Charah Solutions, Inc. - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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, Kentucky | 40299 | ||||
| (Address of principal executive offices) | (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 | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.01 per share | CHRA | New York Stock Exchange | ||||||||||||
| 8.50% Senior Notes due 2026 | CHRB | New York Stock Exchange | ||||||||||||
____________________________
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | |||||||||||||
Non-accelerated filer 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 is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No x
As of May 1, 2022, the registrant had 33,725,884 shares of common stock outstanding.
CHARAH SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2022
TABLE OF CONTENTS
| Page | |||||
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information in this Quarterly Report on Form 10‑Q (this “Quarterly 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 Quarterly 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 Quarterly 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. When considering forward‑looking statements, you should keep in mind the risk factors and other cautionary statements included in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 and in Part II, “Item 1A. Risk Factors” of this Quarterly Report and elsewhere herein. 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 from 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;
•timely review and approval of permits, permit renewals, extensions and amendments by regulatory authorities;
•our ability to comply with our debt covenants;
•our expectations relating to dividend payments and our ability to make such payments, if any; and
•plans, objectives, expectations and intentions, as well as any other statement contained in this Quarterly Report that are not statements of historical fact.
We caution you that these forward‑looking statements are subject to all of the 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 Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 and under Part II, “Item 1A. Risk Factors” of this Quarterly Report and elsewhere herein. Should one or more of the risks or uncertainties described occur, or should 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 Quarterly Report are expressly qualified in their entirety by this cautionary note. This cautionary note should also be considered in connection with any subsequent written or oral forward‑looking 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 cautionary note, to reflect events or circumstances after the date of this Quarterly Report.
ii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CHARAH SOLUTIONS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except par value amounts)
(Unaudited)
| March 31, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | 11,184 | $ | 24,266 | |||||||
| Restricted cash | 22,054 | 34,908 | |||||||||
| Trade accounts receivable, net | 50,676 | 49,303 | |||||||||
| Contract assets | 24,912 | 26,844 | |||||||||
| Inventory | 4,793 | 6,289 | |||||||||
| Prepaid expenses and other current assets | 7,652 | 6,113 | |||||||||
| Total current assets | 121,271 | 147,723 | |||||||||
| Real estate, property and equipment, net | 75,943 | 70,473 | |||||||||
| Goodwill | 62,193 | 62,193 | |||||||||
| Intangible assets, net | 51,557 | 53,531 | |||||||||
| Equity method investments | 7 | 7 | |||||||||
| Other assets | 10,483 | 10,180 | |||||||||
| Total assets | $ | 321,454 | $ | 344,107 | |||||||
Liabilities, mezzanine equity and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | 31,396 | 30,641 | |||||||||
| Contract liabilities | 6,593 | 6,199 | |||||||||
| Capital lease obligations, current portion | 8,826 | 6,979 | |||||||||
| Notes payable, current maturities | 8,196 | 7,567 | |||||||||
| Asset retirement obligations, current portion | 24,776 | 27,534 | |||||||||
| Accrued liabilities | 25,160 | 36,874 | |||||||||
| Other current liabilities | 460 | 460 | |||||||||
| Total current liabilities | 105,407 | 116,254 | |||||||||
| Deferred tax liabilities | 985 | 949 | |||||||||
| Contingent payments for acquisitions | 1,950 | 1,950 | |||||||||
| Asset retirement obligations | 9,193 | 14,879 | |||||||||
| Capital lease obligations, less current portion | 25,757 | 19,444 | |||||||||
| Notes payable, less current maturities | 132,539 | 133,661 | |||||||||
| Other liabilities | 641 | 641 | |||||||||
| Total liabilities | 276,472 | 287,778 | |||||||||
Commitments and contingencies (see Note 14) | |||||||||||
| Mezzanine equity | |||||||||||
Series A Preferred Stock — $0.01 par value; 50,000 shares authorized, 26 shares issued and outstanding as of March 31, 2022 and December 31, 2021; aggregate liquidation preference of $33,775 and $32,712 as of March 31, 2022 and December 31, 2021, respectively | 37,676 | 35,532 | |||||||||
Stockholders’ equity | |||||||||||
| Retained losses | (106,719) | (94,679) | |||||||||
Common Stock — $0.01 par value; 200,000 shares authorized, 33,408 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | 334 | 334 | |||||||||
| Additional paid-in capital | 113,432 | 114,880 | |||||||||
Total stockholders’ equity | 7,047 | 20,535 | |||||||||
| Non-controlling interest | 259 | 262 | |||||||||
| Total equity | 7,306 | 20,797 | |||||||||
Total liabilities, mezzanine equity and stockholders’ equity | $ | 321,454 | $ | 344,107 | |||||||
See accompanying notes to condensed consolidated financial statements
1
CHARAH SOLUTIONS, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue | $ | 66,051 | $ | 52,107 | |||||||
| Cost of sales | (69,818) | (46,522) | |||||||||
| Gross profit | (3,767) | 5,585 | |||||||||
| General and administrative expenses | (8,952) | (9,432) | |||||||||
| Gain on sales-type lease | — | 5,568 | |||||||||
| Gains on sales of real estate, property and equipment, net | 3,543 | 547 | |||||||||
| Gain on ARO settlement | 2,451 | — | |||||||||
| Other operating expenses from ERT services | (667) | (290) | |||||||||
| Operating (loss) income | (7,392) | 1,978 | |||||||||
| Interest expense, net | (4,573) | (3,235) | |||||||||
| Income from equity method investment | — | 202 | |||||||||
| Loss before income taxes | (11,965) | (1,055) | |||||||||
| Income tax expense | 78 | 157 | |||||||||
| Net loss | (12,043) | (1,212) | |||||||||
| Less (loss) income attributable to non-controlling interest | (3) | 75 | |||||||||
| Net loss attributable to Charah Solutions, Inc. | (12,040) | (1,287) | |||||||||
| Deemed and imputed dividends on Series A Preferred Stock | (149) | (147) | |||||||||
| Series A Preferred Stock dividends | (2,090) | (2,067) | |||||||||
| Net loss attributable to common stockholders | $ | (14,279) | $ | (3,501) | |||||||
| Net loss attributable to common stockholders per common share: | |||||||||||
| Basic | $ | (0.43) | $ | (0.12) | |||||||
| Diluted | $ | (0.43) | $ | (0.12) | |||||||
| Weighted-average shares outstanding used in loss per common share: | |||||||||||
| Basic | 33,408 | 30,113 | |||||||||
| Diluted | 33,408 | 30,113 | |||||||||
See accompanying notes to condensed consolidated financial statements.
2
CHARAH SOLUTIONS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
(Unaudited)
For the Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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, 2021 | 26,000 | $ | 35,532 | 33,407,806 | $ | 334 | $ | 114,880 | $ | (94,679) | $ | 20,535 | $ | 262 | $ | 20,797 | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (12,040) | (12,040) | (3) | (12,043) | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under share-based compensation plans | — | — | 750 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Taxes paid related to the net settlement of shares | — | — | (260) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 791 | — | 791 | — | 791 | |||||||||||||||||||||||||||||||||||||||||||||||
Deemed and imputed dividends on Series A Preferred Stock | — | 2,144 | — | — | (149) | — | (149) | — | (149) | |||||||||||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock dividends | — | — | — | — | (2,090) | — | (2,090) | — | (2,090) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2022 | 26,000 | $ | 37,676 | 33,408,296 | $ | 334 | $ | 113,432 | $ | (106,719) | $ | 7,047 | $ | 259 | $ | 7,306 | ||||||||||||||||||||||||||||||||||||||||
For the Three Months Ended March 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 | 30,077,018 | $ | 300 | $ | 108,471 | $ | (88,865) | $ | 19,906 | $ | 410 | $ | 20,316 | ||||||||||||||||||||||||||||||||||||||||
Net (loss) income | — | — | — | — | — | (1,287) | (1,287) | 75 | (1,212) | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 298 | — | 298 | — | 298 | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under share-based compensation plans | — | — | 152,337 | 2 | (2) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Taxes paid related to the net settlement of shares | — | — | (970) | — | (1) | — | (1) | — | (1) | |||||||||||||||||||||||||||||||||||||||||||||||
Deemed and imputed dividends on Series A Preferred Stock | — | 1,503 | — | — | (147) | — | (147) | — | (147) | |||||||||||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock dividends | — | — | — | — | (2,067) | — | (2,067) | — | (2,067) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2021 | 26,000 | $ | 28,926 | 30,228,385 | $ | 302 | $ | 106,552 | $ | (90,152) | $ | 16,702 | $ | 485 | $ | 17,187 | ||||||||||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
CHARAH SOLUTIONS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (12,043) | $ | (1,212) | |||||||
| Adjustments to reconcile net loss to net cash and restricted cash (used in) provided by operating activities: | |||||||||||
| Depreciation and amortization | 6,571 | 6,146 | |||||||||
| Paid-in-kind interest on long-term debt | — | 1,230 | |||||||||
| Amortization of debt issuance costs | 561 | 165 | |||||||||
| Deferred income taxes | 36 | 157 | |||||||||
| Gain on sales-type lease | — | (5,568) | |||||||||
| Gains on sales of real estate, property and equipment | (3,543) | (644) | |||||||||
| Income from equity method investment | — | (202) | |||||||||
Non-cash share-based compensation | 791 | 298 | |||||||||
| Gain on interest rate swap | — | (120) | |||||||||
| Gain on ARO settlements | (2,451) | — | |||||||||
| Increase (decrease) in cash and restricted cash due to changes in: | |||||||||||
| Trade accounts receivable | 279 | 9,297 | |||||||||
| Contract assets and liabilities | 2,326 | 23,910 | |||||||||
| Inventory | 1,497 | (873) | |||||||||
| Accounts payable | 1,652 | (475) | |||||||||
| Asset retirement obligation | (5,992) | (1,637) | |||||||||
| Other assets and liabilities | (13,596) | (16,406) | |||||||||
| Net cash and restricted cash (used in) provided by operating activities | (23,912) | 14,066 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Net proceeds from the sales of real estate, property and equipment | 3,095 | 446 | |||||||||
| Purchases of property and equipment | (2,126) | (1,534) | |||||||||
| Cash and restricted cash received from ERT transaction | — | 34,900 | |||||||||
| Payments of working capital adjustment and other items for the sale of subsidiary | — | (7,321) | |||||||||
| Net cash and restricted cash provided by investing activities | 969 | 26,491 | |||||||||
| Cash flows from financing activities: | |||||||||||
| Net proceeds on the line of credit | — | 7,082 | |||||||||
Proceeds from long-term debt | 1,402 | 1,009 | |||||||||
Principal payments on long-term debt | (2,367) | (5,975) | |||||||||
| Payments of debt issuance costs | (144) | — | |||||||||
| Principal payments on capital lease obligations | (1,884) | (536) | |||||||||
| Taxes paid related to net settlement of shares | — | (3) | |||||||||
| Net cash and restricted cash (used in) provided by financing activities | (2,993) | 1,577 | |||||||||
| Net (decrease) increase in cash and restricted cash | (25,936) | 43,127 | |||||||||
| Cash and restricted cash, beginning of period | 59,174 | 29,211 | |||||||||
| Cash and restricted cash, end of period | $ | 33,238 | $ | 72,338 | |||||||
See accompanying notes to condensed consolidated financial statements.
4
Supplemental Disclosures and Non-cash investing and financing transactions
The following table summarizes additional supplemental disclosures and non-cash investing and financing transactions:
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid during the period for interest | $ | 3,865 | 2,002 | ||||||||
| Cash paid during the period for taxes | — | (210) | |||||||||
| Supplemental disclosures and non-cash investing and financing transactions: | |||||||||||
| Gross proceeds from the line of credit | $ | — | $ | 37,480 | |||||||
| Gross payments on the line of credit | — | (30,398) | |||||||||
| Sale of structural fill asset through a sales-type lease | — | 6,000 | |||||||||
| Proceeds from the sale of equipment in accounts receivable, net | 1,652 | 728 | |||||||||
| Series A Preferred Stock dividends payable included in accrued expenses | 2,090 | 2,067 | |||||||||
| Deemed and imputed dividends on Series A Preferred Stock | 2,144 | 1,503 | |||||||||
| Equipment acquired through capital leases | 10,043 | — | |||||||||
| Property and equipment included in accounts payable and accrued expenses | 496 | 205 | |||||||||
| As reported within the unaudited condensed consolidated balance sheet: | |||||||||||
| Cash | $ | 11,184 | $ | 24,429 | |||||||
| Restricted cash | 22,054 | 47,909 | |||||||||
| Total cash and restricted cash as presented in the balance sheet | $ | 33,238 | $ | 72,338 | |||||||
See accompanying notes to condensed consolidated financial statements.
5
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share data)
(Unaudited)
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 (collectively, “BCP”). BCP owns approximately 59% of the total voting power of our outstanding shares of common stock and the outstanding Series A Preferred Stock (“Preferred Stock”) on an as-converted basis. BCP owns all of the outstanding shares of Preferred Stock and it is convertible at BCP's option at any time 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.
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.
Basis for Presentation
The Company’s fiscal year ends December 31. The accompanying unaudited condensed consolidated financial statements include the assets, liabilities, stockholders’ equity and results of operations of the Company and its consolidated subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included, which consist of normal recurring adjustments. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Segment Information
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 unaudited condensed consolidated financial statements.
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 material sales provide customers with the raw materials essential to their business while also providing the sourcing, logistics, and management needed to facilitate these raw material transactions around the globe. ERT services represent an innovative solution designed to meet our coal fired plant energy providers’ evolving and increasingly complex plant closure and environmental remediation needs. These customers need to retire and decommission older or underutilized assets while maximizing the assets value and improving the
6
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
environment. Our ERT services manage the sites' environmental remediation requirements, benefiting the communities and lowering the coal fired plant energy providers’ costs.
Impact of the COVID-19 Pandemic
In March 2020, the World Health Organization categorized the disease caused by a novel coronavirus (“COVID-19”) to be a pandemic. Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position and results of its operations, the specific impact is not readily determinable as of the date of these financial statements. The financial statement does not include any adjustments that might result from the outcome of this uncertainty.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which includes modifications to the limitation on business interest expense and net operating loss carryforward provisions and provided a payment delay of certain employer payroll taxes during 2020. The Company deferred $1,637 of employer payroll taxes otherwise due in 2020, with 50% paid in the year ended December 31, 2021 and the remaining 50% due by December 31, 2022.
2. Recent Accounting Pronouncements
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).At the commencement date of the lease, the Company will recognize: (i) a lease liability for the Company’s obligation to make payments under the lease agreement, measured on a discounted basis; and (ii) a right-of-use asset that represents the Company’s right to use, or control the use of, the specified asset for the lease term. This ASU originally required recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective transition method. In July 2018, the FASB issued ASU No. 2018-11, which provided an additional (and optional) transition method that permits the application of this ASU at the adoption date with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In June 2020, the FASB issued ASU No. 2020-05 and 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, 2022, and interim periods within the fiscal year ending December 31, 2023, with early adoption permitted. The Company has not yet selected a transition method and, while we are still in the process of assessing the impact of this new standard on our consolidated financial position, results of operations and cash flows, we expect the adoption of this standard will have a material impact on our consolidated financial position due to the recognition of the right-of-use asset and lease liability related to operating leases. We had operating leases with remaining rental payments of approximately $28,852 as of March 31, 2022. The discounted minimum remaining rental payments will be the starting point for determining the right-of-use asset and lease liability.
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 Company is currently evaluating the effect that the adoption of this ASU will have on its 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 the London Inter-bank Offered Rate (“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 Company is still assessing the impact of Topic 848 on its 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 simplifies the guidance on accounting for convertible debt instruments by removing the separation models for convertible debt with a cash conversion feature and convertible debt with a beneficial conversion feature. As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock unless certain other conditions are met. Also, the ASU requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock
7
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
method will no longer be available. This ASU will be effective for the Company for the fiscal year ending December 31, 2024, and interim periods therein, with early adoption permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.
3. Asset Acquisitions
Gibbons Creek Asset Acquisition
As part of our ERT service offerings, 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 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 responsibilities 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 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, is redeveloping the property in an environmentally conscious manner which the Company expects to 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 has been 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.
The Gibbons Creek Transaction was accounted for as an asset acquisition in accordance with ASC 805, Business Combinations, with the assumed liabilities net of cash received or owed to us by the seller comprising the purchase price. Since the fair value of the net assets acquired exceeded the cost, the Company allocated the difference pro rata on the basis of relative fair values to reduce land, property and equipment, and intangible assets acquired.
The assets acquired and liabilities assumed as recognized within the Company's condensed 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) | |||
| Assets Acquired: | |||||
| 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 | |||
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 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.
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 and discounted 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 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
8
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
individual asset retirement obligation. The weighted average rate applicable to our long-term asset retirement obligations related to the Gibbons Creek Transaction was approximately 4.5% at the acquisition date.
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. Changes in inflation rates or the estimated costs, timing, or extent of future final closure and post-closure activities typically result in a current adjustment to the recorded liability and land asset.
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 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.
To date, the Company has completed the sale of nearly 80% of the real property acreage acquired through the Gibbons Creek Transaction. The sale of property included 4,860 acres of the 6,166-acre area, the 3,500-acre reservoir, dam and spillway. There were no sales of real property acreage for the three months ended March 31, 2022 and 2021, respectively.
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 will begin environmental remediation and sustainable redevelopment of the property immediately.
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, submerged lands lease in Lake Erie, substation/switch gear and transformers, administrative offices and structures, coal rail and storage yard parcels as well as the interconnection agreement. 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.
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 (collectively, “CPERG”), completed the full acquisition of the Cheswick Generating Station, the Lefever Ash Landfill and the Monarch Wastewater Treatment Facility 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 the properties from GenOn, which consist 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, is currently operating and provides disposal of coal combustion residuals (CCR) and residual waste from the Cheswick Generating Station under an active solid waste permit. 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 day-to-day management and operations and compliance with all applicable environmental regulations.
The closing date of both transactions occurred subsequent to the end of the reporting period and the preliminary allocation of the purchase price to the net assets has not yet been completed. The Company received gross cash and restricted cash of $36,763 from GenOn related to these transactions.
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.
9
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Construction contracts | $ | 30,840 | $ | 19,939 | |||||||
| Byproduct services | 24,018 | 26,473 | |||||||||
| Raw material sales | 11,193 | 5,695 | |||||||||
| Total revenue | $ | 66,051 | $ | 52,107 | |||||||
As of March 31, 2022, the Company had remaining performance obligations with an aggregate transaction price of $457,494 on construction contracts for which we recognize revenue over time. We expect to recognize approximately 23% of our remaining performance obligations as revenue during the remainder of 2022, 10% in 2023, 8% in 2024, and 59% thereafter. Revenue associated with our remaining performance obligations includes performance obligations related to our construction contracts. The balance of remaining performance obligations does not include variable consideration that was determined to be constrained as of March 31, 2022. As of March 31, 2022, there were $1,691 of unapproved change orders associated with project scope changes included in determining the profit or loss on certain construction contracts, of which $164 were approved subsequent to quarter-end.
The Company did not have any foreign revenue for the three months ended March 31, 2022 and 2021.
5. Balance Sheet Items
Real estate, property and equipment, net
The following table shows the components of real estate, property and equipment, net:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Plant, machinery and equipment | $ | 63,961 | $ | 63,937 | |||||||
| Structural fill site improvements | 55,760 | 55,760 | |||||||||
| Vehicles | 11,805 | 11,718 | |||||||||
| Office equipment | 600 | 600 | |||||||||
| Buildings and leasehold improvements | 267 | 267 | |||||||||
| Land, land improvements and structural fill sites | 12,082 | 12,231 | |||||||||
| Capital lease assets | 41,215 | 31,172 | |||||||||
| Construction in progress | 1,539 | 1,522 | |||||||||
| Total real estate, property and equipment | $ | 187,229 | $ | 177,207 | |||||||
| Less: accumulated depreciation | (111,286) | (106,734) | |||||||||
| Real estate, property and equipment, net | $ | 75,943 | $ | 70,473 | |||||||
Land, land improvements and structural fill sites include $5,875 of real property acquired in the Gibbons Creek Transaction that the Company is actively demolishing and for which depreciation expense is not being recorded. During the three months ended March 31, 2022 and 2021, the Company capitalized $842 and $148, respectively, of demolition costs and sold scrap with a cost basis of $990 and $0, respectively.
Depreciation expense was $4,597 and $4,173 for the three months ended March 31, 2022 and 2021, respectively.
Capital leases
The following table shows the components of capital lease assets, net:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Capital lease assets | $ | 41,215 | $ | 31,172 | |||||||
| Less: accumulated depreciation | (5,518) | (3,606) | |||||||||
| Capital lease assets, net | $ | 35,697 | $ | 27,566 | |||||||
The Company's depreciation of capital lease assets is included within depreciation expense as disclosed above.
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.
10
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
In accordance with ASC 840, 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 capital 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 accompanying unaudited condensed consolidated statements of operations for the three months ended March 31, 2021.
The following table reflects the classification of the lease receivable within our accompanying unaudited condensed consolidated balance sheet:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Lease receivable | $ | 5,921 | $ | 5,937 | |||||||
| Less: current portion in prepaid expenses and other current assets | (66) | (65) | |||||||||
| Non-current portion in other assets | $ | 5,855 | $ | 5,872 | |||||||
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.
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 following table reflects the classification of the note receivable within our unaudited condensed consolidated balance sheet:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Note receivable | $ | 1,352 | $ | 1,352 | |||||||
| Less: current portion in prepaid expenses and other current assets | (500) | (500) | |||||||||
| Non-current portion in other assets | $ | 852 | $ | 852 | |||||||
Accrued liabilities
The following table shows the components of accrued liabilities:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Accrued expenses | $ | 18,815 | $ | 25,074 | |||||||
| Accrued interest | 2,192 | 2,008 | |||||||||
| Accrued preferred stock dividends | 2,090 | 1,994 | |||||||||
| Accrued payroll and bonuses | 2,063 | 7,798 | |||||||||
| Accrued liabilities | $ | 25,160 | $ | 36,874 | |||||||
6. Asset Retirement Obligations
As of March 31, 2022, the Company owns one structural fill site with continuing maintenance and monitoring requirements after its closure and four tracts of real property with decommissioning, remediation and monitoring requirements. As of March 31, 2022 and December 31, 2021, the Company has accrued $33,969 and $42,413, respectively, for the asset retirement obligations (“ARO”).
11
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
The following table reflects the activity for our asset retirement obligations:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Balance, beginning of period | $ | 42,413 | $ | 5,159 | |||||||
| Liabilities incurred | — | 50,590 | |||||||||
| Liabilities settled | (6,394) | (1,870) | |||||||||
| Accretion | 401 | 233 | |||||||||
| Gain on ARO settlement | (2,451) | — | |||||||||
| Balance, end of period | 33,969 | 54,112 | |||||||||
| Less: current portion | (24,776) | (18,729) | |||||||||
| Non-current portion | $ | 9,193 | $ | 35,383 | |||||||
7. 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 $18 and $54 for the three months ended March 31, 2022 and 2021, respectively. The Company had no receivables outstanding from ATC at March 31, 2022 and December 31, 2021. The Company had payables and accrued expenses, net of credit memos, due to ATC of $14 and $4 at March 31, 2022 and December 31, 2021, respectively.
As further discussed in Note 9, Long-term Debt, in August 2021, the Company completed an offering of $135,000, in the aggregate, of the Company’s 8.50% Senior Notes due 2026 (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. These fees were capitalized as debt issuance costs within notes payable, less current maturities in the accompanying unaudited condensed consolidated balance sheets and will be amortized prospectively through interest expense, net in the accompanying unaudited condensed consolidated statements of operations using the effective interest method through the maturity date of the Notes.
As further discussed in Note 11, Mezzanine Equity, in March 2020, the Company entered into an agreement with an investment fund affiliated with BCP to sell 26,000 shares of Preferred Stock.
8. 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, of which there were none. There was no goodwill activity during the three months ended March 31, 2022.
Indefinite-Lived and Definite-Lived Intangible Assets
Our intangible assets, net include a trade name that is considered to have an indefinite life and customer relationships that are considered to have a definite life. Our customer relationships are amortized on a straight-line basis over their estimated useful lives of 10 years. The amortization expense of our definite-lived intangible assets was $1,974 for the three months ended March 31, 2022 and 2021.
The Company’s intangible assets consist of the following:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| Definite-lived intangibles | |||||||||||||||||||||||||||||||||||
| Customer relationships | $ | 78,942 | $ | (40,701) | $ | 38,241 | $ | 78,942 | $ | (38,727) | $ | 40,215 | |||||||||||||||||||||||
| Indefinite-lived intangibles | |||||||||||||||||||||||||||||||||||
| Charah trade name | 13,316 | 13,316 | |||||||||||||||||||||||||||||||||
| Total | $ | 51,557 | $ | 53,531 | |||||||||||||||||||||||||||||||
12
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
9. Long-term Debt
Senior Notes
On August 25, 2021, the Company completed a public 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 sale of equity to B. Riley, to fully repay and terminate the Company’s Credit Facility, as defined below, with any remaining proceeds to be used for general corporate purposes, including funding future acquisitions and investments, repaying indebtedness, making capital expenditures and funding working capital.
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, $12,116 of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the accompanying unaudited condensed 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 (the “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 -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
13
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
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.
As of March 31, 2022, the Company has not drawn on the Credit Agreement. Outstanding letters of credit were $15,237 and $19,027 as of March 31, 2022 and December 31, 2021. As of March 31, 2022, all outstanding letters of credit were issued with JPMorgan. At this time, the Company does not intend to draw down on the Credit Agreement. Based on the applicable financial statement balances as of March 31, 2022, if the Company were to borrow in excess of $4,974 on the Credit Agreement, the financial covenants associated with the Credit Agreement would become applicable.
As a result of entering into the Credit Agreement, $1,408 of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the unaudited condensed consolidated Statements of Operations using the effective interest method through the maturity date of the Credit Agreement. Unamortized debt issuance costs as of March 31, 2022 and December 31, 2021 were $1,291 and $1,338, respectively.
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.
14
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
10. Notes Payable
The following table summarizes the major components of debt at each balance sheet date and provides maturities and interest rate ranges for each major category as of March 31, 2022 and December 31, 2021:
| March 31, 2022 | December 31, 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 $688 as of March 31, 2022. | $ | 1,458 | $ | 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 $4,983 as of March 31, 2022. | 5,430 | 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 2024 through December 2024. The notes are secured by equipment with a net book value of $2,275 as of March 31, 2022. | 2,416 | 2,633 | |||||||||
Various equipment notes entered into in 2020, payable in monthly installments ranging from $9 to $10, including interest of 5.4%, maturing in August 2025. The notes are secured by equipment with a net book value of $1,652 as of March 31, 2022. | 1,524 | 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 $1,602 as of March 31, 2022. | 1,769 | 1,861 | |||||||||
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. | 117 | 467 | |||||||||
A commercial insurance premium financing agreement entered into in 2022, payable in monthly installments of $143, including interest of 4.2%, maturing in November 2022. | 1,126 | — | |||||||||
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 $1,885 as of March 31, 2022. | 2,867 | 3,387 | |||||||||
Senior Unsecured Notes, issued August 2021 (see Note 9). The Notes are senior unsecured obligations of the Company, bearing stated interest at 8.5%, and rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness. | 135,000 | 135,000 | |||||||||
| Total | 151,707 | 152,672 | |||||||||
| Less debt issuance costs, net | (10,972) | (11,444) | |||||||||
| 140,735 | 141,228 | ||||||||||
| Less current maturities | (8,196) | (7,567) | |||||||||
| Notes payable due after one year | $ | 132,539 | $ | 133,661 | |||||||
11. Mezzanine Equity
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 “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 “Preferred Stock Offering”). Proceeds from the Preferred Stock Offering were used for liquidity and general corporate purposes. In connection with the issuance of the Preferred Stock, the Company incurred direct expenses of $966, including financial advisory fees, closing costs, legal expenses and other offering-related expenses. The Preferred Stock was initially recorded net of OID and direct expenses, which will be 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 March 31, 2022 and December 31, 2021, the Company had accrued dividends of $1,063 and $1,030, respectively, associated with the Preferred Stock, which was recorded at a fair value of $2,090 and $1,994, respectively, using observable information for similar items and is classified as a level 2 fair value measurement.
15
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
Dividend Rights The 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 Preferred Stock had an initial liquidation preference of $1 (one thousand dollars) per share.
The holders of the 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 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. 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 March 31, 2022, the liquidation preference of the Preferred Stock was $33,775.
Conversion Features The Preferred Stock is convertible at the option of the holders at any time into shares of common stock at a conversion price of $2.77 per share (the “Conversion Price”), which represents a 30% premium to the 20-day volume-weighted average price ended March 4, 2020. As of March 31, 2022, the maximum number of common shares that could be required to be issued if converted is 12,193 (twelve million one hundred ninety-three 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 after the three-year anniversary of the date of issuance, if the holders have not elected to convert all their shares of 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 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 Preferred Stock and the associated dividend payable on March 31, 2020, 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. If a BCF is recognized, a reduction to paid-in capital and the Preferred Stock will be recorded and subsequently accreted through the first redemption date.
Additionally, the Company determined that the nature of the 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 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 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 Preferred Stock.
On or after the three-year anniversary of the issuance of the Preferred Stock, the Company may redeem the 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 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”).
On or after 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 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.
16
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
Since the redemption of the Preferred Stock is contingently or optionally redeemable and therefore not certain to occur, the Preferred Stock is not required to be classified as a liability under ASC 480, Distinguishing Liabilities from Equity. As the 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 Preferred Stock in mezzanine equity in the accompanying unaudited condensed 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 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 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 after the third anniversary of the issuance date.
Voting Rights The holders of the 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 Preferred Stock have certain customary registration rights with respect to the shares of common stock into which the Preferred Stock is converted, pursuant to the terms of a registration rights agreement.
12. Contract Assets and Liabilities
The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets, and contract liabilities on the accompanying unaudited condensed consolidated balance sheets.
Our contract assets are as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Costs and estimated earnings in excess of billings | $ | 15,421 | $ | 17,163 | |||||||
| Retainage | 9,491 | 9,681 | |||||||||
| Total contract assets | $ | 24,912 | $ | 26,844 | |||||||
Our contract liabilities are as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Billings in excess of costs and estimated earnings | $ | 5,505 | $ | 5,716 | |||||||
| Deferred revenue | 1,088 | 483 | |||||||||
| Total contract liabilities | $ | 6,593 | $ | 6,199 | |||||||
We recognized revenue of $5,772 for the three months ended March 31, 2022 that was previously included in contract liabilities at December 31, 2021.
The Company's net position on uncompleted contracts is as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Costs incurred on uncompleted contracts | $ | 236,562 | $ | 227,195 | |||||||
| Estimated earnings | 18,356 | 22,331 | |||||||||
| Total costs and estimated earnings | 254,918 | 249,526 | |||||||||
| Less billings to date | (245,002) | (238,079) | |||||||||
| Net balance in process | $ | 9,916 | $ | 11,447 | |||||||
The net balance in process classified on the accompanying unaudited condensed consolidated balance sheets is as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Costs and estimated earnings in excess of billings | $ | 15,421 | $ | 17,163 | |||||||
| Billings in excess of costs and estimated earnings | (5,505) | (5,716) | |||||||||
| Net balance in process | $ | 9,916 | $ | 11,447 | |||||||
Anticipated losses on long-term contracts are recognized when such losses become evident. As of March 31, 2022 and December 31, 2021, accruals for anticipated losses on long-term contracts were $136 and $159, respectively.
17
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
13. 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 5,007 shares of common stock for issuance under the 2018 Plan.
A summary of the Company’s non-vested share activity for the three months ended March 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 | 885 | $ | 4.62 | 648 | $ | 4.24 | 1,533 | $ | 4.46 | ||||||||||||||||||||||||||
| Granted | 2 | 4.78 | — | — | 2 | 4.78 | |||||||||||||||||||||||||||||
| Forfeited | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Vested | (1) | 4.78 | — | — | (1) | 4.78 | |||||||||||||||||||||||||||||
Balance as of March 31, 2022 | 886 | $ | 4.62 | 648 | $ | 4.24 | 1,534 | $ | 4.46 | ||||||||||||||||||||||||||
| 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 March 31, 2022 | 0.63 | $ | 4,425 | 1.01 | $ | 3,231 | 0.79 | $ | 7,656 | ||||||||||||||||||||||||||
Stock-based compensation expense related to the restricted stock issued was $571 and $257 during the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, total unrecognized stock-based compensation expense related to non-vested awards of restricted stock, net of estimated forfeitures, was $975, and is expected to be recognized over a weighted-average period of 1.40 years.
Stock-based compensation expense related to the performance stock issued was $220 and $41 during the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, total unrecognized stock-based compensation expense related to non-vested awards of performance stock, net of estimated forfeitures, was $787, and is expected to be recognized over a weighted-average period of 1.85 years.
14. Commitments and Contingencies
We were party to a lawsuit filed against North Carolina by an environmental advocacy group alleging that the issuance by the state of certain permits associated with our Brickhaven clay mine reclamation site exceeded the state’s power. In December 2020, the Company, the environmental advocacy group and the state settled, resolved and dismissed all matters. Before the settlement, all customer-related work at the Brickhaven site had been completed. The settlement allows for all completed work to remain unchanged. Per the settlement, the Company will not place any additional material at the site, will place a deed restriction requiring engineering oversight for the future development of the site and will continue groundwater monitoring at the site. In April 2021, the state approved the Company’s application to modify its permit to conform to the work as completed. The Company will continue its work with the state to complete the remaining site closure operations.
In addition to the above matter, we are from time to time 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.
15. Income Taxes
The Company had income tax expense of $78 and $157 for the three months ended March 31, 2022 and 2021, respectively, due to current state income tax expense and adjustments to the valuation allowance on deferred tax assets.
The effective income tax rate for the three months ended March 31, 2022 was 23.2% without regard to the impact of the valuation allowance and includes the effect of state income taxes, nondeductible items. The Company’s income is subject to a federal statutory rate of 21.0% and an estimated state statutory rate of 3.9% before considering the valuation allowance.
18
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
The Company evaluates its effective income tax rate at each interim period and adjusts it accordingly as facts and circumstances warrant. The determination of the annual estimated effective income tax rate at each interim period requires certain estimates and judgments including, but not limited to, the expected operating income for the year, estimated permanent differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur and additional information is obtained.
At March 31, 2022, deferred tax liabilities, net of deferred tax assets, was $985. A valuation allowance has been recorded for the deferred tax assets as the Company has determined that it is not more likely than not that the tax benefits related to all the deferred tax assets will be realized. The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on its deferred tax assets.
16. Loss Per Share
Basic loss per share is computed by dividing net loss attributable to the Company’s stockholders by the weighted-average number of shares outstanding during the period. Diluted loss per share reflects all potentially dilutive ordinary shares outstanding during the period and is computed by dividing net loss attributable 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:
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Numerator: | |||||||||||
| Net loss attributable to Charah Solutions, Inc. | $ | (12,040) | $ | (1,287) | |||||||
| Deemed and imputed dividends on Series A Preferred Stock | (149) | (147) | |||||||||
| Series A Preferred Stock dividends | (2,090) | (2,067) | |||||||||
| Net loss attributable to common stockholders | $ | (14,279) | $ | (3,501) | |||||||
| Denominator: | |||||||||||
| Weighted average shares outstanding | 33,408 | 30,113 | |||||||||
| Dilutive share-based awards | — | — | |||||||||
| Total weighted average shares outstanding, including dilutive shares | 33,408 | 30,113 | |||||||||
| Net loss attributable to common stockholders per common share | |||||||||||
| Basic | $ | (0.43) | $ | (0.12) | |||||||
| Diluted | $ | (0.43) | $ | (0.12) | |||||||
The holders of the Preferred Stock have non-forfeitable rights to common stock dividends or common stock dividend equivalents. Accordingly, the Preferred Stock qualifies as participating securities.
As a result of the net loss per share for the three months ended March 31, 2022 and 2021, the inclusion of all potentially dilutive shares would be anti-dilutive. Therefore, dilutive shares of 13,114 and 11,788 were excluded from the computation of the weighted-average shares for diluted net loss per share for the three months ended March 31, 2022 and 2021, respectively.
A summary of securities excluded from the computation of diluted earnings per share is presented below:
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Diluted earnings per share: | |||||||||||
| Anti-dilutive restricted and performance stock units | 1,300 | 1,393 | |||||||||
| Anti-dilutive Series A Preferred Stock convertible into common stock | 11,814 | 10,395 | |||||||||
| Potentially dilutive securities, excluded as anti-dilutive | 13,114 | 11,788 | |||||||||
19
Item 2. 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 related notes included in Part I, “Item 1. Financial Statements” of this Quarterly Report. 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 a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, public health threats or outbreaks of communicable diseases, such as the ongoing novel coronavirus “COVID-19” pandemic and its impact on our business, customers, employees or customers' facilities, capital expenditures, economic and competitive conditions, and regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in this Quarterly Report. Please read “Cautionary Note Regarding Forward‑Looking Statements” included elsewhere in this Quarterly Report. Except as otherwise 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 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 2021, we performed work at more than 40 coal-fired generation sites nationwide.
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 material 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 material transactions around the globe. ERT services represent an innovative solution designed to meet coal fired plant energy providers’ evolving and increasingly complex plant closure and environmental remediation needs. These customers need to retire and decommission older or underutilized assets while maximizing the assets value and improving the environment. Our ERT services manage the sites' environmental remediation requirements, benefiting the communities and lowering the coal fired plant energy providers’ costs.
COVID-19 Update
The pandemic caused by a novel coronavirus (“COVID-19”) has impacted many aspects of our operations, directly and indirectly, including our employees, the services we provide at our customers’ power generation facilities, our suppliers and the overall market. We, along with our utility partners, have implemented the precautionary health and safety measures recommended by the Centers for Disease Control and Prevention (the “CDC”) in response to the COVID-19 pandemic, including, but not limited to: an employee health status questionnaire, taking daily temperatures, enhanced sanitation practices and cleaning surfaces throughout each shift, and increasing the number of hand sanitizing stations. We have also implemented social distancing measures such as staggering shift start and stop times and break times with additional break spaces to support social distancing as well as holding safety meetings outside of the site trailer. Furthermore, we have implemented work-from-home measures for the majority of office employees. Understanding that the COVID-19 challenge is evolving, based on new information and feedback, we continue to monitor the situation and update our proactive measures in coordination with our customers. We continue to work closely with our utility partners and concrete producer customers to meet their needs and monitor any potential slowdowns of byproduct recycling and marketing services if there is decreased demand for construction materials.
The COVID-19 pandemic presents potential new risks to the Company’s business, including logistical, supply chain and other challenges that may continue to affect demand for services, which are driven by construction activity, and the timing of our remediation and compliance services projects, due to delays in new contract awards and increasing costs and declining availability for certain machinery and equipment.
20
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 that gross profit is a meaningful metric because it provides insight on financial performance of our revenue streams without consideration of company overhead. When analyzing gross profit, we compare actual gross profit to our internal projections for a given period and to prior periods to assess our performance.
Operating Income
We analyze our operating income, which we define as revenue less cost of sales and general and administrative expenses, to measure our financial performance. We believe that operating income is a meaningful metric because it provides insight on profitability and true operating performance based on the historical cost basis of our assets. Additionally, due to the nature of the accounting requirements relating to our ERT services, the gains from the sales of fixed assets and the costs associated with ERT fixed asset sales are recorded as a component of operating income. When analyzing operating income, we compare actual operating income to our internal projections for a given period and to prior periods to assess our performance.
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 when 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, income taxes, depreciation and amortization, equity-based compensation, impairment expense (including inventory reserves), gain on change in contingent payment liability 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 attributable to Charah Solutions, Inc., 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
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in costs and billings 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 raw material sales. 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, sustainability, and governance (“ESG”) standards and providing innovative services to solve our coal fired plant energy providers’ most complex environmental challenges.
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 through 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 significantly 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 material 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 material 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.
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Results of Operations
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
| Three Months Ended | |||||||||||||||||||||||
| March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenue | $ | 66,051 | $ | 52,107 | $ | 13,944 | 26.8 | % | |||||||||||||||
| Cost of sales | (69,818) | (46,522) | (23,296) | 50.1 | % | ||||||||||||||||||
| Gross profit | (3,767) | 5,585 | (9,352) | (167.4) | % | ||||||||||||||||||
| General and administrative expenses | (8,952) | (9,432) | 480 | (5.1) | % | ||||||||||||||||||
| Gain on sales-type lease | — | 5,568 | (5,568) | (100.0) | % | ||||||||||||||||||
| Gains on sales of real estate, property and equipment, net | 3,543 | 547 | 2,996 | 547.7 | % | ||||||||||||||||||
| Gain on ARO settlement | 2,451 | — | 2,451 | 100.0 | % | ||||||||||||||||||
| Other operating expenses from ERT services | (667) | (290) | (377) | 130.0 | % | ||||||||||||||||||
| Operating (loss) income | (7,392) | 1,978 | (9,370) | 473.7 | % | ||||||||||||||||||
| Interest expense, net | (4,573) | (3,235) | (1,338) | (41.4) | % | ||||||||||||||||||
| Income from equity method investment | — | 202 | (202) | (100.0) | % | ||||||||||||||||||
| Loss before income taxes | (11,965) | (1,055) | (10,910) | 1,034.1 | % | ||||||||||||||||||
| Income tax expense | 78 | 157 | (79) | (50.3) | % | ||||||||||||||||||
| Net loss | (12,043) | (1,212) | (10,831) | (893.6) | % | ||||||||||||||||||
| Less (loss) income attributable to non-controlling interest | (3) | 75 | (78) | 104.0 | % | ||||||||||||||||||
| Net loss attributable to Charah Solutions, Inc. | $ | (12,040) | $ | (1,287) | (10,753) | (835.5) | % | ||||||||||||||||
Revenue. Revenue increased $13.9 million, or 26.8%, to $66.1 million for the three months ended March 31, 2022 as compared to $52.1 million for the three months ended March 31, 2021, primarily driven by increases in remediation and compliance services revenue of $10.9 million from the net commencements of new project work and in raw material sales of $5.5 million from an increase in shipments. This increase was partially offset by lower byproduct services revenue of $2.5 million primarily due to net completions of operations work.
Gross Profit. Gross profit decreased $9.4 million, or 167.4%, to $(3.8) million for the three months ended March 31, 2022 as compared to $5.6 million for the three months ended March 31, 2021. As a percentage of revenue, gross profit was (5.7)% and 10.7% for the three months ended March 31, 2022 and 2021, respectively. The decrease in gross profit and gross profit margin was directly affected by several factors, most notably supply chain and logistics issues, which impacted the expected ramp of two long-term beneficial use projects, and significant weather challenges, which delayed the completion of three projects during the quarter, resulting in cost overruns. Delays in receiving material and obtaining necessary rail and trucking resources resulted in a delay to the start of one large project and have pushed the expected ramp of the second. The Company is taking steps to address these issues, and it is not expected that the long-term profitability of the projects will be materially impacted. Additionally, significant rain events at three construction projects extended the final completion dates for those projects and resulted in cost overruns. The projects had originally been scheduled for completion in the Fall of 2021. The Company has now demobilized at the largest of these projects and expects to complete the remaining two projects during the second quarter.
General and Administrative Expenses. General and administrative expenses decreased $0.5 million, or 5.1%, for the three months ended March 31, 2022 to $9.0 million as compared to $9.4 million for the three months ended March 31, 2021, primarily attributable to improved expense management.
Gain on sales-type lease. Gain on sales-type lease decreased $5.6 million for the three months ended March 31, 2022 due to the absence of the recognition of a parcel transferred under a sales-type lease at an ERT project as discussed in Note 5, Balance Sheet Items, to the accompanying unaudited condensed consolidated financial statements.
Gains on Sales of Real Estate, Property and Equipment, Net. Gains on sales of real estate, property and equipment, net increased $3.0 million, or 547.7%, to $3.5 million for the three months ended March 31, 2022 as compared to $0.5 million for the three months ended March 31, 2021, primarily due to increased scrap sales from the demolition of the Gibbons Creek power plant.
Gain on ARO settlement. Gain on ARO settlement increased $2.5 million for the three months ended March 31, 2022 due to 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 $0.4 million, or 130.0%,to $0.7 million for the three months ended March 31, 2022 as compared to $0.3 million for the three months ended March 31, 2021, primarily driven by a complete quarter of expenses associated with operations on the Gibbons Creek ERT project in 2022.
Interest Expense, Net. Interest expense, net increased $1.3 million, or 41.4%, to $4.6 million for the three months ended March 31, 2022 as compared to $3.2 million for the three months ended March 31, 2021, primarily due to higher debt balances, a higher weighted-average cost of capital associated with equipment financing and an increase in amortization of debt issuance costs.
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Income from Equity Method Investment. Income from equity method investment decreased $0.2 million for the three months ended March 31, 2022 due to the dissolution of our joint venture in CV Ash in the first quarter of 2021.
Income Tax Expense. Income tax expense decreased $0.1 million, or 50.3%, for the three months ended March 31, 2022 to $0.1 million as compared to $0.2 million for the three months ended March 31, 2021, primarily due to limitations of the utilization of deferred tax assets against the reversal of deferred tax liabilities.
Net Loss. Net loss increased $10.8 million, or 893.6%, to $12.0 million for the three months ended March 31, 2022 as compared to $1.2 million for the three months ended March 31, 2021.
Condensed Consolidated Balance Sheets
The following table is a summary of our overall financial position:
| March 31, 2022 | December 31, 2021 | Change | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Total assets | $ | 321,454 | $ | 344,107 | $ | (22,653) | |||||||||||
| Total liabilities | 276,472 | 287,778 | (11,306) | ||||||||||||||
| Mezzanine equity | 37,676 | 35,532 | 2,144 | ||||||||||||||
| Total equity | 7,306 | 20,797 | (13,491) | ||||||||||||||
Assets
Total assets decreased $22.7 million, driven primarily by:
▪$25.9 million in decreases of cash and restricted cash due to $23.9 million of cash used in operating activities, $1.0 million of cash provided by investing activities and $3.0 million of cash used in financing activities;
▪$4.6 million in property and equipment depreciation expense during the three months ended March 31, 2022; and
▪$2.0 million in intangible asset amortization expense during the three months ended March 31, 2022.
These decreases were partially offset by:
▪$10.0 million in real estate, property and equipment additions, net of disposals, resulting from new capital leases entered into during the three months ended March 31, 2022.
Liabilities
Total liabilities decreased $11.3 million, primarily driven by:
▪$8.4 million in net decreases of current and non-current asset retirement obligations (“AROs”) resulting from the settlements and gains on settlement of the Gibbons Creek AROs during the three months ended March 31, 2022;
▪$5.7 million in decreases in accrued payroll and bonuses for the payment of accrued bonuses and timing of payroll accruals at period-end; and
▪$5.2 million in decreases in accounts payables and accrued expenses from the timing of payments to vendors;
▪$1.9 million in principal payments on capital lease obligations.
These decreases were partially offset by:
▪$10.0 million in new capital lease obligations entered into during the three months ended March 31, 2022.
Mezzanine Equity
Total mezzanine equity increased $2.1 million related to the paid in-kind dividends and accretion associated with the Preferred Stock.
Equity
Total equity decreased $13.5 million primarily driven by the $12.0 million net loss and $2.2 million in paid in-kind and deemed dividends associated with our Preferred Stock, partially offset by $0.8 million of share-based compensation.
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 and overall liquidity. Our lengthy 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.
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As of March 31, 2022, we had $11.2 million of cash on hand and borrowing capacity under our Credit Agreement (as defined elsewhere herein) of $14.2 million, for total liquidity of $25.4 million. At this time, the Company does not intend to draw down on the Credit Agreement. Based on the applicable financial statement balances as of March 31, 2022, if the Company were to borrow in excess of approximately $5.0 million on the Credit Agreement, the associated financial covenants would become applicable.
We believe our cash on hand and cash generated from operations will be sufficient to cover our working capital requirements and debt obligations for the next 12 months from the issuance of this Quarterly Report.
Cash Flows
The following table sets forth our cash flow data:
| Three Months Ended | |||||||||||||||||
| March 31, | Change | ||||||||||||||||
| 2022 | 2021 | $ | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Net cash and restricted cash (used in) provided by operating activities | (23,912) | 14,066 | $ | (37,978) | |||||||||||||
| Net cash and restricted cash provided by investing activities | 969 | 27,484 | (26,515) | ||||||||||||||
| Net cash and restricted cash (used in) provided by financing activities | (2,993) | 1,577 | (4,570) | ||||||||||||||
| Net change in cash and restricted cash | $ | (25,936) | $ | 43,127 | $ | (69,063) | |||||||||||
Operating Activities
Net cash used in operating activities decreased $38.0 million to $23.9 million for the three months ended March 31, 2022 as compared to net cash provided by operating activities of $14.1 million for the three months ended March 31, 2021. The change in cash flows from operating activities was primarily attributable to:
•an increase in net loss of $10.8 million.
•an increase in non-working capital adjustments to net loss of $0.5 million, primarily due to increases in gains on sales of real estate, property and equipment and ARO settlements of $2.9 million and $2.5 million, respectively, during the three months ended March 31, 2022. These changes were partially offset by the absence of the gain on sales-type lease of $5.6 million for the three months ended March 31, 2022.
•an increase in cash used from all other operating activities of $27.7 million, which was primarily driven by the decreases in contract liabilities resulting from the timing of billings for construction projects and in AROs resulting from cash settlements of the existing liabilities.
Investing Activities
Net cash provided by investing activities decreased $26.5 million to $1.0 million for the three months ended March 31, 2022 as compared to $27.5 million for the three months ended March 31, 2021. The changes in cash flows from investing activities was primarily driven by the absences of $34.9 million in cash and restricted cash received from the Gibbons Creek Transaction and payments of $7.3 million of the working capital adjustment and other items resulting from the sale of the Allied subsidiary, partially offset by increases of $2.6 million in net proceeds from the sales of real estate, property and equipment from increased scrap sales from the demolition of the Gibbons Creek power plant.
Financing Activities
Net cash used in financing activities decreased $4.6 million to $3.0 million for the three months ended March 31, 2022 as compared to net cash provided by financing activities of $1.6 million for the three months ended March 31, 2021. The change in cash flows from financing activities was primarily driven by the absence of $7.1 million in net proceeds on the line of credit, partially offset by a decrease of $2.3 million in principal payments on long-term debt and capital lease obligations.
Working Capital
Our working capital, which we define as total current assets less total current liabilities, totaled $15.9 million at March 31, 2022 as compared to $31.5 million at December 31, 2021. This decrease in net working capital for the three months ended March 31, 2022 was primarily due to:
•decreases in cash and cash equivalents from net cash used in operating activities, partially offset by cash provided by investing activities; and
•increases in capital lease obligations and notes payables due to new long-term debt financing and capital leases entered into during the three months ended March 31, 2022.
These changes were partially offset by:
•decreases in accrued expenses primarily from the decreases in accrued payroll and bonuses for the payment of accrued bonuses and timing of payroll, job-specific and other accruals at period-end; and
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•decreases in AROs primarily from the settlements and gains on settlement of the Gibbons Creek AROs during the three months ended March 31, 2022.
Our Debt Agreements
Senior Notes
On August 25, 2021, the Company completed a public 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 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 net proceeds before payment of expenses and other fees of $135.0 million. The Company used the proceeds, along with cash from the sale of equity to B. Riley, to fully repay and terminate the Company’s Credit Facility, as defined below, with any remaining proceeds to be used for general corporate purposes, including funding future acquisitions and investments, repaying indebtedness, making capital expenditures and funding working capital.
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 unaudited condensed 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 (the “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, 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
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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 March 31, 2022, the Company has not drawn on the Credit Agreement. Outstanding letters of credit were $15.2 million and $19.0 million as of March 31, 2022 and December 31, 2021. As of March 31, 2022, all outstanding letters of credit were issued with JPMorgan.
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 unaudited condensed consolidated statements of operations using the effective interest method through the maturity date of the Credit Agreement.
Equipment Financing Facilities
We have entered into various equipment financing arrangements to finance the acquisition of certain equipment (the “Equipment Financing Facilities”). As of March 31, 2022, we had $15.5 million of equipment notes outstanding. Each of the Equipment Financing Facilities includes non-financial covenants, and, as of March 31, 2022, we were in compliance with these covenants.
Series A Preferred Stock
In March 2020, the Company entered into an agreement with an investment fund affiliated with BCP to sell 26,000 shares of Series A Preferred Stock, par value $0.01 per share (the “Preferred Stock”), for net proceeds of approximately $25.2 million in a private placement (the “Preferred Stock Offering”). The Preferred Stock had 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. The Company intends to pay dividends-in-kind for the foreseeable future. Proceeds from the Preferred Stock Offering were used for liquidity and general corporate purposes.
For more information related to the Series A Preferred Stock, see Note 11, Mezzanine Equity, to the accompanying unaudited condensed consolidated financial statements.
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Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
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 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 in accordance with 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 presentation of Adjusted EBITDA 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 the success of our business 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.
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Net loss attributable to Charah Solutions, Inc. | $ | (12,040) | $ | (1,287) | |||||||
| Interest expense, net | 4,573 | 3,235 | |||||||||
| Income tax expense | 78 | 157 | |||||||||
| Depreciation and amortization | 6,571 | 6,146 | |||||||||
| Equity-based compensation | 791 | 298 | |||||||||
| Impairment expense | 380 | — | |||||||||
Transaction-related expenses and other items(1) | 7 | 971 | |||||||||
| Adjusted EBITDA | $ | 360 | $ | 9,520 | |||||||
Adjusted EBITDA margin(2) | 0.5 | % | 18.3 | % | |||||||
(1)Represents expenses associated with the Amendment to the Credit Facility, non-recurring legal costs and expenses and other miscellaneous items.
(2)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.
Off-Balance Sheet Arrangements
We currently have no material off-balance sheet arrangements except for operating leases as referenced within Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2021.
Contractual Obligations
As of March 31, 2022, there have been no material changes in our outstanding contractual obligations from those disclosed within Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2021.
Critical Accounting Policies and Estimates
There were no changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Accounting Pronouncements
Please see Note 2, Recent Accounting Pronouncements, to the accompanying unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report and Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of recent accounting pronouncements.
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Under the Jumpstart Our Business Startups Act (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 financial accounting standards pursuant to 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 the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act until we are no longer an emerging growth company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d‑15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based on such evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of March 31, 2022 because of the material weakness in our internal control over financial reporting both as described below and as previously identified in our Annual Report on Form 10-K for the year ended December 31, 2021.
As previously disclosed on our Annual Report on Form 10-K, we identified the following control deficiencies which aggregate to a material weakness: (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.
Management's Remediation Plan
We have identified and implemented, and continue to implement, certain remediation efforts to improve the effectiveness of our internal control over financial reporting and disclosure controls and procedures. These remediation efforts are ongoing. As previously disclosed in our Annual Report on Form 10-K, the following remedial actions have been identified and initiated:
▪We have hired an external consultant to assist us in an evaluation of design and implementation of certain internal controls to address the identified deficiencies.
▪We are in the process of hiring additional accounting resources with appropriate levels of experience and reallocating responsibilities across the finance organization. This measure will provide for appropriate segregation of duties and will ensure that the appropriate level of knowledge and experience will be applied based on the risk and complexity of transactions and tasks under review.
▪We are revising user profiles within our accounting systems to ensure appropriate segregation of duties are in place.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
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. 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.
While progress has been made to enhance our internal control over financial reporting, 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 weakness 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 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 March 31, 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities
Except with respect to 260 shares of common stock withheld for income tax purposes connected with the vesting of shares of restricted stock, there were no repurchases of our common stock during the three months ended March 31, 2022.
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Item 6. Exhibits
| Exhibit Number | Description | |||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase Document. | |||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104* | Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
___________
| * | Filed herewith. | |||||||
| ** | Furnished herewith. | |||||||
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SIGNATURES
Pursuant to the requirements 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 10, 2022 | By: | /s/ Scott A. Sewell | ||||||
| Name: | Scott A. Sewell | |||||||
| Title: | President and Chief Executive Officer | |||||||
| (Principal Executive Officer) | ||||||||
| May 10, 2022 | By: | /s/ Roger D. Shannon | ||||||
| Name: | Roger D. Shannon | |||||||
| Title: | Chief Financial Officer and Treasurer | |||||||
| (Principal Financial Officer and Principal Accounting Officer) | ||||||||
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