationship with customers, suppliers, vendors, regulators and other business partners. For example, customers, suppliers, vendors and other counterparties may defer decisions concerning working with us, or seek to change existing business relationships with us. Changes to, or termination of, existing business relationships could adversely affect our results of operations and financial condition, as well as the market price of our common stock. The adverse effects of the pendency of the transactions could be exacerbated by any delays in completion of the transactions or termination of the Merger Agreement.
Until the Merger is completed, the Merger Agreement restricts us from taking specified actions without the consent of the other party, and, in regards to us, requires us to operate in the ordinary course of business consistent with past practice. These restrictions may prevent us from making appropriate changes to our respective businesses or pursuing attractive business opportunities that may arise prior to the completion of the Merger.
Risks Related to Our Common Stock
Our stock's market price may be influenced by many factors, some of which are beyond our control.
These factors include the various risks described in this section as well as the following:
•the failure of securities analysts to continue to cover our common stock or changes in financial estimates or recommendations by analysts;
•announcements by us or our competitors of significant contracts, acquisitions, or capital commitments;
•changes in market valuation or earnings of our competitors;
•variations in quarterly operating results;
•internal control failures;
•changes in management;
•availability of capital;
•general economic conditions;
•terrorist acts;
•natural disasters and pandemics;
•legislation;
•future sales of our common stock; and
•investor perception of us and the power generation industry.
Additional factors that do not specifically relate to our company or the electric utility industry may also materially reduce our common stock market price, regardless of our operating performance.
The concentration of our capital stock will limit other stockholders’ ability to influence corporate matters.
Bernhard Capital Partners Management, LP and its affiliates (“BCP”) beneficially own 71% of the total voting power of our outstanding shares of common stock and all of the outstanding Series A and Series B Preferred Stock (collectively, the “Preferred Stock”). The Preferred Stock is convertible at BCP's option at any time into shares of common stock. As a result, BCP can exert substantial influence or actual control over our management and affairs and most matters requiring our stockholders' actions. The interests of BCP may not coincide with the interests of the other holders of our common stock. This concentration of ownership may also affect delaying or preventing a change in control otherwise favored by our other stockholders, which could depress our common stock's market price.
BCP and its respective affiliates are not limited in their ability to compete with us, and the corporate opportunity provisions in our amended and restated certificate of incorporation could enable BCP to benefit from corporate opportunities that might otherwise be available to us.
Our governing documents provide that BCP and its respective affiliates (including portfolio investments of BCP and its affiliates) are not restricted from owning assets or engaging in businesses that compete directly or indirectly with us. In particular, subject to the limitations of applicable law, our amended and restated certificate of incorporation, among other things:
• permits BCP and its respective affiliates to conduct business that competes with us and to make investments in any kind of property in which we may make investments; and
• provides that if BCP or its respective affiliates, or any employee, partner, member, manager, officer or director of BCP or its respective affiliates, which is also one of our directors or officers, becomes aware of a potential business opportunity, transaction, or other matter, they will have no duty to communicate or offer that opportunity to us.
BCP or its respective affiliates may become aware, from time to time, of certain business opportunities (such as acquisition opportunities) and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Furthermore, such businesses may choose to compete with us for these opportunities, possibly causing these opportunities to not be available to us or causing them to be more expensive for us to pursue. In addition, BCP and its respective affiliates may dispose of properties or other assets in the future without any obligation to offer us the opportunity to purchase any of those assets. As a result, our business or prospects may be negatively affected if such parties procure attractive business opportunities for their benefit rather than for ours.
We have engaged in transactions with our affiliates, and we may do so in the future. The terms of such transactions and the resolution of any conflicts that may arise may not always be in our or our stockholders’ best interests.
We have engaged in transactions with affiliated companies in the past and may do so in the future. The terms of such transactions and the resolution of any conflicts that may arise may not always be as favorable as may be obtained with a third party.
Our amended and restated certificate of incorporation and amended and restated bylaws, as well as Delaware law, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock.
Our amended and restated certificate of incorporation authorizes our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. Also, some provisions of our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders, including:
• after BCP and its affiliates no longer collectively hold more than 35% of the voting power of our common stock, providing that all vacancies, including newly created directorships, may, except as otherwise required by law or, if applicable, the rights of holders of a series of preferred stock, only be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum (before such time, vacancies may also be filled by stockholders holding a majority of the outstanding shares entitled to vote);
• after BCP and its affiliates no longer collectively hold more than 35% of the voting power of our common stock, permitting any action by stockholders to be taken only at an annual meeting or special meeting rather than by written consent of the stockholders, subject to the rights of any series of preferred stock concerning such rights;
• after BCP and its affiliates no longer collectively hold more than 35% of the voting power of our common stock, permitting our amended and restated certificate of incorporation and amended and restated bylaws to be amended by the affirmative vote of the holders of at least two-thirds of our then outstanding shares of stock entitled to vote thereon;
• after BCP and its affiliates no longer collectively hold more than 35% of the voting power of our common stock, permitting special meetings of our stockholders to be called only by our board of directors pursuant to a resolution adopted by the affirmative vote of a majority of the total number of authorized directors whether or not there exist any vacancies in previously authorized directorships (before such time, a special meeting may also be called at the request of stockholders holding a majority of the outstanding shares entitled to vote);
• after BCP and its affiliates no longer collectively hold more than 35% of the voting power of our common stock, requiring the affirmative vote of the holders of at least 75% in voting power of all then outstanding common stock entitled to vote generally in the election of directors, voting together as a single class, to remove any or all of the directors from office at any time, and directors will be removable only for “cause”
• dividing our board of directors into three classes of directors, with each class serving staggered three-year terms;
• prohibiting cumulative voting in the election of directors;
• establishing advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders; and
• providing that the board of directors is expressly authorized to adopt or alter or repeal our amended and restated bylaws.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that our stockholders may initiate, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees, or agents.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees, agents, or stockholders to us or our stockholders, (iii) any action asserting a claim against us or any director, officer, employee, or agent of ours arising under any provision of the Delaware General Corporation Law (the “DGCL”), our amended and restated certificate of incorporation or our amended and restated bylaws, or (iv) any action asserting a claim that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our amended and restated certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees, or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, or results of operations.
We do not intend to pay cash dividends on shares of our common stock. Consequently, your only opportunity to achieve a return on your investment is if our common stock price appreciates.
We do not plan to declare cash dividends on shares of our common stock in the foreseeable future. Additionally, our debt agreements place certain restrictions on our ability to pay cash dividends on common stock. Consequently, your only opportunity to achieve a return on your investment in us will be if you sell your common stock at a price higher than you paid for it. There is no guarantee that our common stock price will prevail in the market will ever exceed the price you paid for it.
Shares eligible for future sale may cause our common stock's market price to drop significantly, even if our business is doing well.
Our common stock market price could decline due to sales of a large number of shares of our common stock in the market or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
On November 14, 2022 and March 16, 2020, respectively, we issued $30.0 million and $26.0 million in Preferred Stock to BCP, the terms of which could adversely affect the voting power or value of our common stock.
We currently have 30 (thirty thousand) shares of Series B Preferred Stock outstanding, which is convertible at BCP's option at any time following the three-month anniversary of the issuance date into shares of common stock with an initial conversion price of $17.40 per share following the December 29, 2022 reverse stock split. In addition, we currently have 26 (twenty-six thousand) shares of Series A Preferred Stock outstanding, which is convertible at BCP's option at any time following the three-month anniversary of the issuance date into shares of common stock with an initial conversion price of $27.70 per share following the December 29, 2022 reverse stock split. Dividends on the Series A Preferred Stock will be payable quarterly at a rate of 13% per annum, provided that we pay dividends in-kind through the issuance of additional shares to BCP. Our Preferred Stock gives BCP a superior right to our assets upon liquidation compared to our common stock and could adversely impact the voting power or value of our common stock. For example, our preferred stock provides BCP the right to nominate one member of the Company's board of directors and the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences assigned to BCP could affect the common stock's residual value.
Taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our common stock less attractive to investors.
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). An emerging growth company may take advantage of certain reduced reporting and other generally applicable public company requirements. Under these reduced disclosure requirements, emerging growth companies are not required to, among other things, comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, provide certain disclosures regarding executive compensation, hold stockholder advisory votes on executive compensation, or obtain stockholder approval of any golden parachute payments not previously approved. In addition, emerging growth companies have extended phase-in periods to adopt new or revised financial accounting standards.
We intend to take advantage of all of the reduced reporting requirements and exemptions, including the extended phase-in periods for adopting new or revised financial accounting standards under Section 107 of the JOBS Act, until we are no longer an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until those standards apply to private companies.
Our election to use the longer phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the extended phase-in periods under Section 107 of the JOBS Act and who will comply with new or revised financial accounting standards. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our common stock price may be more volatile.
The requirements of being a public company may strain our resources, increase our costs and divert management’s attention, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company, we are required to comply with the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) as well as rules and regulations implemented by the SEC. We have incurred, and expect to continue to incur significant legal, regulatory, finance, accounting, investor relations and other expenses relating to compliance with these rules and regulations. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board, our Board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to fines, sanctions and other regulatory action and potentially civil litigation.
If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our common stock, or our operating results do not meet their expectations, our stock price could decline.
Our common stock's trading market is influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us
regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company adversely changes their recommendation concerning our common stock or if our operating results do not meet their expectations, our stock price could decline.
We have identified material weaknesses in our internal control over financial reporting. If we fail to remediate the material weakness, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, is designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in the implementation, could cause us to fail to meet our reporting obligations. In addition, any testing by us, as and when required, our independent registered public accounting firm may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
As previously disclosed in our Annual Report on Form 10-K for the twelve months ended December 31, 2021, we identified the following control deficiencies which aggregated to a material weakness in control design: (i) lack of a sufficient number of trained resources with assigned responsibilities and accountability for the design and operation of internal controls over financial reporting; (ii) lack of formal and effective controls over certain financial statement account balances; (iii) lack of user profiles to ensure adequate restriction of users to perform only transactions that are consistent with their function; and (iv) lack of appropriate segregation of duties within the accounting and finance functions, including order to cash, process to pay and payroll business processes.
Due to the lack of remediation of the previously disclosed material weakness, in combination with additional deficiencies identified by management in connection with preparation of this Annual Report on Form 10-K for the year ended December 31, 2022, management determined that, in the aggregate, there are additional material weaknesses in our internal control over financial reporting, as follows:
▪Control Environment – We failed to remediate the previously disclosed deficiency related to a lack of sufficient number of trained resources with assigned responsibility and accountability for the design and operation of internal controls and reporting. Lack of trained resources contributed to a lack of control awareness and adequate diligence and expertise required to review accounting transactions. This material weakness increased the likelihood of a material misstatement occurring in the Company’s interim and annual financial statements not being prevented or detected.
▪Risk Assessment – We did not have an effective risk assessment process that defined clear financial reporting objectives, that identified and evaluated risks of misstatement due to errors over certain financial reporting processes, or that developed internal controls to mitigate those risks. The lack of an effective risk assessment process contributed to the Company not identifying the previously disclosed fraudulent activities in a timely manner.
▪Control Activities – Given the absence of proper segregation of duties within the accounting and finance functions including order to cash, process to pay, payroll business processes and information and communication, we failed to design control activities that address relevant risks as well as implement and perform effective controls at the level of precision required to identify all potential material errors. The material weaknesses of improper control design around accounting and financial reporting and failure of control operation of adequately designed controls, increased the likelihood of a material misstatement occurring in the Company’s interim and annual financial statements and not being prevented or detected.
▪Information and Communication – We failed to design and implement certain information and communication activities related to obtaining or generating and using relevant quality information to support the functioning of internal control. Specifically, within information technology controls (“GITCs”), there is a lack of segregation of duties controls within the information technology systems utilized by the Company in its financial reporting. The lack of segregation of duties within information technology systems increased the likelihood of a material misstatement occurring in the Company’s interim and annual financial statements and not being prevented or detected.
▪Monitoring – As a result of the material weaknesses described above, we failed to obtain the required resources, implement the required procedures and effectively monitor the internal control environment and allow the Company to respond timely.
We are continuing to evaluate the material weaknesses discussed above and are in the process of executing the plans to remediate these material weaknesses. We expect our remediation plan to include, among other things:
▪Control Environment – (i) Investing in training and hiring personnel with appropriate expertise across the accounting and financial reporting function, (ii) continue communicating and emphasizing the importance of internal control across the Company, and (iii) continue involving and reporting regularly to the Company’s Audit Committee.
▪Risk Assessment – (i) Performing a rigorous scoping and risk assessment process to identify and analyze risk across the various levels of the Company; (ii) identifying and analyzing risks.
▪Control Activities – (i) Enhancing the design of control activities to operate at a level of precision to identify all potential material errors; (ii) training control owners to improve the required retention of documentation evidencing their operation;(iii) implementing revised policies and procedures for corporate expenditures, including spending with corporate credit cards, and the associated approval of those expenditures, and (iv) designing and implementing policies and procedures to address segregation of duties and the risk of fraud..
▪Information and Communication – (i) Designing and implementing controls that review, approve, and periodically re-evaluate the user access privileges for all system users and the business purpose for allowing access for each authorized user to address segregation of duties in information technology systems; (ii) developing and implementing mitigating control procedures to address areas where limitations exist within GITCs or fraud is more likely to occur.
▪Monitoring – (i) Developing a remediation plan with measurable action items and continuous assessment of progression until completion; (ii) developing sustainable and measurable procedures to assess the internal control environment on an ongoing basis.
As we continue to evaluate and take actions to improve our internal control over financial reporting, we will further refine our remediation plan and take additional actions to address control deficiencies or modify certain of the remediation measures described above.
We are still in the process of designing, implementing, documenting, and testing the effectiveness of these processes, procedures and controls. Additional time is required to complete the implementation and to assess and ensure the sustainability of these procedures. We will continue to devote time and attention to these remedial efforts. However, the material weaknesses cannot be considered remediated until the applicable remedial controls are fully implemented, have operated for a sufficient period of time and management has concluded that these controls are operating effectively through testing.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
While many of our employees are embedded directly at our customers’ power generation facilities, we lease our corporate headquarters in Louisville, Kentucky and own and lease other facilities throughout the United States where we conduct business. Our facilities are utilized for operations in our reportable segment and include offices, equipment yards, mines, storage, and manufacturing facilities. As of December 31, 2022, we owned two of our facilities and leased the remainder. We believe that our existing facilities are sufficient for our current needs.
Item 3. Legal Proceedings
We are from time-to-time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. With respect to all such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been incurred, and the amount of loss can be reasonably estimated. Although it is difficult to predict the ultimate outcome of these lawsuits, claims and proceedings, we do not believe that the ultimate disposition of any of these matters, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. We maintain liability insurance for certain risks that is subject to certain self-insurance limits.
Item 4. Mine Safety Disclosures
Not applicable.
Information About Our Executive Officers
The following information is provided for each of the Company's executive officers as of May 31, 2023.
Name | Age | Positions with Charah Solutions | ||||||
Jonathan T. Batarseh | 47 | President, Chief Executive Officer and Director | ||||||
Joseph P. Skidmore | 37 | Chief Financial Officer and Treasurer | ||||||
Jonathan T. Batarseh—President, Chief Executive Officer and Director. Mr. Batarseh is a licensed Certified Public Accountant with more than 25 years of corporate finance and operations experience in the engineering and construction industries. He joined Charah Solutions in October 2022 as the CFO and became the President, Chief Executive Officer and a director in November 2022. Prior to Charah Solutions, Mr. Batarseh was the CFO at Brown & Root Industrial Services beginning in 2016, where he led strategic planning, acquisitions, and optimizing operational effectiveness in addition to overseeing all financial management and reporting, treasury, and information technology. Prior, Mr. Batarseh served as Vice President, Tax at KBR and in senior financial leadership roles in various industrial service companies including The Shaw Group and Atkins. He began his career with 10 years at KPMG serving clients in the manufacturing and industrial sectors. Mr. Batarseh received his Bachelor of Science degree in accounting from Louisiana State University and is a member of the Society of Louisiana CPAs.
Joseph P. Skidmore—Chief Financial Officer and Treasurer. Mr. Skidmore joined Charah Solutions in 2018. Having been promoted with increasing responsibility, he most recently served as Corporate Controller for the past two years before his promotion in November 2022 to become Chief Financial Officer and Treasurer. Prior, Mr. Skidmore began his career at KPMG in audit for close to a decade serving both public and private clients in a variety of industries, including those in the industrial manufacturing sector. Mr. Skidmore earned his Bachelor of Science degree in accounting and finance from the University of Louisville and is a CPA.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock shares and our Notes trade on the OTC Pink marketplace under the trading symbols “CHRA” and "CHRB," respectively.
As of April 10, 2023, there were 2,095 stockholders of record of our common stock. We have not paid dividends on our common stock to date and do not intend to pay dividends in the foreseeable future. Our debt agreements place certain restrictions on our ability to pay cash dividends on common stock and limit our ability to pay cash dividends on preferred equity. We intend to retain earnings to finance the development and expansion of our business. Payment of common and/or stock dividends in the future will depend upon our debt covenants, our ability to generate earnings, our need for capital, our investment opportunities and our overall financial condition, among other things.
Unregistered Sales of Equity Securities and Use of Proceeds
There were no repurchases of our common stock during the three months ended December 31, 2022.
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the historical financial statements and the related notes included in Part II Item 8. Financial Statements and Supplementary Data. The following Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report provides an analysis of our financial condition and results of operations and reasons for material changes therein for the year ended December 31, 2022 as compared to the year ended December 31, 2021 and 2020 ("2021 and 2020"). This discussion contains “forward‑looking statements” reflecting our current expectations, estimates, and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward‑looking statements due to several factors. Factors that could cause or contribute to such differences include, but are not limited to, capital expenditures, economic and competitive conditions, regulatory changes, and other uncertainties, as well as those factors discussed below and elsewhere herein. Please read Cautionary Note Regarding Forward‑Looking Statements. Please read the risk factors and other cautionary statements described under “Item 1A. Risk Factors” included elsewhere herein. Except as required by applicable law, we assume no obligation to update any of these forward‑looking statements.
Charah Solutions, Inc.
Charah Solutions, Inc. (together with its subsidiaries, “Charah Solutions,” the “Company,” “we,” “us” or “our”) was incorporated in Delaware in 2018 in connection with our initial public offering in June 2018 and, together with its predecessors, has been in business since 1987. Since our founding, we have continuously worked to anticipate our customers’ evolving environmental needs, increasing the number of services we provide through our embedded presence at their power generation facilities. Our multi-service platform allows customers to gain efficiencies from sourcing multiple required offerings from a single, trusted partner compared to service providers with a more limited scope.
Overview
We are a leading national service provider of mission-critical environmental services and byproduct recycling to the power generation industry. We offer a suite of remediation and compliance services, byproduct services, raw material sales and Environmental Risk Transfer (“ERT”) services. We also design and implement solutions for complex environmental projects (such as coal ash pond closures) and facilitate coal ash recycling through byproduct marketing and other beneficial use services. We believe we are a partner of choice for the power generation industry due to our quality, safety, domain experience, and compliance record, all of which are key criteria for our customers. In 2022, we performed work at more than 40 coal-fired generation sites nationwide.
On November 19, 2020, the Company sold its Allied Power Holdings LLC (“Allied”) subsidiary engaged in maintenance, modification and repair services to the nuclear and fossil power generation industry to an affiliate of Bernhard Capital Partners Management, LP (“BCP”), the Company’s majority shareholder, in an all-cash deal for $40 million (the “Allied Transaction”) subject to customary adjustments for working capital and other adjustments as set forth in the Purchase Agreement. As described in further detail in Part II, Item 8. Financial Statements and Supplementary Data, the company has presented Allied as discontinued operations in the accompanying consolidated financial statements and related notes.
We operate as a single operating segment, reflecting the suite of end-to-end services we offer our utility partners and how our chief operating decision maker reviews consolidated financial information to evaluate results of operations, assess performance and allocate resources for these services. We provide the following services through our one segment: remediation and compliance services, byproduct services, raw material sales and ERT services. Remediation and compliance services are associated with our customers’ need for multi-year environmental improvement and sustainability initiatives, whether driven by regulatory requirements, power generation customer initiatives or consumer expectations and standards. Byproduct services consist of recurring and mission-critical coal ash management and operations for coal-fired power generation facilities while also supporting both our power generation customers’ desire to recycle their recurring and legacy volumes of coal combustion residuals (“CCRs”), commonly known as coal ash, and our ultimate end customers’ need for high-quality, cost-effective supplemental cementitious materials (“SCMs”) that provide a sustainable, environmentally-friendly substitute for Portland cement in concrete. Our raw materials sales provide customers with the raw materials that are essential to their business while also providing the sourcing, logistics, and management needed to facilitate these raw materials transactions around the globe. ERT services represent an innovative solution designed to meet utility customers' evolving and increasingly complex plant closure and environmental remediation needs. These customers need to retire and decommission older or underutilized assets while maximizing the asset's value and improving the environment. Our ERT services manage the sites' environmental remediation requirements, benefiting the communities and lowering the utility customers' costs
How We Evaluate Our Operations
We use a variety of financial and operational metrics to assess the performance of our operations, including:
•Revenue;
•Gross Profit;
•Operating Income;
•Adjusted EBITDA; and
•Adjusted EBITDA Margin.
Revenue
We analyze our revenue by comparing actual revenue to our internal projections for a given period and to prior periods to assess our performance. We believe that revenue is a meaningful indicator of the demand and pricing for our services.
Gross Profit
We analyze our gross profit, which we define as revenue less cost of sales, to measure our financial performance. We believe gross profit is a meaningful metric because it provides insight into our revenue streams' financial performance without consideration of Company overhead. When analyzing gross profit, we compare actual gross profit to our internal projections for a given period and prior periods to assess our performance.
Operating Income
We analyze our operating income, which we define as revenue less cost of sales, general and administrative expenses, gain on change in contingent payment liability and impairment expense to measure our financial performance. We believe operating income is a meaningful metric because it provides insight into profitability and operating performance based on our assets' cost basis. We also compare operating income to our internal projections for a given period and to prior periods.
Adjusted EBITDA and Adjusted EBITDA Margin
We view Adjusted EBITDA and Adjusted EBITDA Margin, which are non-GAAP financial measures, as important indicators of performance because they allow for an effective evaluation of our operating performance compared to our peers, without regard to our financing methods or capital structure.
We define Adjusted EBITDA as net loss attributable to Charah Solutions, Inc. before income from discontinued operations, net of tax, interest expense, net, loss on extinguishment of debt, impairment expense, gain on change in contingent payment liability, income taxes, depreciation and amortization, equity-based compensation, the Brickhaven contract deemed termination revenue reversal and transaction-related expenses and other items. Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total revenue. See “—Non-GAAP Financial Measures” below for more information and a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.
Key Factors Affecting Our Business and Financial Statements
Ability to Capture New Contracts and Opportunities
Our ability to grow revenue and earnings is dependent on maintaining and increasing our market share, renewing existing contracts, and obtaining additional contracts from proactive bidding on contracts with new and existing customers. We proactively work with existing customers ahead of contract end dates to attempt to secure contract renewals. We also leverage the embedded long-term nature of our customer relationships to obtain insight and capture new business opportunities across our platform.
Seasonality of Business
Based on historical trends, we expect our operating results to vary seasonally. Variations in normal weather patterns can also cause changes in energy consumption which may influence the demand and timing of associated services for our byproduct services offerings. Our byproduct services and raw material sales are also negatively affected during winter months when the use of cement and cement products is generally lower. Inclement weather can impact construction-related activities associated with pond and landfill remediation, which affects the timing of revenue generation for our remediation and compliance services.
Project-Based Nature of Environmental Remediation Mandates
We believe there is a significant pipeline of coal ash ponds and landfills that will require remediation and/or closure in the future. Due to their scale and complexity, these environmental remediation projects are typically completed over longer periods. As a result, our revenue from these projects can fluctuate over time. Some of our revenue from projects is recognized over time using the cost-to-cost input method of accounting for GAAP purposes, based primarily on contract costs incurred to date compared to total estimated contract costs. This method is the most accurate measure of our contract performance because it depicts the company’s performance in transferring control of goods or services promised to customers according to a reasonable measure of progress toward complete satisfaction of the performance obligation. The timing of revenue recorded for financial reporting purposes may differ from actual billings to customers, sometimes resulting in costs and billing in excess of actual revenue. Because of the risks in estimating gross profit margins for long-term jobs, actual results may differ from these estimates.
Byproduct Recycling Market Dynamics
There is a growing demand for recycled coal ash across various applications driven by market forces and governmental regulations, creating the need to dispose of coal ash in an environmentally sensitive manner. Pricing of byproduct services and raw material sales are driven by supply and demand market dynamics as well as the chemical and physical properties of the ash. As demand increases for the end-products that use CCRs’ (i.e., concrete for construction and infrastructure projects), the demand for recycled coal ash also typically rises. These fluctuations affect the relative demand for our services. In recessionary periods, construction and infrastructure spending and the corresponding need for concrete may decline. However, this unfavorable effect may be partially offset by an increase in the demand for recycled coal ash during recessionary periods, given that coal ash is more cost-effective than other alternatives.
Power Generation Industry Spend on Environmental Liability Management and Regulatory Requirements
The power generation industry has increased annual spending on environmental liability management. We believe this results from regulatory requirements and consumer pressure, and the industry’s increasing focus on environmental stewardship. Continued increases in spending on environmental liability management by our customers should result in increased demand for services across our platform.
Many power generation entities are experiencing an increased need to retire and decommission older or less economically viable generating assets while minimizing costs and maximizing the value of the assets and improving the environment. Our ERT services allow these partners to remove the environmental risk and insurance obligations and place control and oversight with a company specializing in these complex remediation and reclamation projects. We believe our broad set of service capabilities, track record of quality service and safety, exacting environmental standards, and a dependable and experienced labor force is a significant competitive advantage. Our work, mission and culture are directly aligned with meeting environmental, social, and governance (“ESG”) standards and providing innovative services to solve our utility customers’ most complex environmental challenges. We have a proven track record of quality, safety, and compliance, and we are committed to reducing greenhouse gas emissions and preserving our environment for a cleaner energy future.
Cost Management and Capital Investment Efficiency
Our principal operating costs consist of labor, material and equipment costs and equipment maintenance. We focus on cost management and efficiency, including monitoring labor costs, both in terms of wage rates and headcount, along with other costs such as materials and equipment. We believe we maintain a disciplined approach to capital expenditure decisions, typically associated with specific contract requirements. Furthermore, we strive to extend our equipment's useful life by applying a well-planned routine maintenance program.
How We Generate Revenue
Our remediation and compliance services primarily consist of designing, constructing, managing, remediating and closing ash ponds and landfills on customer-owned sites.
Our byproduct services include recycling recurring and contracted volumes of coal-fired power generation waste byproducts, such as fly ash, bottom ash, IGCC slag and gypsum byproducts, each of which can be used for various industrial purposes. Byproduct services also include the management of coal ash which is mission-critical to power plants’ daily operations including silo management, on-site ash transportation and capture, and disposal of combustion byproducts from coal-power operations. More than 90% of our services work is time and materials based, cost reimbursable or unit price contracts, which reduces the risk of loss on contracts and provides gross margin visibility. Revenue from management contracts is recognized when the ash is hauled to the landfill or the management services are provided. Revenue from the sale of ash is recognized when it is delivered to the customer. Revenue from construction contracts is recognized using the cost-to-cost input method.
Our raw materials sales provide customers with the raw materials that are essential to their business while also providing the sourcing, logistics, and management needed to facilitate these raw materials transactions around the globe.
Revenue from construction contracts is recognized using the cost-to-cost input method. Revenue from management contracts is recognized when the ash is hauled to the landfill or the management services are provided. Revenue from the sale of ash is recognized when it is delivered to the customer. This combination of one-stop related services deepens customer connectivity and drives long-term relationships, which we believe are critical for renewing existing contracts, winning incremental business from existing customers at new sites and adding new customers.
Overview of Financial Results
In 2022, we won $247 million in contracted new business awards compared to $840 million in 2021 and $715 million in 2020. The 2022 awards included one large and several mid-size and smaller remediation and compliance projects, several ash marketing agreements, and multiple renewals of existing contracts. Revenue contributions from these new awards will be recognized beginning in 2022 and 2023 and, for some awards, continue beyond 2023. We believe that our unique ability to provide a single-source solution for large-scale and complex environmental challenges continues to position us well to capture a significant portion of a large and growing addressable market, although the timing of future awards is uncertain. We believe that regulatory developments in several states as well as at the federal level will positively impact our business opportunities over time as state legislatures and the EPA become more prescriptive in their requirements to remediate ash ponds.
Results of Operations
A discussion of results of operations changes between the years ended December 31, 2022 and 2021 is included below. A discussion of changes between the years ended December 31, 2021 and 2020 can be found in Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 31, 2022.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
The table below sets forth our selected operating data for the years ended December 31, 2022 and 2021.
| Year Ended December 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Construction and service revenue | $ | 246,779 | $ | 261,987 | (15,208) | (5.8) | % | ||||||||||||||||
| Raw material sales | 46,388 | 31,232 | 15,156 | 48.5 | % | ||||||||||||||||||
| Total revenues | 293,167 | 293,219 | (52) | — | % | ||||||||||||||||||
| Construction and service cost of sales | (259,845) | (239,847) | (19,998) | 8.3 | % | ||||||||||||||||||
| Raw material cost of sales | (42,936) | (27,474) | (15,462) | 56.3 | % | ||||||||||||||||||
| Gross (loss) profit | (9,614) | 25,898 | (35,512) | (137.1) | % | ||||||||||||||||||
| General and administrative expenses | (39,365) | (42,189) | 2,824 | (6.7) | % | ||||||||||||||||||
| Gain on sales-type lease | — | 5,568 | (5,568) | (100.0) | % | ||||||||||||||||||
| Gains on sales of real estate, property and equipment, net | 12,245 | 23,543 | (11,298) | (48.0) | % | ||||||||||||||||||
| Gain on ARO settlement, net | 4,789 | 3,623 | 1,166 | 32.2 | % | ||||||||||||||||||
| Other operating expenses from ERT services | (15,372) | (5,078) | (10,294) | 202.7 | % | ||||||||||||||||||
| Impairment expense | (62,271) | (827) | (61,444) | 7,429.7 | % | ||||||||||||||||||
| Operating (loss) income | (109,588) | 10,538 | (120,126) | 1,139.9 | % | ||||||||||||||||||
| Interest expense, net | (18,567) | (15,227) | (3,340) | 21.9 | % | ||||||||||||||||||
| Loss on extinguishment of debt | — | (638) | 638 | 100.0 | % | ||||||||||||||||||
| (Loss) income from equity method investment | (7) | 191 | (198) | (103.7) | % | ||||||||||||||||||
| Loss from continuing operations before income taxes | (128,162) | (5,136) | (123,026) | (2,395.4) | % | ||||||||||||||||||
| Income tax (expense) benefit | 57 | (661) | 718 | (108.6) | % | ||||||||||||||||||
| Net loss | (128,105) | (5,797) | (122,308) | 2,109.8 | % | ||||||||||||||||||
| Less (loss) income attributable to non-controlling interest | (262) | 17 | (279) | (1,641.2) | % | ||||||||||||||||||
| Net loss attributable to Charah Solutions, Inc. | $ | (127,843) | $ | (5,814) | $ | (122,029) | 2,098.9 | % | |||||||||||||||
Construction and Service Revenue. Construction and service revenue decreased $15.2 million, or 5.8%, to $246.8 million for the year ended December 31, 2022, as compared to $262.0 million for the year ended December 31, 2021, primarily driven by net remediation and compliance project completions, partially offset by an increase in byproduct service revenue of $4.6 million due to increased production.
Raw Material Sales. Raw material sales revenue increased $15.2 million, or 48.5%, to $46.4 million for the year ended December 31, 2022 as compared to $31.2 million for the year ended December 31, 2021, primarily driven by increased shipments driven by higher demand.
Gross (Loss) Profit. Gross profit decreased $35.5 million, or 137.1%, to a gross loss of $9.6 million for the year ended December 31, 2022 as compared to a gross profit of $25.9 million for the year ended December 31, 2021. As a percentage of revenue, gross profit was negative 3.3% and positive 8.8% for the years ended December 31, 2022 and 2021, respectively. The decrease in gross profit was directly affected by several factors, including supply chain and logistics issues that impacted two long-term beneficial use projects, increases in estimated costs to complete on certain construction projects, and net project completions and activity that resulted in lower gross profit. Delays in receiving material and obtaining necessary rail and trucking resources and securing necessary off-take agreements resulted in delays in production revenue while overhead costs were still being incurred, leading to margin degradation on the beneficial use projects. During the year ended December 31, 2022, gross loss was $14.6 million on the two beneficial use projects.
General and Administrative Expenses. General and administrative expenses decreased $2.8 million, or 6.7%, to $39.4 million for the year ended December 31, 2022, as compared to $42.2 million for the year ended December 31, 2021. The decrease was primarily attributable to a decrease in employee bonus expenses, partially offset by an increase in severance expense associated with the loss of certain members of management and a reduction-in-force across the Company, bad debt expense, legal and accounting fees, and employee payroll costs.
Gain on sales-type lease. Gain on sales-type lease decreased $5.6 million for the year ended December 31, 2022 due to the recognition of a parcel transferred under a sales-type in 2021 as discussed in Note 6, Balance Sheet Items, to the accompanying consolidated financial statements that did not recur in the year ended December 31, 2022.
Gains on sales of real estate, property and equipment, net. Gains on sales of real estate, property and equipment, net decreased $11.3 million for the year ended December 31, 2022 due to the absence of parcel sales in 2022 at our Gibbons Creek ERT project, and partially offset by the commencement of scrap sales at our Avon Lake and Cheswick ERT projects, which recognized gains on sales of real estate, property and equipment, net of $5.9 million.
Gain on ARO settlement, net. Gain on ARO settlement, net increased $1.2 million for the year ended December 31, 2022 due to increased differences between the estimated costs used in the measurement of the fair value of the Company's AROs and the actual costs incurred for specific remediation tasks recognized on a proportionate basis.
Other operating expenses from ERT services. Other operating expenses from ERT services increased $10.3 million for the year ended December 31, 2022 due to expenses associated with the commencement of operations on the Avon Lake and Cheswick ERT projects in 2022 and an increase in other operating expenses on the Gibbons Creek ERT project primarily driven by increased project management-related expenses recognized for achievement of certain project-related milestones and profitability levels on the project in 2022.
Impairment Expense. Impairment expense increased $61.4 million to $62.3 million for the year ended December 31, 2022, as compared to $0.8 million for the year ended December 31, 2021 primarily driven by (i) a $34.3 million impairment of the Company's customer relationship intangible assets, (ii) a $13.3 million impairment of the Charah Solutions trade name indefinite-lived intangible asset, and (iii) a $14.7 million impairment of the Company's property and equipment, net, finance leases and right-of-use assets.
Interest Expense, Net. Interest expense, net increased $3.3 million, or 21.9%, to $18.6 million for the year ended December 31, 2022, as compared to $15.2 million for the year ended December 31, 2021. The increase was primarily attributable to higher debt balances, a higher weighted-average cost of capital associated with equipment financing and an increase in amortization of debt issuance costs.
Loss on Extinguishment of Debt. Loss on extinguishment of debt decreased $0.6 million during the year ended December 31, 2022 due to the absence of the Company’s write-off of unamortized debt issuance costs related to the Credit Facility in the third quarter of 2021.
Income Tax (Expense) Benefit. Income tax (expense) benefit decreased by $0.7 million to an income tax benefit of $0.1 million for the year ended December 31, 2022, as compared to an income tax expense of $0.7 million during the year ended December 31, 2021. The change in balance was primarily driven by changes in the valuation allowance recorded during the year ended December 31, 2022 as compared to the year ended December 31, 2021 as we were not able to conclude it was more likely than not certain deferred tax assets will be realized.
Net Loss. Net loss increased $122.3 million, or 2,109.8%, to $128.1 million for the year ended December 31, 2022, as compared to $5.8 million for the year ended December 31, 2021.
Consolidated Balance Sheet
The following table is a summary of our overall financial position:
| As of December 31, | Change | ||||||||||||||||
| 2022 | 2021 | $ | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Total assets | $ | 338,543 | $ | 344,107 | $ | (5,564) | |||||||||||
| Total liabilities | 378,252 | 287,778 | 90,474 | ||||||||||||||
| Mezzanine equity | 71,543 | 35,532 | 36,011 | ||||||||||||||
| Total equity | (111,252) | 20,797 | (132,049) | ||||||||||||||
Assets
Total assets decreased $5.6 million, driven primarily by:
▪$62.3 million in impairment charges taken on held and used equipment and vehicles, construction in progress, finance leases, right-of-use assets and intangible assets;
▪$19.4 million in depreciation expense associated with property and equipment assets and finance leases during the year ended December 31, 2022;
▪$11.7 million in non-cash lease expenses associated with right-of-use assets during the year ended December 31, 2022;
▪$5.9 million in intangible asset amortization expense during the year ended December 31, 2022;
▪$5.9 million in contract assets resulting from a decrease in costs and earnings in excess of billings resulting from the timing of the achievement of certain billing-based project milestones and the impact of executed change orders on billings during the year ended December 31, 2022; and
▪$3.6 million in decreases to trade accounts receivable, net from legacy project completions during the year ended December 31, 2022.
These decreases were partially offset by:
▪$58.6 million in property and equipment additions, primarily resulting from the Avon Lake and Cheswick transactions, equipment purchases and new finance leases executed during the year ended December 31, 2022;
▪$32.7 million from the recognition of right-of-use assets on the Company's Consolidated Balance Sheet, resulting from the adoption of ASC 842, Leases; and
▪$2.5 million in cash and restricted cash due to $77.1 million in cash used in operating activities, $49.4 million in cash provided by investing activities and $30.3 million in cash provided by financing activities.
Liabilities
Total liabilities increased $90.5 million, primarily driven by:
•$26.1 million in increases to current and non-current asset retirement obligations (“AROs”) resulting from the AROs acquired in Avon Lake and Cheswick Transaction and partially offset by ARO liabilities settled and gain on ARO settlement, net during the year ended December 31, 2022;
•$23.0 million in proceeds from long-term debt;
•$18.1 million in new finance lease obligations entered into during the year ended December 31, 2022; and
•$15.9 million from operating lease liabilities added in exchange for new right-of-use assets.
These increases were partially offset by:
•$10.6 million in principal payments of long-term debt;
•$9.4 million in principal payments on capital lease obligations; and
•$4.7 million in decreases to accounts payables and accrued expenses from the timing of payments to vendors.
Mezzanine Equity
Total mezzanine equity increased $36.0 million driven by the issuance of $28.8 million of Series B Preferred Stock, paid-in-kind dividends and accretion associated with our Preferred Stock.
Total Equity
Total equity decreased $132.0 million, driven primarily by a $128.1 million net loss.
Liquidity and Capital Resources
Our primary ongoing sources of liquidity and capital resources are cash on the balance sheet, cash flows generated by operating activities, borrowings under the Notes, proceeds from the issuance of common stock and availability under our asset-based lending credit agreement. Due to longer sales cycles, driven by the increase in the size, scope and complexity of remediation and compliance projects that we are bidding on, we have experienced contract initiation delays and project completion delays that have adversely affected our revenue, profitability and overall liquidity. Our long and complex projects require us to expend large sums of working capital, and delays in payment receipts, project commencement or project completion can adversely affect our financial position and the cash flows that typically fund our expenditures.
As discussed in Note 10, Long-Term Debt, on April 28, 2023, the Company entered into Consent and Amendment No. 3 to Credit Amendment ("Amendment No. 3") that, among other things, (i) provides consent to the Merger Agreement (as defined elsewhere herein), subject to certain conditions, provided that it occurs before October 16, 2023, is materially consistent with the terms of the Merger Agreement and related documents, and no event of default, as defined within the Credit Agreement, has occurred or will result from the acquisition; (ii) amends the definition of Progress Billings Cap Amount to be used in certain borrowing base certificates; (iii) amends the definition of the Applicable Rate; (iv) changes the maturity date from November 9, 2025 to January 31, 2024; and (v) consents to an extension of the deadline for certain financial deliverables for the fiscal year ended December 31, 2022. The Company does not have sufficient cash on hand or available liquidity to repay the maturing credit agreement debt, including the outstanding letters of credit, as it becomes due within one year after the date that these consolidated financial statements are issued. This condition, combined with the Company’s recurring losses, negative
operating cash flows, and lack of available liquidity, raises substantial doubt about the Company’s ability to continue as a going concern.
In response, the Company has entered into a definitive agreement to be acquired by SER Capital Partners, which management anticipates will bring necessary funding to support the ongoing operations of the Company, and has implemented certain cost saving strategies to preserve liquidity. Additionally, the Company is currently pursuing a plan to refinance its Credit Agreement before the maturity date and other strategies to secure additional liquidity.
However, these factors are subject to external conditions that are not within the Company’s control, and therefore, implementation of management’s plans cannot be deemed probable. As a result, management has concluded these plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Cash Flows
The following table is a summary of our cash flows for the years ended December 31, 2022 and 2021:
| Year Ended December 31, | Change | ||||||||||||||||
| 2022 | 2021 | $ | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Net cash and restricted cash used in operating activities | $ | (77,134) | $ | (10,166) | $ | (66,968) | |||||||||||
| Cash and restricted cash provided by investing activities | 49,353 | $ | 56,432 | (7,079) | |||||||||||||
| Cash and restricted cash provided by (used in) financing activities | 30,266 | $ | (16,303) | 46,569 | |||||||||||||
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Operating Activities
Net cash and restricted cash used in operating activities increased $67.0 million to $77.1 million of net cash used in operating activities for the year ended December 31, 2022 as compared to $10.2 million of net cash used in operating activities. The change in cash flows used in operating activities was primarily attributable to:
▪an increase in net loss of $122.3 million.
▪an increase in non-working capital adjustments to net loss of $87.3 million, primarily due to an increase of $61.4 million in impairment expense, a decrease of $11.6 million in (gain) loss on sale of property and equipment, $5.6 million in gain on a sales-type lease and an increase of $0.7 million in depreciation and amortization. These changes were partially offset by an increase of $1.2 million in gain on ARO settlement, net and a decrease of $0.6 million in loss on extinguishment of debt during the year ended December 31, 2022.
▪a decrease of $32.0 million from all other operating activities, primarily due to an increase in changes to asset retirement obligations resulting from the additional spend on the Avon Lake, Cheswick and Gibbons Creek ERT projects and an additional change in balance for lease liabilities resulting from the adoption of ASC 842, Leases.
Investing Activities
Net cash and restricted cash provided by investing activities decreased $7.1 million to $49.4 million for the year ended December 31, 2022, as compared to $56.4 million for the year ended December 31, 2021. The change in cash flows provided by investing activities was primarily attributable to a $20.1 million decrease in proceeds from the sales of real estate, property and equipment, primarily from the absence of real estate sales associated with the Gibbons Creek Transaction, partially offset by $3.3 million increase in cash and restricted cash received from the Avon Lake and Cheswick Transactions and a decrease in capital and land improvement expenditures of $3.3 million.
Financing Activities
Net cash and restricted cash provided by (used in) financing activities increased $46.6 million for the year ended December 31, 2022, to $30.3 million provided by financing activities as compared $16.3 million used in financing activities for the year ended December 31, 2021. The change in cash flows provided by financing activities was primarily attributable to a $23.0 million proceeds received from long-term debt, $28.8 million of net proceeds received from the issuance of Series B Preferred Stock, and a $12.5 million decrease in payments of debt issuance costs. These changes were partially offset by a $4.6 million increase in principal payments on finance lease obligations, and the absence of $13.0 million of proceeds from the issuance of common stock.
Working Capital
Our working capital, which we define as total current assets less total current liabilities, was a working capital deficit of $4.7 million at December 31, 2022 as compared to a working capital surplus of $31.5 million as of December 31, 2021. This decrease in net working capital for the year ended December 31, 2022 was primarily due to:
•increases in the current portion of our asset retirement obligations primarily driven by the AROs acquired in the Avon Lake and Cheswick Transaction and the estimated timing of remediation activities of all of our ERT projects;
•decreases in contract assets and trade accounts receivable primarily due to a decrease in the number of remediation and compliance projects and changes in the timing of the related billings and collections associated with these projects;
•increases in current maturities of finance lease obligations and notes payable as a result of new financing transactions; and
•increases in operating lease liabilities added in exchange for new right-of-use assets.
These changes were partially offset by:
•increases in restricted cash associated with the Avon Lake and Cheswick Transactions, partially offset by decreases from the Gibbons Creek restricted cash releases and the cash collateral deposits for our letters of credit; and
•decreases in accounts payable and accrued liabilities, primarily driven by a decrease in the number of remediation and compliance projects and changes in the timing of the related payments to vendors associated with these projects.
Our Debt Agreements
Senior Notes
On August 25, 2021, the Company completed an offering of $135.0 million, in the aggregate, of the Company’s Notes, which amount includes the exercise by the underwriters of their option to purchase an additional $5.0 million aggregate principal amount of Notes.
The Notes were sold pursuant to the Company’s Registration Statement on Form S-1, as amended (File No. 333-258650), which was declared effective by the Securities and Exchange Commission on August 20, 2021. The Notes were issued pursuant to the First Supplemental Indenture (the “First Supplemental Indenture”), dated as of August 25, 2021, between the Company and Wilmington Savings Fund Society, FSB, as trustee (the “Trustee”). The First Supplemental Indenture supplements the Indenture entered into by and between the Company and the Trustee, dated as of August 25, 2021 (the “Base Indenture” and, together with the First Supplemental Indenture, the “Indenture”).
The public offering price of the Notes was 100.0% of the principal amount. The Company received proceeds before payment of expenses and other fees of $135.0 million. The Company used the proceeds, along with cash from the issuance of $13.0 million of common stock, to fully repay and terminate the Company’s Credit Facility, as defined below.
The Notes bear interest at the rate of 8.50% per annum. Interest on the Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing October 31, 2021. The Notes will mature on August 31, 2026.
The Company may redeem the Notes for cash in whole or in part at any time (i) on or after August 31, 2023 and prior to August 31, 2024, at a price equal to 103% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after August 31, 2024 and prior to August 31, 2025, at a price equal to 102% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iii) on or after August 31, 2025 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Notes. If the Company is redeeming less than all of the Notes, the Trustee will select the Notes to be redeemed by such method as the Trustee deems fair and appropriate in accordance with methods generally used at the time of selection by fiduciaries in similar circumstances.
The Indenture also contains customary event of default and cure provisions. If an uncured default occurs and is continuing, the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes may declare the Notes to be immediately due and payable.
The Notes are senior unsecured obligations of the Company and rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness.
As a result of the issuance of the Notes, $12.1 million of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the accompanying consolidated statements of operations using the effective interest method through the maturity date of the Notes.
Asset-Based Lending Credit Agreement
On November 9, 2021, the Company entered into a new Credit Agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, the lenders party thereto and certain subsidiary guarantors named therein. The Credit Agreement provides for a four-year senior secured revolving credit facility with initial aggregate commitments from the lenders of $30.0 million, which includes $5.0 million available for swingline loans, plus an additional $5.0 million of capacity available for the issuance of letters of credit if supported by cash collateral provided by the Company (with a right to increase such amount by up to an additional $5.0 million) (“Aggregate Revolving Commitments”). Availability under the Credit Agreement is subject to a borrowing base calculated based on the value of certain eligible accounts receivable, inventory, and equipment of the Company and subject to redeterminations made in good faith and in the exercise of permitted discretion of JPMorgan. Proceeds of the Credit Agreements may be used for working capital and general corporate purposes.
The Credit Agreement provides for borrowings of either base rate loans or Eurodollar loans. Principal amounts borrowed are payable on the maturity date with such borrowings bearing interest that is payable (i) with respect to base rate loans, monthly and (ii) with respect to Eurodollar loans, the last day of each Interest Period (as defined below); provided that if any Interest Period for a Eurodollar loan exceeds three months, interest will be payable on the respective dates that fall every three months after the beginning of such Interest Period. Eurodollar Loans bear interest at a rate per annum equal to the Adjusted LIBOR for one, three or six months (the “Interest Period”), plus an applicable margin of 2.25%. Base rate loans bear interest at a rate per annum equal to the greatest of (i) the agent bank’s reference rate, (ii) the federal funds effective rate plus 50 basis points and (iii) the rate for one month Adjusted LIBOR loans plus 100 basis points, plus an applicable rate of 125 basis points. The Credit Agreement contains a provision for sustainability adjustments annually that will impact the applicable margin by between positive 0.05% and negative 0.05% based on the achievement, or lack thereof, of certain metrics agreed upon between JPMorgan and the Company and publicly reported through the Company’s annual non-financial sustainability report.
The Credit Agreement is guaranteed by certain of the Company’s subsidiaries and is secured by substantially all of the Company’s and such subsidiaries’ assets. The Credit Agreement contains customary restrictive covenants for asset-based loans that may limit the Company’s ability to, among other things: incur additional indebtedness, sell assets, make loans to others, make investments, pay cash dividends to common stockholders, limit or restrict payments of cash dividends on preferred equity, enter into mergers, make certain restricted payments, incur liens, and engage in certain other transactions without the prior consent of the lenders.
A covenant testing period (“Covenant Testing Period”) is a period in which excess availability (which is defined in the Credit Agreement as the sum of availability and an amount up to $1.0 million) is less than the greater of (a) 12.5% of the lesser of the aggregate revolving commitments and the borrowing base, (b) the lesser of $7.5 million and the PP&E Component as defined in the Credit Agreement, and (c) $3.5 million, for three consecutive business days. During a Covenant Testing Period, the Credit Agreement requires the Company to maintain a fixed charge coverage ratio as defined in the Credit Agreement, determined for any period of twelve (12) consecutive months ending on the last day of each fiscal quarter, of at least 1.00 to 1.00.
As of December 31, 2022, the Company had no borrowings outstanding on the Credit Agreement. Outstanding letters of credit were $10.7 million as of December 31, 2022.
The Company elected to draw down $7.5 million on March 1, 2023 and an additional $1.0 million on March 6, 2023 of the Credit Agreement to fund operating activities. Immediately following this drawdown, after taking into account the terms of the Credit Agreement, as amended, and the negative covenants contained therein, no unused borrowing capacity remained available to the Company under the Credit Agreement and all other current long-term financing arrangements.
On April 28, 2023, the Company entered into Consent and Amendment No. 3 to Credit Amendment ("Amendment No. 3") that, among other things, (i) provides consent to the Merger Agreement (as defined elsewhere herein), subject to certain conditions, provided that it occurs before October 16, 2023, is materially consistent with the terms of the Merger Agreement and related documents, and no event of default, as defined within the Credit Agreement, has occurred or will result from the acquisition; (ii) amends the definition of Progress Billings Cap Amount to be used in certain borrowing base certificates; (iii) amends the definition of the Applicable Rate; (iv) changes the maturity date from November 9, 2025 to January 31, 2024; and (v) consents to an extension of the deadline for certain financial deliverables for the fiscal year ended December 31, 2022.
As a result of entering into the Credit Agreement, $1.4 million of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the accompanying consolidated statements of operations using the
effective interest method through the maturity date of the Credit Agreement.
Previous Credit Facility
On September 21, 2018, we entered into a credit agreement (the “Credit Facility”) by and among us, the lenders party thereto from time to time and Bank of America, N.A., as administrative agent (the “Administrative Agent”). The Credit Facility included:
•A revolving loan not to exceed $50.0 million (the “Revolving Loan”);
•A term loan of $205.0 million (the “Closing Date Term Loan”); and
•A commitment to loan up to a further $25.0 million in term loans, which expired in March 2020 (the “Delayed Draw Commitment” and the term loans funded under such Delayed Draw Commitment, the “Delayed Draw Term Loan,” together with the Closing Date Term Loan, the “Term Loan”).
Pursuant to the terms of the Credit Facility and its related amendments, all amounts associated with the Revolving Loan and the Term Loan under the Credit Facility were set to mature in July 2022. The interest rates per annum applicable to the loans under the Credit Facility were based on a fluctuating rate of interest measured by reference to, at our election, either (i) the Eurodollar rate, currently LIBOR, or (ii) an alternative base rate. Various margins were added to the interest rate based on our consolidated net leverage ratio (as defined in the Credit Facility). Customary fees were payable regarding the Credit Facility and included (i) commitment fees for the unused portions of the Credit Facility and (ii) fees on outstanding letters of credit. Amounts borrowed under the Credit Facility were secured by substantially all of the assets of the Company.
The Credit Facility contained various customary representations, warranties, restrictive covenants, certain affirmative covenants, including reporting requirements, and customary events of default.
During the year ended December 31, 2021, using the proceeds from the Notes, along with cash from the sale of equity to B. Riley, to fully repay and terminate the Credit Facility, the Company paid $114.1 million of outstanding principal on the Closing Date Loan and $12.3 million of outstanding loans on the Revolver. Further, the Company paid $2.0 million of previously accrued fees required as consideration for Amendment No. 3 to Credit Agreement that was otherwise due and payable on the maturity date. During the year ended December 31, 2021, the Company wrote off unamortized debt issuance costs of $0.6 million as a result of this refinancing, which is included in loss on extinguishment of debt in the accompanying consolidated statements of operations.
Equipment Financing Facilities and Finance Lease Equipment Financing
We have entered into various equipment financing arrangements to finance the acquisition of certain equipment (the “Equipment Financing Facilities”). As of December 31, 2022, we had $13.6 million of equipment notes outstanding. Each of the Equipment Financing Facilities includes non-financial covenants, and, as of December 31, 2022, we complied with all such covenants.
We have entered into various equipment finance lease financing arrangements to finance the acquisition of certain equipment. As of December 31, 2022, we had $35.2 million of future minimum lease payments related to this equipment.
Series A Preferred Stock
As a condition to the Third Amendment, the Company entered into an agreement with an investment fund affiliated with Bernhard Capital Partners Management, LP (“BCP”) to sell 26 (twenty-six thousand) shares of Series A Preferred Stock, par value $0.01 per share (the “Preferred Stock”), for net proceeds of $25.2 million in a private placement (the “Preferred Stock Offering”). The Preferred Stock has an initial liquidation preference of $1,000 per share and pays a dividend at the rate of 10% per annum in cash, or 13% if the Company elects to pay dividends in-kind by adding such amount to the liquidation preference. Upon meeting certain “specified payment conditions,” the Company has the ability under the Asset-Based Lending Credit Agreement to pay cash dividends on the Series A Preferred Stock. However, the Company intends to pay dividends-in-kind for the foreseeable future. We used proceeds from the Preferred Stock Offering for liquidity and general corporate purposes.
For more information related to the Series A Preferred Stock, see Note 12 “Mezzanine Equity" to the notes to consolidated financial statements included in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Series B Preferred Stock and Debt Conversion Investments
On November 14, 2022, the Company and an investment fund affiliated with BCP entered into (i) an agreement to sell 30 (thirty thousand) shares of Series B Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”), with an initial aggregate liquidation preference of $30.0 million, net of a 4% Original Issue Discount (“OID”) of $1.2 million for net
proceeds of $28.8 million in a private placement (the “Preferred Stock Investment”), and (ii) a binding term sheet to convert the then-outstanding loans under the Term Loan Agreement into equity interests in the remaining real estate associated with our GCERG and CPERG subsidiaries (the “Debt Conversion Investment”). This real estate has a carrying value of $13.6 million and is classified within real estate, property and equipment, net in the Consolidated Balance Sheets as of December 31, 2022.
The Series B Preferred Stock ranks senior to all classes or series of equity securities of the Company with respect to dividend rights and rights on liquidation. In the event of any liquidation or winding up of the Company, the holder of each share of the Series B Preferred Stock will receive in preference to the holders of the Company common stock a per share amount equal to the greater of (i) the stated value of the Series B Preferred Stock and (ii) the amount such holders would be entitled to receive at such time if the Preferred Stock were converted into Company common stock. Proceeds from the Preferred Stock Investment will be used for liquidity and general corporate purposes.
For more information related to the Series B Preferred Stock, see Note 12 “Mezzanine Equity" to the notes to consolidated financial statements included in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Common Stock Issuances
In August 2021, the Company executed a stock purchase agreement with a previously unrelated third party, B. Riley, and issued 0.3 million shares of common stock at $45.00 per share in a private placement for total proceeds of $13.0 million. Pursuant to the terms of the stock purchase agreement, B. Riley entered into an Investor Rights Agreement and appointed one director to the Company's board of directors.
Material Cash Requirements
The following table sets forth our material cash requirements from contractual obligations as of December 31, 2022.
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | |||||||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Senior Notes | $ | 135,000 | $ | — | $ | — | $ | — | $ | 135,000 | $ | — | $ | — | |||||||||||||||||||||||||||
| Term Loan Agreement | 20,000 | — | 20,000 | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Equipment Financing Facilities | 10,714 | 9,058 | 322 | 1,122 | 212 | — | — | ||||||||||||||||||||||||||||||||||
| Commercial insurance financing agreement | 591 | 591 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Interest on Outstanding Loans | 45,792 | 14,286 | 12,340 | 11,512 | 7,654 | — | — | ||||||||||||||||||||||||||||||||||
| Finance Lease Obligations | 35,176 | 10,592 | 9,118 | 8,356 | 6,190 | 920 | — | ||||||||||||||||||||||||||||||||||
| Interest on Finance Lease Obligations | 4,888 | 2,234 | 1,510 | 815 | 311 | 18 | — | ||||||||||||||||||||||||||||||||||
Operating Lease Obligations(1) | 42,213 | 14,583 | 9,354 | 5,150 | 3,935 | 3,069 | 6,122 | ||||||||||||||||||||||||||||||||||
| Minimum Royalty and purchase obligations | 35,519 | 13,644 | 15,914 | 5,961 | — | — | — | ||||||||||||||||||||||||||||||||||
Total(2) | $ | 329,893 | $ | 64,988 | $ | 68,558 | $ | 32,916 | $ | 153,302 | $ | 4,007 | $ | 6,122 | |||||||||||||||||||||||||||
(1)We lease equipment and office facilities under non-cancellable operating leases.
(2)Contingent payments for acquisitions and the asset retirement obligation are not included in the table above because such payments' timing is uncertain. There are no uncertain tax positions.
Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA and Adjusted EBITDA margin are not financial measures determined in accordance with GAAP.
We define Adjusted EBITDA as net loss attributable to Charah Solutions, Inc. before income from discontinued operations, net of tax, interest expense, net, loss on extinguishment of debt, income taxes, depreciation and amortization, equity-based compensation, impairment expense (including inventory reserves), gain on change in contingent payment liability severance and related costs and transaction-related expenses and other items.. Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total revenue.
We believe Adjusted EBITDA and Adjusted EBITDA margin are useful performance measures because they allow for an effective evaluation of our operating performance compared to our peers, without regard to our financing methods or capital structure. We exclude the items listed above from net loss attributable to Charah Solutions, Inc. in arriving at Adjusted EBITDA because these amounts are either non-recurring or can vary substantially within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net loss attributable to Charah Solutions, Inc. determined according to GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding
and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are reflected in Adjusted EBITDA. Our Adjusted EBITDA presentation should not be construed as an indication that our results will be unaffected by the items excluded from Adjusted EBITDA. Our computations of Adjusted EBITDA may not be identical to other similarly titled measures of other companies. We use Adjusted EBITDA margin to measure our business's success in managing our cost base and improving profitability. The following table presents a reconciliation of Adjusted EBITDA to net loss attributable to Charah Solutions Inc., our most directly comparable financial measure calculated and presented in accordance with GAAP, along with our Adjusted EBITDA margin.
The table below represents the consolidated financial information of Charah Solutions for the years ended December 31, 2022, 2021 and 2020.
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Net loss attributable to Charah Solutions, Inc. | $ | (127,843) | $ | (5,814) | $ | (55,863) | |||||||||||
| Income from discontinued operations, net of tax | — | — | (8,883) | ||||||||||||||
Interest expense, net(1) | 18,567 | 15,227 | 13,774 | ||||||||||||||
Loss on extinguishment of debt(1) | — | 638 | 8,603 | ||||||||||||||
Impairment expense(1) | 62,271 | 827 | 44,572 | ||||||||||||||
Gain on change in contingent payment liability(1) | — | — | (9,702) | ||||||||||||||
Income tax expense (benefit)(1) | (57) | 661 | (914) | ||||||||||||||
Depreciation and amortization(1) | 25,283 | 24,612 | 19,131 | ||||||||||||||
Equity-based compensation(1) | 2,660 | 2,702 | 2,394 | ||||||||||||||
Severance and related costs(1) | 2,956 | — | — | ||||||||||||||
Transaction-related expenses and other items(1)(2) | 1,522 | 1,219 | 1,130 | ||||||||||||||
| Adjusted EBITDA | $ | (14,641) | $ | 40,072 | $ | 14,242 | |||||||||||
Adjusted EBITDA margin(3) | (5.1) | % | 13.7 | % | 6.1 | % | |||||||||||
(1)Represents amounts for continuing operations only.
(2)Represents expenses associated with the Amendment to the Credit Facility, non-recurring legal costs and expenses and other miscellaneous items.
(3)Adjusted EBITDA margin is a non-GAAP financial measure that represents the ratio of Adjusted EBITDA to total revenue. We use Adjusted EBITDA margin to measure the success of our businesses in managing our cost base and improving profitability.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. In connection with preparing our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expense, and related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends and other factors that management believes to be relevant when preparing our consolidated financial statements. Regularly, management reviews the accounting policies, assumptions, estimates, and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ materially from our assumptions and estimates.
Our significant accounting policies are described in Note 2 to our consolidated financial statements included herein. Our critical accounting policies are described below to provide a better understanding of our estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant accounting estimates are important to the representation of our financial position and results of operations and involve our most difficult, subjective or complex judgments. We base our estimates on historical experience and various other assumptions we believe to be reasonable according to the current facts and circumstances through the date of the issuance of our financial statements.
Revenue
To determine revenue recognition for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment, and the decision to combine a group of contracts or
separate a combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. Contracts are considered to have a single performance obligation if the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts primarily because we provide a service that involves multiple inter-related and integrated tasks to achieve the completion of a specific, single project. We allocate the transaction price to each performance obligation for contracts with multiple performance obligations using our best estimate of the stand-alone selling price of each distinct good or service in the contract.
For sales and service contracts where we have the right to consideration from the customer in an amount that corresponds directly with the value received by the customer based on our performance to date, revenue is recognized at a point in time when services are performed and contractually billable. Certain service contracts contain provisions dictating fluctuating rates per unit for the certain services in which the rates are not directly related to changes in the Company’s effort to perform under the contract. We recognize revenue based on the stand-alone selling price per unit for such contracts, calculated as the average rate per unit over the term of those contractual rates. This creates a contract asset or liability for the difference between the revenue recognized and the amount billed to the customer.
Under the typical payment terms of our services contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, at periodic intervals (e.g., weekly, biweekly or monthly).
We recognize revenue over time, as performance obligations are satisfied, for substantially all of our construction contracts due to the continuous transfer of control to the customer. For most of our construction contracts, the customer contracts with us to provide a service that involves multiple inter-related and integrated tasks to complete a specific, single project and is therefore accounted for as a single performance obligation. We recognize revenue using the cost-to-cost input method, based primarily on contract costs incurred to date compared to total estimated contract costs. This method is the most accurate measure of our contract performance because it depicts the company’s performance in transferring control of goods or services promised to customers according to a reasonable measure of progress toward complete satisfaction of the performance obligation.
Contract costs include all direct material, labor and subcontractor costs and indirect costs related to contract performance. The costs incurred that do not relate directly to transferring a service to the customer are excluded from the input method used to recognize revenue. Project mobilization costs are generally charged to the project as incurred when they are an integrated part of the performance obligation being transferred to the client. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client.
It is common for our contracts to contain contract provisions that give rise to variable consideration such as unpriced change orders or volume discounts that may either increase or decrease the transaction price. We estimate the amount of variable consideration at the expected value or most likely amount, depending on which is determined to be more predictive of the amount to which the Company will be entitled. Variable consideration is included in the transaction price when it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include such amounts in the transaction price are based largely on our assessment of legal enforceability, anticipated performance, industry business practices, and any other information (historical, current or forecasted) that is reasonably available to us. Variable consideration associated with unapproved change orders is included in the transaction price only to the extent of costs incurred.
We provide limited warranties to customers for work performed under our contracts. Such warranties are not sold separately, assure that the services comply with the agreed-upon specifications and legal requirements and do not provide customers with a service in addition to assurance of compliance with agreed-upon specifications. Accordingly, these types of warranties are not considered to be separate performance obligations. Historically, warranty claims have not resulted in material costs incurred by the Company.
Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. As a significant change in one or more of these estimates could affect the profitability of our contracts, we routinely review and update our contract-related estimates through a disciplined project review process in which management reviews the progress and execution of our performance obligations and the estimated costs at completion. As part of this process, management reviews information including, but not limited to, outstanding contract matters, progress towards completion, program schedule and the associated changes in estimates of revenue and costs. Management must make assumptions and estimates regarding the availability and productivity of labor, the complexity of the work to be performed, the availability and cost of materials, the performance of subcontractors, and the availability and timing of funding from the customer, along with other risks inherent in performing services under all contracts where we recognize revenue over-time using the cost-to-cost method.
We recognize changes in contract estimates on a cumulative catch-up basis in the period in which the changes are identified. Such changes in contract estimates can result in recognition of revenue in a current period for performance obligations that were satisfied or partially satisfied in prior periods. Changes in contract estimates may also result in the reversal of previously recognized revenue if the current estimate differs from the previous estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the period it is identified.
Contracts are often modified to account for changes in contract specifications and requirements. Most of our contract modifications are for goods or services that are not distinct from existing contracts due to the significant integration provided in the context of the contract and are accounted for as if they were part of the original contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. We account for contract modifications when the modification results in the promise to deliver additional goods or services that are distinct and the increase in the price of the contract is for the same amount as the stand-alone selling price of the additional goods or services included in the modification.
Indefinite-Lived Intangible Assets
We assess our trade name indefinite-lived intangible asset at least annually as of October 1 for impairment, or more frequently if certain events occur or circumstances change that would more likely than not reduce the fair value of an indefinite-lived intangible asset below its carrying value. The Charah Solutions trade name fair value is based upon the income approach, primarily utilizing the relief from royalty methodology. This methodology assumes that a third party would be willing to pay a royalty to obtain the rights to use the comparable asset in place of ownership. An impairment loss is recognized when the intangible asset's estimated fair value is less than the carrying value. Fair value calculation requires significant judgments in determining both the asset's estimated cash flows and the appropriate discount and royalty rates applied to those cash flows to determine fair value. Variations in economic conditions or a change in general consumer demands, operating results estimates or the application of alternative assumptions could produce significantly different results.
During the year ended December 31, 2022, we performed a quantitative assessment of our trade name indefinite-lived intangible asset and determined there was impairment of $13.3 million, primarily as a result of decreases in projected revenue, operating results and the royalty rate used in the valuation that was primarily attributable to the recent performance of the Company.
During the year ended December 31, 2020, we recorded an impairment of our Charah Solutions trade name intangible asset of $21.0 million. As part of the October 1, 2020 annual impairment test, we identified a decrease in the royalty rate used in the valuation primarily attributable to the Company's recent performance.
Some of the inherent estimates and assumptions used in determining the fair value of the indefinite-lived intangible asset are outside management control, including interest rates, cost of capital, tax rates and credit ratings. As for the indefinite-lived intangible asset, the most significant assumptions used are the projected revenue, operating results, revenue growth rate, the royalty rate, and the discount rate.
Deferred Taxes, Valuation Allowance
As discussed in Note 19, Income Taxes, to our consolidated financial statements, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. We record a valuation allowance to reduce certain deferred tax assets to amounts that are more-likely-than-not to be realized. We evaluate the realizability of our deferred tax assets by assessing the valuation allowance and adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include our forecast of future taxable income exclusive of reversing temporary differences and carryforwards, future reversals of existing taxable temporary differences and available tax planning strategies that could be implemented to realize the net deferred tax assets.
Based on the available evidence as of December 31, 2022 and 2021, we could not conclude it is more likely than not certain deferred tax assets will be realized. Therefore, a valuation allowance of $50.3 million and $19.9 million, respectively, was recorded against our deferred tax assets. We will continue to evaluate the need for a valuation allowance on our deferred tax assets in future periods.
Asset Retirement Obligations
The Company has land and structural fill assets with corresponding obligations to restore such assets at the end of their operation. Estimating the future closure and post-closure costs is difficult and requires management to make estimates and judgments because these obligations are over many years in the future. Asset retirement obligations (“ARO”) associated with retiring long-lived assets are recognized as a liability in the period in which a legal obligation is incurred and becomes
determinable. The ARO liability reflects the estimated present value of the closure and post-closure activities associated with the Company’s land and structural fill assets. The Company utilizes current retirement costs to estimate the expected cash outflows for retirement obligations.
Inherent in the present value calculation are numerous assumptions and judgments, including the ultimate settlement amounts, inflation factors, credit-adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the land and/or structural fill balance. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. Gains and losses on ARO settlement are recognized as specific remediation tasks are performed. These gains and losses are determined based on the differences between the estimated costs used in the measurement of the fair value of the Company's AROs and the actual costs incurred for specific remediation tasks recognized on a proportionate basis.
Recent Accounting Pronouncements
Please see Note 2, “Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements” and “Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” to our historical consolidated financial statements as of and for the years ended December 31, 2022 and 2021, included elsewhere herein, for a discussion of recent accounting pronouncements.
Under the JOBS Act, we meet the definition of an “emerging growth company,” which allows us to have an extended transition period for complying with new or revised accounting standards under Section 107(b) of the JOBS Act. We intend to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for adopting new or revised financial accounting standards under Section 107(b) of the JOBS Act until we are no longer an emerging growth company.
Item 7A. Quantitative and Qualitative Disclosure About Market Risks
Market risk is the risk of loss arising from adverse changes in market rates and prices. Currently, our market risks relate to potential changes in the fair value of our long-term debt due to fluctuations in applicable market interest rates. We expect that in the future, our market risk exposure generally will be limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes.
Interest Rate Risk
Our cash consists of cash in readily available checking accounts. Outstanding borrowing under our Credit Agreement bear interest at a variable rate; however, there were no outstanding borrowings on our Credit Agreement as of December 31, 2022. As a result, the fair value of our long-term debt is relatively insensitive to interest rate changes.
Credit Risk
While we are exposed to credit risk in the event of non-performance by counter parties, the majority of our customers are investment-grade companies, and we do not anticipate non-performance. We mitigate the associated credit risk by performing credit evaluations and monitoring the payment patterns of our customers.
Off-Balance Sheet Arrangements
We currently have no material off-balance sheet arrangements as referenced in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and the related notes begin on page F-1 herein.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is processed, recorded, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer and Treasurer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer and Treasurer concluded, as of December 31, 2022, the disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting described below.
Notwithstanding the identified material weaknesses disclosed below, management, including our Chief Executive Officer and Chief Financial Officer and Treasurer, believes the consolidated financial statements included in this Annual Report on Form 10-K fairly represent, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with U.S. GAAP.
Background
In December 2022, the Company was notified by a whistleblower that certain employees had engaged in improper spending activities at one of our project sites. In response, the Company conducted an internal investigation that substantiated the whistleblower's allegations. The Company engaged external legal counsel and a forensic accounting investigation team to thoroughly assess the extent of the fraudulent activities. Based on specific assumptions and limitations, we determined a range of probable, or potentially fraudulent, transactions believed to have been billed to a customer from 2018 through 2022. The investigation will continue to proceed through the legal process, which includes examining the extent of involvement of the customer or any third parties in contributory responsibility, evaluating the extent of insurance coverage available for reimbursement of the Company's losses, and collaborating with external law enforcement agencies to ascertain the full scope and magnitude of the overall fraudulent scheme. Management concluded that our system of internal control over financial reporting did not timely identify the fraudulent activities as part of the evaluation of the effectiveness of the internal controls. See Note 17 Commitments and Contingencies for further discussion.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). The Company’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer and Treasurer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its financial statements for external reporting purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company’s internal control over financial reporting is based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO framework”). Our internal control over financial reporting system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Management evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 based on the criteria established in the COSO Framework. Based on this evaluation, management, with the participation
of the Chief Executive Officer and Chief Financial Officer and Treasurer, concluded that, as of December 31, 2022, the Company’s internal control over financial reporting was not effective due to the material weaknesses described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
As previously disclosed in our Annual Report on Form 10-K for the twelve months ended December 31, 2021, we identified the following control deficiencies which aggregated to a material weakness in control design: (i) lack of a sufficient number of trained resources with assigned responsibilities and accountability for the design and operation of internal controls over financial reporting; (ii) lack of formal and effective controls over certain financial statement account balances; (iii) lack of user profiles to ensure adequate restriction of users to perform only transactions that are consistent with their function; and (iv) lack of appropriate segregation of duties within the accounting and finance functions, including order to cash, process to pay and payroll business processes.
Due to the lack of remediation of the previously disclosed material weakness, in combination with additional deficiencies identified by management in connection with preparation of this Annual Report on Form 10-K for the year ended December 31, 2022, management determined that, in the aggregate, there are additional material weaknesses in our internal control over financial reporting, as follows:
▪Control Environment – We failed to remediate the previously disclosed deficiency related to a lack of sufficient number of trained resources with assigned responsibility and accountability for the design and operation of internal controls and reporting. Lack of trained resources contributed to a lack of control awareness and adequate diligence and expertise required to review accounting transactions. This material weakness increased the likelihood of a material misstatement occurring in the Company’s interim and annual financial statements not being prevented or detected.
▪Risk Assessment – We did not have an effective risk assessment process that defined clear financial reporting objectives, that identified and evaluated risks of misstatement due to errors over certain financial reporting processes, or that developed internal controls to mitigate those risks. The lack of an effective risk assessment process contributed to the Company not identifying the previously disclosed fraudulent activities in a timely manner.
▪Control Activities – Given the absence of proper segregation of duties within the accounting and finance functions including order to cash, process to pay, payroll business processes and information and communication, we failed to design control activities that address relevant risks as well as implement and perform effective controls at the level of precision required to identify all potential material errors. The material weaknesses of improper control design around accounting and financial reporting and failure of control operation of adequately designed controls, increased the likelihood of a material misstatement occurring in the Company’s interim and annual financial statements and not being prevented or detected.
▪Information and Communication – We failed to design and implement certain information and communication activities related to obtaining or generating and using relevant quality information to support the functioning of internal control. Specifically, within information technology controls (“GITCs”), there is a lack of segregation of duties controls within the information technology systems utilized by the Company in its financial reporting. The lack of segregation of duties within information technology systems increased the likelihood of a material misstatement occurring in the Company’s interim and annual financial statements and not being prevented or detected.
▪Monitoring – As a result of the material weaknesses described above, we failed to obtain the required resources, implement the required procedures and effectively monitor the internal control environment and allow the Company to respond timely.
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm due to an exemption for emerging growth companies under the JOBS Act.
Management's Remediation Plan
We are continuing to evaluate the material weaknesses discussed above and are in the process of executing the plans to remediate these material weaknesses. We expect our remediation plan to include, among other things:
▪Control Environment – (i) Investing in training and hiring personnel with appropriate expertise across the accounting and financial reporting function, (ii) continue communicating and emphasizing the importance of
internal control across the Company, and (iii) continue involving and reporting regularly to the Company’s Audit Committee.
▪Risk Assessment – (i) Performing a rigorous scoping and risk assessment process to identify and analyze risk across the various levels of the Company; (ii) identifying and analyzing risks.
▪Control Activities – (i) Enhancing the design of control activities to operate at a level of precision to identify all potential material errors; (ii) training control owners to improve the required retention of documentation evidencing their operation;(iii) implementing revised policies and procedures for corporate expenditures, including spending with corporate credit cards, and the associated approval of those expenditures, and (iv) designing and implementing policies and procedures to address segregation of duties and the risk of fraud..
▪Information and Communication – (i) Designing and implementing controls that review, approve, and periodically re-evaluate the user access privileges for all system users and the business purpose for allowing access for each authorized user to address segregation of duties in information technology systems; (ii) developing and implementing mitigating control procedures to address areas where limitations exist within GITCs or fraud is more likely to occur.
▪Monitoring – (i) Developing a remediation plan with measurable action items and continuous assessment of progression until completion; (ii) developing sustainable and measurable procedures to assess the internal control environment on an ongoing basis.
As we continue to evaluate and take actions to improve our internal control over financial reporting, we will further refine our remediation plan and take additional actions to address control deficiencies or modify certain of the remediation measures described above.
We are still in the process of designing, implementing, documenting, and testing the effectiveness of these processes, procedures and controls. Additional time is required to complete the implementation and to assess and ensure the sustainability of these procedures. We will continue to devote time and attention to these remedial efforts. However, the material weaknesses cannot be considered remediated until the applicable remedial controls are fully implemented, have operated for a sufficient period of time and management has concluded that these controls are operating effectively through testing.
Changes in Internal Control Over Financial Reporting
Aside from the identification of the material weaknesses described above and the actions taken as described in Management’s Remediation Plan above to improve the Company’s internal control over financial reporting, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2022 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The Board of Directors
The Company is governed by the Board of Directors and its various committees. The Board and its committees have general oversight responsibility for the affairs of the Company. In exercising its fiduciary duties, the Board represents and acts on behalf of the Company’s stockholders. The Board has adopted written corporate governance policies, principles, and guidelines, known as the Corporate Governance Guidelines. The Board also has adopted (i) a Financial Code of Ethics, which applies to the Company’s principal executive officer, principal financial officer and principal accounting officer or controller and all persons performing similar functions for the Company; and (ii) a Code of Business Conduct and Ethics, which applies to the directors, officers, employees and agents of the Company and its subsidiaries, and members of their immediate family. The Financial Code of Ethics and the Code of Business Conduct and Ethics include guidelines relating to the ethical handling of actual or potential conflicts of interest, compliance with laws, accurate financial reporting, and other related topics.
The number of directors is currently fixed at ten (10) and the Board of Directors currently consists of ten (10) members. The Company’s Amended and Restated Certificate of Incorporation provides for a classified Board of Directors under which the Board is divided into three (3) classes of directors, designated Class I, Class II, and Class III, with each class as nearly equal in number as is reasonably possible. The Company also has one (1) Designated Preferred Director.
Class I Directors
Robert Decenci
Mr. Decensi, 60, has been a member of the Board since November 2022. Mr. Decensi currently serves as the Executive Chairman of the Board for the Company. Mr. Decensi was recently the CEO and Board member of BHI Energy, a utility service company that provides engineering, construction, and maintenance to the power generation and power delivery markets. Prior joining BHI Energy, Mr. Decensi spent 18 years in the utility power generation and power delivery business filling positions in both middle and senior level management. He has worked for several of the largest U.S. blue-chip utilities, including Northeast Utilities, Dominion Energy, Connecticut Light & Power, and Entergy. During his utility tenure, he was part of two major power plant recovery efforts with Northeast Utilities and Entergy. Mr. Decensi served on the Board of Directors for NEI (Nuclear Energy Institute) and has served in several capacities supporting the Institute of Nuclear Power Operations (INPO). He is a graduate of Millersville University of Pennsylvania and attended the University of New Haven Executive MBA Program.
Because of his broad knowledge of the competitive and regulated power generation industry, the Board of Directors believes Mr. Decensi is well qualified to serve on the Board. Mr. Decensi was recommended to the Board of Directors by BCP and has been designated as a BCP Director by the Board pursuant to the Stockholders’ Agreement.
Robert C. Flexon
Mr. Flexon, 64, has been a member of the Board since June 2018. Mr. Flexon served as President and Chief Executive Officer of Dynegy Inc. from June 2011 to June 2018, until its merging with Vistra Energy Corp. in April 2018. Prior to joining Dynegy, Mr. Flexon served as Chief Financial Officer of UGI Corporation (NYSE:UGI) in 2011, and President and Chief Executive Officer of Foster Wheeler AG from 2009 to 2010. Mr. Flexon also served as Chief Financial Officer of NRG Energy, Inc. (NYSE:NRG) from March 2009 to November 2009 and from March 2004 to March 2008 as well as its Chief Operating Officer from March 2008 to March 2009. Prior to joining NRG, Mr. Flexon served as a Vice President in various capacities at Hercules Inc., which he joined in 2000. Previously, Mr. Flexon served with Atlantic Richfield Company for more than 10 years, including as General Auditor from 1998 to 2000, Franchise Manager of ARCO Products from 1996 to 1998 and Controller of ARCO Products from 1995 to 1996. He began his career with the former Coopers & Lybrand public accounting firm in 1980.
Mr. Flexon also serves as Chair of the Board of Pacific Gas and Electric (NYSE: PCG) since July 2020, Director and Chair of Capstone Green Energy (NASDAQ: CGRN) since April 2018, and Director of Charah Solutions Inc. since 2018. Mr. Flexon previously served on the Boards of Dynegy from 2001 to 2018, TransAlta Corporation from 2018 to 2020 and Westmoreland Coal Company from 2016 to 2019. Mr. Flexon is a certified public accountant (inactive) and holds a bachelor’s degree in accounting from Villanova University.
Because of his broad knowledge of the competitive and regulated power generation industry, and executing cultural, operational, and financial restructurings, while achieving top decile safety performance, the Board of Directors believes Mr. Flexon is well qualified to serve on the Board.
L.W. Varner
Mr. Varner, 72, has been a member of the Board since November 2022. Mr. Varner was most recently the CEO and Board member of Select Interior Concepts, a premier installer and nationwide distributor of interior products, leading the company from June 2020 to October 2021 and successfully taking the public company private with a divestiture to Sun Capital Partners. Previously, Mr. Varner was CEO of United Subcontractors, Inc. (USI), the third largest insulation services provider in the United States, from July 2012 to May 2018. During his tenure, he led a transformation of the business through organic growth and strategic M&A that resulted in USI achieving double digit EBITDA margins and an eventual sale of the business, creating significant value for shareholders. From 2004 to 2012, Mr. Varner served as President and CEO of Aquilex Corporation, a leading provider of specialty services to the energy sector. Under his leadership, the company grew revenues by fivefold and achieved record earnings. Prior to joining Aquilex in 2004, Mr. Varner served as President for several global businesses in various equipment/component manufacturing and service industries, orchestrating their growth in new markets through expansion of service and product offerings. He is a graduate of The Citadel in Charleston, South Carolina, and has served on various philanthropic, industry, and community boards. Currently, Mr. Varner serves on the board of directors for Acousti Engineering, Strada Services, and Outdoor Living Supply.
Because of his extensive experience with numerous public companies and his broad knowledge of corporate and financial issues, the Board of Directors believes Mr. Varner is well qualified to serve on the Board. Mr. Varner was recommended to the Board of Directors by B. Riley pursuant to the Investor Rights Agreement.
Class II Directors
Jonathan Batarseh
Mr. Batarseh, 47, has been a member of the Board since October 2022. Mr. Batarseh currently serves as the President and Chief Executive Officer for the Company. Mr. Batarseh also previously briefly served as Treasurer and Chief Financial Officer as well as the Principal Financial Officer and Principal Accounting Officer for the Company. Mr. Batarseh is a licensed Certified Public Accountant (“CPA”) with more than 20 years of corporate finance and accounting experience in the engineering and construction industries. He joined the Company from Brown & Root Industrial Services, a partnership between KBR (NYSE: KBR) and Bernhard Capital Partners providing engineering, procurement, and construction services, where he was CFO for six years, responsible for overseeing all financial management and reporting, treasury, and information technology and services, and where he also served as Vice President in the finance organization of KBR for two years. Previously, Mr. Batarseh served in senior financial leadership roles in various industrial service companies including The Shaw Group, four years, and Atkins, one year, following 10 years at KPMG serving clients in the manufacturing and industrial sectors. Mr. Batarseh received his Bachelor of Science degree in accounting from Louisiana State University and is a member of the Society of Louisiana CPAs and the Tax Executives Institute.
Because of his industry and financial experience, the Board of Directors believes that Mr. Batarseh is well qualified to serve on the Board.
Jack A. Blossman, Jr.
Mr. Blossman, 58, has been a member of the Board since June 2018. Mr. Blossman has been a practicing attorney for more than 25 years, primarily focusing his practice on the utility regulatory field. He is Of Counsel at the New Orleans law firm of Milling Benson Woodward LLP, which he joined in 2017. Prior to his current role, Mr. Blossman worked as a solo practitioner and general consultant. He was a member of the Louisiana Public Service Commission from 1996 to 2008 and served two terms as its chairman from 2002 to 2003 and from 2007 to 2008. From 1993 to 2008, Mr. Blossman served on the board of directors of Parish National Bank before it was acquired by Whitney Holding Corporation. Mr. Blossman currently sits on the Board of Trustees of Louisiana State University. Mr. Blossman holds a bachelor’s degree in general studies from Louisiana State University and a J.D. from Southern University School of Law.
Because of his energy, regulatory and financial experience and legal background, the Board of Directors believes that Mr. Blossman is well qualified to serve on the Board. Mr. Blossman was recommended to the Board of Directors by BCP and has been designated as a BCP Director by the Board pursuant to the Stockholders’ Agreement.
Timothy Alan Simon
Mr. Simon, 67, has been a member of the Board since July 2021. Mr. Simon, Commissioner Emeritus, was appointed to the California Public Utilities Commission (CPUC) by Governor Arnold Schwarzenegger in February 2007 ending his term in December 2012. During his time as commissioner, Mr. Simon served on the Board of Directors of the University of California at Berkeley, Berkeley Energy Collaborative (BERC) and the Energy Imbalance Market (EIM) Regional Taskforce. He also served as Chair of the National Association of Regulatory Utility Commissioners (NARUC) Gas Committee, Chair of the LNG Partnership between the Department of Energy (DOE) and NARUC, founding member of the Call to Action National Gas Pipeline Safety Taskforce with the U.S. DOT, member the NARUC Board of Directors, Critical Infrastructure and
Consumer Affairs Committees, the Wireless Task Force, and Vice-Chair of the Utility Marketplace Access Subcommittee and member of the National Petroleum Council.
Prior to his CPUC appointment, Mr. Simon served as Appointments Secretary in the Office of the Governor, the first African American in California history to hold this post. He also served as Adjunct Professor of Law at Golden Gate University School of Law and the University of California Hastings. Prior to public service, Mr. Simon was an in-house counsel and compliance officer with Bank of America, Wells Fargo, and Robertson Stephens.
In 2013, Mr. Simon created TAS STRATEGIES where he remains Principal today, serving as an attorney and consultant on utility, infrastructure, financial services, and broadband projects. He is a frequent public speaker, expert witness and panelist on energy, infrastructure, diversity, and inclusion.
In 2019, Mr. Simon was elected Chairman of the Board of Directors for the California African American Chamber of Commerce and elected to the University of San Francisco Board of Trustees. He currently serves on the North American Energy Standards Board Advisory Council and is a member of the National Bar Association, Energy Bar Association, The Saint Thomas More Society and the National Board of Directors for the American Association of Blacks in Energy. Mr. Simon received a bachelor’s degree in Economics from the University of San Francisco (Distinguished Alumni), and a Juris Doctor from the U.C. Hastings College of the Law. He is an active member of the State Bar of California.
Because of his broad knowledge of the power generation industry, the Board of Directors believes Mr. Simon is well qualified to serve on the Board. Mr. Simon was recommended to the Board of Directors by BCP and has been designated as a BCP Director by the Board pursuant to the Stockholders’ Agreement.
Class III Directors
Timothy J. Poché
Mr. Poché, 55, has been a member of the Board since May 2020. Mr. Poché is the Chief Financial Officer & Chief Operating Officer at BCP. He serves as a member of the Investment Committee and Portfolio Company Review Committee at BCP, a private equity management firm which directly and indirectly through certain affiliates owns 73% of the total voting power of the outstanding shares of the Common Stock, including the Preferred Stock on an as‐converted basis. Since joining BCP in 2013, he oversees all aspects of finance, compliance, and financial reporting. Prior to joining BCP, Mr. Poché served as Senior Vice President and Chief Accounting Officer for The Shaw Group. Along with this role, Mr. Poché served as Senior Vice President and Chief Financial Officer for the largest operating segment at Shaw, Shaw Power. Before his time with Shaw, Mr. Poché spent 22 years as a Partner with Deloitte & Touche LLP. During his tenure at Deloitte, Mr. Poché served as Office Managing Partner and Professional Practice Director in New Orleans, Louisiana where he was responsible for all New Orleans marketplace activities for the assurance, tax, and consulting service lines. Prior to that, he was a Lead Client Service Partner in Houston, Texas where he worked with multi‐national, Fortune 500 companies operating in the utility, services, and midstream sectors of the energy industry. Mr. Poché received his B.S. in Accounting from Louisiana State University and is a Certified Public Accountant.
Because of this extensive knowledge and experience with industrial services businesses and his experience in finance, accounting and audit, the Board of Directors believes Mr. Poché is qualified to serve on the Board. Mr. Poché was recommended to the Board of Directors by BCP and was recommended to the Board of Directors by BCP and has been designated as a BCP Director by the Board pursuant a Stockholders’ Agreement entered into on June 18, 2018, between the Company, BCP, CEP Holdings, Inc. and the other parties thereto (the “Stockholders’ Agreement”).
Mark Spender
Mr. Spender, 45, has been a member of the Board since January 2018. Mr. Spender is a Managing Director and member of the Investment Committee at BCP, a private equity management firm which directly and indirectly through certain affiliates owns 73% of the total voting power of the outstanding shares of the Voting Stock, including the Preferred Stock on an as-converted basis. Since joining BCP in October 2015, Mr. Spender has led the firm’s investments in the environmental and utility services industries. Prior to his roles at BCP, Mr. Spender was a Managing Director in the Global Industrials Group in the Investment Banking Department at Credit Suisse, a leading financial services company, where he began his career in 2000. Mr. Spender also held various roles in the Investment Banking Department at UBS from 2004 to 2011. During his more than 15 years in investment banking, Mr. Spender focused on a variety of industrial subsectors, including engineering and construction, building products and construction materials, and industrial distribution. Mr. Spender holds a B.B.A. in finance with highest distinction from the University of Michigan’s Ross School of Business.
Because of his extensive knowledge of the power generation industry and his involvement and directorship with our predecessor companies, the Board of Directors believes Mr. Spender is well qualified to serve on the Board. Mr. Spender was
recommended to the Board of Directors by BCP and has been designated as a BCP Director by the Board pursuant to the Stockholders’ Agreement.
Dennis T. Whalen
Mr. Whalen, 64, has been a member of the Board since June 2021. Mr. Whalen retired as Senior Partner with KPMG in 2020 with expertise in driving innovative growth, aligning risk with strategy, and developing dynamic talent. He served as the lead audit partner on key clients, including GE Healthcare, Pfizer, The Shaw Group, Halliburton, and Koch Industries. Mr. Whalen brings more than 35 years of global experience and an exceptional record of delivering results for his broad technical, operational, and business experience to serve as a trusted advisor to senior leaders and board members across the energy, construction, industrial manufacturing, and life sciences industries in both developed and emerging markets as well as shaping governance strategy to create long-term value and unlock the power of diversity. As the founder of KPMG’s Board Leadership Center, Mr. Whalen is nationally recognized as a thought leader in governance strategy, fostering best practices that support growth, managing risk, and exceeding investor and stakeholder expectations. Mr. Whalen is a Board Leadership Fellow of the National Association of Corporate Directors (NACD), recently attained the distinction of Directorship Certified by successfully passing NACD’s new exam and has been consistently named as one of the most influential people in governance in America by NACD’s Directorship magazine.
Because of his extensive experience as an independent auditor over numerous public companies and his broad knowledge of corporate and financial issues of construction, energy, and industrial manufacturing companies, the Board of Directors believes Mr. Whalen is well qualified to serve on the Board.
Designated Preferred Director
Mignon L. Clyburn
Ms. Clyburn, 61, has been a member of the Board since March 2019. Ms. Clyburn is President of MLC Strategies, LLC, a Washington, D.C.-based consulting firm, a position she has held since January 2019. Previously, Ms. Clyburn served as a Commissioner of the U.S. Federal Communications Commission (the “FCC”) from 2009 to 2018, including as acting chair. While at the FCC, she was committed to closing the digital divide and championed the modernization of the agency’s Lifeline Program, which assists low-income consumers with voice and broadband service. In addition, Ms. Clyburn promoted diversity in media ownership, initiated Inmate Calling Services reforms, supported inclusion in STEM opportunities and fought for an Open Internet. Prior to her federal appointment, she served 11 years on the Public Service Commission of South Carolina and worked for nearly 15 years as publisher of the Coastal Times, a Charleston weekly newspaper focused on the African American community. Ms. Clyburn holds a bachelor’s degree in banking, finance, and economics from the University of South Carolina. Ms. Clyburn has served on the Board of Directors and as a member of the Nominating and Corporate Governance Committee of Lions Gate Entertainment Corp. (NYSE: LGF.A) since September 2020. Since November of 2020, Ms. Clyburn has also served on the Board of Directors of RingCentral, Inc. (NYSE: RNG).
Because of her experience as a state regulator of investor-owned utilities and as a federal commissioner in the technology and telecommunications fields and her background as a successful business executive, the Board of Directors believes Ms. Clyburn is well qualified to serve on the Board. On April 29, 2022, Charah Preferred Stock Aggregator, LP, an affiliate of BCP, signed an action by written consent pursuant to its rights under the Company's Certificate of Designations of Series A Preferred Stock (the "Certificate of Designations") as the owner of 100% of the Company's Series A Preferred Stock, which appointed Ms. Clyburn as the Preferred Director.
Executive Officers
Certain other information relating to the Executive Officers of the Company appears in Part 1 of this Annual Report on Form 10-K under the heading "Information about our Executive Officers."
Documents Available
All of the Company’s corporate governance materials, including the charters for the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee, as well as the Corporate Governance Guidelines, the Financial Code of Ethics and the Code of Business Conduct and Ethics are published on the investors portion of the Company’s website, www.charah.com. These materials are also available in print free of charge to any stockholder upon request by contacting the Company in writing at Charah Solutions, Inc., 12601 Plantside Drive, Louisville, Kentucky 40299, Attention: Investor Relations, or by telephone at (502) 245-1353. Any modifications to these corporate governance materials will be reflected, and the Company intends to post any amendments to, or waivers from, the Financial Code of Ethics (to the extent required to be disclosed pursuant to Form 8-K) on the investors portion of the Company’s website, www.charah.com. By referring to the Company’s website, www.charah.com, or any portion thereof, including the investors portion of the Company’s website, the Company does not incorporate its website or its contents into this Form 10-K.
Hedging and Pledging Policies
The Company has a stock trading policy that, among other things, prohibits all of our employees (including executive officers) and directors from engaging in speculative trading in the Company’s shares, which prohibition includes any arrangement by which a stockholder or option holder changes his or her economic exposure to changes in the price of the stock. Prohibited arrangements include buying standardized put or call options, writing put or call options, selling stock short, buying or selling securities convertible into other securities, or merely engaging in a private arrangement where the value of the agreement varies in relation to the price of the underlying security. Such arrangements are prohibited because these transactions may give the appearance of improper trades and look disloyal. In addition, our stock trading policy prohibits all of our employees (including executive officers) and directors from holding the Company’s securities in a margin account or otherwise pledging these securities as collateral for a loan, except for pledges of securities in effect before the adoption of the Company’s insider trading policy.
Share Ownership Guidelines and Share Retention Policy
Under the Company’s Share Ownership Guidelines and Share Retention Policy, all non-BCP and Company employee directors are expected to own shares of Company Common Stock with a value equal to at least five (5) times the annual cash retainer (currently $325,000) by their fifth anniversary of Board service. As of May 30, 2023, all non-BCP and Company employee directors have met or, within the applicable period, are expected to meet the Company ownership guidelines.
With regard to executive ownership of Company common stock, executives are expected to own a minimum number of shares of Company Common Stock, expressed as a multiple of annual base salary. The required salary multiple for each such executive is 3, except for our CEO, whose required salary multiple is 5.
The threshold must be accomplished by November 15, 2026. The Board believes these guidelines encourage the alignment of executive and stockholder interests and promote the Company’s objective of building long-term stockholder value by requiring executives to build and maintain a meaningful stake in the Company.
The stock ownership guidelines are designed to encourage stock ownership at levels high enough to indicate management’s commitment to the Company and share value appreciation, while satisfying an individual executive’s prudent needs for investment diversification. The stock ownership guidelines are set by the Board using competitive benchmarking data, and the guidelines are reviewed each year and updated as necessary.
Board Leadership Structure
The Board believes that the existing leadership structure, under which Mr. Robert Decensi serves as Executive Chairman of the Board and Mr. Jonathan Batarseh serves as President and Chief Executive Officer, is the most appropriate and in the best interests of Charah Solutions and its stockholders at this time. Given the Company’s current needs, the Board believes this structure is optimal as it allows Mr. Batarseh to focus on providing the day-to-day leadership of the Company, while allowing Mr. Decensi to focus on providing guidance to Mr. Batarseh and setting the agenda for Board meetings and presiding over meetings of the Board. Although the Board believes that this leadership structure is currently in the best interests of Charah Solutions and its stockholders, the Board has the flexibility to elect the same individual to the position of Chairman of the Board and Chief Executive Officer if, in the future, the Board determines that returning to such a leadership structure would be appropriate.
Board Committees
The Board of Directors has a standing Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. Committee members and committee chairs are appointed by the Board. The members and chairs of these Committees are identified in the following table:
| Audit Committee | Compensation Committee | Nominating and Governance Committee | |||||||||||||||
| Jonathan T. Batarseh | |||||||||||||||||
| Jack A. Blossman, Jr. | Chair | ||||||||||||||||
| Mignon L. Clyburn | Chair | Member | |||||||||||||||
| Robert Decensi | |||||||||||||||||
| Robert C. Flexon | Chair | ||||||||||||||||
| Timothy J. Poché | Member | ||||||||||||||||
| Timothy Alan Simon | Member | ||||||||||||||||
| Mark Spender | Member | ||||||||||||||||
| L.W. Varner | Member | ||||||||||||||||
| Dennis T. Whalen | Member | Member | |||||||||||||||
The Board of Directors has determined that Messrs. Flexon and Whalen are each an “audit committee financial expert” within the meaning of the SEC rules and that Mr. Simon is “financially literate” and has accounting or related financial management expertise, in each case as determined by the Board, in its business judgment. Messrs. Flexon, Simon, and Whalen are “independent” as that term is defined under Rule 10A-3(b)(1)(ii) of the Exchange Act.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires the Company’s executive officers and directors and persons who beneficially own more than 10% of the outstanding shares of Common Stock (collectively, the “reporting persons”) to file with the SEC initial reports of their beneficial ownership of Common Stock and reports of changes in their beneficial ownership of Common Stock. Based solely on a review of such reports and written representations made by the Company’s reporting persons with respect to the completeness and timeliness of their filings, the Company believes that the reporting persons complied with all applicable Section 16(a) filing requirements on a timely basis during fiscal 2022, except for (i) Messrs. Sewell and Shannon, officers of the Company, due to internal errors, failed to timely report restricted stock unit shares withheld to cover associated taxes, each filed a late Form 4; and (ii) Mr. Batarseh did not timely file a Form 4 related to a CHRA stock purchase on November 18, 2022.
Item 11. Executive Compensation
Director Compensation
The table below sets forth the compensation paid to each non‑employee director who served on the Board in fiscal 2022. Directors who are employees of the Company (formerly Mr. Sewell and currently Mr. Batarseh) did not receive compensation for their service on the Board of Directors in 2022. Mr. Poché and Mr. Spender began receiving payment in the historical Fees Earned or Paid In Cash amounts described below on April 1, 2022.
2022 Director Compensation Table
| Fees Earned or Paid in Cash | Stock Awards(1) | Total | |||||||||||||||
| Jack A. Blossman, Jr. | $ | 85,000 | $ | 140,000 | $ | 225,000 | |||||||||||
| Mignon Clyburn | 77,500 | 100,000 | 177,500 | ||||||||||||||
| Robert Decensi | — | (3) | — | — | |||||||||||||
| Robert C. Flexon | 80,000 | 100,000 | 180,000 | ||||||||||||||
| Timothy J. Poché | 148,750 | (4) | — | (2) | 148,750 | ||||||||||||
| Timothy Alan Simon | 65,000 | 100,000 | 165,000 | ||||||||||||||
| Mark Spender | 148,750 | (4) | — | (2) | 148,750 | ||||||||||||
| L.W. Varner | — | (3) | — | — | |||||||||||||
| Dennis T. Whalen | 65,000 | 100,000 | 165,000 | ||||||||||||||
| Kenneth Young | 48,750 | — | 48,750 | ||||||||||||||
(1)With the exception of Mr. Poché and Mr. Spender (explained in Note 2, below), this represents the full grant date fair value of restricted stock unit (“RSU”) awards granted on June 28, 2022, computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation – Stock Compensation (“FASB ASC Topic 718”). Generally, the full grant date fair value is the amount that the Company would expense in the consolidated and combined financial statements over the award’s vesting schedule. For additional information regarding the assumptions made in calculating these amounts, see Note 2 to the
consolidated and combined financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. These amounts reflect the accounting expense and do not correspond to the actual value that will be recognized by the directors.
(2)On November 4, 2022, Mr. Poché and Mr. Spender each received an Other Cash-Based Award Grant Notice which provided them the cash equivalent of the vesting day value of the equity grant provided to the non-employee and non-BCP employee Directors, to vest and be paid on June 6, 2023.
(3)While Messrs. Decensi and Varner started on the Board in November 2022, they did not receive any 2022 compensation. They received a 2023 First Quarter Retainer payment in January 2023.
(4)This figure includes the includes the value of the Other Cash-Based Award Grant Notice referred to in Note 2, above, calculated against the full grant date fair value of RSU awards granted to the non-BCP and non-employee directors on June 28, 2022.
Historically, each non-employee director receives an annual retainer of $65,000 paid in quarterly installments. The chairpersons of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee receive additional annual compensation of $15,000, $12,500, and $10,000, respectively, paid in quarterly installments.
Historically, each eligible non-employee director receives an annual equity grant with a target value of $100,000 made in the form of RSUs. The RSUs vest on the first anniversary of the grant date and will be paid in shares of Common Stock on the vesting date.
The Chairman of the Board receives additional annual compensation of $60,000, one-third of which is paid in cash and two-thirds of which is paid in stock grants. The fiscal 2022 annual equity grant occurred on June 28, 2022.
Executive Compensation
We are providing compensation disclosure that satisfies the requirements applicable to emerging growth companies, as defined in the Jumpstart Our Business Startups Act.
Summary Compensation Table
The following table summarizes, with respect to our Named Executive Officers, information relating to compensation earned for services rendered in all capacities during the fiscal years ended December 31, 2022 and 2021.
| Year | Salary | Bonus(1) | Stock Awards(2) | Non-Equity Incentive Compensation Plan | All Other Compensation(3) | Total | ||||||||||||||||||||||||||||||||||||||
Scott A. Sewell President and Chief Executive Officer | 2022 | $ | 497,539 | $ | — | $ | 1,112,001 | $ | — | $ | 66,340 | $ | 1,675,880 | |||||||||||||||||||||||||||||||
| 2021 | 536,538 | 693,576 | 1,080,004 | — | 35,311 | 2,345,429 | ||||||||||||||||||||||||||||||||||||||
Roger D. Shannon Chief Financial Officer and Treasurer | 2022 | $ | 378,757 | $ | — | $ | 521,753 | $ | — | $ | 78,329 | $ | 978,839 | |||||||||||||||||||||||||||||||
| 2021 | 422,692 | 382,109 | 425,000 | — | 55,491 | 1,285,292 | ||||||||||||||||||||||||||||||||||||||
Jonathan T. Batarseh President and Chief Executive Officer | 2022 | $ | 76,154 | $ | — | $ | 276,500 | $ | — | $ | — | $ | 352,654 | |||||||||||||||||||||||||||||||
Joseph P. Skidmore Chief Financial Officer and Treasurer | 2022 | $ | 178,304 | $ | — | $ | 55,621 | $ | — | $ | 7,006 | $ | 240,931 | |||||||||||||||||||||||||||||||
(1)Amounts shown represent the payment of annual bonuses for the applicable year.
(2)The amounts in the “Stock Awards” column do not reflect the actual value the Named Executive Officers will realize from the RSUs and the performance share units (“PSUs”) awarded to the executives. The amounts presented in the table are the grant date fair values of the awards computed in accordance with FASB ASC Topic 718 based on the probable outcome of any applicable performance conditions (determined as of the applicable date of grant) and excluding the effect of estimated forfeitures. The Company will recognize the grant date fair values of the awards as compensation expense over the vesting period of the awards.
For the 2022 figures, this column includes the grant date fair values of $447,997 for 166,667 PSUs awarded to Mr. Sewell on April 4, 2022; $208,698 for 49,690 PSUs awarded to Mr. Shannon on April 4, 2022; and $16,682 for PSUs awarded to Mr. Skidmore on April 1, 2022. Mr. Skidmore also received $38,938 for 9,271 RSUs awarded (one-third vesting on each of April 1, 2023, April 1, 2024, and April 1, 2025) on April 4, 2022 which were not
previously reported. The April 4, 2022, per share value was $4.20 (pre-Reverse Stock Split). Under the Grant Agreement, the PSUs vest if the employee meets the Service Requirement of maintaining employment from the grant date through December 31, 2024, the Performance Period End Date and if the Company achieves a relative total stockholder return (“TSR”) percentile ranking of the Company as compared to the specific performance peer group and achieves a target 3-year cumulative revenue growth from January 1, 2022 through December 31, 2024. The awards can be adjusted for overperformance or under performance. The grant date fair values of the PSUs assume all of the PSUs would be earned at the end of the three-year period.
Note 13 to the Company’s consolidated and combined financial statements included in its Annual Report on Form 10‑K for the fiscal year ended December 31, 2022 contains more information about the Company’s accounting for stock‑based compensation arrangements, including the assumptions used to determine the grant date fair values of the stock awards.
(3)The following table reflects the types and amounts of allowances and reimbursements included in this column:
| Scott A. Sewell | Roger D. Shannon | Jonathan A. Batarseh | Joseph P. Skidmore | ||||||||||||||||||||
| Vehicle Allowance or Value of Vehicle Lease Reimbursement | $ | 5,300 | $ | 4,293 | $ | — | $ | — | |||||||||||||||
| Club Membership Dues Reimbursement | 8,814 | — | — | — | |||||||||||||||||||
| Employer Contributions to 401(k) Plan | 9,150 | 9,150 | — | 7,006 | |||||||||||||||||||
| Housing Allowance | — | 31,223 | — | — | |||||||||||||||||||
| Severance Benefits | 43,076 | 33,673 | — | — | |||||||||||||||||||
| Total | 66,340 | 78,339 | — | 7,006 | |||||||||||||||||||
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the post-December 29, 2022 Reverse Stock Split beneficial ownership of each person who, based upon filings made by such person with the SEC, as of May 22, 2023, was the beneficial owner of more than five percent of any outstanding class of Company Stock.
| Name and address of Beneficial Owner | Number of Shares of Common Stock | Percentage of Common Stock | Number of Shares of Series A Preferred Stock | Percentage of Series A Preferred Stock | Number of Shares of Series B Preferred Stock | Percentage of Series B Preferred Stock | Percentage of Voting Stock | |||||||||||||||||||||||||||||||||||||
| Principal Stockholders: | ||||||||||||||||||||||||||||||||||||||||||||
| BCP Energy Services Fund-A, LP 400 Convention Street, Suite 1010 Baton Rouge, LA 70802 | 1,065,274 | (1) | 31.31 | % | — | — | % | — | — | % | 16.36 | % | ||||||||||||||||||||||||||||||||
| BCP Energy Services Fund, LP 400 Convention Street, Suite 1010 Baton Rouge, LA 70802 | 853,841 | (1) | 25.09 | % | — | — | % | — | — | % | 13.11 | % | ||||||||||||||||||||||||||||||||
| Charah Holdings LP 400 Convention Street, Suite 1010 Baton Rouge, LA 70802 | 305,481 | (1) | 8.98 | % | — | — | % | — | — | % | 4.69 | % | ||||||||||||||||||||||||||||||||
Charah Preferred Stock Aggregator, LP 400 Convention Street, Suite 1010 Baton Rouge, LA 70802 (1) | — | — | % | 26,000 | 100.00 | % | 30,000 | 100.00 | % | 47.75 | % | |||||||||||||||||||||||||||||||||
| Lewis H. Titterton Jr. 1900 Purdy Ave. Unit 1902, Miami Beach, FL 33139 | 187,500 | (2) | 5.51 | % | — | — | % | — | — | % | 2.88 | % | ||||||||||||||||||||||||||||||||
| Directors and Named Executive Officers: | ||||||||||||||||||||||||||||||||||||||||||||
| Scott A. Sewell | (3) | 50,226 | 1.48 | % | — | — | % | — | — | % | * | |||||||||||||||||||||||||||||||||
| Roger D. Shannon | (4) | 27,675 | * | — | — | % | — | — | % | * | ||||||||||||||||||||||||||||||||||
| Jonathan T. Batarseh | 18,571 | * | — | — | % | — | — | % | * | |||||||||||||||||||||||||||||||||||
| Joseph P. Skidmore | 1,640 | * | — | — | % | — | — | % | * | |||||||||||||||||||||||||||||||||||
| Robert J. Decensi | — | — | % | — | — | % | — | — | % | — | % | |||||||||||||||||||||||||||||||||
| Jack A. Blossman, Jr. | 12,056 | * | — | — | % | — | — | % | * | |||||||||||||||||||||||||||||||||||
| Mignon L. Clyburn | 8,864 | * | — | — | % | — | — | % | * | |||||||||||||||||||||||||||||||||||
| Robert C. Flexon | 12,922 | * | — | — | % | — | — | % | * | |||||||||||||||||||||||||||||||||||
| Timothy J. Poché | — | * | — | — | % | — | — | % | — | % | ||||||||||||||||||||||||||||||||||
| Timothy Alan Simon | 2,907 | * | — | — | % | — | — | % | * | |||||||||||||||||||||||||||||||||||
| Mark Spender | — | * | — | — | % | — | — | % | — | % | ||||||||||||||||||||||||||||||||||
| Kenneth Young | (5) | — | * | — | — | % | — | — | % | — | % | |||||||||||||||||||||||||||||||||
| L.W. “Bill” Varner | — | * | — | — | % | — | — | % | — | % | ||||||||||||||||||||||||||||||||||
| Dennis T. Whalen | 4,646 | * | — | — | % | — | — | % | * | |||||||||||||||||||||||||||||||||||
| Directors and Executive Officers as a Group (12 Persons) | (6) | 61,606 | 4.10 | % | — | — | % | — | — | % | * | |||||||||||||||||||||||||||||||||
*Less than 1%.
(1)This information is based on the Schedule 13D/A filed with the SEC on April 21, 2023. BCP’s interest is held through Charah Holdings LP (“Charah Holdings”), BCP Energy Services Fund-A, LP and BCP Energy Services Fund, LP (collectively, the “BCP Energy Services Funds”) and Charah Preferred Stock Aggregator, LP. The general partner of Charah Holdings is Charah Holdings GP LLC. Charah Holdings GP LLC is owned by the BCP Energy Services Funds. The general partner of Charah Preferred Stock Aggregator, LP is Charah Preferred Stock Aggregator GP, LLC. The general partner of both the BCP Energy Services Funds and Charah Preferred Stock Aggregator GP, LLC is BCP Energy Services Fund GP, LP, and the general partner of BCP Energy Services Fund GP, LP is BCP Energy Services Fund UGP, LLC. BCP Energy Services Fund UGP, LLC is managed by J.M. Bernhard, Jr. and Jeff Jenkins. Each of the BCP entities and Messrs. Bernhard and Jenkins may be deemed to beneficially own such shares directly or indirectly controlled, but each disclaims beneficial ownership of such shares in excess of its or his pecuniary interest therein. Company directors, Messrs. Poché and Spender collectively own less than 5% of a general partnership which owns less than 5% of each of BCP Energy Services Fund, LP and BCP Energy Services Fund-A, LP. The address of each of the BCP entities and Messrs. Bernhard and Jenkins is 400 Convention Street, Suite 1010, Baton Rouge, Louisiana 70802.
(2)This information is based upon a Schedule 13G filed with the SEC on April 20, 2023, directly by Lewis H. Titterton Jr.
(3)This information is based upon Mr. Sewell’s holdings as of his resignation as the Company’s President and Chief Executive Officer on November 14, 2022.
(4)This information is based upon Mr. Shannon’s holdings as of his resignation as the Company’s Treasurer and Chief Financial Officer on October 17, 2022.
(5)This information is based upon Mr. Young’s holdings as of his resignation as a Company Director on September 13, 2022.
(6)Includes the beneficial ownership of the Common Stock as of May 22, 2023, for Messrs. Batarseh, Skidmore, Blossman, Flexon, Poché, Spender, Simon, Whalen, and Young and Ms. Clyburn.
Equity Compensation Plan Information
The table below provides information as of December 31, 2022, with respect to the securities authorized for issuance to employees, directors and consultants of the Company and its affiliates under the Incentive Plan. The 2018 Plan, which was adopted by the Board of Directors upon the closing of the IPO, provides for the grant of stock options, stock appreciation rights, restricted stock, RSUs, bonus stock, dividend equivalents, other stock-based awards, substitute awards, annual incentive awards and performance awards. The Company has reserved 500,658 shares of Common Stock for issuance under the 2018 Plan, and all future equity awards described above will be issued pursuant to the 2018 Plan.
Plan Category(1) | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (shares) (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (shares) (c) | ||||||||||||||||||||
| Equity compensation plans approved by security holders | 54,121 | (2) | $ | — | (3) | $ | 82,134 | (4) | |||||||||||||||
(1)The Company does not have any equity compensation plan not approved by security holders.
(2)Represents the number of unvested RSUs and unearned PSUs awarded to the Company’s key employees and non-employee directors under the 2018 Plan.
(3)There are no outstanding stock options or other equity awards having an exercise price.
(4)Represents shares available for award in the future under the 2018 Plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Director Independence
The Board believes that a majority of its members are independent under the applicable SEC rules and the rules of the New York Stock Exchange ("NYSE"). Until April 2023, the Company's shares of Common Stock were listed on the NYSE; the Company continues to use the listing rules of the NYSE for determining the independence of the members of its Board of Directors.
The Board of Directors, with the assistance of the Nominating and Corporate Governance Committee, has conducted an evaluation of director independence based on the SEC and NYSE rules. The Board considered all relationships and transactions between each director and director nominee (and his or her immediate family members and affiliates) and each of the Company, its management and its independent registered public accounting firm, as well as the transactions described below under “Related Party Transactions.” As a result of this evaluation, the Board determined that each of Messrs. Blossman, Decensi, Flexon, Poché, Simon, Spender, Varner, and Whalen and Ms. Clyburn qualifies as an independent director under the SEC and NYSE rules. The Board determined, with the assistance of the Nominating and Corporate Governance Committee that Mr. Batarseh, based on his status as a Company employee, was not independent. The Board also determined that each member of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee (see membership information below under “—Board Committees”) is independent, including that each member of the Audit Committee is “independent” as that term is defined under Rule 10A-3(b)(1)(ii) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Policy for Review of Related Party Transactions
Pursuant to the Company’s Related Party Transactions Policy, the Audit Committee reviews all of the relevant facts and circumstances of related party transactions and either approves or disapproves entry into the related party transaction, subject to certain limited exceptions. In determining whether to approve or disapprove entry into a related party transaction, the Audit Committee takes into account, among other factors, the following:
a.the position within or relationship of the related party with the Company;
b.the materiality of the transaction to the related party and the Company, including the dollar value of the transaction, without regard to profit or loss;
c.the business purpose for and reasonableness of the transaction (including the anticipated profit or loss from the transaction), taken in the context of the alternatives available to the Company for attaining the purposes of the transaction;
d.whether the transaction is comparable to a transaction that could be available with an unrelated party, or is on terms that the Company offers generally to persons who are not related parties;
e.whether the transaction is in the ordinary course of the Company’s business and was proposed and considered in the ordinary course of business;
f.the effect of the transaction on the Company’s business and operations, including on the Company’s internal control over financial reporting and system of disclosure controls or procedures; and
g.any additional conditions or controls (including reporting and review requirements) that should be applied to such transaction.
Furthermore, the Company’s Related Party Transactions Policy requires that all related party transactions shall be publicly disclosed to the extent and in the manner required by applicable legal requirements and listing standards.
Related Party Transactions
Registration Rights Agreement
In connection with the closing of the IPO, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with certain stockholders identified on the signature pages thereto as the Holders.
Pursuant to, and subject to the limitations set forth in, the Registration Rights Agreement, dated June 13, 2018, filed by the Company with the SEC on June 15, 2018, BCP has the right to require the Company by written notice to prepare and file a registration statement registering the offer and sale of a number of BCP’s shares of Common Stock. The Company is required to use all commercially reasonable efforts to maintain the effectiveness of any such registration statement until all shares covered by such registration statement have been sold.
In addition, pursuant to the Registration Rights Agreement, BCP has the right to require the Company, subject to certain limitations set forth therein, to effect a distribution of any or all of BCP’s shares of Common Stock by means of an underwritten offering. Further, subject to certain exceptions, if at any time the Company proposes to register an offering of its equity securities or to conduct an underwritten offering, whether or not for its account, then the Company must notify BCP of such proposal before the anticipated filing date or commencement of the underwritten offering, as applicable, to allow BCP to include a specified number of its shares in that registration statement or underwritten offering, as applicable.
These registration rights are subject to certain conditions and limitations, including the right of the underwriters to limit the number of shares to be included in a registration or offering and the Company’s right to delay or withdraw a registration statement under certain circumstances. The Company will generally pay all registration expenses in connection with its obligations under the Registration Rights Agreement, regardless of whether a registration statement is filed or becomes effective.
On March 16, 2020, the Company amended the Registration Rights Agreement in order to grant to Charah Preferred Stock Aggregator, LP the registration rights applicable to the other BCP-affiliated parties thereto with respect to the Common Stock into which the Preferred Stock is convertible.
In connection with entering into the Series B Purchase Agreement, on November 14, 2022, the Company amended the Registration rights agreement, in order to grant registration rights related to the Common Stock issuable upon conversion of the Series B Preferred Stock.
Stockholders’ Agreement
In connection with the closing of the IPO, the Company entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”), dated as of June 18, 2018, with CEP Holdings, BCP and certain members of management. Among other things, the Stockholders’ Agreement provides BCP with the right to nominate a number of directors to the Board in a proportionate amount to the number of shares of Common Stock that it holds, as follows: (i) a majority of the directors as long as BCP owns at least 50% of the Common Stock; (ii) at least 40% of the directors as long as BCP owns at least 40% but less than 50% of the Common Stock; (iii) at least 30% of the directors as long as BCP owns at least 30% but less than 40% of the Common Stock; (iv) at least 20% of the directors as long as BCP owns at least 20% but less than 30% of the Common Stock; and (v) at least 10% of the directors as long as BCP owns at least 5% but less than 20% of the Common Stock. Pursuant to its right under the Stockholders’ Agreement, BCP has nominated and/or the Board of Directors has designated, as applicable, Messrs. Blossman, Poché, Spender, and Simon.
On July 9, 2020, CEP Holdings irrevocably waived its right under the Stockholders’ Agreement to nominate Charles E. Price as a director.
Information Rights Agreement
On October 9, 2018, Charah Solutions entered into an Information Rights Agreement (the “Information Rights Agreement”) with BCP, pursuant to which the Company will provide BCP with certain financial and other information and other rights. Specifically, the Information Rights Agreement provides that (i) the Company will deliver, or cause to be delivered, to BCP, upon written request, certain monthly, quarterly and annual financial information as well as the Company’s annual budget, business plan, and financial forecasts and projections for so long as BCP and its affiliates beneficially own at least 10% of the outstanding shares of the Common Stock; (ii) the Company will deliver to BCP, upon written request, such
other information about the Company and its subsidiaries and provide access to the Company’s management, in each case, as may be reasonably requested by BCP for so long as BCP and its affiliates beneficially own at least 20% of the outstanding shares of the Common Stock; (iii) BCP will have the right to appoint one non-voting observer to the Board, provided that the observer will not be considered a director of the Company or otherwise constitute a member of the Board and will in no event be entitled to vote on any matters presented to the Board, for so long as BCP and its affiliates beneficially own at least 10% of the outstanding shares of the Common Stock; (iv) BCP and its affiliates, employees, agents and representatives will be bound by certain confidentiality and use restrictions regarding any information obtained pursuant to the Information Rights Agreement; and (v) BCP will notify the Chairman of the Board if BCP or its affiliates have agreed to purchase or beneficially own 10% or more of the equity of a competitor of the Company, in such event, the Company will not comply with the provisions of the Information Rights Agreement requiring it (A) to deliver, or cause to be delivered, to BCP certain monthly financial information as well as the Company’s annual budget, business plan, and financial forecasts and projections, (B) to deliver to BCP such other information about the Company and its subsidiaries and to provide access to the Company’s management, in each case, as may be reasonably requested by BCP and (C) to provide BCP the right to appoint a non-voting observer to the Board, in each case, if the Board determines that doing so could have an adverse impact on the Company. The Company’s entering into the Information Rights Agreement was approved by the Audit Committee of the Board as well as the Board.
Series A Preferred Stock Purchase Agreement
On March 5, 2020, we entered into a Series A Preferred Stock Purchase Agreement (the “Preferred Stock Purchase Agreement”), by and between us and Charah Preferred Stock Aggregator, LP (the “Preferred Stock Investor”), an affiliate of BCP, which beneficially owns approximately 59% of the total voting power of the outstanding shares of the Voting Stock, including the Preferred Stock on an as-converted basis, whereby we agreed to issue and sell to the Preferred Stock Investor 26,000 shares of Preferred Stock in exchange for $25.2 million. As a condition to entering into the Preferred Stock Purchase Agreement, we agreed to amend the Registration Rights Agreement to give the Preferred Stock Investor certain registration rights with respect to the Preferred Stock.
The Certificate of Designations of Series A Preferred Stock provides that so long as any shares of Preferred Stock are outstanding, the Holders shall have the right, but not the obligation, to appoint either a Preferred Board Observer or Preferred Director. The Preferred Board Observer or Preferred Director shall be elected by a majority of the Holders serving a term of office expiring at the next annual meeting of the Company. BCP has selected Mignon Clyburn to serve at the Preferred Director.
Series B Preferred Stock Purchase Agreement
On November 14, 2022, Charah Solutions, Inc. (the “Company”) entered into a Series B Preferred Stock Purchase Agreement (the “Preferred Stock Purchase Agreement”), by and between the Company and Charah Preferred Stock Aggregator, LP (the “Investor”), an affiliate of Bernhard Capital Partners Management, LP (“BCP”), pursuant to which the Company issued and sold to Investor, and Investor purchased from the Company, 30,000 shares of the Company’s preferred stock, par value $0.01 per share, designated as “Series B Preferred Stock” (the “Series B Preferred Stock”), having terms set forth in the Certificate of Designations (the “Certificate”), a form of which is an exhibit to the Preferred Stock Purchase Agreement. The consideration for the purchase of the Series B Preferred Stock was $28.8 million.
The Series B Preferred Stock ranks senior to the Company’s Common Stock, par value $0.01 per share (the “Common Stock”) and Series A Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”) with respect to rights on liquidation, winding up and dissolution.
Each share of Preferred Stock was issued with a Liquidation Preference (as defined in the Certificate) of $1,000.00, for a total initial value of $30,000,000.00. The Series B Preferred Stock will be convertible at the option of the holders at any time after the three month anniversary of the issuance of the Series B Preferred Stock into the amount of shares of Common Stock per share of Series B Preferred Stock (such rate, the “Conversion Rate”) equal to the quotient of (i) $1,000.00 divided by (ii) a conversion price of $1.74 per share of Common Stock (the “Conversion Price”), subject to customary anti-dilution adjustments.
At any time following the three year anniversary of issuance of the Series B Preferred Stock, the Company may give 30 days’ notice to the holders of the Series B Preferred Stock that it intends to cause the conversion of the Series B Preferred Stock at the Conversion Rate, provided the closing sale price of the Common Stock equals or exceeds 120% of the Conversion Price for the 20 trading days ending on the date immediately prior to the date of delivery of the Company’s notice to convert and subject to certain other requirements. Upon delivery of such notice, each holder of the Series B Preferred Stock proposed to be converted will have the option, at its discretion, to have its Series B Preferred Stock converted at the then-applicable Conversion Rate or redeemed in cash at the then-applicable Redemption Price (as defined below).
At any time following the three-year anniversary of the issuance of the Series B Preferred Stock, the Company may redeem the Series B Preferred Stock, in whole or in part, for an amount in cash equal to the greater of (i) the closing sale price of the Common Stock on the date the Company delivers such notice multiplied by the number of shares of Common Stock issuable upon conversion of the outstanding Series B Preferred Stock and (ii) $1,000.00 per share of Series B Preferred Stock (the “Redemption Price”).
At any time following the 30-month anniversary of the issuance, the holders of the Series B Preferred Stock will have the option to require the Company to redeem any or all of the then-outstanding shares of Series B Preferred Stock for cash consideration equal to $1,000.00 per share of Series B Preferred Stock. If the Company is not able to effect this redemption as requested, a 12% payable-in-kind dividend would accrue on the applicable Liquidation Preference until paid.
For so long as any shares of Series B Preferred Stock are outstanding, the holders of Series B Preferred Stock will be entitled to either (i) appoint one director to our board of directors or (ii) one non-voting observer to our board of directors. Any director or board observer appointed by the holders of the Series B Preferred Stock will have representation on each committee of the board of the Company, subject to applicable legal and stock exchange requirements. BCP has not appointed a director or non-voting observer.
Until conversion, the holders of the Series B Preferred Stock will vote together with the Company’s Common Stock on an as-converted basis and also have rights to vote as a separate class on certain customary matters impacting the Series B Preferred Stock.
Effective as of the Closing, the Company granted BCP certain additional board designation rights which have the effect of increasing BCP’s existing designation rights contemplated by the Stockholders’ Agreement, dated June 18, 2018, by and among the Company, Bernhard Capital Partners Management, LP, CEP Holdings, Inc., and the stockholders identified on the signature pages thereto. These additional designation rights allow BCP to designate directors based on the amount of our Common Stock owned by BCP and its affiliates, including shares of Series A Preferred Stock and Series B Preferred Stock on an as-converted basis.
Term Loan Agreement
The Company entered into the Term Loan Agreement (the “Term Loan Agreement”) by and among Gibbons Creek Environmental Redevelopment Group, LLC, a Texas limited liability company (the “Term Loan Borrower”), as borrower, the Company and Charah, LLC, a Kentucky limited liability company (“Charah, LLC”), as guarantors, and Charah Preferred Stock Aggregator, LP, a Delaware limited partnership, as lender. The Term Loan Agreement provides for a delayed-draw term loan in an aggregate principal amount of $20.0 million. Borrowings under the Term Loan Agreement accrue interest at a percentage per annum equal to 12.0%, with interest payments due on the first business day of each calendar quarter following the effective date of the Term Loan Agreement, and on the maturity date.
On April 16, 2023, the Company entered into an Amendment 2 to the Term Loan Agreement (the “Term Loan Amendment”), which amends that certain Term Loan Agreement, dated as of August 15, 2022. The Term Loan Amendment, among other things, (i) waives the mandatory prepayment provisions with respect to certain asset sale proceeds, (ii) joins certain subsidiaries of the Company as guarantors under Term Loan Agreement, (iii) consents to an extension of the deadline for certain financial deliverables for the fiscal year ended December 31, 2022 and (iv) makes certain other amendments to the Term Loan Agreement as further set forth therein. In connection with the Term Loan Amendment, Avon Lake Environmental Redevelopment Group, LLC, Cheswick Lefever LLC and Cheswick Plant Environmental Redevelopment Group LLC (the “Grantors”) entered in to a security agreement (the “Security Agreement”), dated as of April 16, 2023, with Charah Preferred Stock Aggregator, LP, as the secured party (the “Secured Party”), pursuant to which the Grantors granted liens over substantially all of their assets in favor of the Secured Party.
ATC Group Services LLC Service Contract
ATC Group Services LLC (“ATC”), an entity owned by BCP, provided environmental consulting and engineering services at certain service sites. Expenses paid to ATC in fiscal 2022 were $45,383.71.
Item 14. Principal Accountant Fees and Services
Fees Paid to Independent Registered Public Accounting Firm
The following table presents fees for professional audit services rendered by Deloitte & Touche LLP for the audit of the Company’s consolidated and combined financial statements for the fiscal years ended December 31, 2022 and 2021 and fees billed for other services rendered by Deloitte & Touche LLP during those periods.
| Fiscal 2022 | Fiscal 2021 | ||||||||||
Audit Fees(1) | $ | 1,350,000 | $ | 807,538 | |||||||
Audit-Related Fees(2) | 15,000 | 160,000 | |||||||||
| Tax Fees | — | — | |||||||||
All Other Fees(3) | — | 1,895 | |||||||||
| Total | 1,365,000 | 969,433 | |||||||||
(1)Audit Fees consists of services rendered for audit of our annual consolidated financial statements and reviews of the interim condensed consolidated financial statements period.
(2)Audit-Related Services consists of services rendered for issuance of comfort letter related to the Company’s issuance of debt, review of registration statements filed by the Company with the SEC, and the issuance of consents to the incorporation by reference of opinions in registration statements filed by the Company with the SEC.
(3)All Other Fees consists of licensing fees paid for access to an online accounting research program provided by the Company’s independent registered public accounting firm.
Audit Committee Pre-Approval of Audit and Non-Audit Services
The Audit Committee has implemented procedures to ensure that all audit and permitted non-audit services to be provided to the Company have been pre-approved by the Audit Committee. Specifically, the Audit Committee pre-approves the use of the Company’s independent registered public accounting firm for specific audit and non-audit services, within pre-approved monetary limits. If a proposed service has not been pre-approved, then it must be specifically pre-approved by the Audit Committee before the service may be provided by the Company’s independent registered public accounting firm. Any pre-approved services exceeding the pre-approved monetary limits require specific approval by the Audit Committee. For fiscal 2022, all of the audit fees were approved by the Audit Committee in accordance with the above procedures. All of the other fees billed by Deloitte & Touche LLP to the Company for fiscal 2022 were approved by the Audit Committee by means of specific pre-approvals. All non-audit services provided in fiscal 2022 were reviewed with the Audit Committee, which concluded that the provision of such services by Deloitte & Touche LLP was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.
PART IV
Item 15. Exhibits and Financial Statement Schedules
1. Financial Statements
| Description | Page Number | |||||||
Report of Independent Registered Public Accounting Firm PCAOB ID No. 34 | F-1 | |||||||
F-2 | ||||||||
F-3 | ||||||||
F-4 | ||||||||
F-6 | ||||||||
F-9 | ||||||||
2. Financial Statement Schedules
3. Listing of Exhibits
INDEX TO EXHIBITS
| Exhibit Number | Description | |||||||
| Exhibit Number | Description | |||||||
| Exhibit Number | Description | |||||||
| Exhibit Number | Description | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.INS* | Inline XBRL Instance Document. | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase Document. | |||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 104* | Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
* Filed herewith.
** Furnished herewith.
† Indicates a management contract or compensatory plan or arrangement.
†† Schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant will furnish a supplemental copy of any omitted schedule or similar attachment to the SEC upon request.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CHARAH SOLUTIONS, INC. | ||||||||
| May 31, 2023 | By: | /s/ Jonathan T. Batarseh | ||||||
| Name: | Jonathan T. Batarseh | |||||||
| Title: | President, Chief Executive Officer and Director | |||||||
| (Principal Executive Officer) | ||||||||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jonathan T. Batarseh, Joseph P. Skidmore and Steven A. Brehm, or any of them, his or her attorney-in-fact, with full power of substitution and resubstitution for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorney-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
| Signature | Title | ||||
| /s/ Jonathan T. Batarseh | President, Chief Executive Officer and Director | ||||
| Jonathan T. Batarseh | (Principal Executive Officer) | ||||
| /s/ Joseph P. Skidmore | Chief Financial Officer and Treasurer | ||||
| Joseph P. Skidmore | (Principal Financial Officer and | ||||
| Principal Accounting Officer) | |||||
| /s/ Robert J. Decensi | Director | ||||
| Robert J. Decensi | |||||
| /s/ Jack A. Blossman, Jr. | Director | ||||
| Jack A. Blossman, Jr. | |||||
| /s/ Mignon L. Clyburn | Director | ||||
| Mignon L. Clyburn | |||||
| /s/ Timothy J. Poché | Director | ||||
| Timothy J. Poché | |||||
| Signature | Title | ||||
| /s/ Timothy Alan Simon | Director | ||||
| Timothy Alan Simon | |||||
| /s/ Robert C. Flexon | Director | ||||
| Robert C. Flexon | |||||
| /s/ Mark Spender | Director | ||||
| Mark Spender | |||||
| /s/ Dennis T. Whalen | Director | ||||
| Dennis T. Whalen | |||||
| /s/ Leo W. Varner, Jr. | Director | ||||
| Leo W. Varner, Jr. | |||||
| May 31, 2023 | |||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Charah Solutions, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Charah Solutions, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company does not have sufficient cash on hand or available liquidity to repay the maturing credit agreement debt, including the outstanding letters of credit, and sustain operations for the one-year period following the date that these consolidated financial statements are issued and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, effective January 1, 2022, the Company adopted FASB ASC 842, Leases, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Louisville, Kentucky
May 31, 2023
We have served as the Company’s auditor since 2017.
F-1
CHARAH SOLUTIONS, INC.
Consolidated Balance Sheets
(amounts in thousands except par value and share amounts)
| December 31, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | 21,559 | $ | 24,266 | |||||||
| Restricted cash | 40,100 | 34,908 | |||||||||
| Trade accounts receivable, net | 45,696 | 49,303 | |||||||||
| Contract assets | 20,981 | 26,844 | |||||||||
| Inventory | 5,204 | 6,289 | |||||||||
| Prepaid expenses and other current assets | 4,709 | 6,113 | |||||||||
| Total current assets | 138,249 | 147,723 | |||||||||
| Real estate, property and equipment, net | 93,940 | 70,473 | |||||||||
| Right-of-use assets | 32,748 | — | |||||||||
| Goodwill | 62,193 | 62,193 | |||||||||
| Intangible assets, net | — | 53,531 | |||||||||
| Equity method investments | — | 7 | |||||||||
| Other assets | 11,413 | 10,180 | |||||||||
| Total assets | $ | 338,543 | $ | 344,107 | |||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 36,475 | $ | 30,641 | |||||||
| Contract liabilities | 8,418 | 6,199 | |||||||||
| Finance lease obligations, current portion | 10,592 | 6,979 | |||||||||
| Operating lease obligations, current portion | 12,483 | — | |||||||||
| Notes payable, current maturities | 9,649 | 7,567 | |||||||||
| Asset retirement obligation | 37,982 | 27,534 | |||||||||
| Accrued liabilities | 26,296 | 36,874 | |||||||||
| Other liabilities | 1,027 | 460 | |||||||||
| Total current liabilities | 142,922 | 116,254 | |||||||||
| Deferred tax liabilities | 819 | 949 | |||||||||
| Contingent payments for acquisitions | 1,950 | 1,950 | |||||||||
| Asset retirement obligation | 30,579 | 14,879 | |||||||||
| Finance lease obligations, less current portion | 24,585 | 19,444 | |||||||||
| Operating lease obligations, less current portion | 23,621 | — | |||||||||
| Notes payable, less current maturities | 149,584 | 133,661 | |||||||||
| Other liabilities | 4,192 | 641 | |||||||||
| Total liabilities | 378,252 | 287,778 | |||||||||
Commitments and contingencies (see Note 17) | |||||||||||
| Mezzanine equity | |||||||||||
Preferred Stock, Series A — $0.01 par value; 50,000,000 shares authorized, 26,000 shares issued and outstanding as of December 31, 2022; aggregate liquidation preference of $37,176 and $28,783 as of December 31, 2022 and 2021, respectively | 42,743 | 35,532 | |||||||||
Preferred Stock, Series B — $0.01 par value; 50,000,000 shares authorized, 30,000 shares issued and outstanding as of December 31, 2022; aggregate liquidation preference of $30,000 as of December 31, 2022 | 28,800 | — | |||||||||
| Stockholders’ equity | |||||||||||
| Retained losses | (222,522) | (94,679) | |||||||||
Common Stock — $0.01 par value; 20,000,000 shares authorized, 3,379,605 and 3,340,782 shares issued and outstanding as of December 31, 2022 and 2021, respectively | 339 | 334 | |||||||||
| Additional paid-in capital | 110,931 | 114,880 | |||||||||
| Total stockholders’ equity | (111,252) | 20,535 | |||||||||
| Non-controlling interest | — | 262 | |||||||||
| Total equity | (111,252) | 20,797 | |||||||||
| Total liabilities and equity | $ | 338,543 | $ | 344,107 | |||||||
See notes to consolidated financial statements.
F-2
CHARAH SOLUTIONS, INC.
Consolidated Statements of Operations
(dollars in thousands except per share data)
| Year Ended December 31, | |||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||||||||
| Construction and service revenue | $ | 246,779 | $ | 261,987 | $ | 187,509 | |||||||||||
| Raw material sales | 46,388 | 31,232 | 44,868 | ||||||||||||||
| Total revenues | 293,167 | 293,219 | 232,377 | ||||||||||||||
| Construction and service cost of sales | (259,845) | (239,847) | (168,605) | ||||||||||||||
| Raw material cost of sales | (42,936) | (27,474) | (40,965) | ||||||||||||||
| Total cost of sales | (302,781) | (267,321) | (209,570) | ||||||||||||||
| Gross (loss) profit | (9,614) | 25,898 | 22,807 | ||||||||||||||
| General and administrative expenses | (39,365) | (42,189) | (34,064) | ||||||||||||||
| Gain on sales-type lease | — | 5,568 | — | ||||||||||||||
| Gains on sales of real estate, property and equipment, net | 12,245 | 23,543 | — | ||||||||||||||
| Gain on ARO settlement, net | 4,789 | 3,623 | — | ||||||||||||||
| Other operating expenses from ERT services | (15,372) | (5,078) | — | ||||||||||||||
| Gain on change in contingent payment liability | — | — | 9,702 | ||||||||||||||
| Impairment expense | (62,271) | (827) | (38,014) | ||||||||||||||
| Operating (loss) income | (109,588) | 10,538 | (39,569) | ||||||||||||||
| Interest expense, net | (18,567) | (15,227) | (13,774) | ||||||||||||||
| Loss on extinguishment of debt | — | (638) | (8,603) | ||||||||||||||
| (Loss) income from equity method investment | (7) | 191 | (2,516) | ||||||||||||||
| Loss from continuing operations before income taxes | (128,162) | (5,136) | (64,462) | ||||||||||||||
| Income tax (expense) benefit | 57 | (661) | 914 | ||||||||||||||
| Loss from continuing operations, net of tax | (128,105) | (5,797) | (63,548) | ||||||||||||||
| Income from discontinued operations, net of tax | — | — | 8,883 | ||||||||||||||
| Net loss | (128,105) | (5,797) | (54,665) | ||||||||||||||
| Less (loss) income attributable to non-controlling interest | (262) | 17 | 1,198 | ||||||||||||||
| Net loss attributable to Charah Solutions, Inc. | $ | (127,843) | $ | (5,814) | $ | (55,863) | |||||||||||
| Amounts attributable to Charah Solutions, Inc. | |||||||||||||||||
| Loss from continuing operations, net of tax and non-controlling interest | $ | (127,843) | $ | (5,814) | $ | (64,746) | |||||||||||
| Deemed and imputed dividends on Series A Preferred Stock | (599) | (592) | (461) | ||||||||||||||
| Series A Preferred Stock dividends | (5,307) | (8,156) | (4,064) | ||||||||||||||
| Net loss from continuing operations attributable to common stockholders | (133,749) | (14,562) | (69,271) | ||||||||||||||
| Net income from discontinued operations | — | — | 8,883 | ||||||||||||||
| Net loss attributable to common stockholders | $ | (133,749) | $ | (14,562) | $ | (60,388) | |||||||||||
| Net loss from continuing operations per common share | |||||||||||||||||
| Basic | $ | (39.77) | $ | (4.61) | $ | (23.17) | |||||||||||
| Diluted | $ | (39.77) | $ | (4.61) | $ | (23.17) | |||||||||||
| Net income from discontinued operations per common share | |||||||||||||||||
| Basic | $ | — | $ | — | $ | 2.97 | |||||||||||
| Diluted | $ | — | $ | — | $ | 2.97 | |||||||||||
| Net loss attributable to common stockholders per common share | |||||||||||||||||
| Basic | $ | (39.77) | $ | (4.61) | $ | (20.20) | |||||||||||
| Diluted | $ | (39.77) | $ | (4.61) | $ | (20.20) | |||||||||||
| Weighted-average shares outstanding used in loss per common share: | |||||||||||||||||
| Basic | 3,363 | 3,157 | 2,990 | ||||||||||||||
| Diluted | 3,363 | 3,157 | 2,990 | ||||||||||||||
See notes to consolidated financial statements.
F-3
CHARAH SOLUTIONS, INC.
Consolidated Statements of Stockholders’ Equity
(dollars in thousands unless otherwise indicated)
| For the Year Ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mezzanine Equity | Permanent Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock (Shares) | Preferred Stock (Amount) | Common Stock (Shares) | Common Stock (Amount) | Additional Paid-In Capital | Retained Losses | Total | Non-Controlling Interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | — | $ | — | 2,962,284 | $ | 296 | $ | 85,187 | $ | (33,002) | $ | 52,481 | $ | 792 | $ | 53,273 | ||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | (55,863) | (55,863) | 1,198 | (54,665) | |||||||||||||||||||||||||||||||||||||||||||||||
| Share based compensation expense | — | — | — | — | 2,539 | — | 2,539 | — | 2,539 | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | — | — | — | (1,580) | (1,580) | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under share-based compensation plans | — | — | 54,971 | 5 | (5) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Taxes paid related to the net settlement of shares | — | — | (9,552) | (1) | (231) | — | (232) | — | (232) | |||||||||||||||||||||||||||||||||||||||||||||||
| Contribution from sale of subsidiary to entity under common control | — | — | — | — | 25,506 | — | 25,506 | — | 25,506 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series A Preferred Stock, net of issuance costs | 26,000 | 24,253 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Deemed and imputed dividends on Series A Preferred Stock | — | 3,169 | — | — | (461) | — | (461) | — | (461) | |||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock Dividends | — | — | — | — | (4,064) | — | (4,064) | — | (4,064) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 26,000 | $ | 27,423 | 3,007,703 | $ | 300 | $ | 108,471 | $ | (88,865) | $ | 19,906 | $ | 410 | $ | 20,316 | ||||||||||||||||||||||||||||||||||||||||
| For the Year Ended December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mezzanine Equity | Permanent Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock (Shares) | Preferred Stock (Amount) | Common Stock (Shares) | Common Stock (Amount) | Additional Paid-In Capital | Retained Losses | Total | Non-Controlling Interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 26,000 | $ | 27,423 | 3,007,703 | $ | 300 | $ | 108,471 | $ | (88,865) | $ | 19,906 | $ | 410 | $ | 20,316 | ||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | (5,814) | (5,814) | 17 | (5,797) | |||||||||||||||||||||||||||||||||||||||||||||||
| Share based compensation expense | — | — | — | — | 2,702 | — | 2,702 | — | 2,702 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | 288,889 | 29 | 12,971 | — | 13,000 | — | 13,000 | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | — | — | — | (165) | (165) | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under share-based compensation plans | — | — | 53,542 | 6 | (5) | — | 1 | — | 1 | |||||||||||||||||||||||||||||||||||||||||||||||
| Taxes paid related to the net settlement of shares | — | — | (9,352) | (1) | (511) | — | (512) | — | (512) | |||||||||||||||||||||||||||||||||||||||||||||||
| Deemed and imputed dividends on Series A Preferred Stock | — | 8,109 | — | — | (592) | — | (592) | — | (592) | |||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock Dividends | — | — | — | — | (8,156) | — | (8,156) | — | (8,156) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 26,000 | $ | 35,532 | 3,340,782 | $ | 334 | $ | 114,880 | $ | (94,679) | $ | 20,535 | $ | 262 | $ | 20,797 | ||||||||||||||||||||||||||||||||||||||||
See notes to consolidated financial statements.
F-4
CHARAH SOLUTIONS, INC.
Consolidated Statements of Stockholders’ Equity
(dollars in thousands unless otherwise indicated)
| For the Year Ended December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mezzanine Equity | Permanent Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock (Shares) | Series A Preferred Stock (Amount) | Series B Preferred Stock (Shares) | Series B Preferred Stock (Amount) | Common Stock (Shares) | Common Stock (Amount) | Additional Paid-In Capital | Retained Losses | Total | Non-Controlling Interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 26,000 | $ | 35,532 | — | $ | — | 3,340,782 | $ | 334 | $ | 114,880 | $ | (94,679) | $ | 20,535 | $ | 262 | $ | 20,797 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | — | — | (127,843) | (127,843) | (262) | (128,105) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share based compensation expense | — | — | — | — | — | — | 2,660 | — | 2,660 | — | 2,660 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under share-based compensation plans | — | — | — | — | 64,721 | 6 | (6) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxes paid related to the net settlement of shares | — | — | — | — | (25,898) | (1) | (697) | — | (698) | — | (698) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series B Preferred Stock, net of issuance costs | — | — | 30,000 | 28,800 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deemed and imputed dividends on Series A Preferred Stock | — | 7,211 | — | — | — | — | (599) | — | (599) | — | (599) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock Dividends | — | — | — | — | — | — | (5,307) | — | (5,307) | — | (5,307) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | 26,000 | $ | 42,743 | 30,000 | $ | 28,800 | 3,379,605 | $ | 339 | $ | 110,931 | $ | (222,522) | $ | (111,252) | $ | — | $ | (111,252) | |||||||||||||||||||||||||||||||||||||||||||||||||
See notes to consolidated financial statements.
F-5
CHARAH SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(dollars in thousands unless otherwise indicated)
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net loss | $ | (128,105) | $ | (5,797) | $ | (54,665) | |||||||||||
| Adjustments to reconcile net loss to net cash and restricted cash (used in) provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 25,283 | 24,612 | 19,886 | ||||||||||||||
| Non-cash lease expense | 11,734 | — | — | ||||||||||||||
| Loss on extinguishment of debt | — | 638 | 8,603 | ||||||||||||||
| Paid-in-kind interest on long-term debt | — | 2,844 | 4,448 | ||||||||||||||
| Impairment expense | 62,271 | 827 | 40,772 | ||||||||||||||
| Amortization of debt issuance costs | 2,451 | 1,086 | 599 | ||||||||||||||
| Deferred income tax expense (benefit) | (129) | 581 | (834) | ||||||||||||||
| Gain on sales-type lease | — | (5,568) | — | ||||||||||||||
| (Gain) loss on sales of real estate, property and equipment | (11,873) | (23,436) | 708 | ||||||||||||||
| (Income) loss from equity method investment | 7 | (191) | 2,516 | ||||||||||||||
| Distributions received from equity investment | — | — | 1,731 | ||||||||||||||
| Non-cash share-based compensation | 2,660 | 2,702 | 2,539 | ||||||||||||||
| Loss (gain) on interest rate swap | — | 270 | (181) | ||||||||||||||
| Interest rate swap settlement | — | (745) | — | ||||||||||||||
| Gain on ARO settlement, net | (4,789) | (3,623) | — | ||||||||||||||
| Realization of deferred gain on ERT project performance | (284) | — | — | ||||||||||||||
| Gain on change in contingent payment liability | — | — | (9,702) | ||||||||||||||
| Interest accreted on contingent payments for acquisition | — | — | 171 | ||||||||||||||
| Increase (decrease) in cash and restricted cash due to changes in: | |||||||||||||||||
| Trade accounts receivable | 3,607 | 105 | (21,791) | ||||||||||||||
| Contract assets and liabilities | 8,083 | (8,612) | 8,025 | ||||||||||||||
| Inventory | 1,085 | (803) | 6,037 | ||||||||||||||
| Accounts payable | 7,071 | 13,636 | (457) | ||||||||||||||
| Lease liabilities | (11,972) | — | — | ||||||||||||||
| Asset retirement obligation | (32,636) | (9,712) | (9,694) | ||||||||||||||
| Accrued expenses and other liabilities | (11,598) | 1,020 | 13,811 | ||||||||||||||
| Net cash and restricted cash (used in) provided by operating activities | (77,134) | (10,166) | 12,522 | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Proceeds from the sales of real estate, property and equipment | 16,265 | 36,383 | 1,517 | ||||||||||||||
| Purchases of property and equipment, including costs of demolition | (5,152) | (8,499) | (4,304) | ||||||||||||||
| Proceeds from sale-leaseback transaction | — | — | 7,000 | ||||||||||||||
| Cash and restricted cash received from ERT transaction | 38,240 | 34,900 | — | ||||||||||||||
| Payments of working capital adjustment and other items for the sale of subsidiary | — | (7,367) | — | ||||||||||||||
| Proceeds from the sale of subsidiary, net of subsidiary cash | — | — | 37,860 | ||||||||||||||
| Distributions received from equity method investment | — | 1,015 | — | ||||||||||||||
| Net cash and restricted cash provided by investing activities | 49,353 | 56,432 | 42,073 | ||||||||||||||
See notes to consolidated financial statements.
F-6
| Year Ended | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Net payments on line of credit | — | (12,003) | (6,997) | ||||||||||||||
| Proceeds on asset-based lending credit agreement | 13,000 | — | — | ||||||||||||||
| Payments on asset-based lending credit agreement | (13,000) | — | — | ||||||||||||||
| Proceeds from senior unsecured notes | — | 135,000 | — | ||||||||||||||
| Proceeds from term loan | — | — | 15,000 | ||||||||||||||
| Proceeds on related party term loan | 20,000 | — | — | ||||||||||||||
| Proceeds from promissory note | — | 17,852 | — | ||||||||||||||
| Proceeds from equipment and other debt | 3,023 | 3,449 | 3,897 | ||||||||||||||
| Principal payments on term loan | — | (128,083) | (46,397) | ||||||||||||||
| Principal payments on promissory note | — | (17,852) | — | ||||||||||||||
| Principal payments on equipment and other debt | (10,615) | (8,841) | (17,599) | ||||||||||||||
| Payments of debt issuance costs | (861) | (13,380) | (1,623) | ||||||||||||||
| Principal payments on finance lease obligations | (9,381) | (4,768) | (316) | ||||||||||||||
| Taxes paid related to net settlement of shares | (700) | (512) | (150) | ||||||||||||||
| Net proceeds from issuance of convertible Series A Preferred Stock | — | — | 24,253 | ||||||||||||||
| Net proceeds from issuance of convertible Series B Preferred Stock | 28,800 | — | — | ||||||||||||||
| Proceeds from issuance of common stock | — | 13,000 | — | ||||||||||||||
| Distributions to non-controlling interest | — | (165) | (1,580) | ||||||||||||||
| Net cash and restricted cash provided by (used in) financing activities | 30,266 | (16,303) | (31,512) | ||||||||||||||
| Net increase (decrease) in cash and restricted cash | 2,485 | 29,963 | 23,083 | ||||||||||||||
| Cash and restricted cash, beginning of period | 59,174 | 29,211 | 6,128 | ||||||||||||||
| Cash and restricted cash, end of period | $ | 61,659 | $ | 59,174 | $ | 29,211 | |||||||||||
Supplemental Disclosures and Non-cash investing and financing transactions
The following table summarizes additional supplemental disclosures and non-cash investing and financing transactions:
| Year Ended | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Supplemental disclosures of cash flow information: | |||||||||||||||||
| Cash paid during the year for interest | $ | 15,461 | $ | 12,579 | $ | 13,331 | |||||||||||
| Cash paid (refunded) during the year for taxes | 46 | 884 | (942) | ||||||||||||||
| Supplemental disclosures and non-cash investing and financing transactions: | |||||||||||||||||
| Gross proceeds from revolving loan included in line of credit | $ | — | $ | 85,820 | $ | 118,895 | |||||||||||
| Gross payments on revolving loan included in line of credit | — | 73,817 | 125,892 | ||||||||||||||
| ASC 842 lease adoption | 32,480 | — | — | ||||||||||||||
| Right-of-use asset added in exchange for lease liabilities | 15,866 | — | — | ||||||||||||||
| Equipment acquired through finance leases | 18,134 | 24,508 | — | ||||||||||||||
| Sale of structural fill asset through a sales-type lease | — | 6,000 | — | ||||||||||||||
| Deemed and imputed dividends on Series A Preferred Stock | 7,211 | 8,156 | 3,169 | ||||||||||||||
| Non-cash Series A Preferred Stock dividends included in accrued expenses | 689 | 1,994 | 1,356 | ||||||||||||||
| Proceeds from the sale of equipment in accounts receivable, net | — | 1,313 | — | ||||||||||||||
| Changes in property and equipment included in accounts payables and accrued expenses | 1,237 | 1,187 | 205 | ||||||||||||||
| Debt issuance costs included in accounts payable and accrued expenses | — | 102 | — | ||||||||||||||
| Property and equipment reduction due to sale-leaseback | — | — | 7,000 | ||||||||||||||
| Working capital owed related to sale of subsidiary included in accrued expenses | — | — | 6,954 | ||||||||||||||
| Sale of equipment through the issuance of a note receivable | — | — | 1,450 | ||||||||||||||
| Asset retirement obligation reduction through property and equipment | — | — | 279 | ||||||||||||||
| Taxes paid related to the net settlement of shares included in current liabilities of discontinued operations held for sale | — | — | 79 | ||||||||||||||
See notes to consolidated financial statements.
F-7
| Year Ended | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| As reported within the Consolidated Balance Sheet: | |||||||||||||||||
| Cash from continuing operations | $ | 21,559 | $ | 24,266 | $ | 24,787 | |||||||||||
| Restricted cash from continuing operations | 40,100 | 34,908 | 4,424 | ||||||||||||||
| Total cash, cash equivalents and restricted cash as presented in the balance sheet | $ | 61,659 | $ | 59,174 | $ | 29,211 | |||||||||||
See notes to consolidated financial statements.
F-8
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
1. Nature of Business and Basis of Presentation
Organization
Charah Solutions, Inc. (together with its wholly-owned subsidiaries, “Charah Solutions,” the “Company,” “we,” “us,” or “our”), is a holding company formed in Delaware in January 2018. The Company's majority shareholder is Bernhard Capital Partners Management, LP and its affiliates (“BCP”). BCP owns 73% of the total voting power of our outstanding shares of common stock and all of the outstanding Series A and Series B Preferred Stock (collectively, the “Preferred Stock”), which is convertible at BCP's option at any time following the three-month anniversary of the issuance date into shares of common stock.
Description of Business Operations
The Company is a leading national service provider of mission-critical environmental services and byproduct recycling to the power generation industry, enabling our customers to address challenges related to the remediation of coal ash ponds and landfills at open and closed power plant sites while continuously operating and providing necessary electric power to communities nationwide. Services offered include a suite of remediation and compliance services, byproduct services, raw material sales and Environmental Risk Transfer (“ERT”) services. The Company has corporate offices in Kentucky and North Carolina and principally operates in the eastern and mid-central United States.
The accompanying consolidated financial statements include the assets, liabilities, stockholders’ equity, members’ equity, and results of operations of the Company and its consolidated subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Under the Jumpstart Our Business Startups Act (the “JOBS Act”), the Company meets the definition of an “emerging growth company,” which allows the Company to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. The Company intends to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act until the Company is no longer an emerging growth company. Among other things, we are not required to provide an auditor attestation report on the assessment of the internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002 and our disclosure obligations regarding executive compensation may be reduced. We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the IPO, or December 31, 2023. However, if certain events occur before the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.07 billion, or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company before the end of such five-year period.
Going Concern
The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
As discussed in Note 10, Long-Term Debt, the Company entered into an amendment to its Credit Agreement (as defined elsewhere herein) to change the maturity date from November 9, 2025 to January 31, 2024, amongst other changes. The Company does not have sufficient cash on hand or available liquidity to repay the maturing credit agreement debt, including the outstanding letters of credit, as it becomes due within one year after the date that these consolidated financial statements are issued. Combined with the Company’s recurring losses, recurring and continuing negative operating cash flows, and lack of available liquidity or cash on hand to sustain operations, these conditions, raise substantial doubt about the Company’s ability to continue as a going concern.
In response, the Company has entered into a definitive agreement to be acquired by SER Capital Partners, which management anticipates will bring necessary funding to support the ongoing operations of the Company, and has implemented certain cost saving strategies to preserve liquidity. Additionally, the Company is currently pursuing a plan to refinance its Credit Agreement before the maturity date and other strategies to secure additional liquidity. However, these factors are subject to external conditions that are not within the Company’s control, and therefore, implementation of management’s plans cannot be
F-9
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
deemed probable. As a result, management has concluded these plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Discontinued Operations
On November 19, 2020, the Company sold its Allied subsidiary engaged in maintenance, modification and repair services to the nuclear and fossil power generation industry to an affiliate of BCP (the “Purchaser”), the Company’s majority shareholder, in an all-cash deal for $40,000 (the “Allied Transaction”), subject to adjustments for working capital and certain other adjustments as set forth in the purchase agreement (the "Purchase Agreement").
Discontinued operations comprise those activities that have been disposed of during the period and represent a separate major line of business that can be clearly distinguished for operational and financial reporting purposes. Accordingly, the Consolidated Balance Sheets, Statements of Operations, and the Notes to Consolidated Financial Statements reflect the Allied results as discontinued operations for all periods presented. Unless otherwise specified, disclosures in these consolidated financial statements reflect continuing operations only. The Consolidated Statements of Cash Flows include both continuing and discontinued operations. Refer to Note 3, Discontinued Operations, for further information on the discontinued operations relating to the Allied Transaction.
Segment Information
After the Allied Transaction, the Company operates as one reportable segment, reflecting the suite of end-to-end services we offer our utility partners and how our Chief Operating Decision Maker (“CODM”) reviews consolidated financial information to evaluate results of operations, assess performance and allocate resources. Due to the nature of the Company’s business, the Company's Chief Executive Officer, who is also the CODM, evaluates the performance of the Company and allocates resources of the Company based on consolidated gross profit, general and administrative expenses, balance sheet, liquidity, capital spending, safety statistics and business development reports for the Company as a whole. Since the Company has a single operating segment, all required financial segment information can be found in the consolidated financial statements.
We provide the following services through our one segment: remediation and compliance services, byproduct services, raw material sales and ERT transfer services. Remediation and compliance services are associated with our customers’ need for multi-year environmental improvement and sustainability initiatives, whether driven by regulatory requirements, power generation customer initiatives or consumer expectations and standards. Byproduct services consist of recurring and mission-critical coal ash management and operations for coal-fired power generation facilities while also supporting both our power generation customers’ desire to recycle their recurring and legacy volumes of coal combustion residuals (“CCRs”), commonly known as coal ash, and our ultimate end customers’ need for high-quality, cost-effective supplemental cementitious materials (SCMs) that provide a sustainable, environmentally-friendly substitute for Portland cement in concrete. Our raw materials sales provide customers with the materials essential to their business while also providing the sourcing, logistics, and management needed to facilitate these raw materials transactions around the globe. ERT services represent an innovative solution designed to meet the evolving and increasingly complex needs of utility customers' evolving and increasingly complex plant closure and environmental remediation needs. These customers need to retire and decommission older or underutilized assets while maximizing the asset's value and improving the environment. Our ERT services manage the sites' environmental remediation requirements, benefiting the communities and lowering the utility customers' costs
2. Summary of Significant Accounting Policies
Management’s Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions, in particular estimates of legal reserves, remediation costs for asset retirement obligations (“ARO”), costs to complete contracts in process, contract modifications and unapproved change orders, that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
F-10
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
Balance Sheet Classification
The Company includes in current assets and liabilities contract assets, contract liabilities and retainage amounts payable, which may extend beyond one year. One year is used as the basis for classifying all other assets and liabilities.
Reclassification
Resulting from the increase in significance of the Company's raw material sales, revenue and cost of sales amounts reported in prior years have been reclassified to conform to the current year’s presentation.
Cash
The Company maintains cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash.
Restricted Cash
We maintain restricted cash in non-interest bearing escrow accounts for specific remediation and compliance projects, cash collateral for letters of credit, and insurance-related items. This cash becomes unrestricted as project milestones are completed in accordance with each project's defined project schedule, or when credit agreements requiring cash collateral are terminated. As of December 31, 2022 and 2021, restricted cash in these accounts held $40,100 and $34,908, respectively.
Trade Accounts Receivable, Net
Trade accounts receivable, net consist of amounts due from customers. An allowance for doubtful accounts is recorded to the extent it is probable that a portion of a particular account will not be collected. Management determines the allowance for doubtful accounts by evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. An allowance for doubtful accounts of $1,130 and $146 was included in trade accounts receivable, net as of December 31, 2022 and 2021, respectively.
Trade accounts receivable balances are considered past due based upon contract or invoice terms and are charged off when deemed uncollectible. The Company does not charge interest on customer accounts and generally does not require collateral on sales and services during the normal course of business. The Company has the right to file liens on the owner’s property with regard to certain construction contracts.
Inventory
Inventories, mainly comprising ash for resale, are valued using the first-in, first-out (“FIFO”) method. Inventories are stated at the lower of cost or net realizable value.
Property and Equipment
Property and equipment are stated at cost. Construction-in-progress represents costs incurred on the construction of assets that have not been completed or placed in service as of the end of the year. We evaluate the long-lived assets each reporting period to determine whether events and circumstances continue to support the asset's carrying value. Depreciation is provided principally by the straight-line method over the estimated useful lives of the assets as follows:
| Plant, machinery and equipment | 2 - 15 years | |||||||
| Vehicles | 2 - 10 years | |||||||
| Office equipment | 2 - 10 years | |||||||
| Buildings and leasehold improvements | 5 - 40 years | |||||||
| Finance lease assets | 3 - 7 years | |||||||
Repair and maintenance costs are expensed as incurred and expenditures for improvements are capitalized.
Asset Retirement Obligations
AROs associated with retiring long-lived assets are recognized as a liability in the period in which a legal obligation is incurred and becomes determinable. The ARO liability reflects the estimated present value of the closure and post-closure
F-11
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
activities associated with the Company’s land and structural fill assets. The Company utilizes current retirement costs to estimate the expected cash outflows for retirement obligations.
Inherent in the present value calculation are numerous assumptions and judgments, including the ultimate settlement amounts, inflation factors, credit-adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the land and/or structural fill balance. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. Gains and losses on ARO settlement are recognized as specific remediation tasks are performed. These gains and losses are determined based on the differences between the estimated costs used in the measurement of the fair value of the Company's AROs and the actual costs incurred for specific remediation tasks recognized on a proportionate basis.
Goodwill and Indefinite Lived Intangible Assets
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired in a business combination. Our intangible assets in the Consolidated Balance Sheets as of December 31, 2021 included a trade name that was considered to have an indefinite life. All intangible assets were impaired to zero during the year ended December 31, 2022.
Goodwill and indefinite-lived intangible assets are not amortized but instead are tested for impairment at least annually or more often if events or changes in circumstances indicate that the fair value of the asset may have decreased below its carrying value.
Goodwill is tested at the reporting unit level, which has been determined to be the Company. When performing its goodwill impairment test, the Company considers a qualitative assessment, when appropriate, and a quantitative assessment using the market approach and its market capitalization when determining the fair value of the reporting unit.
We evaluate the indefinite-lived trade name each reporting period to determine whether events and circumstances continue to support an indefinite useful life. When performing its indefinite-lived intangible asset impairment test, the Company considers a qualitative assessment, when appropriate, and a quantitative assessment using the relief-from-royalty method, an income approach, that estimates the present value of royalty income that could be hypothetically earned by licensing the brand name to a third party over the remaining useful life.
The assets will be written down to their implied fair value if the carrying value exceeds its fair value.
Definite-Lived Intangible Assets
Definite-lived intangible assets are comprised of our customer relationships. We evaluate our definite-lived intangible asset each reporting period to determine whether events and circumstances indicate that a triggering event has occurred that suggests that the fair value of the asset is below its carrying value. These assets are amortized on a straight-line basis over their estimated useful lives, as shown in the table below.
| Definite Lived Intangible | Useful Life | ||||
| Customer relationships | 10 years | ||||
Fair Value Disclosure
The Company follows Accounting Standards Codification (“ASC”) 820, Fair Value Measurements, which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. ASC 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis or on a nonrecurring basis.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.
F-12
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
Fair Value Hierarchy
Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets and liabilities.
Level 2 - Valuation is based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets and liabilities; quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
In determining the appropriate levels, the Company performs a detailed analysis of assets and liabilities that are subject to ASC 820. The Company's contingent payments for acquisitions and interest rate swap are the only assets or liabilities subject to fair value measurements on a recurring basis. The Company may also be required, from time to time, to measure certain other financial and non-financial assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. There have been no transfers between levels of the fair value hierarchy during the years ended December 31, 2022 and 2021.
The fair value of the Company's 8.50% Senior Notes due 2026 (the "Notes") were valued using quoted prices in active markets for the Notes, which is considered to be a Level 1 measurement. The Notes had a fair value of $54,594 and $131,760 as of December 31, 2022 and 2021, respectively, and a carrying value of $135,000 as of December 31, 2022 and 2021.
The book value of our outstanding equipment and other notes of $14,209 approximated fair value as December 31, 2022 based on consideration of recently executed transactions for similar debt, which are considered to be Level 2 measurements.
Our outstanding debt as of December 31, 2020 primarily bore interest at variable rates and book value approximated fair value, which were considered to be Level 2 measurements.
The carrying amounts and fair values of the Company’s recurring fair value measurements as of December 31, 2022 and 2021 are presented in the following table:
December 31, 2022 | Level 1 | Level 2 | Level 3 | Total Fair Value | Total Carrying Value | |||||||||||||||||||||||||||
| Recurring: | ||||||||||||||||||||||||||||||||
Contingent payments for acquisitions(1) | $ | — | $ | — | $ | 1,950 | $ | 1,950 | $ | 1,950 | ||||||||||||||||||||||
| December 31, 2021 | Level 1 | Level 2 | Level 3 | Total Fair Value | Total Carrying Value | |||||||||||||||||||||||||||
| Recurring: | ||||||||||||||||||||||||||||||||
Contingent payments for acquisitions(1) | — | — | 1,950 | 1,950 | 1,950 | |||||||||||||||||||||||||||
1.As of December 31, 2022 and 2021, the fair value of the contingent payments for acquisitions was estimated at the acquisition date using the present value of future payments. This analysis is updated at each reporting date to determine if any changes to the fair value are required and is considered to be a Level 3 measurement.
The Company's non-recurring level 3 fair value measurements consist of the measurement of AROs as described in Notes 5 and 7, the valuation of goodwill, intangible assets, and real estate, property and equipment, net as described in Notes 6 and 9 and the measurement of the preferred stock paid-in-kind dividends as described in Note 13.
Debt Issuance Costs
Debt issuance costs associated with our various credit agreements are amortized as interest expense over the term of the applicable agreement. Debt issuance costs related to the Notes are presented as a direct deduction from the carrying amount
F-13
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
of the related liability in the Consolidated Balance Sheet. Debt issuance costs related to the Asset-Based Lending Credit Agreement (the “Credit Agreement”) are included in other assets in the Consolidated Balance Sheet.
Freight Costs
Freight costs charged to customers are included in construction and service revenue and raw material sales. Costs incurred by the Company for freight are included in construction and service cost of sales and raw material cost of sales.
Leases
We lease equipment, vehicles, and real estate under various arrangements which are classified as either operating or finance leases. We recognize operating lease right-of-use assets and operating lease liabilities for operating leases and finance lease assets and liabilities for finance leases based on the present value of the lease payments over the lease term. The present value is based on our incremental borrowing rate, which represents the rate of interest that we would pay to borrow on a collateralized basis, over a similar term, an amount equal to the lease payments. See note 20 for further discussion of leases.
Income Taxes
Income taxes are accounted for in accordance with ASC 740. Income tax expense, or benefit, is calculated using the asset and liability method under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
The Company assesses its deferred tax assets each quarter to determine whether the assets are more likely than not (probability of more than 50%) realizable under ASC 740. The Company is required to record a valuation allowance for any portion of the tax assets that, based on the assessment, are not more likely than not realizable. The assessment considers, among other things, earnings in prior periods, forecasts of future taxable income, statutory carryforward periods, and tax planning strategies, to the extent feasible. The realization of deferred tax assets largely depends part on the generation of future taxable income during the periods in which the differences become deductible. The value of the deferred tax assets will also depend on applicable income tax rates. Judgment is required in determining the future tax consequences of events that have been recognized in the financial statements. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on the financial statements. Changes in existing tax laws and tax rates also affect actual tax results and the valuation of deferred tax assets over time.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans as equity-classified plans, in accordance with the fair value recognition provisions of ASC 718, Compensation-Stock Compensation. The Company utilizes the Black-Scholes model, which requires the input of subjective assumptions. These assumptions include estimating (i) the volatility of the common stock price over the expected term, (ii) the expected term, and (iii) expected dividends. Where the vesting of the stock is also based upon performance measures, management determines the likelihood of meeting such measures. Changes in the subjective assumptions can materially affect the estimate of the fair value of stock-based compensation and, consequently, the related amounts recognized on the Consolidated Statements of Operations.
Stock-based compensation expense is recognized in general and administrative expenses.
Revenue from Contracts with Customers
Revenue is measured based on the amount of consideration specified in a contract with a customer. Revenue is recognized when our performance obligations under the terms of the contract are satisfied, which generally occurs with the transfer of control of the goods or services to the customer.
Contract Combination
To determine revenue recognition for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment, and the decision to combine a group of contracts or separate a combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. Contracts are considered to have a single performance obligation if the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts primarily because we provide a service that involves multiple inter-related and integrated tasks to achieve the completion of a specific, single project. We
F-14
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
allocate the transaction price to each performance obligation for contracts with multiple performance obligations using our best estimate of the stand-alone selling price of each distinct good or service in the contract.
Sales and Services Contracts
For sales and service contracts where we have the right to consideration from the customer in an amount that corresponds directly with the unit price for the product and the value received by the customer based on our performance to date, revenue is recognized at a point in time when product is delivered to the customer and services are performed and contractually billable. Certain service contracts contain provisions dictating fluctuating rates per unit for the certain services in which the rates are not directly related to changes in the Company’s effort to perform under the contract. We recognize revenue based on the stand-alone selling price per unit for such contracts, calculated as the average rate per unit over the term of those contractual rates. This creates a contract asset or liability for the difference between the revenue recognized and the amount billed to the customer.
Under the typical payment terms of our services contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, at periodic intervals (e.g., weekly, biweekly or monthly).
Construction Contracts
We recognize revenue over time, as performance obligations are satisfied, for substantially all of our construction contracts due to the continuous transfer of control to the customer. For most of our construction contracts, the customer contracts with us to provide a service that involves multiple inter-related and integrated tasks to complete a specific, single project and is therefore accounted for as a single performance obligation. We recognize revenue using the cost-to-cost input method, based primarily on contract costs incurred to date compared to total estimated contract costs. This method is the most accurate measure of our contract performance because it depicts the company’s performance in transferring control of goods or services promised to customers according to a reasonable measure of progress toward complete satisfaction of the performance obligation.
Contract costs include all direct material, labor and subcontractor costs and indirect costs related to contract performance. The costs incurred that do not relate directly to transferring a service to the customer are excluded from the input method used to recognize revenue. Project mobilization costs are generally charged to the project as incurred when they are an integrated part of the performance obligation being transferred to the client. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client.
The payment terms of our construction contracts from time to time require the customer to make advance payments as well as interim payments as work progresses. The advance payment generally is not considered a significant financing component as we expect to recognize those amounts in revenue within a year of receipt as work progresses on the related performance obligation.
Variable Consideration
It is common for our contracts to contain contract provisions that give rise to variable consideration such as unpriced change orders or volume discounts that may either increase or decrease the transaction price. We estimate the amount of variable consideration at the expected value or most likely amount, depending on which is determined to be more predictive of the amount to which the Company will be entitled. Variable consideration is included in the transaction price when it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include such amounts in the transaction price are based largely on our assessment of legal enforceability, anticipated performance, industry business practices, and any other information (historical, current or forecasted) that is reasonably available to us. Variable consideration associated with unapproved change orders is included in the transaction price only to the extent of costs incurred.
We provide limited warranties to customers for work performed under our contracts. Such warranties are not sold separately, assure that the services comply with the agreed-upon specifications and legal requirements and do not provide customers with a service in addition to assurance of compliance with agreed-upon specifications. Accordingly, these types of warranties are not considered to be separate performance obligations. Historically, warranty claims have not resulted in material costs incurred.
F-15
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
Contract Estimates and Modifications
Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. As a significant change in one or more of these estimates could affect the profitability of our contracts, we routinely review and update our contract-related estimates through a disciplined project review process in which management reviews the progress and execution of our performance obligations and the estimated costs at completion. As part of this process, management reviews information including, but not limited to, outstanding contract matters, progress towards completion, program schedule and the associated changes in estimates of revenue and costs. Management must make assumptions and estimates regarding the availability and productivity of labor, the complexity of the work to be performed, the availability and cost of materials, the performance of subcontractors, and the availability and timing of funding from the customer, along with other risks inherent in performing services under all contracts where we recognize revenue over-time using the cost-to-cost method.
We recognize changes in contract estimates on a cumulative catch-up basis in the period in which the changes are identified. Such changes in contract estimates can result in the recognition of revenue in a current period for performance obligations that were satisfied or partially satisfied in prior periods. Changes in contract estimates may also result in the reversal of previously recognized revenue if the current estimate differs from the previous estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the period it is identified.
Contracts are often modified to account for changes in contract specifications and requirements. Most of our contract modifications are for goods or services that are not distinct from existing contracts due to the significant integration provided in the context of the contract and are accounted for as if they were part of the original contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. We account for contract modifications when the modification results in the promise to deliver additional goods or services that are distinct and the increase in the price of the contract is for the same amount as the stand-alone selling price of the additional goods or services included in the modification.
We evaluate our contracts whether we are acting as the principal or as the agent when providing services, which we consider in determining if revenue should be reported on a gross or net basis. We determine the Company to be a principal if we control the specified service before that service is transferred to a customer.
Contract Assets and Liabilities
Billing practices are governed by each project's contract terms based upon costs incurred, achievement of the milestones or predetermined schedules. Billings do not necessarily correlate with revenue recognized over time using the cost-to-cost input method. Contract assets include unbilled amounts typically resulting from revenue under long-term contracts when the revenue recognized exceeds the amount billed to the customer. Contract liabilities consist of billings in excess of revenue recognized as well as deferred revenue.
Contract assets also include retainage, which represents amounts withheld by our clients from billings according to provisions in the contracts and may not be paid to us until the completion of specific tasks or the completion of the project and, in some instances, for even longer periods.
Our contract assets and liabilities are reported in a gross position on a contract-by-contract basis at the end of each reporting period. We include in current assets and liabilities contract assets and liabilities, which may extend beyond one year.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), requiring all leases to be recognized on the balance sheet as a right-of-use asset and a lease liability unless the lease is a short-term lease (generally a lease with a term of 12 months or less). On January 1, 2022, we adopted ASC 842. As further described in Note 20, we lease equipment and vehicles primarily used at our project sites. We adopted ASC 842 using a modified retrospective approach (Comparatives Under 840 Option). The Comparatives Under 840 Option requires recognition under the new standard in ASC 842, Leases (“Leases (Topic 842)”) to be applied as of the date of adoption (January 1, 2022) with all prior periods being presented under Accounting Standards Codification (ASC) 840, Leases (“Leases (Topic 840)”). As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. ASC 842 also permitted the election of certain
F-16
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
practical expedients upon adoption. We elected the transition package of practical expedients which allowed us to carryforward the historical lease classification.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets. The amendments contained in this ASU will be applied through a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2018, the FASB issued ASU No. 2018-19, which amended the effective date of ASU No. 2016-13 and clarified that receivables arising from operating leases are not within the scope of Subtopic 326-20. In October 2019, the FASB delayed the effective date of this ASU, extending the effective date for non-public business entities and making the ASU effective for the Company for the fiscal year ending December 31, 2023, and interim periods therein, with early adoption permitted. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). This ASU provides supplemental guidance and clarification to ASU No. 2020-04, and these updates must be adopted concurrently, cumulatively referred to as “Topic 848.” The amendments in Topic 848 are currently effective for all entities and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In August 2020, the FASB issued ASU No. 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU No. 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. The Company adopted ASU No. 2020-06 effective as of January 1, 2022. The adoption of ASU No. 2020-06 did not have an impact on the Company’s consolidated financial statements.
3. Discontinued Operations
On November 19, 2020, the Company completed the Allied Transaction through an all-cash deal for $40,000, subject to adjustments for working capital and certain other adjustments as set forth in the Purchase Agreement. The Allied Transaction was approved by a special committee of the Company’s board of directors consisting solely of independent directors, which obtained a fairness opinion in connection with the Allied Transaction. This Allied Transaction has been treated as a sale to an entity under common control, with $25,506 recognized as a contribution to equity.
The parties made customary representations and warranties and have agreed to customary covenants in the Purchase Agreement. The Company entered into a non-competition and non-solicitation arrangement under the Purchase Agreement with the Purchaser, subject to customary exceptions. In addition, the parties also entered into a Transition Services Agreement pursuant to which the Company provided Allied and the Purchaser with certain transition assistance services from the date of the Allied Transaction until April 30, 2021 in exchange for payment. The Transition Services Agreement was subsequently amended and extended with certain transition assistance services provided until August 30, 2021. In total, the Company received $0 and $60 for its performance under the Transition Services Agreement during the year ended December 31, 2022 and 2021, respectively. The Company had receivables outstanding from Allied of $0 at December 31, 2022 and 2021, respectively. In accordance with applicable accounting guidance for the disposal of long-lived assets, the results of the Allied Transaction are presented as discontinued operations and, as such, have been excluded from continuing operations for all periods presented.
F-17
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
The Company received cash proceeds of $37,860, which was net of transaction costs of $1,900 and Allied restricted cash of $240. The Company assumed Allied liabilities of $3,500, recorded a $301 increase to paid-in-capital for the income tax impact related to the Allied Transaction and recognized accruals of $6,954 for working capital adjustments and $413 for other acquisition-related charges in accrued expenses in our Consolidated Balance Sheet as of December 31, 2021. All accruals recognized through the Allied Transaction were paid during the year ended December 31, 2021.
F-18
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
The Company derecognized the following assets and liabilities through this Allied Transaction:
| Restricted cash | $ | 240 | |||
| Trade accounts receivable, net | 25,752 | ||||
| Prepaid expenses and other current assets | 1,453 | ||||
| Property and equipment, net | 1,112 | ||||
Goodwill(a) | 12,020 | ||||
| Accounts payable | (8,681) | ||||
| Accrued liabilities | (26,367) | ||||
| Carrying value of Allied | $ | 5,529 | |||
(a) Goodwill was allocated to discontinued operations on a relative fair value basis.
The following amounts related to discontinued operation were derived from historical financial information and have been segregated from continuing operations and reported as discontinued operations in our Consolidated Statements of Operations:
| Year Ended December 31, | |||||
| 2020 | |||||
| Revenue | $ | 314,251 | |||
| Cost of sales | 295,423 | ||||
| Gross profit | 18,828 | ||||
| General and administrative expenses | 7,106 | ||||
| Operating income | 11,722 | ||||
Interest expense, net(b) | (2,745) | ||||
| Income from discontinued operations before income taxes | 8,977 | ||||
| Income tax expense | 94 | ||||
| Income from discontinued operations | $ | 8,883 | |||
(b) Interest expense was allocated to discontinued operations due to a requirement in our amended Credit Agreement that cash generated from the Allied Transaction was to be used to reduce our borrowings.
The following table provides supplemental cash and restricted cash information related to discontinued operations:
| Year Ended December 31, | |||||
| 2020 | |||||
| Cash and restricted cash: | |||||
| Cash and restricted cash - continuing operations | $ | 29,211 | |||
| Cash and restricted cash - discontinued operations | — | ||||
| Total cash and restricted cash | $ | 29,211 | |||
F-19
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
The depreciation and amortization, capital expenditures and significant operating noncash items of Allied were as follows:
| Year Ended December 31, | |||||
| 2020 | |||||
| Cash flows from discontinued operating activities: | |||||
| Depreciation and amortization | $ | 755 | |||
| Loss on disposal of fixed assets | 22 | ||||
| Non-cash shared-based compensation | 145 | ||||
| Cash flows from discontinued investing activities: | |||||
| Purchase of property and equipment | $ | 93 | |||
4. Revenue
We disaggregate our revenue from customers by customer arrangement and geographic region as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below.
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Construction contracts | 140,798 | 160,632 | 80,805 | ||||||||||||||
| Byproduct services | 105,981 | 101,355 | 106,704 | ||||||||||||||
| Raw material sales | 46,388 | 31,232 | 44,868 | ||||||||||||||
| Total revenue | $ | 293,167 | $ | 293,219 | $ | 232,377 | |||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| United States | $ | 293,167 | $ | 293,219 | $ | 231,032 | |||||||||||
| Foreign | — | — | 1,345 | ||||||||||||||
| Total revenue | $ | 293,167 | $ | 293,219 | $ | 232,377 | |||||||||||
On December 31, 2022, we had $517,914 in transaction price for existing contracts allocated to remaining performance obligations. We expect to recognize approximately 19% of our remaining performance obligations as revenue during 2023, 13% in 2024, 11% in 2025 and 56% thereafter. Revenue associated with our remaining performance obligations relates to our construction contracts. The balance of remaining performance obligations does not include variable consideration that was determined to be constrained as of December 31, 2022. As of December 31, 2022, there were $2,923 in unapproved change orders associated with project scope changes included in estimated costs at completion on certain construction contracts, of which $2,330 were approved after year end.
5. Asset Acquisitions
The Company closed on two acquisitions during the year ended December 31, 2022, and one acquisition during the year ended December 31, 2021, as part of our ERT service offerings.
As each asset group lacked the necessary elements of a business, these transactions were accounted for as asset acquisitions in accordance with ASC 805, Business Combinations. The purchase price comprised the assumed liabilities plus expenses and cash paid by or owed to the seller. Since the fair value of the net assets acquired was different than the purchase price of the assets, the Company allocated the difference pro rata on the basis of relative fair values to reduce the basis of land, land improvements and structural fill sites, property and equipment and other assets acquired. For Cheswick Generating Station asset acquisition as discussed further herein, the Company recognized a deferred gain representing the excess of fair value of the financial assets acquired over the consideration given (including transaction costs incurred).
The Company has identified asset retirement obligations within the assumed liabilities to be initially measured and valued in accordance with ASC 410, Asset Retirement and Environmental Obligations. We developed our estimates of these
F-20
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
obligations using input from our operations personnel. Our estimates are based on our interpretation of current requirements and proposed regulatory changes and are intended to approximate fair value. In the absence of quoted market prices, we determine the estimate of fair value based on the best available information, including the results of present value techniques. We use professional engineering judgment and estimated prices based on quotes rates from third parties and amounts paid for similar work to determine the fair value of these obligations. We are required to recognize these obligations at market prices, whether we plan to contract with third parties or perform the work ourselves.
Once we determined the estimated closure and post-closure costs for each asset retirement obligation, we inflation-adjusted those costs to the expected time of payment using an estimated inflation rate. We then discounted those expected future costs back to present value using the credit-adjusted, risk-free rate effective at the time the obligation was incurred, consistent with the expected cash flow approach. Any changes in expectations that result in an upward revision to the estimated cash flows are treated as a new liability and discounted at the current rate, while downward revisions are discounted at the historical weighted average rate of the recorded obligation. The credit-adjusted, risk-free discount rate used to calculate the present value of an obligation is specific to each specific asset retirement obligation. Gains on ARO settlements result from the requirement to record costs plus an estimate of third-party profit in determining the ARO. When we perform the work using internal resources and reduce the ARO for work performed, we recognize a gain if actual costs are less than the estimated costs plus the third-party profit.
Because these obligations are measured at estimated fair value using present value techniques, changes in the estimated cost or timing of future closure, demolition, and post-closure activities could result in a material change in these liabilities, related assets, and results of operations. We assess the appropriateness of the estimates used to develop our recorded balances annually or more often if conditions warrant. Changes in the timing or extent of future final closure and post-closure activities typically result in a current adjustment to the recorded liability and land, land improvements and structural fill sites assets.
Avon Lake Asset Acquisition
On April 4, 2022, the Company, through its wholly-owned special purpose vehicle subsidiary Avon Lake Environmental Redevelopment Group, LLC (“ALERG”), completed the full acquisition of the Avon Lake Generating Station and adjacent property (the "Avon Lake Property") from GenOn Power Midwest, LP, (“GenOn”) and has begun environmental remediation and sustainable redevelopment of the property.
As part of this agreement, the Company acquired the Avon Lake Property, which is a 40-acre area located on Lake Erie that consists of multiple parcels of land adjacent to the retired generating plant, including the generating station, which ceased electric generation in March 2022, submerged lands lease in Lake Erie, substation/switch gear and transformers, administrative offices and structures, coal rail and storage yard parcels. ALERG assumed all liabilities related to the Avon Lake Property and will be responsible for the shutdown and decommissioning of the coal power plant and performing all environmental remediation and redevelopment work at the site. The decommissioning of the coal power plant and redevelopment of the property are expected to be completed within 36 months from the date of acquisition.
The assets acquired and liabilities assumed as recognized within the Company's consolidated balance sheet upon closing on the APA consisted of the following:
| Consideration and direct transaction costs: | |||||
| Asset retirement obligations | $ | (34,300) | |||
| Direct transaction costs | (1,345) | ||||
| Total consideration and transaction costs incurred | $ | (35,645) | |||
| Assets Acquired: | |||||
| Restricted Cash | $ | 2,900 | |||
| Land, land improvements and structural fill sites | 32,109 | ||||
| Plant, machinery and equipment | 623 | ||||
| Vehicles | 13 | ||||
| Total allocated value of assets acquired | $ | 35,645 | |||
A summary of the other assumptions included in the fair value measurement of the asset retirement obligations to be recognized upon closing of the APA consisted of the following:
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CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
| Other Assumptions: | |||||
| Inflation rate | 2.50 | % | |||
| Weighted average rate applicable to our long-term asset retirement obligations | 7.35 | % | |||
As part of the acquisition, the Company acquired certain plant, machinery and equipment and vehicles for which management committed to a plan to sell. Property and equipment of $505 that was initially classified as held for sale were sold to third parties as of December 31, 2022. The Company received proceeds of $1,565 and recorded a gain of $1,060 within gains on sales of real estate, property and equipment, net, in the Company's consolidated statements of operations. The proceeds were recorded in cash flows from investing activities in the Company's consolidated statements of cash flows. The amount of land, land improvements and structural fill sites acquired includes fair value estimates for real estate and scrap to be sold from the demolition of the coal power plant.
Restricted cash is exclusively used to fund initial costs related to the acquisition and the remaining balance will be used to fund a portion of the asset retirement obligations. Restricted cash is held and will be disbursed by an escrow agent. Funds will be released to the Company as asset retirement obligation costs are incurred and performance of remediation activities are certified by an authorized representative of GenOn.
Cheswick Generating Station Asset Acquisition
On April 6, 2022, the Company, through its wholly-owned special purpose vehicle subsidiaries, Cheswick Plant Environmental Redevelopment Group, LLC, Cheswick Lefever, LLC and Harwick Operating Company, LLC (collectively, “CPERG”), completed the full acquisition of the Cheswick Generating Station, the Lefever Ash Landfill and the Monarch Wastewater Treatment Facility (the "Cheswick Property") from GenOn and will begin environmental remediation and sustainable redevelopment of the Pennsylvania properties immediately. The Cheswick Generating Station ceased electrical generation operations on March 31, 2022.
As part of this agreement, the Company, through CPERG, has acquired properties consisting of:
▪The retired Cheswick Generating Station, a 565 MW coal-fired plant previously operated by GenOn, located in Springdale, PA. The 56-acre primary generating station site, along with an adjacent 27-acre parcel, consists of an operating rail line, a coal yard, bottom ash emergency and recycle ponds, waste ponds and a coal pile runoff pond, coal delivery equipment, and an ash handling parcel. CPERG will be responsible for the shutdown and decommissioning of the coal power plant, the remediation of the two ash ponds and performing all environmental remediation and redevelopment work at the site.
▪The Lefever Ash Landfill in Cheswick, PA. The 182-acre site, including the 50-acre landfill facility, provided disposal of coal combustion residuals (CCR) and residual waste from the Cheswick Generating Station. CPERG will be responsible for the closure design, remediation closure work and post-closure monitoring of the landfill.
▪The Monarch Wastewater Treatment Facility in Allegheny County, PA. CPERG will be responsible for management and compliance with all applicable environmental regulations.
In the process of accounting for this transaction, the basis of the land, property and equipment acquired was reduced to zero, resulting in an excess of financial assets over and above the purchase price. The Company recorded a deferred gain of $4,476, representing the difference between the fair value of the assets acquired and the consideration given (including transaction costs incurred). This deferred gain will be recognized ratably over the entire project as remediation costs are incurred in proportion to total estimated remediation costs. During the year ended December 31, 2022, the Company recognized $284 of the deferred gain within gains on sales of real estate, property and equipment, net, in the Company's consolidated statements of operations. The decommissioning of the coal power plant and redevelopment of these properties are expected to be completed within 42 months from the date of acquisition, and the post-closure monitoring associated with the Lefever Ash Landfill and Monarch Wastewater Treatment Facility will occur for 30 years after the closure of the sites.
The assets acquired and liabilities assumed as recognized within the Company's consolidated balance sheet upon closing on the APA consisted of the following:
F-22
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
| Consideration and direct transaction costs: | |||||
| Asset retirement obligations | $ | (30,179) | |||
| Direct transaction costs and accrued expenses | (684) | ||||
| Total consideration and transaction costs incurred | $ | (30,863) | |||
| Assets Acquired: | |||||
| Cash | $ | 5,577 | |||
| Restricted cash | 29,762 | ||||
| Total allocated value of assets acquired | $ | 35,339 | |||
| Excess of fair value of assets acquired over total consideration – deferred gain | $ | (4,476) | |||
A summary of the other assumptions included in the fair value measurement of the asset retirement obligations to be recognized upon closing of the APA consisted of the following:
| Other Assumptions: | |||||
| Inflation rate | 2.50 | % | |||
| Weighted average rate applicable to our long-term asset retirement obligations | 7.45 | % | |||
As part of the acquisition, the Company acquired certain plant, machinery and equipment and vehicles for which management committed to a plan to sell. The Company received proceeds and recorded a gain of $526 within gains on sales of real estate, property and equipment, net, in the Company's consolidated statements of operations. The proceeds were recorded in cash flows from investing activities in the Company's consolidated statements of cash flows.
Restricted cash is exclusively used to fund initial costs related to the acquisition and the remaining balance will be used to fund a portion of the asset retirement obligations. Restricted cash is held and will be disbursed by an escrow agent. Funds will be released to the Company as certain project milestones are met and performance of remediation activities are certified by an authorized representative of GenOn.
Gibbons Creek Asset Acquisition
In February 2021, the Company, through its wholly-owned special purpose vehicle subsidiary Gibbons Creek Environmental Redevelopment Group (“GCERG”), closed on an Asset Purchase Agreement (the “APA” or the “Agreement”) with Texas Municipal Power Agency (“TMPA”) to acquire, remediate and redevelop the Gibbons Creek Steam Electric Station and Reservoir (the “Gibbons Creek Transaction”). As part of this Agreement, GCERG took ownership of the 6,166-acre area (collectively, the “Purchased Assets”), which includes the closed power station and adjacent property, the 3,500-acre reservoir, dam and floodway. GCERG assumed all environmental obligations and became responsible for the decommissioning of the coal power plant as well as performing all environmental remediation work for the site landfills and ash ponds. At the closing of the APA, GCERG became liable for and expressly fully assumed any and all environmental liabilities and environmental compliance, as well as, without limitation, any remediation, investigation, management, mitigation, closure, maintenance, reporting, removal, disposal of and any other actions with respect to any hazardous substances at, on, in, under, or emanating from the Purchased Assets.
GCERG, at its discretion, plans to redevelop the property in an environmentally conscious manner that will expand economic activity and benefit the surrounding communities, as well as restore the property to a state that will enable it to be put to its best potential use. The existing power plant is being demolished, and GCERG is working with the Texas Commission on Environmental Quality to complete all environmental remediation required for the property and then plans to redevelop the remediated property within all zoning restrictions. The redevelopment of the property is expected to be completed within 34 months from the date of acquisition.
F-23
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
The assets acquired and liabilities assumed as recognized within the Company's Consolidated Balance Sheet upon closing on the APA consisted of the following:
| Consideration and direct transaction costs: | |||||
| Asset retirement obligations | $ | (50,590) | |||
| Bond and insurance accrued expenses, net | (2,229) | ||||
| Direct transaction costs | (2,336) | ||||
| Total consideration and transaction costs incurred | $ | (55,155) | |||
| Asset Received: | |||||
| Cash | $ | 6,354 | |||
| Restricted cash | 28,546 | ||||
| Water rights | 5,196 | ||||
| Land | 14,385 | ||||
| Plant, machinery and equipment | 610 | ||||
| Vehicles | 64 | ||||
| Total allocated value of assets acquired | $ | 55,155 | |||
A summary of the other assumptions included in the fair value measurement of the asset retirement obligations to be recognized upon closing of the APA consisted of the following:
| Other Assumptions: | |||||
| Inflation rate | 3.00 | % | |||
| Weighted average rate applicable to our long-term asset retirement obligations | 4.50 | % | |||
Demolition costs will be capitalized as part of the land as incurred as part of preparing the site for sale since, at the acquisition date, (i) we planned to demolish the existing structure as part of the redevelopment plan for the acquired property, (ii) demolition is expected to occur within a reasonable period of time after the acquisition, and (iii) such expected costs will be incurred to make the land saleable to a third party.
As part of the acquisition, the Company acquired certain plant, machinery and equipment and vehicles for which management committed to a plan to sell. Property and equipment of $193 that was initially classified as held for sale was subsequently sold to third parties.
As of December 31, 2022, the Company has completed the sale of nearly 80% of the real property acreage acquired through the Gibbons Creek Transaction. There were no sales of real property acreage for the year ended December 31, 2022. For the year ended December 31, 2021, the sale of property included 4,860 acres of the 6,166-acre area, the 3,500-acre reservoir, dam and spillway. The Company received net proceeds of $23,575 and recorded a gain on sales of property and equipment, net, of $14,669 in the Consolidated Statements of Operations related to this transaction. The proceeds were recorded in cash flows from investing activities in the Consolidated Statements of Cash Flows.
F-24
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
6. Balance Sheet Items
Property and equipment, net
The following table shows the components of property and equipment, net:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Plant, machinery and equipment | $ | 60,377 | $ | 63,937 | |||||||
| Structural fill site improvements | 55,760 | 55,760 | |||||||||
| Vehicles | 11,619 | 11,718 | |||||||||
| Office equipment | 600 | 600 | |||||||||
| Buildings and leasehold improvements | 267 | 267 | |||||||||
| Land, land improvements and structural fill sites | 44,790 | 12,231 | |||||||||
| Finance lease assets | 49,306 | 31,172 | |||||||||
| Construction in progress | — | 1,522 | |||||||||
Total property and equipment | $ | 222,719 | $ | 177,207 | |||||||
| Less: accumulated depreciation | (128,779) | (106,734) | |||||||||
Property and equipment, net | $ | 93,940 | $ | 70,473 | |||||||
Land, land improvements and structural fill sites include $19,107 of real property acquired in the asset acquisitions discussed in Note 5 that the Company is actively demolishing and for which depreciation expense is not being recorded. During the year ended December 31, 2022, the Company capitalized $3,129 of demolition costs and sold scrap with a cost basis of $2,679.
Depreciation expense for the years ended December 31, 2022, 2021, and 2020 was $19,363, $16,718, and $17,659, respectively.
Impairment of Long-Lived Assets Other than Goodwill and Intangible Assets
Long-lived assets other than goodwill and indefinite-lived intangible assets, held and used by the Company, including inventory and property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates the recoverability of assets to be held and used by comparing the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset to determine if the carrying value is not recoverable. If the carrying value is not recoverable, the Company fair values the asset and compares that fair value to the carrying value. If the asset is considered to be impaired, the impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value.
During the year ended December 31, 2022, the Company determined that a triggering event occurred that indicated that the carrying value of certain long-lived assets may not be recoverable. The Company determined that the discounted future cash flows were less that the carrying value of the asset group, indicating impairment. The fair value of the assets was determined through a market approach using the net realizable value of the assets, which indicated that certain assets were impaired that resulted in an impairment charge of $10,484. The long-lived assets impaired had a remaining fair value of $20,003 as of December 31, 2022.
During the year ended December 31, 2021, the Company determined that a triggering event occurred that indicated that the carrying value of certain remaining grinding technology-related equipment may not be recoverable. The fair value of the assets was determined through a market approach using the net realizable value of the assets, which indicated that the assets were impaired and resulted in an impairment charge of $673. The long-lived assets impaired had no remaining fair value as of December 31, 2021.
During the year ended December 31, 2020, as a result of the expiration of the option as discussed below, the Company determined that a triggering event had occurred that indicated that the asset group may not be recoverable as the option expiration led to a significant adverse change in the manner in which the long-lived asset was being used. The Company evaluated the recoverability of the structural fill site assets to be held and used by comparing the carrying amount of the asset group to the future net undiscounted cash flows expected to be generated to determine if the carrying value is not recoverable. The recoverability test indicated that these assets were not recoverable. The fair value of the assets was determined using an income approach of the discounted cash flows expected from the assets and compared to the assets' carrying value, which
F-25
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
indicated that the assets were impaired and resulted in an impairment charge. The Company recognized an charge of $6,399. The long-lived assets impaired during the year ended December 31, 2020, had a remaining fair value of $711 before the asset retirement obligation reassessment discussed below.
During the year ended December 31, 2020, as a result of a significant adverse change in the manner in which the long-lived assets were being used, the Company determined that certain grinding technology-related equipment and construction in progress assets were no longer viable as certain performance sales levels would not be achieved. We concluded that a triggering event had occurred that indicated that the asset group may not be recoverable. The fair value of the assets was determined through a market approach using the net realizable value of the assets, which indicated that the assets were impaired and resulted in an impairment charge. The Company recognized an impairment charge of $9,150.
During the year ended December 31, 2020, in connection with the impairment of certain grinding technology equipment and construction in progress assets, the Company determined that certain slow-moving inventory stored at two locations would no longer be used to create finished goods through the use of the previously mentioned technology-related equipment and would be sold to external parties. We concluded that a triggering event had occurred that the inventory value may not be recoverable. The fair value was determined through a market approach using the net realizable value of the inventory, which indicated that the assets were impaired and resulted in an impairment charge. The Company recognized an impairment charge of $2,757, which was recorded in cost of sales in the Consolidated Statement of Operations. As of December 31, 2022 and 2020, the inventory impaired during the year ended December 31, 2020 had a remaining fair value of $8 and $1,090, respectively.
Sales-type lease
In March 2021, the Company amended an existing ground lease with a third party concerning one of the Company's structural fill assets with a 30-year term expiring on December 31, 2050. The lease includes multiple options that may be exercised at any time during the lease term for the lessee to purchase all or a portion of the premises, as well as a put option (the “Put Option”) that provides the Company the option to require the lessee to purchase all of the premises at the end of the lease term.
In accordance with ASC 840 and ASC 842, Leases, the Company considered whether this lease, as amended, met any of the following four criteria as part of classifying the lease at the amendment date: (a) the lease transfers ownership of the property to the lessee by the end of the lease term; (b) the lease contains a bargain purchase option; (c) the lease term is equal to 75 percent or more of the estimated economic life of the lease property; and (d) the present value of the minimum lease payments, excluding executory costs, equals or exceeds 90 percent of the excess of the fair value of the lease property to the lessor at lease inception. This lease was recorded as a sales-type finance lease due to the Put Option provision contained within the lease agreement that represents a transfer of ownership of the property by the end of the lease term. Additionally, the Company determined that collectability of the lease payments was reasonably assured and that there were not any significant uncertainties related to costs that it has yet to incur with respect to the lease.
At the amendment date of the lease, a discount rate of 3.9% implicit in the sales-type lease was used to calculate the present value of the minimum lease payments, which the Company recorded as a lease receivable. The Company recognized a gain of $5,568 within operating income in the Consolidated Statements of Operations.
The following table reflects the classification of the lease receivable within our Consolidated Balance Sheet:
| December 31, 2022 | |||||
| Lease receivable | $ | 5,872 | |||
| Less: current portion in prepaid expenses and other current assets | (68) | ||||
| Non-current portion in other assets | $ | 5,804 | |||
Asset sale agreement
In June 2021, the Company consummated an asset sale with an unrelated third party in which the Company assigned a lease agreement to the purchaser and sold certain grinding-related inventory and fixed assets for an aggregate sale price of $2,852. The Company received $1,250 in cash at closing, with the remaining portion to be paid over time on specified dates, with the final payment to be received 36 months from the closing date.
F-26
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
The Company determined that the note receivable included a significant financing component. As a result, the sale price and gain on sale were determined on a discounted cash flow basis. The Company recognized a gain of $1,187 within gains on sales of fixed assets in the Consolidated Statements of Operations.
F-27
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
The following table reflects the classification of the note receivable within our Consolidated Balance Sheet:
| December 31, 2022 | |||||
| Note receivable | $ | 852 | |||
| Less: current portion in prepaid expenses and other current assets | (500) | ||||
| Non-current portion in other assets | $ | 352 | |||
Accrued liabilities
The following table shows the components of accrued liabilities:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Accrued expenses | $ | 17,022 | $ | 25,074 | |||||||
| Accrued payroll and bonuses | 5,732 | 7,798 | |||||||||
| Accrued preferred stock dividends | 689 | 1,994 | |||||||||
| Accrued interest | 2,853 | 2,008 | |||||||||
Accrued liabilities | $ | 26,296 | $ | 36,874 | |||||||
Contingent payments for acquisitions
The following table presents the changes in the contingent payments for acquisitions:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Balance, beginning of period | $ | 1,950 | $ | 1,950 | |||||||
| Add: interest accreted on contingent payments for acquisition | — | — | |||||||||
| Less: gain on change in contingent payment liability | — | — | |||||||||
| Balance, end of period | $ | 1,950 | $ | 1,950 | |||||||
On March 30, 2018, Charah Management completed a transaction with SCB Materials International, Inc. and affiliated entities (“SCB”), a previously unrelated third party, pursuant to which Charah Solutions acquired certain assets and liabilities of SCB for a purchase price of $35,000, with $20,000 paid at closing and $15,000 to be paid over time in conjunction with certain performance metrics. The contract also contained various mechanisms for a working capital true-up. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations, (“ASC 805”) with the allocation of the purchase price for the acquisition finalized as of March 31, 2019 with the recognized goodwill allocated to the Consolidated Balance Sheets. In November 2018, the $15,000 to be paid over time was reduced by $3,300.
As previously discussed and as further discussed in Note 9, during the year ended December 31, 2020, the Company evaluated the recoverability of certain grinding technology assets. As part of that review, we assessed the likelihood of paying the contingent liability based on achieving certain performance sales levels using these technology assets. The Company concluded that certain sales levels would not be achieved, and we reduced the corresponding liability by $9,702 and this reduction was recognized as a component of operating (loss) income in the Consolidated Statement of Operations. As of December 31, 2022, the remaining liability balance of $1,950 is expected to be paid after 2022.
7. Asset Retirement Obligations
The Company owns two structural fill sites with continuing maintenance and monitoring requirements after their closure, one wastewater treatment facility with continuing maintenance and monitoring requirements, and eight tracts of real property with decommissioning, remediation and monitoring requirements. As of December 31, 2022 and 2021, the Company has accrued $68,561 and $42,413, respectively, for the asset retirement obligations (“ARO”).
F-28
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
Structural Fill Site ARO
Asset retirement activities and our related accounting for this ARO are as follows:
•Final capping and closure involve the installation of drainage and compacted soil layers and topsoil over areas where total airspace capacity has been consumed. Asset retirement obligations are recorded on a units-of-consumption basis as airspace is consumed. The liability is based on estimates of the discounted cash flows.
•Post closure involves the maintenance and monitoring of the structural fill sites. Generally, we are required to maintain and monitor the structural fill sites for a 30-year period. These maintenance and monitoring costs are recorded as an asset retirement obligation as airspace is consumed over the life of the structural fill sites. Post-closure obligations are recorded over the life of the structural fill sites on a units-of-consumption basis as airspace is consumed, based on estimates of the discounted cash flows associated with performing post-closure activities.
We develop our estimates of these obligations using input from our operations personnel. Our estimates are based on our interpretation of current requirements and proposed regulatory changes and are intended to approximate fair value. Absent quoted market prices, the estimate of fair value is based on the best available information, including the results of present value techniques. We use professional engineering judgment and estimated prices paid for similar work to determine the fair value of these obligations. We are required to recognize these obligations at market prices whether we plan to contract with third parties or perform the work ourselves. In those instances where we perform the work with internal resources, the incremental profit margin realized will be recognized as a component of operating income when the work is completed.
Once we determined the final capping, closure, and post-closure costs, we inflated those costs to the expected time of payment and discount those expected future costs back to present value using an inflation rate of 3.0%. We discounted these costs to present value using the credit-adjusted, risk-free rate effective of 5.25% at the time an obligation was incurred, consistent with the expected cash flow approach.
We record the estimated fair value of final capping, closure, and post-closure liabilities for our structural fill sites based on the capacity consumed through the current period. Because these obligations are measured at estimated fair value using present value techniques, changes in the estimated cost or timing of future final capping, closure, and post-closure activities could result in a material change in these liabilities, related assets, and results of operations. We assess the appropriateness of the estimates used to develop our recorded balances annually, or more often if conditions warrant.
Real Estate AROs
The Company acquired certain real property through three separate asset acquisitions with decommissioning, remediation and monitoring requirements. Refer to Note 5, Asset Acquisitions, for asset retirement activities and our related accounting for these AROs.
The following table reflects the activity for our asset retirement obligations:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Balance, beginning of period | $ | 42,413 | $ | 5,159 | |||||||
| Liabilities incurred | 64,479 | 50,590 | |||||||||
| Liabilities settled | (37,901) | (11,725) | |||||||||
| Accretion | 4,359 | 2,012 | |||||||||
| Gain on ARO settlement, net | (4,789) | (3,623) | |||||||||
| Balance, end of period | 68,561 | 42,413 | |||||||||
| Less: current portion | (37,982) | (27,534) | |||||||||
| Non-current portion | $ | 30,579 | $ | 14,879 | |||||||
During the years ended December 31, 2022 and 2021, the Company recognized a gain on ARO settlement, net of $4,789 and $3,623, respectively, representing differences between the estimated costs used in the measurement of the fair value of the Company's AROs and the actual expenditures incurred for specific remediation tasks performed during the year.
During the year ended December 31, 2020, after the expiration of the option and the impairment of the structural fill site assets in August 2020 as discussed above, the Company performed a review of the asset retirement obligation to determine if there had been changes in the estimated amount or timing of cash flows. The Company identified a downward adjustment of
F-29
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
$2,127 primarily due to the refinement of cost information associated with project bonding and insurance and the decrease in actual closure costs incurred since the site has ceased operations. The Company views the asset retirement obligation and the related structural fill site asset as a single asset so we first recorded a reduction of $279 to the carrying value of the asset down to $0 and then recorded the excess balance of $1,848 as a reduction to cost of sales in the Consolidated Statement of Operations.
8. Distributions to Stockholders, Receivable from Affiliates, and Related Party Transactions
ATC Group Services LLC (“ATC”), an entity owned by BCP, our majority stockholder, provided environmental consulting and engineering services at certain service sites. Expenses to ATC were $55, $100, and $288, during the years ended December 31, 2022, 2021, and 2020, respectively. The Company had no receivables outstanding from ATC at December 31, 2022 and 2021. The Company had payables and accrued expenses, net of credit memos, due to ATC of $14 and $4 at December 31, 2022 and 2021, respectively.
As further discussed in Note 10, Long-term Debt, in August 2021, the Company completed an offering of $135,000, in the aggregate, of the Notes, which amount included the exercise by the underwriters of their option to purchase an additional $5,000 aggregate principal amount of Notes. B. Riley Securities, Inc. (“B. Riley”), a shareholder of the Company with board representation, served as the lead book-running manager and underwriter for this offering, purchasing a principal amount of $80,325 of the Notes. Fees paid to B. Riley related to this offering were $7,914 for the year ended December 31, 2021. These fees were capitalized as debt issuance costs within notes payable, less current maturities in the Consolidated Balance Sheets and will be amortized prospectively through interest expense, net in the Consolidated Statements of Operations using the effective interest method through the maturity date of the Notes. In addition, Charah, LLC, a Kentucky limited liability company and indirect subsidiary of the Company, issued a promissory note in exchange for cash in favor of B. Riley Commercial Capital, LLC, an affiliate of B. Riley, evidencing a loan in aggregate principal amount of $17,852. The promissory note was repaid in full as of December 31, 2021.
As further discussed in Note 3, in November 2020, the Company sold its Allied subsidiary to an affiliate of BCP.
As further discussed in Note 13, in March 2020, the Company entered into an agreement with an investment fund affiliated with BCP to sell 26 (twenty-six thousand) shares of Series A Preferred Stock and, in November 2022, the Company entered into an investment agreement with BCP to sell 30 (thirty thousand) shares of Series B Preferred Stock.
9. Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized but instead are tested for impairment annually or more often if events or changes in circumstances indicate that the fair value of the asset may have decreased below its carrying value. We perform our impairment test effective October 1st of each year and evaluate for impairment indicators between annual impairment tests.
Goodwill
As of December 31, 2022 and 2021, goodwill was $62,193. We performed a quantitative assessment of the Company, which we concluded was a single reporting unit, as of October 1, 2022 and 2021 using a market approach, whereby the market capitalization of the Company was compared to its carrying value. The market capitalization was derived from the Company's publicly traded stock price. The fair value of the reporting unit exceeded its carrying value, and therefore, no impairment was recognized.
Indefinite-Lived Intangible Asset
Our intangible assets, net include a trade name that is considered to have an indefinite life. The Charah trade name fair value is based upon the income approach, primarily utilizing the relief-from-royalty methodology. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset. An impairment loss is recognized when the estimated fair value of the intangible asset is less than the carrying value. The fair value calculation requires significant judgments in determining both the assets’ estimated cash flows as well as the appropriate discount and royalty rates applied to those cash flows to determine fair value. Variations in economic conditions or a change in general consumer demands, operating results estimates or the application of alternative assumptions could produce significantly different results.
F-30
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
During the year ended December 31, 2022, we recorded an of our Charah trade name intangible asset of $13,316, primarily as a result of decreases in projected revenue, operating results and the royalty rate used in the valuation that was primarily attributable to the recent performance of the Company.
During the year ended December 31, 2020, we recorded an of our Charah trade name intangible asset of $21,014, primarily as a result of a decrease in the royalty rate used in the valuation that was primarily attributable to the recent performance of the Company.
Definite-Lived Intangible Assets
Definite-lived intangible assets were comprised of our customer relationships. Amortization expense of definite-lived intangible assets was $5,921, $7,894, and $8,582 for the years ended December 31, 2022, 2021, and 2020, respectively.
Long-lived assets, including definite-lived intangible assets are reviewed for impairment whenever certain triggering events may indicate impairment. In 2022, due to current-period operating losses and decline in market capitalization, we determined that a triggering event had occurred indicating it was more likely than not the fair value of the customer relationships definite-lived intangible assets were less than the associated carrying value. As a result of the Company’s continued poor financial performance, lack of profitability and negative projected cash flows, we determined that the customer relationships definite-lived intangible assets had no value. The Company recognized an of $34,295.
During the year ended December 31, 2020, as discussed in Note 6, the Company determined that certain technology- related equipment and construction in progress assets were no longer viable and recognized an impairment charge associated with those assets. As a result of this impairment, we concluded that a triggering event had occurred that indicated that the technology intangible asset group may not be recoverable. We determined that the technology intangible asset had no value since we will no longer be attempting to use the technology in construction equipment. The Company recognized an charge of $1,452.
The Company’s intangible assets consist of the following as of:
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization and Impairment | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization and Impairment | Net Carrying Amount | ||||||||||||||||||||||||||||||
| Definite-lived intangibles | |||||||||||||||||||||||||||||||||||
| Customer relationships | $ | 78,942 | $ | (78,942) | $ | — | $ | 78,942 | $ | (38,727) | $ | 40,215 | |||||||||||||||||||||||
| Indefinite-lived intangibles | |||||||||||||||||||||||||||||||||||
| Charah trade name | 13,316 | (13,316) | — | 13,316 | — | 13,316 | |||||||||||||||||||||||||||||
| Total | $ | — | $ | 53,531 | |||||||||||||||||||||||||||||||
10. Long-term Debt
Senior Notes
On August 25, 2021, the Company completed an offering of $135,000, in the aggregate, of the Company’s Notes, which amount includes the exercise by the underwriters of their option to purchase an additional $5,000 aggregate principal amount of Notes.
The Notes were issued pursuant to the First Supplemental Indenture (the “First Supplemental Indenture”), dated as of August 25, 2021, between the Company and Wilmington Savings Fund Society, FSB, as trustee (the “Trustee”). The First Supplemental Indenture supplements the Indenture entered into by and between the Company and the Trustee, dated as of August 25, 2021 (the “Base Indenture” and, together with the First Supplemental Indenture, the “Indenture”).
The public offering price of the Notes was 100.0% of the principal amount. The Company received proceeds before payment of expenses and other fees of $135,000. The Company used the proceeds, along with cash from the issuance of $13,000 of common stock, to fully repay and terminate the Company’s Credit Facility, as defined below.
F-31
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
The Notes bear interest at the rate of 8.50% per annum. Interest on the Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing October 31, 2021. The Notes will mature on August 31, 2026.
The Company may redeem the Notes for cash in whole or in part at any time (i) on or after August 31, 2023 and prior to August 31, 2024, at a price equal to 103% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after August 31, 2024 and prior to August 31, 2025, at a price equal to 102% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iii) on or after August 31, 2025 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Notes.
The Indenture also contains customary event of default and cure provisions. If an uncured default occurs and is continuing, the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes may declare the Notes to be immediately due and payable.
The Notes are senior unsecured obligations of the Company and rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness.
As a result of the issuance of the Notes, $12,116 of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the Consolidated Statements of Operations using the effective interest method through the maturity date of the Notes.
Asset-Based Lending Credit Agreement
On November 9, 2021, the Company entered into a new Credit Agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, the lenders party thereto and certain subsidiary guarantors named therein. The Credit Agreement provides for a four-year senior secured revolving credit facility with initial aggregate commitments from the lenders of $30,000, which includes $5,000 available for swingline loans, plus an additional $5,000 of capacity available for the issuance of letters of credit if supported by cash collateral provided by the Company (with a right to increase such amount by up to an additional $5,000) (“Aggregate Revolving Commitments”). Availability under the Credit Agreement is subject to a borrowing base calculated based on the value of certain eligible accounts receivable, inventory, and equipment of the Company and subject to redeterminations made in good faith and in the exercise of permitted discretion of JPMorgan. Proceeds of the Credit Agreements may be used for working capital and general corporate purposes.
The Credit Agreement provides for borrowings of either base rate loans or Eurodollar loans. Principal amounts borrowed are payable on the maturity date with such borrowings bearing interest that is payable (i) with respect to base rate loans, monthly and (ii) with respect to Eurodollar loans, the last day of each Interest Period (as defined below); provided that if any Interest Period for a Eurodollar loan exceeds three months, interest will be payable on the respective dates that fall every three months after the beginning of such Interest Period. Eurodollar Loans bear interest at a rate per annum equal to the Adjusted LIBOR for one, three or six months (the “Interest Period”), plus an applicable margin of 2.25%. Base rate loans bear interest at a rate per annum equal to the greatest of (i) the agent bank’s reference rate, (ii) the federal funds effective rate plus 50 basis points and (iii) the rate for one month Adjusted LIBOR loans plus 100 basis points, plus an applicable rate of 125 basis points. The Credit Agreement contains a provision for sustainability adjustments annually that will impact the applicable margin by between positive 0.05% and negative 0.05% based on the achievement, or lack thereof, of certain metrics agreed upon between JPMorgan and the Company and publicly reported through the Company’s annual non-financial sustainability report.
The Credit Agreement is guaranteed by certain of the Company’s subsidiaries and is secured by substantially all of the Company’s and such subsidiaries’ assets. The Credit Agreement contains customary restrictive covenants for asset-based loans that may limit the Company’s ability to, among other things: incur additional indebtedness, sell assets, make loans to others, make investments, enter into mergers, make certain restricted payments, incur liens, and engage in certain other transactions without the prior consent of the lenders.
A covenant testing period (“Covenant Testing Period”) is a period in which excess availability (which is defined in the Credit Agreement as the sum of availability and an amount up to $1,000), is less than the greater of (a) 12.5% of the lesser of the aggregate revolving commitments and the borrowing base, (b) the lesser of $7,500 and the PP&E Component as defined in the Credit Agreement, and (c) $3,500, for three consecutive business days. During a Covenant Testing Period, the Credit Agreement requires the Company to maintain a fixed charge coverage ratio as defined in the Credit Agreement, determined for any period of twelve (12) consecutive months ending on the last day of each fiscal quarter, of at least 1.00 to 1.00.
F-32
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
As of December 31, 2022, the Company had no borrowings outstanding on the Credit Agreement. Outstanding letters of credit were $10,687 as of December 31, 2022.
As a result of entering into the Credit Agreement, $1,366 of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the Consolidated Statements of Operations using the effective interest method through the maturity date of the Credit Agreement.
On April 28, 2023, the Company entered into Consent and Amendment No. 3 to Credit Amendment ("Amendment No. 3") that, among other things, (i) provides consent to the Merger Agreement (as defined elsewhere herein), subject to certain conditions, provided that it occurs before October 16, 2023, is materially consistent with the terms of the Merger Agreement and related documents, and no event of default, as defined within the Credit Agreement, has occurred or will result from the acquisition; (ii) amends the definition of Progress Billings Cap Amount to be used in certain borrowing base certificates; (iii) amends the definition of the Applicable Rate; (iv) changes the maturity date from November 9, 2025 to January 31, 2024; and (v) consents to an extension of the deadline for certain financial deliverables for the fiscal year ended December 31, 2022.
Term Loan Agreement
On August 15, 2022, the Company, through its GCERG subsidiary (the “Term Loan Borrower”), entered into a term loan agreement (the “Term Loan Agreement”) with Charah Preferred Stock Aggregator, LP, an affiliate of Bernhard Capital Partners Management, LP (“BCP”). As a result of unexpected operating losses, an increase in contract assets and accelerated cash outflows for remediation activities on an ERT project that led to a decrease in cash during the six months ended June 30, 2022, the Company sought additional financing options to fund ongoing operations and project level investment. The Term Loan Agreement was executed to provide additional liquidity for the Company and accelerate the timing of the Company's cash flows for anticipated sales of the GCERG real estate parcels. The Term Loan Agreement provides for a delayed-draw term loan in an aggregate principal amount of $20,000. The Term Loan Agreement is scheduled to mature on the earlier of the sale of the remaining GCERG real estate parcels or April 15, 2024. The Company elected to draw down the full borrowing capacity available under the Term Loan Agreement by November 8, 2022 through separate funding requests in order to fund operating activities. Borrowings under the Term Loan Agreement accrue interest at a percentage per annum equal to 12.0%, with interest payments due on the first business day of each calendar quarter following the effective date of the Term Loan Agreement and on the maturity date. The Term Loan Borrower agreed to pay a commitment fee equal to $1,000 that is payable on the earliest of (i) April 15, 2024, (ii) the date on which the loans are redeemed in full and all commitments are terminated and (iii) the date on which all commitments are terminated in full. The Term Loan Agreement is secured by a lien on, and security interest in, substantially all of the Term Loan Borrower’s assets, including real property, and is guaranteed on an unsecured basis by the Company and Charah, LLC. Voluntary prepayments are permitted at any time, without premium or penalty.
The Term Loan Agreement contains certain customary representations and warranties and affirmative and negative covenants. The negative covenants include, subject to customary exceptions, limitations on indebtedness, investments and acquisitions, mergers and consolidations, restricted payments, transactions with affiliates, liens and dispositions. The Term Loan Agreement allows the Term Loan Borrower to make distributions to its equity holders with the proceeds of the loans made thereunder. The Term Loan Agreement contains customary events of default. If an event of default occurs and is continuing, the lenders may declare all loans to be immediately due and payable.
As a result of entering into the Term Loan Agreement, $598 of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the consolidated statements of operations using the effective interest method through the maturity date of the Term Loan Agreement.
On April 16, 2023, the Company entered into Amendment No. 2 to the Term Loan Amendment that, among other things, (i) waives the mandatory prepayment provisions with respect to certain asset sale proceeds, (ii) joins certain subsidiaries of the Company as guarantors under Term Loan Agreement, and (iii) consents to an extension of the deadline for certain financial deliverables for the fiscal year ended December 31, 2022. In connection with the Term Loan Amendment, ALERG, Cheswick Lefever LLC and Cheswick Plant Environmental Redevelopment Group LLC (collectively, the “Grantors”) entered in to a security agreement, dated as of April 16, 2023, with Charah Preferred Stock Aggregator, LP, an affiliate of BCP, as the secured party (the “Secured Party”), pursuant to which the Grantors granted liens over substantially all of their assets in favor of the Secured Party.
F-33
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
Previous Credit Facility
On September 21, 2018, we entered into a credit agreement (the “Credit Facility”) by and among us, the lenders party thereto from time to time and Bank of America, N.A., as administrative agent (the “Administrative Agent”). The Credit Facility included:
•A revolving loan not to exceed $50,000 (the “Revolving Loan”);
•A term loan of $205,000 (the “Closing Date Term Loan”); and
•A commitment to loan up to a further $25,000 in term loans, which expired in March 2020 (the “Delayed Draw Commitment” and the term loans funded under such Delayed Draw Commitment, the “Delayed Draw Term Loan,” together with the Closing Date Term Loan, the “Term Loan”).
Pursuant to the terms of the Credit Facility and its related amendments, all amounts associated with the Revolving Loan and the Term Loan under the Credit Facility were set to mature in July 2022. The interest rates per annum applicable to the loans under the Credit Facility were based on a fluctuating rate of interest measured by reference to, at our election, either (i) the Eurodollar rate, currently LIBOR, or (ii) an alternative base rate. Various margins were added to the interest rate based upon our consolidated net leverage ratio (as defined in the Credit Facility). Customary fees were payable regarding the Credit Facility and included (i) commitment fees for the unused portions of the Credit Facility and (ii) fees on outstanding letters of credit. Amounts borrowed under the Credit Facility were secured by substantially all of the assets of the Company.
The Credit Facility contained various customary representations, warranties, restrictive covenants, certain affirmative covenants, including reporting requirements, and customary events of default.
Outstanding letters of credit under the previous Credit Facility were $11,079 as of December 31, 2020.
During the year ended December 31, 2021, using the proceeds from the Notes, along with cash from the issuance of $13,000 of common stock, to fully repay and terminate the Credit Facility, the Company paid $114,123 of outstanding principal on the Closing Date Loan and $12,340 of outstanding loans on the Revolver. Further, the Company paid $2,000 of previously accrued fees required as consideration for Amendment No. 3 to Credit Agreement that was otherwise due and payable on the maturity date. During the year ended December 31, 2021, the Company wrote off unamortized debt issuance costs of $638 as a result of extinguishment of debt, which is included in loss on extinguishment of debt in the Consolidated Statements of Operations.
F-34
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
11. Notes Payable
The following table summarizes the significant components of debt at each balance sheet date and provides maturities and interest rate ranges for each major category as of December 31, 2022 and 2021:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Various equipment notes entered into in November 2017, payable in monthly installments ranging from $6 to $24, including interest at 5.2%, maturing in December 2022 through December 2023. The notes are secured by equipment with a net book value of $0 as of December 31, 2022. | $ | 565 | $ | 1,748 | |||||||
Various equipment notes entered into in 2018, payable in monthly installments ranging from $1 to $39, including interest ranging from 5.6% to 6.8%, maturing in March 2023 through May 2025. The notes are secured by equipment with a net book value of $3,469 as of December 31, 2022. | 3,818 | 5,952 | |||||||||
Various equipment notes entered into in 2019, payable in monthly installments ranging from $2 to $23, including interest ranging from 3.9% to 6.4%, maturing in April 2021 through December 2024. The notes are secured by equipment with a net book value of $1,295 as of December 31, 2022. | 1,748 | 2,633 | |||||||||
Various equipment notes entered in 2020, payable in monthly installments ranging from $9 to $10, including interest of 5.4%, maturing in August and September 2025. The notes are secured by equipment with a net book value of $1,098 as of December 31, 2022. | 1,215 | 1,624 | |||||||||
Various equipment notes entered into in 2021, payable in monthly installments ranging from $3 to $9, including interest ranging from 4.0% to 6.5%, maturing in February 2026 through August 2026. The notes are secured by equipment with a net book value of $1,696 as of December 31, 2022. | 1,484 | 1,861 | |||||||||
An equipment note entered into in 2022 with a customer, payable in monthly installments of $68 with no interest component, maturing with a balloon payment of the remaining outstanding balance in April 2023. The note is secured by equipment with a net book value of $3,784 as of December 31, 2022. | 3,784 | — | |||||||||
Various commercial insurance premium financing agreements entered into in 2021, payable in monthly installments ranging from $24 to $117, including interest ranging from 3.0% to 3.9%, maturing in October 2021 through April 2022. | — | 467 | |||||||||
Various commercial insurance premium financing agreements entered into in 2022, payable in monthly installments ranging from $19 to $143, including interest ranging from 4.2% to 5.3%, maturing in November 2022 through June 2023. | 592 | — | |||||||||
A $10,000 equipment line with a bank, entered into in December 2017, secured by all equipment purchased with the proceeds of the loan. Interest is calculated on any outstanding amounts using a fixed rate of 4.5%. The equipment line converted to a term loan in September 2018, with a maturity date of June 22, 2023. The term loan is secured by equipment with a net book value of $459 as of December 31, 2022. | 1,003 | 3,387 | |||||||||
Term Loan Agreement, issued August 2022, and related amendments (see Note 10). After consideration of the amendment, the Term Loan Agreement bears interest at 12.0%, matures in April 2024 and is secured by land and land improvements with a book value of $13,404. | 20,000 | — | |||||||||
Senior Unsecured Notes, issued August 2021 (see Note 10). The Notes are senior unsecured obligations of the Company, bearing stated interest at 8.50%, and rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness. | 135,000 | 135,000 | |||||||||
| Total | 169,209 | 152,672 | |||||||||
| Less debt issuance costs | (9,976) | (11,444) | |||||||||
| 159,233 | 141,228 | ||||||||||
| Less current maturities | (9,649) | (7,567) | |||||||||
| Notes payable due after one year | $ | 149,584 | $ | 133,661 | |||||||
F-35
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
Future maturities of notes payable at December 31 are as follows:
| For the Year Ending December 31, | |||||
| 2023 | $ | 9,649 | |||
| 2024 | 23,226 | ||||
| 2025 | 1,122 | ||||
| 2026 | 135,212 | ||||
| Total | $ | 169,209 | |||
12. Sale-leaseback Transaction
In November 2020, we entered into a sale-leaseback transaction whereby we sold and leased back plant, machinery and equipment and vehicles. The transaction met the requirements of a sale in accordance with ASC 606, and the lease is classified as a finance lease under Leases (Topic 842) as of December 31, 2022 and a capital lease under Leases (Topic 840) as of December 31, 2021 and 2022. Proceeds from the sale were $7,000, and the cost and related accumulated depreciation of the plant, machinery and equipment and vehicles of $9,841 and $3,302, respectively, were removed from the Consolidated Balance Sheet at the time of the sale. The $461 gain realized on the sale and $88 in loan origination fees incurred at the time of the sale were included in the lease asset that is being depreciated over the life of the lease (three years). The lease obligation of $2,128 is recorded within current liabilities in the Consolidated Balance Sheet as of December 31, 2022. The lease obligation of $2,357 and $2,128 is recorded within current and long-term liabilities, respectively, in the Consolidated Balance Sheet as of December 31, 2021. The proceeds from the sale were recorded within investing activities in the Consolidated Cash Flow Statements in the year ended December 31, 2020.
13. Mezzanine Equity
Series A Preferred Stock
In March 2020, the Company entered into an agreement with an investment fund affiliated with BCP to sell 26 (twenty-six thousand) shares of Series A Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), with an initial aggregate liquidation preference of $26,000, net of a 3% Original Issue Discount (“OID”) of $780 for net proceeds of $25,220 in a private placement (the “Series A Preferred Stock Offering”). Proceeds from the Series A Preferred Stock Offering are being used for liquidity and general corporate purposes. In connection with the issuance of the Series A Preferred Stock, the Company incurred direct expenses of $966, including financial advisory fees, closing costs, legal expenses and other offering-related expenses. The Series A Preferred Stock was initially recorded net of OID and direct expenses, which are being accreted through paid-in-capital as a deemed dividend from the date of issuance through the first possible known redemption date, March 16, 2023. As of December 31, 2022, the Company had accrued dividends of $1,170 associated with the Series A Preferred Stock, which was recorded at a fair value of $689 using unobservable information for similar items and is classified as a level 3 fair value measurement.
Dividend Rights The Series A Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights on the distribution of assets in any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Series A Preferred Stock had an initial liquidation preference of $1 (one thousand dollars) per share.
The holders of the Series A Preferred Stock are entitled to a cumulative dividend paid in cash at the rate of 10.0% per annum, payable on a quarterly basis. If we do not declare and pay a dividend to the holders of the Series A Preferred Stock, the dividend rate will increase to 13.0% per annum and the dividends are paid-in-kind by adding such amount to the liquidation preference. Upon meeting certain "specified payment conditions," the Company has the ability under the Asset-Based Lending Credit Agreement to pay cash dividends on the Series A Preferred Stock. However, the Company’s intention is to pay dividends in-kind for the foreseeable future. The dividend rate will increase to 16.0% per annum upon the occurrence and during the continuance of an event of default. As of December 31, 2022, the liquidation preference of the Series A Preferred Stock, inclusive of dividends in-kind, was $37,176.
Conversion Features The Series A Preferred Stock is convertible at the option of the holders at any time on and subsequent to the three-month anniversary of the date of issuance into shares of common stock at a conversion price of $27.70 per share (the “Conversion Price”), which represents a 30% premium to the 20-day volume-weighted average price ended March 4, 2020. As of December 31, 2022, the maximum number of common shares that could be required to be issued if
F-36
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
converted is 1,342 (one million three hundred forty-two thousand). The conversion rate is subject to the following customary anti-dilution and other adjustments:
•the issuance of common stock as a dividend or the subdivision, combination, or reclassification of common stock into a greater or lesser number of shares of common stock;
•the dividend, distribution or other issuance of rights, options or warrants to holders of common stock entitling them to subscribe for or purchase shares of common stock at a price per share that is less than the market value for such issuance;
•the issuance of a dividend or similar distribution in-kind, which can include shares of any class of capital stock, evidences of the Company’s indebtedness, assets or other property or securities, to holders of common stock;
•a transaction in which a subsidiary of the Company ceases to be a subsidiary of the Company as a result of the distribution of the equity interests of the subsidiary to the holders of the Company’s common stock; and
•the payment of a cash dividend to the holders of common stock.
On or subsequent to the three-year anniversary of the date of issuance, if the holders have not elected to convert all their shares of Series A Preferred Stock, the Company may give 30 days’ notice to the holders giving the holders the option to choose, in their sole discretion, to have all outstanding shares of Series A Preferred Stock converted into shares of common stock or redeemed in cash at the then applicable Redemption Price (as defined below). The Company may not issue this conversion notice unless (i) the average volume-weighted average price per share of the Company’s common stock during each of the 20 consecutive trading days before the conversion is greater than 120% of the conversion price; (ii) the Company’s common stock is listed on a national securities exchange; (iii) a registration statement for the re-sale of the common stock is then effective; and (iv) the Company is not then in possession of material non-public information as determined by Regulation FD promulgated under the Exchange Act.
The Series A Preferred Stock and the associated dividends during the year ended December 31, 2022 did not generate a beneficial conversion feature (“BCF”) upon issuance as the fair value of the Company’s common stock was less than the conversion price at the dividend dates. The Company will determine and, if required, measure a BCF based on the fair value of our stock price on the date dividends are declared for each subsequent dividend. If a BCF is recognized, a reduction to paid-in capital and the Series A Preferred Stock will be recorded and then subsequently accreted through the first redemption date.
Additionally, the Company determined that the nature of the Series A Preferred Stock was more akin to an equity instrument and that the economic characteristics and risks of the embedded conversion options were clearly and closely related to the Series A Preferred Stock. As such, the conversion options were not required to be bifurcated from the host under ASC 815, Derivatives and Hedging.
Redemption Rights If the Company undergoes certain change of control transactions, the Company will be required to immediately make an offer to repurchase all of the then-outstanding shares of Series A Preferred Stock for cash consideration per share equal to the greater of (i) 100% of the Liquidation Preference, plus accrued and unpaid dividends, if any, plus, if applicable for a transaction occurring before the third anniversary of the closing, a make-whole premium determined pursuant to a calculation of the present value of the dividends that would have accrued through such anniversary, discounted at a rate equal to the applicable treasury rate plus 0.50% (the “Make-Whole Premium”); provided that if the transaction occurs before the first anniversary of the closing, the Make-Whole Premium shall be no greater than $4,000 and (ii) the closing sale price of the common stock on the date of such redemption multiplied by the number of shares of common stock issuable upon conversion of the outstanding Series A Preferred Stock.
On or subsequent to the three-year anniversary of the issuance of the Series A Preferred Stock, the Company may redeem the Series A Preferred Stock, in whole or in part, for an amount in cash equal to the greater of (i) the closing sale price of the common stock on the date the Company delivers such notice multiplied by the number of shares of common stock issuable upon conversion of the outstanding Series A Preferred Stock and (ii) (x) if the redemption occurs before the fourth anniversary of the date of the closing, 103% of the Liquidation Preference, plus accrued and unpaid dividends, or (y) if the redemption occurs on or after the fourth anniversary of the date of the closing, the Liquidation Preference plus accrued and unpaid dividends (the foregoing clauses (i) or (ii), as applicable, the “Redemption Price”).
F-37
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
On or subsequent to the seven-year anniversary of the date of issuance, the holders have the right, subject to applicable law, to require the Company to redeem the Series A Preferred Stock, in whole or in part, into cash consideration equal to the liquidation preference, plus all accrued and unpaid dividends, from any source of funds legally available for such purpose.
Since the redemption of the Series A Preferred Stock is contingently or optionally redeemable and therefore not certain to occur, the Series A Preferred Stock is not required to be classified as a liability under ASC 480, Distinguishing Liabilities from Equity. As the Series A Preferred Stock is redeemable in certain circumstances at the option of the holder and is redeemable in certain circumstances upon the occurrence of an event that is not solely within our control, we have classified the Series A Preferred Stock in mezzanine equity in the Consolidated Balance Sheets.
Liquidation Rights In the event of any liquidation, winding-up or dissolution of the Company, whether voluntary or involuntary, the holders of the Series A Preferred Stock would receive an amount in cash equal to the greater of (i) 100% of the liquidation preference plus a Make-Whole Premium and (ii) the amount such holders would be entitled to receive at such time if the Series A Preferred Stock were converted into Company common stock immediately before the liquidation event. The Make-Whole Premium is removed from the calculation for a liquidation event occurring subsequent to the third anniversary of the issuance date.
Voting Rights The holders of the Series A Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis in addition to voting as a separate class as provided by applicable Delaware law and the Company’s organizational documents. The holders, acting exclusively and as a separate class, shall have the right to appoint either a non-voting observer to the Company’s Board of Directors or one director to the Company’s Board of Directors.
Registration Rights The holders of the Series A Preferred Stock have certain customary registration rights with respect to the Series A Preferred Stock and the shares of common stock into which they are converted, pursuant to the terms of a registration rights agreement.
Series B Preferred Stock
On November 14, 2022, the Company and an investment fund affiliated with BCP entered into (i) an agreement to sell 30 (thirty thousand) shares of Series B Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”), with an initial aggregate liquidation preference of $30,000, net of a 4% Original Issue Discount (“OID”) of $1,200 for net proceeds of $28,800 in a private placement (the “Series B Preferred Stock Investment”).
The Series B Preferred Stock ranks senior to all classes or series of equity securities of the Company with respect to dividend rights and rights on liquidation. In the event of any liquidation or winding up of the Company, the holder of each share of the Series B Preferred Stock will receive in preference to the holders of the Company common stock a per share amount equal to the greater of (i) the stated value of the Series B Preferred Stock and (ii) the amount such holders would be entitled to receive at such time if the Series B Preferred Stock were converted into Company common stock. Proceeds from the Series B Preferred Stock Investment were used for liquidity and general corporate purposes.
Conversion Features The holder of the Series B Preferred Stock may at any time following the 3-month anniversary of issuance convert all or a portion of the Series B Preferred Stock into common stock of the Company. Each share of Series B Preferred Stock will be convertible into a number of shares of common stock of the Company equal to the purchase price of such share divided by the conversion price, which will be set at an amount representing the volume-weighted average closing price of the Company common stock for the 20-trading days immediately preceding the public announcement of this transaction.
At any time after the three-year anniversary of the date of issuance, if the holders have not elected to convert all their shares of Series B Preferred Stock, the Company will have the option to convert all of the then-outstanding shares of Series B Preferred Stock; provided that (i) the closing price of the Company’s common stock exceeds 120% of the conversion price for each of the 20 consecutive trading days prior to the date of conversion, (ii) the Company’s common stock is then listed on a national securities exchange, (iii) a registration statement for re-sale of the Company’s common stock is then effective and (iv) the Company is not then in possession of material non-public information. The Company will provide the holders with 30 days’ notice of its intention to convert the Series B Preferred Stock and the holders will then have the option, in their sole discretion, to have their Series B Preferred Stock converted at the then-applicable Conversion Price or redeemed in cash at the Company’s redemption price as defined in the agreement. In the event the holders elect to have the Series B Preferred Stock redeemed in cash and the Company is unable to redeem the Series B Preferred Stock in cash, then the holders shall not be required to participate in any conversion and shall retain their then-outstanding Series B Preferred Stock in all respects.
F-38
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
Redemption Rights If a change of control of the Company occurs, subject to the payment in full of all obligations under the Credit Agreement, the Company will be required to immediately make an offer to repurchase all of the then-outstanding shares of Series B Preferred Stock for cash consideration per share equal to the Company’s redemption price as defined in the agreement. Unless the holders buy all or substantially all of the Company’s assets in a transaction or a series of related transactions approved by the Company’s board of directors, no acquisition or disposition of securities by the holders shall constitute a change of control hereunder.
At any time after the 30-month anniversary of the date of closing, the holders will have the option to require the Company to redeem any or all of the then-outstanding shares of Series B Preferred Stock for cash consideration equal to the stated value provided that the Company has the financial means and subject to the approval of the Company's lender if required under a customary credit facility.
At any time after the 30-month anniversary of the date of closing, and upon not less than 30 days prior written notice, if the holders have not elected to convert or redeem all their shares of Series B Preferred Stock, the Company may elect to redeem all shares of Series B Preferred Stock for an amount equal to the greater of (i) the closing sale price of the Common Stock on the date the Company delivers such notice multiplied by the number of shares of Common Stock issuable upon conversion of the outstanding Series B Preferred Stock and (ii) the stated value.
Voting Rights The holders of the Series B Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis and not as a separate class. The voting power of the Series B Preferred Stock will be limited to 5.0% of the outstanding common stock of the Company.
Registration Rights The holders of the Series B Preferred Stock will receive (i) customary transferable shelf registration rights pertaining to the Series B Preferred Stock and any shares of Company common stock issued upon the conversion thereof and (ii) customary piggyback and demand rights in respect of any Company common stock issued upon the conversion of any preferred stock, in each case, by amendment to the Company’s current registration rights agreement or otherwise and on terms consistent therewith.
14. Contract Assets and Liabilities
The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets, and contract liabilities on the Consolidated Balance Sheets.
Our contract assets are as follows:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Costs and estimated earnings in excess of billings | $ | 11,700 | $ | 17,163 | |||||||
| Retainage | 9,281 | 9,681 | |||||||||
Total contract assets | $ | 20,981 | $ | 26,844 | |||||||
The increase in contract assets in 2022 was primarily attributable to the timing of the billings for construction contracts.
Our contract liabilities are as follows:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Deferred revenue | $ | 258 | $ | 483 | |||||||
| Billings in excess of costs and estimated earnings | 8,160 | 5,716 | |||||||||
Total contract liabilities | $ | 8,418 | $ | 6,199 | |||||||
We recognized revenue of $5,941 for the year ended December 31, 2022, which was previously included in the contract liability balance at December 31, 2021.
F-39
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
The following table sets forth the costs and estimated earnings on uncompleted contracts as of:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Costs incurred on uncompleted contracts | $ | 344,692 | $ | 227,195 | |||||||
| Estimated earnings | 20,267 | 22,331 | |||||||||
Total costs and earnings | 364,959 | 249,526 | |||||||||
| Less billings to date | (361,419) | (238,079) | |||||||||
Costs and estimated earnings in excess of billings | $ | 3,540 | $ | 11,447 | |||||||
The following table sets forth the net balance in process as of:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Costs and estimated earnings in excess of billings | $ | 11,700 | $ | 17,163 | |||||||
| Billings in excess of costs and estimated earnings | (8,160) | (5,716) | |||||||||
Net balance in process | $ | 3,540 | $ | 11,447 | |||||||
Anticipated losses on long-term contracts are recognized when such losses become evident. As of December 31, 2022 and 2021, accruals for anticipated losses on long-term contracts were $120 and $159, respectively.
15. Stock-Based Compensation
The Company adopted the Charah Solutions, Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”), pursuant to which employees, consultants, and directors of the Company and its affiliates, including named executive officers, are eligible to receive awards. The 2018 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock, dividend equivalents, other stock-based awards, substitute awards, annual incentive awards, and performance awards intended to align the interests of participants with those of Company's stockholders. The Company has reserved 301 shares of common stock for issuance under the 2018 Plan, and all future equity awards described above will be issued pursuant to the 2018 Plan. During the year ended December 31, 2022, the Company amended the 2018 Plan to reserve an additional 200 shares of common stock, for a total of 501 shares of common stock reserved for issuance under the 2018 Plan.
Restricted share units (“RSUs”)
During the years ended December 31, 2022, 2021 and 2020, the Company granted 90, 50 and 54, respectively, RSUs under the 2018 Plan that have time-based vesting requirements.
Of the RSUs granted during the year ended December 31, 2022, 17 vest at the end of a one-year period, 56 vest in equal annual installments over three years, and 17 vest in equal annual installments over four years. The fair value of these RSUs is based on the market price of the Company’s shares on the grant date. As of December 31, 2022, 3 of the shares were vested and none had been forfeited.
Of the RSUs granted during the year ended December 31, 2021, 9 vest at the end of a one-year period, and 41 vest in equal annual installments over three years. The fair value of these RSUs is based on the market price of the Company’s shares on the grant date. As of December 31, 2022, 251 of the shares were vested and 71 had been forfeited.
Of the RSUs granted during the year ended December 31, 2020, 2 vested at the end of an eleven-month period, 9 vest after one year, 43 vest in equal installments over three years. The fair value of these RSUs is based on the market price of the Company's shares on the grant date. As of December 31, 2022, 491 of the shares were vested and 111 had been forfeited.
Performance share units (“PSUs”)
During the year ended December 31, 2022, 2021 and 2020, the Company granted 31, 24, and 23 PSUs, respectively, under the 2018 Plan that cliff vest after three years. The vesting of the PSUs is dependent upon the following performance goals during a specified period (the “Performance Period”): (i) the relative total stockholder return (“TSR”) percentile ranking of the Company as compared to the specified performance peer group and (ii) cumulative revenue. Each performance goal is weighted at 50% in determining the number of PSUs that become earned PSUs. The maximum number of earned PSUs for the Performance Period is 200% of the target number of PSUs. The total compensation cost we will recognize under the PSUs will
F-40
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
be determined using the Monte Carlo valuation methodology, which factors in the value of the TSR market condition when determining the grant date fair value of the PSU. Compensation cost for each PSU is recognized during the Performance Period based on the probable achievement of the two performance criteria. The PSUs are converted into shares of our common stock at the time the PSU award value is finalized. Two shares granted during 2022 vested and 4 shares had been forfeited, 2 shares granted during 2021 vested and 2 shares had been forfeited, and 23 shares granted during 2019 were forfeited.
A summary of the Company’s non-vested share activity for the year ended December 31, 2022 is as follows:
| Restricted Stock | Performance Stock | Total | |||||||||||||||||||||||||||||||||
| Shares | Weighted-Average Grant Date Fair Value | Shares | Weighted-Average Grant Date Fair Value | Shares | Weighted-Average Grant Date Fair Value | ||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | 89 | $ | 46.16 | 65 | $ | 42.40 | 154 | $ | 44.60 | ||||||||||||||||||||||||||
| Granted | 90 | 36.09 | 31 | 29.70 | 121 | 34.45 | |||||||||||||||||||||||||||||
| Forfeited | (30) | 44.28 | (29) | 56.45 | (59) | 50.24 | |||||||||||||||||||||||||||||
| Vested | (61) | 45.78 | (4) | 41.19 | (65) | 45.53 | |||||||||||||||||||||||||||||
Balance as of December 31, 2022 | 88 | $ | 36.90 | 63 | $ | 30.21 | 151 | $ | 34.08 | ||||||||||||||||||||||||||
| Restricted Stock | Performance Stock | Total | |||||||||||||||||||||||||||||||||
| Weighted Average Remaining Contractual Terms (Years) | Aggregate Intrinsic Value | Weighted Average Remaining Contractual Terms (Years) | Aggregate Intrinsic Value | Weighted Average Remaining Contractual Terms (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | 0.88 | $ | 4,072 | 1.26 | $ | 2,979 | 1.04 | $ | 7,051 | ||||||||||||||||||||||||||
Balance as of December 31, 2022 | 1.08 | $ | 476 | 1.33 | $ | 346 | 1.18 | $ | 822 | ||||||||||||||||||||||||||
Stock-based compensation expense related to the restricted stock issued was $1,936, $1,945 and $1,839 during the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022, total unrecognized stock-based compensation expense related to non-vested awards of restricted stock, net of estimated forfeitures, was $1,576, and is expected to be recognized over a weighted-average period of 1.18 years. The total fair value of awards vested for the year ended December 31, 2022 was $2,133.
Stock-based compensation expense related to the performance stock issued was $724, $757 and $555 during the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022, total unrecognized stock-based compensation expense related to non-vested awards of performance stock, net of estimated forfeitures, was $853, and is expected to be recognized over a weighted-average period of 1.83 years.
16. Defined Contribution Retirement Plan
Charah and its operating subsidiary, Ash Management Services (“AMS”), provide a defined contribution employee benefit plan (the “Charah and AMS 401(k) Plan”) qualified under Section 401(k) of the Code to employees who have completed 90 days of service and have attained age 18. Participants may contribute up to the lesser of 90% of eligible compensation or the maximum allowed under the Code. Charah and AMS make matching safe harbor contributions to participant accounts of up to 3% of the participant’s annual compensation. During the year ended December 31, 2022, 2021 and 2020, Charah and AMS contributed $968, $940 and $393, respectively, to the Charah and AMS 401(k) Plan.
17. Commitments and Contingencies
In December 2022, the Company was notified by a whistleblower that certain employees had engaged in improper spending activities at one of our project sites. In response, the Company conducted an internal investigation that substantiated the whistleblower's allegations. The Company engaged external legal counsel and a forensic accounting investigation team to thoroughly assess the extent of the fraudulent activities. Based on specific assumptions and limitations, we determined a range of $1,140 to $2,670 of possible loss related to potentially fraudulent transactions believed to have been billed to the customer from 2018 through 2022. The investigation will continue to proceed through the legal process, which includes examining the extent of involvement of the customer, its representatives or any third parties in contributory responsibility, evaluating the extent of insurance coverage available for reimbursement of the Company's losses, and collaborating with external law enforcement agencies to ascertain the full scope and magnitude of the overall fraudulent scheme. The Company has reversed
F-41
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
revenue of $2,476 for these fraudulent activities during the year ended December 31, 2022, representing management's best estimate of the probable loss, irrespective of potential recoveries from third parties or insurance policies.
In September 2022, TMPA served GCERG in the District Court of Travis County, Texas with a lawsuit alleging improper calculation of costs attributed to the remediation of the Site F Landfill on our Gibbons Creek project. In our APA with TMPA, GCERG agreed that if aggregate costs actually incurred to remediate the Site F Landfill did not exceed $13,600, then the cash and restricted cash received would be reduced on a dollar-for-dollar basis. In May 2023, the two parties held an unsuccessful mediation. This lawsuit is in the discovery phase and the Company intends to continue to defend the case vigorously.
From time to time the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. For all such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. Although it is difficult to predict the ultimate outcome of these lawsuits, claims and proceedings, we do not believe that the ultimate disposition of any of these matters, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. We maintain liability insurance for certain risks that is subject to certain self-insurance limits.
We believe amounts previously recorded are sufficient to cover any liabilities arising from the proceedings with all outstanding legal claims. Except as reflected in such accruals, we are currently unable to estimate a range of reasonably possible loss or a range of reasonably possible loss in excess of the amount accrued for outstanding legal matters.
18. Multiemployer Pension Plan
AMS contributes to union-sponsored multiemployer retirement defined benefit pension plans (the “multiemployer plans”) under the terms of collective bargaining agreements that cover its union-represented employees. The risks of participating in multiemployer plans are different from single-employer plans in the following aspects:
•Assets contributed to the multiemployer plans by one employer may be used to provide benefits to employees of other participating employers.
•If a participating employer stops contributing to the multiemployer plans, the unfunded obligations of the multiemployer plans may be borne by the remaining participating employers.
•If AMS chooses to stop participating in the multiemployer plans, AMS may be required to pay the multiemployer plans an amount based on the underfunded status of the multiemployer plans, referred to as a withdrawal liability.
The primary multiemployer plan to which AMS made contributions for the year ended December 31, 2022, 2021 and 2020 is outlined in the table below. The “EIN/Pension Plan Number” column provides the Employer Identification Number (“EIN”). The most recent Pension Protection Act zone status available in 2022 is for the respective multiemployer plan’s year-end within those years, unless otherwise noted. The zone status is based on information that AMS received from the multiemployer plans and is certified by the respective multiemployer plan’s actuary. Among other factors, multiemployer plans in the red zone (critical) are generally less than 65% funded, multiemployer plans in the yellow zone (endangered) are less than 80% funded, and multiemployer plans in the green zone (neither critical and declining, critical, or endangered) are at least 80% funded. The “FIP/RP Status Pending/Implemented” column indicates multiemployer plans for which a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented. The last column lists the expiration dates of the collective bargaining agreements to which the multiemployer plans are subject.
F-42
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
Year ended December 31, 2022 | Year ended December 31, 2021 | Year ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Pension Fund | EIN/Pension Plan Number | Pension Protection Act Zone Status | FIP/RP Status Pending/ Implemented | Contributions to Funds by AMS | Contributions to Funds by AMS | Contributions to Funds by AMS | Surcharge Imposed | Expiration Date of Collective Bargaining Agreement | ||||||||||||||||||||||||||||||||||||||||||
| Central states, southeast and southwest areas pension plan | 36-6044243 | Red - Critical and declining | Progress under FIP or RP | $ | 59 | $ | 111 | $ | 55 | No | Continuous with notice period by either party | |||||||||||||||||||||||||||||||||||||||
| Operating Engineers Local 324 Pension Fund | 38-1900637 | Red - Critical | Progress under FIP or RP | $ | — | $ | — | $ | 27 | Yes | 2021 | |||||||||||||||||||||||||||||||||||||||
| Employer Teamsters Locals 175 & 505 pension trust fund | 55-6021850 | Red - Critical | Progress under FIP or RP | $ | 111 | $ | 81 | $ | 74 | Yes | 2023 | |||||||||||||||||||||||||||||||||||||||
19. Income Taxes
The Company is a “C” Corporation under the Code and, as a result, is subject to U.S. federal, state, and local income taxes. The Company’s subsidiaries previously operated as partnerships for income tax purposes. Before the contribution of assets and liabilities to the Company on June 18, 2018, the subsidiaries passed through their taxable income to their owners for U.S. federal and other state and local income tax purposes and, thus, the subsidiaries were not subject to U.S. federal income taxes or other state or local income taxes, except for franchise tax at the state level.
The total income tax (benefit) expense on (loss) income before income taxes was allocated as follows:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Continuing operations | $ | (57) | $ | 661 | $ | (914) | |||||||||||
| Discontinued operations | — | — | 94 | ||||||||||||||
| Total | $ | (57) | $ | 661 | $ | (820) | |||||||||||
The components of the provision for income taxes attributable to continuing operations for the year ended December 31, 2022, 2021, and 2020 is as follows:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Current income tax expense (benefit): | |||||||||||||||||
| Federal | $ | 72 | $ | — | $ | — | |||||||||||
| State | — | 80 | (80) | ||||||||||||||
| 72 | 80 | (80) | |||||||||||||||
| Deferred income tax expense (benefit): | |||||||||||||||||
| Federal | (280) | 500 | (843) | ||||||||||||||
| State | 151 | 81 | 9 | ||||||||||||||
| (129) | 581 | (834) | |||||||||||||||
| Total income tax expense (benefit) | $ | (57) | $ | 661 | $ | (914) | |||||||||||
F-43
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
The items accounting for differences between income taxes computed at the federal statutory rate and the (benefit) provision recorded for income taxes for continuing operations were as follows:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Income tax benefit at the federal statutory rate (21%) | $ | (26,914) | $ | (1,079) | $ | (13,537) | |||||||||||
| State income tax (benefit) expense, net of federal tax benefit | 119 | 127 | (70) | ||||||||||||||
| Non-controlling interest | 55 | (3) | (251) | ||||||||||||||
| Stock compensation | 164 | (164) | 277 | ||||||||||||||
| Valuation allowance | 26,151 | 1,578 | 12,328 | ||||||||||||||
| Foreign income tax differential | 23 | — | — | ||||||||||||||
| Permanent items | 345 | 202 | 339 | ||||||||||||||
| Total income tax (benefit) expense | $ | (57) | $ | 661 | $ | (914) | |||||||||||
The Company accounts for income taxes in accordance with ASC 740, which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax basis of assets and liabilities existing at each balance sheet date using enacted tax rates for the years in which taxes are expected to be paid or recovered.
The components of the Company’s deferred tax assets and liabilities as of December 31, 2022 and 2021 are as follows:
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Deferred tax assets: | |||||||||||
| Loss carryovers | $ | 29,749 | $ | 14,333 | |||||||
| Intangible assets | 13,834 | 3,431 | |||||||||
| Other accrued expenses and reserves | 2,056 | 2,326 | |||||||||
| Right-of-use liability | 8,771 | — | |||||||||
| Finance leases | 517 | 1,091 | |||||||||
| Deferred asset sale | 1,018 | 226 | |||||||||
| Accrued bonus | 1,471 | 1,195 | |||||||||
| Asset retirement obligations | 16,655 | 10,222 | |||||||||
| Capitalized cost | 4,903 | 819 | |||||||||
| Deferred tax assets | 78,974 | 33,643 | |||||||||
| Valuation allowance | (50,311) | (19,937) | |||||||||
| Net deferred tax asset | 28,663 | 13,706 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Fixed assets, including land | 12,433 | 9,757 | |||||||||
| Restricted cash from ERT projects | 9,089 | 4,838 | |||||||||
| Right-of-use assets | 7,955 | — | |||||||||
| Prepaid expenses | 5 | 60 | |||||||||
| Deferred tax liabilities | 29,482 | 14,655 | |||||||||
| Net deferred tax liability | $ | 819 | $ | 949 | |||||||
The Company has net operating loss carryforwards of $90,241 for federal income tax purposes as of December 31, 2022. The increase in the net operating loss carryforward from 2021 is due to operating losses in 2022. Additionally, capital losses of $3,793 were recognized in 2022 which may be carried back to increase the net operating loss carryforward. Deferred interest expense carried forward to 2023 is $25,773. Net operating losses have unlimited carryover periods. Net operating losses and deferred interest expense for state tax purposes vary by state due mainly to apportionment. Most states allow net operating loss carryovers for a limited number of years.
The Company’s utilization of net operating losses and deferred interest expense in the future will be limited due to the provisions of Section 382 of the Internal Revenue Code. This will limit the utilization of carryover losses in 2023 and thereafter to approximately $2,700 per year plus an increased amount for certain built-in gains recognized over the next five years.
F-44
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
Net deferred tax liabilities were $819 and $949 at December 31, 2022 and 2021, respectively. We consider both positive and negative evidence when measuring the need for a valuation allowance. The weight given to the evidence is commensurate with the extent to which it may be objectively verified. Current and cumulative financial reporting results are a source of objectively verifiable evidence. We give operating results during the most recent three-year period a significant weight in our analysis. We typically only consider forecasts of future profitability when positive cumulative operating results exist in the most recent three-year period. We perform scheduling exercises to determine if sufficient taxable income of the appropriate character exists in the periods required in order to realize our deferred tax assets with limited lives before their expiration. Realization of net operating losses and other carryforwards is dependent upon generating sufficient taxable income in the appropriate jurisdiction before the expiration of the carryforward periods, which involves business plans, planning opportunities and expectations about future outcomes.
Furthermore, we consider tax planning strategies available to accelerate taxable amounts if required to utilize expiring deferred tax assets. A valuation allowance is not required to the extent that, in our judgment, positive evidence exists with a magnitude and duration sufficient to result in a conclusion that it is more likely than not that our deferred tax assets will be realized. A valuation allowance is recorded if it is more likely than not that a portion of our deferred tax assets will not be realized.
The change in the valuation allowance for deferred tax assets is as follows:
| As of December 31, | |||||||||||
2022 | 2021 | ||||||||||
| Beginning balance | $ | (19,937) | $ | (17,158) | |||||||
| Current additions recorded in income tax (benefit) or expense | (32,023) | (2,708) | |||||||||
| Current reductions recorded in income tax (benefit) or expense | 1,338 | 837 | |||||||||
| Other adjustments | 311 | (908) | |||||||||
| Ending balance | $ | (50,311) | $ | (19,937) | |||||||
Based on the available evidence as of December 31, 2022 and 2021 we were not able to conclude it was more likely than not certain deferred tax assets would be realized. Therefore, a valuation allowance of $50,311 and $19,937, respectively, was recorded against our deferred tax assets. We will continue to evaluate the need for a valuation allowance on our deferred tax assets in future periods.
The Company classifies any interest and penalties related to income taxes assessed as part of income tax expense. The Company has concluded that there are no significant uncertain tax positions requiring recognition in the financial statements, nor has the Company been assessed any significant interest or penalties by any major tax jurisdiction to any open tax periods.
The Company’s income tax returns for the year ended December 31, 2021, 2020 and 2019 have been timely filed with the U.S. federal, state and local governments. The statute of limitations is open for the federal income tax return and certain state returns through October 15, 2025, 2024, and 2023 respectively, and for most of the remaining state returns through October 15, 2026, 2025 and 2024, respectively.
The Company owned a foreign subsidiary located in a foreign jurisdiction in 2022 and prior calendar years.The Company is not aware of any potential adjustments for 2022 or prior years and any potential adjustment is not expected to be material to the financial statements. The foreign subsidiary was dissolved in 2022.
20. Leases
The Company leases equipment, vehicles, and real estate under various arrangements which are classified as either operating or finance leases. A lease exists when a contract or part of a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In determining whether a lease exists, we consider whether a contract provides us with both: (a) the right to obtain substantially all of the economic benefits from the use of the identified asset and (b) the right to direct the use of the identified asset.
Our leases typically include a combination of fixed and variable payments. Fixed payments are generally included when measuring the right-of-use asset and lease liability. Variable payments, which primarily represent payments based on usage of the underlying asset, are generally excluded from such measurement and expensed as incurred. In addition, certain of our lease arrangements may contain a lease coupled with an arrangement to provide other services, such as maintenance, or may require us to make other payments on behalf of the lessor related to the leased asset, such as payments for taxes or insurance.
F-45
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
We elected the practical expedient to not separate lease and non-lease components for all leases entered into after the date of adoption.
The Company has elected the short-term lease exemption for all underlying asset classes. Accordingly, leases with an initial term of 12 months or less which are not expected to be renewed beyond one year, are not recorded on the balance sheet and are recognized as a lease expense on a straight-line basis over the lease term.
The measurement of right-of-use assets and lease liabilities requires us to estimate appropriate discount rates. To the extent the rate implicit in the lease is readily determinable, such rate is utilized. However, based on information available at lease commencement for our leases, the rate implicit in the lease is not known. As such, we utilize an incremental borrowing rate, which represents the rate of interest that we would pay to borrow on a collateralized basis, over a similar term, an amount equal to the lease payments.
Lease position as of December 31, 2022
The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheet as of December 31, 2022:
| Classification on the Consolidated Balance Sheet | December 31, 2022 | |||||||
| Assets | ||||||||
| Operating lease assets | Operating lease right-of-use assets | $ | 32,748 | |||||
| Finance lease assets | 49,306 | |||||||
| Total lease assets | $ | 82,054 | ||||||
| Liabilities | ||||||||
| Current | ||||||||
| Operating | Operating lease liabilities, current | $ | 12,483 | |||||
| Finance | Finance lease obligations, current | 10,592 | ||||||
| Non-current | ||||||||
| Operating | Operating lease liabilities, long-term | 23,621 | ||||||
| Finance | Finance lease obligations, less current portion | 24,585 | ||||||
| Total lease liabilities | $ | 71,281 | ||||||
Lease costs
The following table presents information related to our lease expense for the years ended December 31, 2022:
| December 31, 2022 | |||||
| Finance lease costs: | |||||
| Amortization expense | $ | 9,785 | |||
| Interest expense | 2,483 | ||||
| Operating lease costs | 13,893 | ||||
| Short-term lease expense | 464 | ||||
| Total lease expense | $ | 26,625 | |||
The total rent expense included in the Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 was $26,990 and $19,406, respectively.
Lease term and Discount rate
The following table presents certain information related to the lease terms and discount rates for our leases as of December 31, 2022:
F-46
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
| December 31, 2022 | |||||
| Weighted-average remaining term in years | |||||
| Operating leases | 3.68 | ||||
| Finance leases | 4.41 | ||||
| Weighted-average discount rate | |||||
| Operating leases | 7.4 | % | |||
| Finance leases | 7.2 | % | |||
Other Information
The following table presents supplemental cash flow information related to our leases for the years ended December 31, 2022:
| December 31, 2022 | |||||
| Cash paid amounts included in the measurement of lease liabilities: | |||||
| Operating cash flows used for operating leases | $ | 14,118 | |||
| Operating cash flows used for finance leases | 2,453 | ||||
| Financing cash flows used for finance leases | 9,381 | ||||
| Total | $ | 25,952 | |||
| Right-of-use assets obtained in exchange for: | |||||
| New operating lease liabilities | $ | 15,866 | |||
| New finance lease liabilities | 18,134 | ||||
| Total | $ | 34,000 | |||
Maturity of Lease Liabilities
The following table reconciles our future minimum lease payments on an undiscounted cash flow basis to our lease liabilities reported in the Consolidated Balance Sheet as of December 31, 2022:
| For the Years Ending December 31, | Operating Leases | Finance Leases | |||||||||
| 2023 | $ | 14,583 | $ | 12,825 | |||||||
| 2024 | 9,354 | 10,628 | |||||||||
| 2025 | 5,150 | 9,172 | |||||||||
| 2026 | 3,935 | 6,500 | |||||||||
| 2027 | 3,069 | 939 | |||||||||
| Thereafter | 6,122 | — | |||||||||
| Total minimum lease payments | $ | 42,213 | $ | 40,064 | |||||||
| Less: Amount of lease payments representing interest | (6,109) | (4,887) | |||||||||
| Present value of future minimum lease payments | $ | 36,104 | $ | 35,177 | |||||||
| Current portion of lease liabilities | $ | 12,483 | $ | 10,592 | |||||||
| Noncurrent portion of lease liabilities | 23,621 | 24,585 | |||||||||
| Total lease liabilities | $ | 36,104 | $ | 35,177 | |||||||
The Company's future minimum lease payments for operating leases as of December 31, 2021 are as follows:
F-47
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
| For the Years Ending December 31, | Operating Leases | ||||
| 2022 | $ | 10,216 | |||
| 2023 | 9,271 | ||||
| 2024 | 5,646 | ||||
| 2025 | 2,151 | ||||
| 2026 | 1,003 | ||||
| Thereafter | 819 | ||||
| Total | $ | 29,106 | |||
21. Loss Per Share
Basic loss per share is computed by dividing loss attributable to the Company’s stockholders by the weighted average number of shares outstanding during the period. Diluted loss per share reflects all potential dilutive ordinary shares outstanding during the period and is computed by dividing loss available to the Company’s stockholders by the weighted average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding as dilutive securities.
Basic and diluted loss per share is determined using the following information:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Numerator: | |||||||||||||||||
| Net loss from continuing operations | $ | (127,843) | $ | (5,814) | $ | (64,746) | |||||||||||
| Deemed and imputed dividends on Series A Preferred Stock | (599) | (592) | (461) | ||||||||||||||
| Series A Preferred Stock dividends | (5,307) | (8,156) | (4,064) | ||||||||||||||
| Net loss from continuing operations attributable to common stockholders | (133,749) | (14,562) | (69,271) | ||||||||||||||
| Net income from discontinued operations | — | — | 8,883 | ||||||||||||||
| Net loss attributable to common stockholders | $ | (133,749) | $ | (14,562) | $ | (60,388) | |||||||||||
| Denominator: | |||||||||||||||||
| Weighted average shares outstanding | 3,363 | 3,157 | 2,990 | ||||||||||||||
| Dilutive share-based awards | — | — | — | ||||||||||||||
| Total weighted average shares outstanding, including dilutive shares | 3,363 | 3,157 | 2,990 | ||||||||||||||
| Net loss from continuing operations per common share | |||||||||||||||||
| Basic | $ | (39.77) | $ | (4.61) | $ | (23.17) | |||||||||||
| Diluted | $ | (39.77) | $ | (4.61) | $ | (23.17) | |||||||||||
| Net income from discontinued operations per common share | |||||||||||||||||
| Basic | $ | — | $ | — | $ | 2.97 | |||||||||||
| Diluted | $ | — | $ | — | $ | 2.97 | |||||||||||
| Net loss attributable to common stockholders per common share | |||||||||||||||||
| Basic | $ | (39.77) | $ | (4.61) | $ | (20.20) | |||||||||||
| Diluted | $ | (39.77) | $ | (4.61) | $ | (20.20) | |||||||||||
The holders of the Series A and Series B Preferred Stock have non-forfeitable rights to common stock dividends or common stock dividend equivalents. Accordingly, the Series A and Series B Preferred Stock qualify as participating securities.
As a result of the net loss from continuing operations per share for the years ended December 31, 2022, 2021, and 2019, the inclusion of all potentially dilutive shares would be anti-dilutive. Therefore, dilutive shares (in thousands) of 1,647, 1,224, and 925 were excluded from the computation of the weighted average shares for diluted net loss per share for the years ended December 31, 2022, 2021, and 2020 respectively.
F-48
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
A summary of securities excluded from the computation of diluted earnings per share is presented below:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Diluted earnings per share: | |||||||||||||||||
| Anti-dilutive restricted and performance stock units | 180 | 132 | 151 | ||||||||||||||
| Anti-dilutive Series A and Series B Preferred Stock convertible into common stock | 1,467 | 1,092 | 774 | ||||||||||||||
| Potentially dilutive securities, excluded as anti-dilutive | 1,647 | 1,224 | 925 | ||||||||||||||
Reverse Stock Split
On December 29, 2022, the Company effected a one-for-ten (1:10) reverse stock split of its common stock, par value $0.01 per share. The reverse stock split, which was authorized by its Board of Directors, was approved by Charah Solutions’ stockholders on November 23, 2022. The reverse stock split reduced the number of outstanding shares of the Company's common stock from 33,889 shares as of December 29, 2022, to 3,389 shares outstanding post-split. The primary purpose of the reverse stock split was to increase the per share market price of the Company’s common stock tin an effort to maintain compliance with applicable NYSE continued listing standards with respect to the closing price of our common stock.
22. Major Customers
Revenues from certain customers in excess of 10% of total consolidated revenues for the years ended December 31 are as follows:
| December 31, 2022 | Revenue | % of Total | % of A/R, net | |||||||||||||||||
| Customer 1 | $ | 64,484 | 22.0 | % | 28.9 | % | ||||||||||||||
| December 31, 2021 | Revenue | % of Total | % of A/R, net | |||||||||||||||||
| Customer 1 | $ | 40,590 | 13.8 | % | 4.6 | % | ||||||||||||||
| Customer 2 | 34,788 | 11.9 | % | 11.1 | % | |||||||||||||||
| Customer 3 | 29,670 | 10.1 | % | 2.4 | % | |||||||||||||||
During the year ended December 31, 2020, no customers accounted for greater than 10% of total consolidated revenue or trade accounts receivable, net.
23. Subsequent Events
Agreement and Plan of Merger
On April 16, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Acquisition Parent 0423 Inc., a Delaware corporation (the “Parent”), and Acquisition Sub April 2023, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Parent (“Acquisition Sub”), pursuant to which, and subject to the terms and conditions therein, Acquisition Sub will be merged with and into the Company, with the Company continuing as the surviving corporation in the merger (the “Merger”). Following the consummation of the Merger, the Company will be a wholly owned subsidiary of Parent. Parent is a wholly owned subsidiary of investment funds affiliated with SER Capital Partners (“SER”), a private investment firm focused on sustainable investment.
Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.01 per share, of the Company issued and outstanding immediately prior to the Effective Time will be cancelled and each share will be converted into the right to receive $6.00 per share in cash, without interest (the “Common Per Share Merger Consideration”). In addition, at the Effective Time, each share of Series A Preferred Stock of the Company and Series B Preferred Stock of the Company that is issued and outstanding immediately prior to the Effective Time shall be purchased and redeemed by Parent pursuant to Section 8 of the Certificate of Designations of Series A Preferred Stock and Section 7 of the Certificate of Designations of Series B Preferred Stock in exchange for the Series A Redemption Price of $40,061 (as such term is defined in the Merger Agreement) or the Series B Redemption Price of $30,000 (as such term is defined in the Merger Agreement), respectively (the “Redemption”).
F-49
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
The parties to the Merger Agreement have made certain customary representations and warranties and have agreed to certain covenants. The Merger Agreement between Parent and the Company may be terminated by mutual consent of both parties or under certain conditions as detailed within the Merger Agreement.
The closing of the transactions contemplated by the Merger Agreement is subject to (i) receipt of the Requisite Stockholder Approval, (ii) consent from the FCC under section 310 of the Communications Act of 1934, and (iii) consent from JPMorgan Chase Bank, N.A. to the Merger and the Redemption, to the extent the Existing Debt Agreement (as such term is defined in the Merger Agreement) remains outstanding.
The Parent has obtained certain equity financing commitments pursuant to an equity commitment letter (the “Equity Commitment Letter”) for the purpose of financing the transactions contemplated by the Merger Agreement and paying related fees and expenses. Certain affiliates of SER Capital Partners (collectively, “Guarantors”) committed to contribute to Parent an equity contribution equal to $88,054 prior to or at the closing, on the terms and subject to the conditions set forth under those certain commitments.
On April 16, 2023, the Guarantors and the Company executed a guarantee (the “Guarantee”) in favor of the Company in which the Guarantors have guaranteed the due and punctual payment of any and all payment obligations of Parent and Acquisition Sub, including Parent’s and/or Acquisition Sub’s obligations to pay actual damages incurred as a result of any knowing or intentional breach of the Merger Agreement prior to the valid termination of the Merger Agreement.
In connection with the execution of the Merger Agreement, BCP, the Parent and the Company entered into a voting and support agreement (the “Letter Agreement”). Subject to the terms and conditions set forth in the Letter Agreement, BCP agreed, among other things, to vote their shares in favor of the adoption of the Merger Agreement, the Merger and the other transactions contemplated thereby, and against any agreement, transaction or proposal that relates to a competing proposal. The Letter Agreement also includes restrictions on the transfer of the Holder's shares and a waiver of appraisal rights. The Letter Agreement will terminate under certain circumstances as defined in the Letter Agreement.
23. Quarterly Financial Data (Unaudited)
The following table summarizes the unaudited quarterly results of operations for the year ended December 31, 2022 and 2021:
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter(a) | ||||||||||||||||||||
2022 | |||||||||||||||||||||||
| Revenue | $ | 66,051 | $ | 77,110 | $ | 81,540 | $ | 68,466 | |||||||||||||||
| Operating income (loss) | (7,392) | (4,795) | (8,902) | (88,499) | |||||||||||||||||||
| Income (loss) from continuing operations, net of tax and non-controlling interest | (12,040) | (9,603) | (13,359) | (92,841) | |||||||||||||||||||
| Deemed and imputed dividends on Series A Preferred Stock | (149) | (150) | (150) | (150) | |||||||||||||||||||
| Series A Preferred Stock dividends | (2,090) | (1,571) | (956) | (690) | |||||||||||||||||||
| Net loss from continuing operations attributable to common stockholders | (14,279) | (11,324) | (14,465) | (93,681) | |||||||||||||||||||
| Income from discontinued operations, net of tax | — | — | — | — | |||||||||||||||||||
| Net loss attributable to common stockholders | (14,279) | (11,324) | (14,465) | (93,681) | |||||||||||||||||||
| Net loss from continuing operations per common share | |||||||||||||||||||||||
| Basic | $ | (4.30) | $ | (3.40) | $ | (4.30) | $ | (27.72) | |||||||||||||||
| Diluted | $ | (4.30) | $ | (3.40) | $ | (4.30) | $ | (27.72) | |||||||||||||||
| Net loss attributable to common stockholders per common share | |||||||||||||||||||||||
| Basic | $ | (4.30) | $ | (3.40) | $ | (4.30) | $ | (27.72) | |||||||||||||||
| Diluted | $ | (4.30) | $ | (3.40) | $ | (4.30) | $ | (27.72) | |||||||||||||||
F-50
CHARAH SOLUTIONS, INC.
Notes to Consolidated Financial Statements, continued
(amounts in thousands except per share data)
First Quarter(b) | Second Quarter | Third Quarter | Fourth Quarter(c) | ||||||||||||||||||||
2021 | |||||||||||||||||||||||
| Revenue | $ | 52,107 | $ | 63,518 | $ | 84,161 | $ | 93,433 | |||||||||||||||
| Operating loss | 1,978 | (770) | 2,661 | 6,669 | |||||||||||||||||||
| Deemed and imputed dividends on Series A Preferred Stock | (147) | (148) | (148) | (149) | |||||||||||||||||||
| Series A Preferred Stock dividends | (2,067) | (2,148) | (1,946) | (1,995) | |||||||||||||||||||
| Income from discontinued operations, net of tax | — | — | — | — | |||||||||||||||||||
| Net loss attributable to common stockholders | (3,501) | (6,462) | (3,771) | (828) | |||||||||||||||||||
| Net loss from continuing operations per common share | |||||||||||||||||||||||
| Basic | $ | (1.20) | $ | (2.10) | $ | (1.16) | $ | (0.15) | |||||||||||||||
| Diluted | $ | (1.20) | $ | (2.10) | $ | (1.16) | $ | (0.15) | |||||||||||||||
| Net loss attributable to common stockholders per common share | |||||||||||||||||||||||
| Basic | $ | (1.20) | $ | (2.10) | $ | (1.16) | $ | (0.15) | |||||||||||||||
| Diluted | $ | (1.20) | $ | (2.10) | $ | (1.16) | $ | (0.15) | |||||||||||||||
(a)Fourth-quarter of 2022 includes a $2,112 reversal of revenue associated with the legal investigation discussed in Note 17. The reversal of revenue corrects errors identified for the period from January 2018 through September 2022, which were not material to the consolidated financial statements for any of the affected unaudited or audited periods. In addition, the Company recognized a $62,271 impairment of intangible assets, equipment and construction in process.
(b)First-quarter of 2021 includes a $5,568 gain on sales-type lease in operating income (loss).
(c)Fourth-quarter of 2021 includes a $14,669 gain on the sale of real estate and $4,750 in accrued bonus.
Basic and diluted (loss) per common share for each of the quarters presented above is based on the respective weighted average number of common and dilutive potential common shares outstanding for each quarter, and the sum of the quarters may not necessarily be equal to the full-year basic and diluted earnings per common share amounts.
F-51
Schedule II. Valuation and Qualifying Accounts
The table below presents valuation and qualifying accounts:
| Balance at Beginning of Period | Charged to Expense | Deductions | Balance at End of Period | ||||||||||||||||||||
Year ended December 31, 2022: | |||||||||||||||||||||||
Allowance for doubtful accounts | $ | 146 | $ | 990 | $ | (6) | $ | 1,130 | |||||||||||||||
Valuation allowance for deferred taxes | 19,937 | 31,712 | (1,338) | 50,311 | |||||||||||||||||||
Year ended December 31, 2021: | |||||||||||||||||||||||
Allowance for doubtful accounts | $ | 467 | $ | 62 | $ | (383) | $ | 146 | |||||||||||||||
Valuation allowance for deferred taxes | 17,158 | 3,616 | (837) | 19,937 | |||||||||||||||||||
F-52