UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________
(Mark One)
For the quarterly period ended March 31, 2023
or
For the transition period from ____________ to ____________
Commission File Number: 001-38523
____________________________
(Exact name of registrant as specified in its charter)
____________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (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 | ||||||||||||
| OTC Markets* | ||||||||||||||
| OTC Markets* | ||||||||||||||
*On April 3, 2023, Charah Solutions, Inc. common stock and 8.50% Senior Notes due 2026 were suspended from trading on the New York Stock Exchange. On April 4, 2023, Charah Solutions, Inc. common stock and 8.50% Senior Notes due 2026 began trading on the OTC Markets operated by the OTC Markets Group, Inc., under the trading symbols CHRA and CHRB, respectively.
____________________________
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 ¨ | |||||||||||||
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 June 15, 2023, the registrant had 3,402,624 shares of common stock outstanding.
CHARAH SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2023
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, 2022, and elsewhere herein.
On April 16, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Acquisition Parent 0423 Inc., a Delaware corporation (the “Parent”), and Acquisition Sub April 2023, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Parent (“Acquisition Sub”), pursuant to which, and subject to the terms and conditions therein, Acquisition Sub will be merged with and into the Company, with the Company continuing as the surviving corporation in the merger (the “Merger”). See Note 18, Subsequent Events, to the accompanying unaudited condensed consolidated financial statements. Various forward-looking statements in this Quarterly Report relate to the acquisition by Parent of the Company. Important transaction-related and other risk factors that could cause actual results and events to differ materially from those expressed or implied in the forward-looking statements include: (i) the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; (ii) the completion of the transaction on unanticipated terms and timing, including delays in obtaining required stockholder and regulatory approvals, and in satisfying the other conditions to the completion of the transaction; (iii) significant transaction costs associated with the transaction; (iv) potential litigation relating to the transaction, including the effects of any outcomes related thereto; (v) the risk that disruptions from the transaction will harm the Company’s business, including current plans and operations; (vi) the ability of the Company to retain and hire key personnel; and (vii) potential adverse reactions or changes to business relationships resulting from the announcement or completion of the transaction.
Forward‑looking statements may include statements about:
•the impacts of the COVID-19 pandemic on the Company's business;
•our business strategy;
•our operating cash flows, the availability of capital and our liquidity;
•our future revenue, income, operating performance and backlog;
•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 and the covenants contained in the Merger Agreement;
•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
ii
statements of historical fact.
We caution you that these forward‑looking statements are subject to a number of risks, uncertainties and assumptions, 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, 2022, 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.
iii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CHARAH SOLUTIONS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except par value and share amounts)
(Unaudited)
| March 31, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Trade accounts receivable, net | |||||||||||
| Contract assets | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Real estate, property and equipment, net | |||||||||||
| Operating right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
Liabilities, mezzanine equity and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | |||||||||||
| Contract liabilities | |||||||||||
| Finance lease obligations, current portion | |||||||||||
| Operating lease obligations, current portion | |||||||||||
| Notes payable, current maturities | |||||||||||
| Asset-based lending credit agreement | |||||||||||
| Asset retirement obligations, current portion | |||||||||||
| Accrued liabilities | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Deferred tax liabilities | |||||||||||
| Contingent payments for acquisitions | |||||||||||
| Asset retirement obligations | |||||||||||
| Finance lease obligations, less current portion | |||||||||||
| Operating lease obligations, less current portion | |||||||||||
| Notes payable, less current maturities | |||||||||||
| Deferred gain and other liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (see Note 15) | |||||||||||
| Mezzanine equity | |||||||||||
Series A Preferred Stock — $ | |||||||||||
Series B Preferred Stock — $ | |||||||||||
Stockholders’ equity | |||||||||||
| Retained losses | ( | ( | |||||||||
Common Stock — $ | |||||||||||
| Additional paid-in capital | |||||||||||
Total stockholders’ equity | ( | ( | |||||||||
Total liabilities, mezzanine equity and stockholders’ equity | $ | $ | |||||||||
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, | |||||||||||
| 2023 | 2022 | ||||||||||
| Construction and service revenue | $ | $ | |||||||||
| Raw material sales | |||||||||||
| Total revenues | |||||||||||
| Construction and service cost of sales | ( | ( | |||||||||
| Raw material cost of sales | ( | ( | |||||||||
| Total cost of sales | ( | ( | |||||||||
| Gross profit (loss) | ( | ||||||||||
| General and administrative expenses | ( | ( | |||||||||
| Gains on sales of real estate, property and equipment, net | |||||||||||
| (Loss) gain on ARO settlement | ( | ||||||||||
| Other operating expenses from ERT services | ( | ( | |||||||||
| Operating loss | ( | ( | |||||||||
| Interest expense, net | ( | ( | |||||||||
| Loss before income taxes | ( | ( | |||||||||
| Income tax expense | ( | ( | |||||||||
| Net loss | ( | ( | |||||||||
| Less (loss) attributable to non-controlling interest | ( | ||||||||||
| Net loss attributable to Charah Solutions, Inc. | ( | ( | |||||||||
| Deemed and imputed dividends on Series A Preferred Stock | ( | ( | |||||||||
| Series A Preferred Stock dividends | ( | ( | |||||||||
| Net loss attributable to common stockholders | $ | ( | $ | ( | |||||||
| Net loss attributable to common stockholders per common share: | |||||||||||
| Basic | $ | ( | $ | ( | |||||||
| Diluted | $ | ( | $ | ( | |||||||
| Weighted-average shares outstanding used in loss per common share: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
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, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mezzanine Equity | Permanent Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock (Shares) | Series A Preferred Stock (Amount) | Series B Preferred Stock (Shares) | Series B Preferred Stock (Amount) | Common Stock (Shares) | Common Stock (Amount) | Additional Paid-In Capital | Retained Losses | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Share based compensation expense | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Deemed and imputed dividends on Series A Preferred Stock | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock Dividends | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2023 | $ | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
For the Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mezzanine Equity | Permanent Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock (Shares) | Series A Preferred Stock (Amount) | Common Stock (Shares) | Common Stock (Amount) | Additional Paid-In Capital | Retained Losses | Total | Non-Controlling Interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income | — | — | — | — | — | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under share-based compensation plans | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Taxes paid related to the net settlement of shares | — | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Deemed and imputed dividends on Series A Preferred Stock | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock dividends | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
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, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash and restricted cash (used in) provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Non-cash lease expense | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Deferred income taxes | |||||||||||
| Gains on sales of real estate, property and equipment | ( | ( | |||||||||
Non-cash share-based compensation | |||||||||||
| Loss (gain) on ARO settlements | ( | ||||||||||
| Realization of deferred gain on ERT project performance | ( | ||||||||||
| Increase (decrease) in cash and restricted cash due to changes in: | |||||||||||
| Trade accounts receivable | ( | ||||||||||
| Contract assets and liabilities | ( | ||||||||||
| Inventory | |||||||||||
| Accounts payable | ( | ||||||||||
| Lease liabilities | ( | ||||||||||
| Asset retirement obligation | ( | ( | |||||||||
| Other assets and liabilities | ( | ||||||||||
| Net cash and restricted cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Net proceeds from the sales of real estate, property and equipment | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash and restricted cash provided by investing activities | |||||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds on asset-based lending credit agreement | |||||||||||
| Proceeds from long-term debt | |||||||||||
Principal payments on long-term debt | ( | ( | |||||||||
| Payments of debt issuance costs | ( | ||||||||||
| Principal payments on finance lease obligations | ( | ( | |||||||||
| Net cash and restricted cash provided by (used in) financing activities | ( | ||||||||||
| Net decrease in cash and restricted cash | ( | ( | |||||||||
| Cash and restricted cash, beginning of period | |||||||||||
| Cash and restricted cash, end of period | $ | $ | |||||||||
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, | |||||||||||
| 2023 | 2022 | ||||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid during the period for interest | $ | ||||||||||
| Cash refunds during the period for taxes | |||||||||||
| Supplemental disclosures and non-cash investing and financing transactions: | |||||||||||
| Proceeds from the sale of equipment in accounts receivable, net | $ | $ | |||||||||
| Series A Preferred Stock dividends payable included in accrued expenses | |||||||||||
| Deemed and imputed dividends on Series A Preferred Stock | |||||||||||
| Equipment acquired through finance leases | |||||||||||
| Property and equipment included in accounts payable and accrued expenses | |||||||||||
| As reported within the unaudited condensed consolidated balance sheet: | |||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash and restricted cash as presented in the balance sheet | $ | $ | |||||||||
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 73 % of the total voting power of our outstanding shares of common stock and all of the outstanding Series A and Series B Preferred Stock (collectively, the “Preferred Stock”), which is convertible at BCP's option 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 the reduced reporting requirements and exemptions, including the longer phase-in periods for adopting 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, 2022.
Going Concern
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
As discussed in Note 9, Long-term Debt, the Company entered into an amendment to its Credit Agreement (as defined elsewhere herein) to change the maturity date from November 9, 2025 to January 31, 2024, amongst other changes. The Company does not have sufficient cash on hand or available liquidity to repay the maturing credit agreement debt, including the outstanding letters of credit, as it becomes due within one year after the date that these unaudited condensed consolidated financial statements are issued. Combined with the Company’s recurring losses, recurring and continuing negative operating cash flows, and lack of available liquidity or cash on hand to sustain operations, these conditions raise substantial doubt about the Company’s ability to continue as a going concern.
In response, the Company has entered into a definitive agreement to be acquired by SER Capital Partners, which management anticipates will bring necessary funding to support the ongoing operations of the Company, and has implemented certain cost saving strategies to preserve liquidity. Additionally, the Company is currently pursuing a plan to refinance its Credit Agreement before the maturity date and other strategies to secure additional liquidity. However, these factors are subject to external conditions that are not within the Company’s control, and therefore, implementation of management’s plans cannot be deemed probable. As a result, management has concluded these plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
The accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
6
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
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 environment. Our ERT services manage the sites’ environmental remediation requirements, benefiting the communities and lowering the coal-fired plant energy providers’ costs.
2. Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASC 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). We adopted ASC 842 using a modified retrospective approach, which required recognition under the new standard, ASC 842, to be applied as of the date of adoption with all prior periods being presented under Leases (Topic 840) (“ASC 840”). In accordance with ASU No. 2020-05, ASC 842 was effective for non-public business entities for the fiscal year ending December 31, 2022 and interim periods within the fiscal year ending December 31, 2023. Therefore, financial information as of and for the period ended March 31, 2022 herein is presented under ASC 840, and financial information as of and for the periods ended December 31, 2022 and March 31, 2023 herein is presented under ASC 842.
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. The adoption of this ASU has not had a material impact on the Company's consolidated financial statements and is not expected to have a material impact on the Company's consolidated financial statements on a go-forward basis.
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 adoption of this ASU has not had a material impact on the Company's consolidated financial statements and is not expected to have a material impact on the Company's consolidated financial statements on a go-forward basis.
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
7
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
3. Revenue
We disaggregate our revenue from customers by customer arrangement 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 table below.
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Construction contracts | $ | $ | |||||||||
| Byproduct services | |||||||||||
| Raw material sales | |||||||||||
| Total revenue | $ | $ | |||||||||
As of March 31, 2023, the Company had remaining performance obligations with an aggregate transaction price of $498,504 on construction contracts for which we recognize revenue over time. We expect to recognize approximately 15 % of our remaining performance obligations as revenue during the remainder of 2023, 14 % in 2024, 12 % in 2025, 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, 2023. As of March 31, 2023, there were $2,113 of unapproved change orders associated with project scope changes included in determining the profit or loss on certain construction contracts, of which $1,014 were approved subsequent to quarter-end.
The Company did not
4. Asset Acquisitions
As part of its ERT service offerings, the Company closed on two acquisitions during the year ended December 31, 2022: the Avon Lake Asset Acquisition and the Cheswick Generation Station Asset Acquisition.
As each asset group lacked the necessary elements of a business, these transactions were accounted for as asset acquisitions in accordance with ASC 805, Business Combinations, with the assumed liabilities, plus expenses and cash paid by or owed to the seller, comprising the purchase price. Since the fair value of the net assets acquired was different than the purchase price of the assets, the Company allocated the difference pro rata on the basis of relative fair values to reduce the basis of land, land improvements and structural fill sites, property and equipment and other assets acquired. For the Cheswick Generating Station Asset Acquisition, the Company recognized a deferred gain representing the difference between the fair value of the assets acquired and the consideration given (including transaction costs incurred).
The Company has identified asset retirement obligations within the assumed liabilities to be initially measured and valued in accordance with ASC 410, Asset Retirement and Environmental Obligations. We developed our estimates of these 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 based on quoted rates from third parties and amounts paid for similar work to determine the fair value of these obligations. We are required to recognize these obligations at market prices whether we plan to contract with third parties or perform the work ourselves.
Once we determined the estimated closure and post-closure costs for each asset retirement obligation, we inflation-adjusted those costs to the expected time of payment using an estimated inflation rate and discounted those expected future costs back to present value using the credit-adjusted, risk-free rate effective at the time the obligation was incurred, consistent with the expected cash flow approach. Any changes in expectations that result in an upward revision to the estimated cash flows are treated as a new liability and discounted at the current rate, while downward revisions are discounted at the historical weighted average rate of the recorded obligation. The credit-adjusted, risk-free discount rate used to calculate the present value of an obligation is specific to each specific asset retirement obligation. Gains on ARO settlements result from the requirement to record costs plus an estimate of third-party profit in determining the ARO. When we perform the work using internal resources and reduce the ARO for work performed, we recognize a gain if actual costs are less than the estimated costs plus the third-party profit.
Because these obligations are measured at estimated fair value using present value techniques, changes in the estimated cost or timing of future closure, demolition, and post-closure activities could result in a material change in these liabilities, related assets, and results of operations. We assess the appropriateness of the estimates used to develop our recorded balances annually or more often if conditions warrant. Changes in timing or extent of future final closure and post-closure activities typically result in a current adjustment to the recorded liability and land, land improvements and structural fill sites asset.
8
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
Avon Lake Asset Acquisition
On April 4, 2022, the Company, through its wholly-owned special purpose vehicle subsidiary Avon Lake Environmental Redevelopment Group, LLC (“ALERG”), completed the full acquisition of the Avon Lake Generating Station and adjacent property (the "Avon Lake Property") from GenOn Power Midwest, LP, (“GenOn”) and has begun environmental remediation and sustainable redevelopment of the property.
As part of this agreement, the Company acquired the Avon Lake Property, which is a 40 -acre area located on Lake Erie that consists of multiple parcels of land adjacent to the retired generating plant, including the generating station, which ceased electric generation in March 2022, submerged lands lease in Lake Erie, substation/switch gear and transformers, administrative offices and structures, coal rail and storage yard parcels. ALERG assumed all liabilities related to the Avon Lake Property and will be responsible for the shutdown and decommissioning of the coal power plant and performing all environmental remediation and redevelopment work at the site. The decommissioning of the coal power plant and redevelopment of the property are expected to be completed within 36 months from the date of acquisition.
The assets acquired and liabilities assumed as recognized within the Company's condensed consolidated balance sheet upon closing on the APA consisted of the following:
| Consideration and direct transaction costs: | |||||
| Asset retirement obligations | $ | ( | |||
| Direct transaction costs | ( | ||||
| Total consideration and transaction costs incurred | $ | ( | |||
| Assets Acquired: | |||||
| Restricted Cash | $ | ||||
| Land, land improvements and structural fill sites | |||||
| Plant, machinery and equipment | |||||
| Vehicles | |||||
| Total allocated value of assets acquired | $ | ||||
A summary of the other assumptions included in the fair value measurement of the asset retirement obligations to be recognized upon closing of the APA consisted of the following:
| Other Assumptions: | |||||
| Inflation rate | % | ||||
| Weighted average rate applicable to our long-term asset retirement obligations | % | ||||
As part of the acquisition, the Company acquired certain plant, machinery and equipment and vehicles for which management committed to a plan to sell. Property and equipment of $505 that was initially classified as held for sale was subsequently sold to third parties in 2022.
Restricted cash is exclusively used to fund initial costs related to the acquisition and the remaining balance will be used to fund a portion of the asset retirement obligations. Restricted cash is held and will be disbursed by an escrow agent. Funds will be released to the Company as asset retirement obligation costs are incurred and performance of remediation activities are certified by an authorized representative of GenOn.
Cheswick Generating Station Asset Acquisition
On April 6, 2022, the Company, through its wholly-owned special purpose vehicle subsidiaries, Cheswick Plant Environmental Redevelopment Group, LLC, Cheswick Lefever, LLC and Harwick Operating Company, LLC (collectively, “CPERG”), completed the full acquisition of the Cheswick Generating Station, the Lefever Ash Landfill and the Monarch Wastewater Treatment Facility (the "Cheswick Property") from GenOn and began environmental remediation and sustainable redevelopment of the Pennsylvania properties immediately. The Cheswick Generating Station ceased electrical generation operations on March 31, 2022.
As part of this agreement, the Company, through CPERG, has acquired properties consisting of:
▪The retired Cheswick Generating Station, a 565 MW coal-fired plant previously operated by GenOn, located in Springdale, PA. The 56 -acre primary generating station site, along with an adjacent 27 -acre parcel, consists of an operating rail line, a coal yard, bottom ash emergency and recycle ponds, waste ponds and a coal pile runoff pond, coal delivery equipment, and an ash handling parcel. CPERG is responsible for the shutdown and decommissioning of the coal power plant, the remediation of the two ash ponds and performing all environmental remediation and redevelopment work at the site.
▪The Lefever Ash Landfill in Cheswick, PA. The 182 -acre site, including the 50 -acre landfill facility, provided disposal of coal combustion residuals (CCR) and residual waste from the Cheswick Generating Station. CPERG is responsible for the closure design, remediation closure work and post-closure monitoring of the landfill.
9
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
▪The Monarch Wastewater Treatment Facility in Allegheny County, PA. CPERG is responsible for management and compliance with all applicable environmental regulations.
In the process of accounting for this transaction, the basis of the land, property and equipment acquired was reduced to zero, resulting in an excess of financial assets over and above the purchase price. The Company recorded a deferred gain of $4,476 , representing the difference between the fair value of the assets acquired and the consideration given (including transaction costs incurred). This deferred gain will be recognized ratably over the entire project as remediation costs are incurred in proportion to total estimated remediation costs. During the three months ended March 31, 2023, the Company recognized $278 of the deferred gain within gains on sales of real estate, property and equipment, net, in the Company's condensed consolidated statements of operations. The decommissioning of the coal power plant and redevelopment of these properties are expected to be completed within 42 months from the date of acquisition, and the post-closure monitoring associated with the Lefever Ash Landfill and Monarch Wastewater Treatment Facility will occur for 30 years after the closure of the sites.
The assets acquired and liabilities assumed as recognized within the Company's condensed consolidated balance sheet upon closing on the APA consisted of the following:
| Consideration and direct transaction costs: | |||||
| Asset retirement obligations | $ | ( | |||
| Direct transaction costs and accrued expenses | ( | ||||
| Total consideration and transaction costs incurred | $ | ( | |||
| Assets Acquired: | |||||
| Cash | $ | ||||
| Restricted cash | |||||
| Total allocated value of assets acquired | $ | ||||
| Excess of fair value of assets acquired over total consideration – deferred gain | $ | ( | |||
A summary of the other assumptions included in the fair value measurement of the asset retirement obligations to be recognized upon closing of the APA consisted of the following:
| Other Assumptions: | |||||
| Inflation rate | % | ||||
| Weighted average rate applicable to our long-term asset retirement obligations | % | ||||
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 that was initially classified as held for sale was subsequently sold to third parties in 2022.
Restricted cash is exclusively used to fund initial costs related to the acquisition and the remaining balance will be used to fund a portion of the asset retirement obligations. Restricted cash is held and will be disbursed by an escrow agent. Funds will be released to the Company as certain project milestones are met and performance of remediation activities are certified by an authorized representative of GenOn.
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, 2023 | December 31, 2022 | ||||||||||
| Plant, machinery and equipment | $ | $ | |||||||||
| Structural fill site improvements | |||||||||||
| Vehicles | |||||||||||
| Office equipment | |||||||||||
| Buildings and leasehold improvements | |||||||||||
| Land, land improvements and structural fill sites | |||||||||||
| Finance lease assets | |||||||||||
| Total real estate, property and equipment | $ | $ | |||||||||
| Less: accumulated depreciation and impairment | ( | ( | |||||||||
| Real estate, property and equipment, net | $ | $ | |||||||||
10
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
Land, land improvements and structural fill sites include $18,870 of real property acquired in the asset acquisitions discussed in Note 4 that the Company is actively demolishing and for which depreciation expense is not being recorded. During the three months ended March 31, 2023 and 2022, the Company capitalized $64 and $842 , respectively, of demolition costs and sold scrap with a cost basis of $237 and $990 , respectively.
Depreciation expense was $3,836 and $4,597 for the three months ended March 31, 2023 and 2022, respectively.
Impairment of Long-Lived Assets Other than Goodwill and Intangible Assets
Long-lived assets other than goodwill and indefinite-lived intangible assets, held and used by the Company, including inventory and property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates the recoverability of assets to be held and used by comparing the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset to determine if the carrying value is not recoverable. If the carrying value is not recoverable, the Company fair values the asset and compares that fair value to the carrying value. If the asset is considered to be impaired, the impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value.
During the year ended December 31, 2022, the Company determined that a triggering event occurred that indicated that the carrying value of certain long-lived assets may not be recoverable. The Company determined that the discounted future cash flows were less that the carrying value of the asset group, indicating impairment. The fair value of the assets was determined through a market approach using the net realizable value of the assets, which indicated that certain assets were impaired that resulted in an impairment charge of $10,484 recognized on October 1, 2022. The long-lived assets impaired had a remaining fair value of $20,003 as of December 31, 2022.
Sales-type lease
In March 2021, the Company amended an existing ground lease with a third party concerning one of the Company's structural fill assets with a 30 -year term expiring on December 31, 2050. The lease includes multiple options that may be exercised at any time during the lease term for the lessee to purchase all or a portion of the premises as well as a put option (the “Put Option”) that provides the Company the option to require the lessee to purchase all of the premises at the end of the lease term.
In accordance with ASC 840 and ASC 842, Leases, the Company considered whether this lease, as amended, met any of the following four criteria as part of classifying the lease at the amendment date: (a) the lease transfers ownership of the property to the lessee by the end of the lease term; (b) the lease contains a bargain purchase option; (c) the lease term is equal to 75 percent or more of the estimated economic life of the lease property; and (d) the present value of the minimum lease payments, excluding executory costs, equals or exceeds 90 percent of the excess of the fair value of the lease property to the lessor at lease inception. This lease was recorded as a sales-type finance lease due to the Put Option provision contained within the lease agreement that represents a transfer of ownership of the property by the end of the lease term. Additionally, the Company determined that collectability of the lease payments was reasonably assured and that there were not any significant uncertainties related to costs that it has yet to incur with respect to the lease.
At the amendment date of the lease, a discount rate of 3.9 % implicit in the sales-type lease was used to calculate the present value of the minimum lease payments, which the Company recorded as a lease receivable.
The following table reflects the classification of the lease receivable within our accompanying unaudited condensed consolidated balance sheet:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Lease receivable | $ | $ | |||||||||
| Less: current portion in prepaid expenses and other current assets | ( | ( | |||||||||
| Non-current portion in other assets | $ | $ | |||||||||
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, 2023 | December 31, 2022 | ||||||||||
| Note receivable | $ | $ | |||||||||
| Less: current portion in prepaid expenses and other current assets | ( | ( | |||||||||
| Non-current portion in other assets | $ | $ | |||||||||
11
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
Accrued liabilities
The following table shows the components of accrued liabilities:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Accrued expenses | $ | $ | |||||||||
| Accrued payroll and bonuses | |||||||||||
| Accrued interest | |||||||||||
| Accrued preferred stock dividends | |||||||||||
| Accrued liabilities | $ | $ | |||||||||
6. Asset Retirement Obligations
As of March 31, 2023, the Company owns two structural fill sites with continuing maintenance and monitoring requirements after their closure, one wastewater treatment facility with continuing maintenance and monitoring requirements, and eight tracts of real property with decommissioning, remediation and monitoring requirements. As of March 31, 2023 and December 31, 2022, the Company has accrued $58,639 and $68,561 , respectively, for the asset retirement obligations (“ARO”).
The following table reflects the activity for our asset retirement obligations:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Balance, beginning of period | $ | $ | |||||||||
| Liabilities settled | ( | ( | |||||||||
| Accretion | |||||||||||
| Loss (gain) on ARO settlement | ( | ||||||||||
| Balance, end of period | |||||||||||
| Less: current portion | ( | ( | |||||||||
| Non-current portion | $ | $ | |||||||||
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 $10 and $18 for the three months ended March 31, 2023 and 2022, respectively. The Company had no 5 and $14 at March 31, 2023 and December 31, 2022, 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 9, Long-term Debt, on August 15, 2022, the Company, through its GCERG subsidiary, entered into the Term Loan Agreement with BCP that provides for a delayed-draw term loan in an aggregate principal amount of $20,000 .
As further discussed in Note 12, 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 and, in November 2022, the Company entered into an investment agreement with BCP to sell 30 (thirty thousand) shares of Series B Preferred Stock.
8. Goodwill
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
12
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
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 being 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 four-year senior secured revolving credit facility with initial aggregate commitments from the lenders of $30,000 , which includes $5,000 available for swingline loans, plus an additional $5,000 of capacity available for the issuance of letters of credit if supported by cash collateral provided by the Company (with a right to increase such amount by up to an additional $5,000 ) (“Aggregate Revolving Commitments”). Availability under the Credit Agreement is subject to a borrowing base calculated based on the value of certain eligible accounts receivable, inventory, and equipment of the Company and subject to redeterminations made in good faith and in the exercise of permitted discretion of JPMorgan. Proceeds of the Credit Agreements may be used for working capital and general corporate purposes.
The Credit Agreement provides for borrowings of either base rate loans or Eurodollar loans. Principal amounts borrowed are payable on the maturity date with such borrowings bearing interest that is payable (i) with respect to base rate loans, monthly and (ii) with respect to Eurodollar loans, the last day of each Interest Period (as defined below); provided that if any Interest Period for a Eurodollar loan exceeds three months, interest will be payable on the respective dates that fall every three months after the beginning of such Interest Period. Eurodollar Loans bear interest at a rate per annum equal to the Adjusted LIBOR for one, three or six months (the “Interest Period”), plus an applicable margin of 2.25 %. Base rate loans bear interest at a rate per annum equal to the greatest of (i) the agent bank’s reference rate, (ii) the federal funds effective rate plus 50 basis points and (iii) the rate for one month Adjusted LIBOR loans plus 100 basis points, plus an applicable rate of 125 basis points. The Credit Agreement contains a provision for sustainability adjustments annually that will impact the applicable margin by between positive 0.05 % and negative 0.05 % based on the achievement, or lack thereof, of certain metrics agreed upon between JPMorgan and the Company and publicly reported through the Company’s annual non-financial sustainability report.
The Credit Agreement is guaranteed by certain of the Company’s subsidiaries and is secured by substantially all of the Company’s and such subsidiaries’ assets. The Credit Agreement contains customary restrictive covenants for asset-based loans that may limit the Company’s ability to, among other things: incur additional indebtedness, sell assets, make loans to others, make investments, enter into mergers, make certain restricted payments, incur liens, and engage in certain other transactions without the prior consent of the lenders.
A covenant testing period (“Covenant Testing Period”) is a period in which excess availability (which is defined in the Credit Agreement as the sum of availability and an amount up to $1,000 ) is less than the greater of (a) 12.5 % of the lesser of the aggregate revolving commitments and the borrowing base, (b) the lesser of $7,500 and the PP&E Component as defined in the Credit Agreement, and (c) $3,500 , for three consecutive business days. During a Covenant Testing Period, the Credit Agreement requires the Company to maintain a fixed charge coverage ratio as defined in the Credit Agreement, determined for any period of twelve (12 ) consecutive months ending on the last day
13
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
of each fiscal quarter, of at least 1.00 to 1.00.
As of March 31, 2023 and December 31, 2022, the Company had $8,500 and $0 , respectively, drawn on the Credit Agreement. Outstanding letters of credit were $12,487 and $10,687 as of March 31, 2023 and December 31, 2022, respectively.
On August 15, 2022, the Company entered into Amendment No. 1 to the Credit Agreement (the “Credit Agreement Amendment”) with JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and certain subsidiary guarantors named therein. The Credit Agreement Amendment, among other things, permitted the Company (and certain of its subsidiaries) to execute the Term Loan Agreement and guarantee the Term Loan Agreement borrower’s obligations under the Term Loan Agreement. Additionally, the Credit Agreement Amendment permits the Company to include certain gains on ARO settlements and cash received for deferred gains from ERT projects in the calculation of the Company’s fixed charge coverage ratio under the Credit Agreement's financial covenant.
On November 14, 2022, the Company entered into Amendment No. 2 to the Credit Agreement (the “Second Credit Agreement Amendment”) with JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and certain subsidiary guarantors named therein. The Second Credit Agreement Amendment, among other things, changed the benchmark rate floor on such loans from the LIBO Rate to the Adjusted Term SOFR Rate, increased the revolver Term Benchmark spread from 2.25 % to 2.75 %, and modified the test for the Covenant Testing Period such that any excess borrowing base over the revolving commitment amount could reduce the threshold that triggers the covenant test up to $2,000 . Additionally, the Second Credit Agreement Amendment permits the Company to include $15,000 of equity contributions in "EBITDA", as defined in the Second Credit Agreement Amendment, for the fourth quarter of 2022.
On April 28, 2023, the Company entered into Consent and Amendment No. 3 to Credit Amendment ("Amendment No. 3") that, among other things, (i) provides consent to the Merger Agreement (as defined elsewhere herein), subject to certain conditions, provided that it occurs before October 16, 2023, is materially consistent with the terms of the Merger Agreement and related documents, and no event of default, as defined within the Credit Agreement, has occurred or will result from the acquisition; (ii) amends the definition of Progress Billings Cap Amount to be used in certain borrowing base certificates; (iii) amends the definition of the Applicable Rate; (iv) changes the maturity date from November 9, 2025 to January 31, 2024; and (v) consents to an extension of the deadline for certain financial deliverables for the fiscal year ended December 31, 2022.
As a result of entering into the Credit Agreement, $1,366 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 straight-line method through the maturity date of the Credit Agreement. Unamortized debt issuance costs as of March 31, 2023 and December 31, 2022 were $1,018 and $1,114 , respectively, and classified in other assets in the accompanying unaudited condensed consolidated balance sheets.
Term Loan Agreement
On August 15, 2022, the Company, through its GCERG subsidiary (the “Term Loan Borrower”), entered into a term loan agreement (the “Term Loan Agreement”) with Charah Preferred Stock Aggregator, LP, an affiliate of Bernhard Capital Partners Management, LP (“BCP”). As a result of unexpected operating losses, an increase in contract assets and accelerated cash outflows for remediation activities on an ERT project that led to a decrease in cash during the six months ended June 30, 2022, the Company sought additional financing options to fund ongoing operations and project level investment. The Term Loan Agreement was executed to provide additional liquidity for the Company and accelerate the timing of the Company's cash flows for anticipated sales of the GCERG real estate parcels. The Term Loan Agreement provides for a delayed-draw term loan in an aggregate principal amount of $20,000 . The Term Loan Agreement is scheduled to mature on the earlier of the sale of the remaining GCERG real estate parcels or April 15, 2024. The Company elected to draw down the full borrowing capacity available under the Term Loan Agreement by November 8, 2022 through separate funding requests in order to fund operating activities. Borrowings under the Term Loan Agreement accrue interest at a percentage per annum equal to 12.0 %, with interest payments due on the first business day of each calendar quarter following the effective date of the Term Loan Agreement and on the maturity date. The Term Loan Borrower agreed to pay a commitment fee equal to $1,000 that is payable on the earliest of (i) April 15, 2024, (ii) the date on which the loans are redeemed in full and all commitments are terminated and (iii) the date on which all commitments are terminated in full. The Term Loan Agreement is secured by a lien on, and security interest in, substantially all of the Term Loan Borrower’s assets, including real property, and is guaranteed on an unsecured basis by the Company and Charah, LLC. Voluntary prepayments are permitted at any time, without premium or penalty.
The Term Loan Agreement contains certain customary representations and warranties and affirmative and negative covenants. The negative covenants include, subject to customary exceptions, limitations on indebtedness, investments and acquisitions, mergers and consolidations, restricted payments, transactions with affiliates, liens and dispositions. The Term Loan Agreement allows the Term Loan Borrower to make distributions to its equity holders with the proceeds of the loans made thereunder. The Term Loan Agreement contains customary events of default. If an event of default occurs and is continuing, the lenders may declare all loans to be immediately due and payable.
On April 16, 2023, the Company entered into Amendment No. 2 to the Term Loan Amendment that, among other things, (i) waives the mandatory prepayment provisions with respect to certain asset sale proceeds, (ii) joins certain subsidiaries of the Company as guarantors under Term Loan Agreement, and (iii) consents to an extension of the deadline for certain financial deliverables for the fiscal year ended December 31, 2022. In connection with the Term Loan Amendment, ALERG, Cheswick Lefever LLC and Cheswick Plant Environmental Redevelopment Group LLC (collectively, the “Grantors”) entered into a security agreement, dated as of April 16, 2023, with Charah Preferred Stock Aggregator, LP, an affiliate of BCP, as the secured party (the “Secured Party”), pursuant to which the Grantors granted liens over
14
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
substantially all of their assets in favor of the Secured Party.
As a result of entering into the Term Loan Agreement, $598 of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the unaudited condensed consolidated statements of operations using the effective interest method through the maturity date of the Term Loan Agreement.
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, 2023 and December 31, 2022:
| March 31, 2023 | December 31, 2022 | ||||||||||
Various equipment notes entered into in November 2017, payable in monthly installments ranging from $ | $ | $ | |||||||||
Various equipment notes entered into in 2018, payable in monthly installments ranging from $ | |||||||||||
Various equipment notes entered into in 2019, payable in monthly installments ranging from $ | |||||||||||
Various equipment notes entered into in 2020, payable in monthly installments ranging from $ | |||||||||||
Various equipment notes entered into in 2021, payable in monthly installments ranging from $ | |||||||||||
An equipment note entered into in 2022 with a customer, payable in monthly installments of $ | |||||||||||
Various commercial insurance premium financing agreements entered into in 2022, payable in monthly installments ranging from $ | |||||||||||
A $ | |||||||||||
Term Loan Agreement, issued August 2022, and related amendments (see Note 9). After consideration of the amendments, the Term Loan Agreement bears interest at | |||||||||||
Senior Unsecured Notes, issued August 2021 (see Note 9). The Notes are senior unsecured obligations of the Company, bearing stated interest at | |||||||||||
| Total | |||||||||||
| Less debt issuance costs, net | ( | ( | |||||||||
| Less current maturities | ( | ( | |||||||||
| Notes payable due after one year | $ | $ | |||||||||
11. Leases
15
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
time in exchange for consideration. In determining whether a lease exists, we consider whether a contract provides us with both: (a) the right to obtain substantially all of the economic benefits from the use of the identified asset and (b) the right to direct the use of the identified asset.
Our leases typically include a combination of fixed and variable payments. Fixed payments are generally included when measuring the right-of-use asset and lease liability. Variable payments, which primarily represent payments based on usage of the underlying asset, are generally excluded from such measurement and expensed as incurred. In addition, certain of our lease arrangements may contain a lease coupled with an arrangement to provide other services, such as maintenance, or may require us to make other payments on behalf of the lessor related to the leased asset, such as payments for taxes or insurance. We elected the practical expedient to not separate lease and non-lease components for all leases entered into after the date of adoption.
The Company has elected the short-term lease exemption for all underlying asset classes. Accordingly, leases with an initial term of 12 months or less which are not expected to be renewed beyond one year, are not recorded on the balance sheet and are recognized as a lease expense on a straight-line basis over the lease term.
The measurement of right-of-use assets and lease liabilities requires us to estimate appropriate discount rates. To the extent the rate implicit in the lease is readily determinable, such rate is utilized. However, based on information available at lease commencement for our leases, the rate implicit in the lease is not known. As such, we utilize an incremental borrowing rate, which represents the rate of interest that we would pay to borrow on a collateralized basis, over a similar term, an amount equal to the lease payments.
Lease position as of March 31, 2023 and December 31, 2022
The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheet as of March 31, 2023 and December 31, 2022:
| Classification on the Consolidated Balance Sheet | March 31, 2023 | December 31, 2022 | ||||||||||||
| Assets | ||||||||||||||
| Operating lease assets | Operating lease right-of-use assets | $ | $ | |||||||||||
| Finance lease assets | ||||||||||||||
| Total lease assets | $ | $ | ||||||||||||
| Liabilities | ||||||||||||||
| Current | ||||||||||||||
| Operating | Operating lease liabilities, current | $ | $ | |||||||||||
| Finance | Finance lease obligations, current | |||||||||||||
| Non-current | ||||||||||||||
| Operating | Operating lease liabilities, long-term | |||||||||||||
| Finance | Finance lease obligations, less current portion | |||||||||||||
| Total lease liabilities | $ | $ | ||||||||||||
As of March 31, 2023, the Company had gross finance lease assets of $49,437 offset by accumulated amortization and impairment of $20,129 . As of December 31, 2022, the Company had gross finance lease assets of $49,306 offset by accumulated amortization and impairment of $17,719 .
Lease costs
The following table presents information related to our lease expense for the three months ended March 31, 2023:
| March 31, 2023 | |||||
| Finance lease costs: | |||||
| Amortization expense | $ | ||||
| Interest expense | |||||
| Operating lease costs | |||||
| Short-term lease expense | |||||
| Total lease expense | $ | ||||
16
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
Lease term and Discount rate
The following table presents certain information related to the lease terms and discount rates for our leases as of March 31, 2023:
| March 31, 2023 | |||||
| Weighted-average remaining term in years | |||||
| Finance leases | |||||
| Operating leases | |||||
| Weighted-average discount rate | |||||
| Finance leases | % | ||||
| Operating leases | % | ||||
Other Information
The following table presents supplemental cash flow information related to our leases for the three months ended March 31, 2023:
| March 31, 2023 | |||||
| Cash paid amounts included in the measurement of lease liabilities: | |||||
| Operating cash flows used for operating leases | $ | ||||
| Operating cash flows used for finance leases | |||||
| Financing cash flows used for finance leases | |||||
| Total | $ | ||||
| Right-of-use assets obtained in exchange for: | |||||
| New finance lease liabilities | $ | ||||
| New operating lease liabilities | |||||
| Total | $ | ||||
12. Mezzanine Equity
Series A Preferred Stock
In March 2020, the Company entered into an agreement with an investment fund affiliated with BCP to sell 26 (twenty-six thousand) shares of Series A Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), with an initial aggregate liquidation preference of $26,000 , net of a 3 % Original Issue Discount (“OID”) of $780 for net proceeds of $25,220 in a private placement (the “Series A Preferred Stock Offering”). Proceeds from the Series A Preferred Stock Offering were used for liquidity and general corporate purposes. In connection with the issuance of the Series A Preferred Stock, the Company incurred direct expenses of $966 , including financial advisory fees, closing costs, legal expenses and other offering-related expenses. The Series A Preferred Stock was initially recorded net of OID and direct expenses, which 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, 2023 and December 31, 2022, the Company had accrued dividends of $1,208 and $1,170 , respectively, associated with the Series A Preferred Stock, which was recorded at a fair value of $677 and $689 , respectively, using observable information for similar items and is classified as a level 2 fair value measurement.
Dividend Rights The Series A Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights on the distribution of assets in any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Series A Preferred Stock had an initial liquidation preference of $1 (one thousand dollars) per share.
The holders of the Series A Preferred Stock are entitled to a cumulative dividend paid in cash at the rate of 10.0 % per annum on the liquidation preference, payable on a quarterly basis. If we do not declare and pay a cash dividend to the holders of the Series A Preferred Stock, the dividend rate will increase to 13.0 % per annum, and the dividends will be paid-in-kind by adding such amount to the liquidation preference. The Company’s intention is to declare and pay in-kind dividends 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, 2023, the liquidation preference of the Series A Preferred Stock was $38,385 .
Conversion Features The Series A Preferred Stock is convertible at the option of the holders at any time into shares of common stock by dividing the liquidation preference by 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, 2023, the maximum number of common shares that could be required to be issued if converted is 13,857 (thirteen million eight hundred fifty-seven 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;
17
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
•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 Series A Preferred Stock, the Company may give 30 days’ notice to the holders giving the holders the option to choose, in their sole discretion, to have all outstanding shares of Series A Preferred Stock converted into shares of common stock or redeemed in cash at the then applicable Redemption Price (as defined below). The Company may not issue this conversion notice unless (i) the average volume-weighted average price per share of the Company’s common stock during each of the 20 consecutive trading days before the conversion is greater than 120 % of the conversion price; (ii) the Company’s common stock is listed on a national securities exchange; (iii) a registration statement for the re-sale of the common stock is then effective; and (iv) the Company is not then in possession of material non-public information as determined by Regulation FD promulgated under the Exchange Act.
The Series A Preferred Stock and the associated 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 Series A Preferred Stock will be recorded and subsequently accreted through the first redemption date.
Additionally, the Company determined that the nature of the Series A Preferred Stock was more akin to an equity instrument and that the economic characteristics and risks of the embedded conversion options were clearly and closely related to the Series A Preferred Stock. As such, the conversion options were not required to be bifurcated from the host under ASC 815, Derivatives and Hedging.
Redemption Rights If the Company undergoes certain change of control transactions, the Company will be required to immediately make an offer to repurchase all of the then-outstanding shares of Series A Preferred Stock for cash consideration per share equal to the greater of (i) 100 % of the liquidation preference, including accrued and unpaid dividends, if any, plus, if applicable for a transaction occurring before the third anniversary of the closing, a make-whole premium determined pursuant to a calculation of the present value of the dividends that would have accrued through such anniversary, discounted at a rate equal to the applicable treasury rate plus 0.50 % (the “Make-Whole Premium”); provided that if the transaction occurs before the first anniversary of the closing, the Make-Whole Premium shall be no greater than $4,000 and (ii) the closing sale price of the common stock on the date of such redemption multiplied by the number of shares of common stock issuable upon conversion of the outstanding Series A Preferred Stock.
On or after the three-year anniversary of the issuance of the Series A Preferred Stock, the Company may redeem the Series A Preferred Stock, in whole or in part, for an amount in cash equal to the greater of (i) the closing sale price of the common stock on the date the Company delivers such notice multiplied by the number of shares of common stock issuable upon conversion of the outstanding Series A Preferred Stock and (ii) (x) if the redemption occurs before the fourth anniversary of the date of the closing, 103 % of the liquidation preference, including 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 Series A Preferred Stock, in whole or in part, into cash consideration equal to the liquidation preference, including all accrued and unpaid dividends, from any source of funds legally available for such purpose.
Since the redemption of the Series A Preferred Stock is contingently or optionally redeemable and therefore not certain to occur, the Preferred Stock is not required to be classified as a liability under ASC 480, Distinguishing Liabilities from Equity. As the Series A Preferred Stock is redeemable in certain circumstances at the option of the holder and is redeemable in certain circumstances upon the occurrence of an event that is not solely within our control, we have classified the Series A Preferred Stock in mezzanine equity in the 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 Series A Preferred Stock would receive an amount in cash equal to the greater of (i) 100 % of the liquidation preference plus a Make-Whole Premium and (ii) the amount such holders would be entitled to receive at such time if the Series A Preferred Stock were converted into Company common stock immediately before the liquidation event. The Make-Whole Premium is removed from the calculation for a liquidation event occurring after the third anniversary of the issuance date.
Voting Rights The holders of the Series A Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis in addition to voting as a separate class as provided by applicable Delaware law and the Company’s organizational documents. The holders, acting exclusively and as a separate class, shall have the right to appoint either a non-voting observer to the Company’s Board of Directors or one director to the Company’s Board of Directors.
Registration Rights The holders of the Series A Preferred Stock have certain customary registration rights with respect to the shares of common stock into which the Series A Preferred Stock is converted, pursuant to the terms of a registration rights agreement.
18
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
Series B Preferred Stock
On November 14, 2022, the Company and an investment fund affiliated with BCP entered into (i) an agreement to sell 30 (thirty thousand) shares of Series B Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”), with an initial aggregate liquidation preference of $30,000 , net of a 4 % Original Issue Discount (“OID”) of $1,200 for net proceeds of $28,800 in a private placement (the “Series B Preferred Stock Investment”).
The Series B Preferred Stock ranks senior to all classes or series of equity securities of the Company with respect to dividend rights and rights on liquidation. In the event of any liquidation or winding up of the Company, the holder of each share of the Series B Preferred Stock will receive in preference to the holders of the Company common stock a per share amount equal to the greater of (i) the stated value of the Series B Preferred Stock and (ii) the amount such holders would be entitled to receive at such time if the Series B Preferred Stock were converted into Company common stock. Proceeds from the Series B Preferred Stock Investment were used for liquidity and general corporate purposes.
Conversion Features The holder of the Series B Preferred Stock may at any time following the 3 -month anniversary of issuance convert all or a portion of the Series B Preferred Stock into common stock of the Company. Each share of Series B Preferred Stock will be convertible into a number of shares of common stock of the Company equal to the purchase price of such share divided by the conversion price, which will be set at an amount representing the volume-weighted average closing price of the Company common stock for the 20 -trading days immediately preceding the public announcement of this transaction.
At any time after the three-year anniversary of the date of issuance, if the holders have not elected to convert all their shares of Series B Preferred Stock, the Company will have the option to convert all of the then-outstanding shares of Series B Preferred Stock; provided that (i) the closing price of the Company’s common stock exceeds 120 % of the conversion price for each of the 20 consecutive trading days prior to the date of conversion, (ii) the Company’s common stock is then listed on a national securities exchange, (iii) a registration statement for re-sale of the Company’s common stock is then effective and (iv) the Company is not then in possession of material non-public information. The Company will provide the holders with 30 days’ notice of its intention to convert the Series B Preferred Stock and the holders will then have the option, in their sole discretion, to have their Series B Preferred Stock converted at the then-applicable Conversion Price or redeemed in cash at the Company’s redemption price as defined in the agreement. In the event the holders elect to have the Series B Preferred Stock redeemed in cash and the Company is unable to redeem the Series B Preferred Stock in cash, then the holders shall not be required to participate in any conversion and shall retain their then-outstanding Series B Preferred Stock in all respects.
Redemption Rights If a change of control of the Company occurs, subject to the payment in full of all obligations under the Credit Agreement, the Company will be required to immediately make an offer to repurchase all of the then-outstanding shares of Series B Preferred Stock for cash consideration per share equal to the Company’s redemption price as defined in the agreement. Unless the holders buy all or substantially all of the Company’s assets in a transaction or a series of related transactions approved by the Company’s board of directors, no acquisition or disposition of securities by the holders shall constitute a change of control hereunder.
At any time after the 30 -month anniversary of the date of closing, the holders will have the option to require the Company to redeem any or all of the then outstanding shares of Series B Preferred Stock for cash consideration equal to the stated value provided that the Company has the financial means and subject to the approval of the Company's lender if required under a customary credit facility.
At any time after the 30 -month anniversary of the date of closing, and upon not less than 30 days prior written notice, if the holders have not elected to convert or redeem all their shares of Series B Preferred Stock, the Company may elect to redeem all shares of Series B Preferred Stock for an amount equal to the greater of (i) the closing sale price of the Common Stock on the date the Company delivers such notice multiplied by the number of shares of Common Stock issuable upon conversion of the outstanding Series B Preferred Stock and (ii) the stated value.
Voting Rights The holders of the Series B Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis and not as a separate class. The voting power of the Series B Preferred Stock will be limited to 5.0 % of the outstanding common stock of the Company.
Registration Rights The holders of the Series B Preferred Stock will receive (i) customary transferable shelf registration rights pertaining to the Series B Preferred Stock and any shares of Company common stock issued upon the conversion thereof and (ii) customary piggyback and demand rights in respect of any Company common stock issued upon the conversion of any preferred stock, in each case, by amendment to the Company’s current registration rights agreement or otherwise and on terms consistent therewith.
13. Contract Assets and Liabilities
19
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
Our contract assets are as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Costs and estimated earnings in excess of billings | $ | $ | |||||||||
| Retainage | |||||||||||
| Total contract assets | $ | $ | |||||||||
Our contract liabilities are as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Billings in excess of costs and estimated earnings | $ | $ | |||||||||
| Deferred revenue | |||||||||||
| Total contract liabilities | $ | $ | |||||||||
We recognized revenue of $8,198 for the three months ended March 31, 2023 that was previously included in contract liabilities at December 31, 2022. We recognized revenue of $5,772 for the three months ended March 31, 2022, which was previously included in the contract liability balance at December 31, 2021.
The Company's net position on uncompleted contracts is as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Costs incurred on uncompleted contracts | $ | $ | |||||||||
| Estimated earnings | |||||||||||
| Total costs and estimated earnings | |||||||||||
| Less billings to date | ( | ( | |||||||||
| Net balance in process | $ | $ | |||||||||
The net balance in process classified on the accompanying unaudited condensed consolidated balance sheets is as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Costs and estimated earnings in excess of billings | $ | $ | |||||||||
| Billings in excess of costs and estimated earnings | ( | ( | |||||||||
| Net balance in process | $ | $ | |||||||||
Anticipated losses on long-term contracts are recognized when such losses become evident. As of March 31, 2023 and December 31, 2022, accruals for anticipated losses on long-term contracts were $8 and $120 , respectively.
14. 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, 2023 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, 2022 | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Granted | |||||||||||||||||||||||||||||||||||
| Forfeited | |||||||||||||||||||||||||||||||||||
| Vested | |||||||||||||||||||||||||||||||||||
Balance as of March 31, 2023 | $ | $ | $ | ||||||||||||||||||||||||||||||||
20
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
| 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, 2022 | $ | $ | $ | ||||||||||||||||||||||||||||||||
Balance as of March 31, 2023 | $ | $ | $ | ||||||||||||||||||||||||||||||||
Stock-based compensation expense related to the restricted stock issued was $453 and $571 during the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, total unrecognized stock-based compensation expense related to non-vested awards of restricted stock, net of estimated forfeitures, was $1,115 , and is expected to be recognized over a weighted-average period of 1.33 years.
Stock-based compensation expense related to the performance stock issued was $299 and $220 during the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, total unrecognized stock-based compensation expense related to non-vested awards of performance stock, net of estimated forfeitures, was $722 , and is expected to be recognized over a weighted-average period of 1.61 years.
15. Commitments and Contingencies
In December 2022, the Company was notified by a whistleblower that certain employees had engaged in improper spending activities at one of our project sites. In response, the Company conducted an internal investigation that substantiated the whistleblower's allegations. The Company engaged external legal counsel and a forensic accounting investigation team to thoroughly assess the extent of the fraudulent activities. Based on specific assumptions and limitations, we determined a range of $1,140 to $2,670 of possible loss related to potentially fraudulent transactions believed to have been billed to the customer from 2018 through 2022. The investigation will continue to proceed through the legal process, which includes examining the extent of involvement of the customer, its representatives or any third parties in contributory responsibility, evaluating the extent of insurance coverage available for reimbursement of the Company's losses, and collaborating with external law enforcement agencies to ascertain the full scope and magnitude of the overall fraudulent scheme. The Company has reversed revenue of $2,476 for these fraudulent activities during the year ended December 31, 2022, representing management's best estimate of the probable loss, irrespective of potential recoveries from third parties or insurance policies.
In September 2022, TMPA served GCERG in the District Court of Travis County, Texas with a lawsuit alleging improper calculation of costs attributed to the remediation of the Site F Landfill on our Gibbons Creek project. In our APA with TMPA, GCERG agreed that if aggregate costs actually incurred to remediate the Site F Landfill did not exceed $13,600 , then the cash and restricted cash received would be reduced on a dollar-for-dollar basis. In May 2023, the two parties held an unsuccessful mediation. This lawsuit is in the discovery phase and the Company intends to continue to defend the case vigorously.
On June 15, 2023, a purported Company stockholder filed an action against the Company and its Board of Directors (the “Board”) captioned Wilson v. Charah Solutions, Inc., et al., No. 23-cv-00656, in the United States District Court for the District of Delaware (the “Wilson Action”). The plaintiff in the Wilson Action alleges that the Company and its Board violated federal securities laws, including Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated under the Exchange Act, by issuing a materially incomplete and misleading definitive proxy statement in connection with the Merger (as defined elsewhere herein). On June 16, 2023, another purported Company stockholder filed an action against the Company and its Board captioned Wilhelm v. Charah Solutions, Inc., et al., No. 23-cv-00661, in the United States District Court for the District of Delaware (the “Wilhelm Action”) and together with the Wilson Action, the “Actions”). The plaintiffs in the Wilhelm Action also allege that the Company and its Board violated federal securities laws, including Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated under the Exchange Act, by issuing a materially incomplete and misleading definitive proxy statement in connection with the Merger. The plaintiffs in each of the Actions seek, among other things, to enjoin the transactions contemplated by the Merger Agreement (as defined elsewhere herein) and an award of attorneys’ and expert fees and expenses. The Company believes that the allegations in the Actions are without merit. The Company has received demand letters containing similar allegations from other purported stockholders and additional lawsuits arising out of the Merger may also be filed in the future.
From time to time the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. For all such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. Although it is difficult to predict the ultimate outcome of these lawsuits, claims and proceedings, we do not believe that the ultimate disposition of any of these matters, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. We maintain liability insurance for certain risks that is subject to certain self-insurance limits.
We believe amounts previously recorded are sufficient to cover any liabilities arising from the proceedings with all outstanding legal claims. Except as reflected in such accruals, we are currently unable to estimate a range of reasonably possible loss or a range of reasonably possible loss in excess of the amount accrued for outstanding legal matters.
21
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
16. Income Taxes
The Company and income tax expense of $115 and $78 for the three months ended March 31, 2023 and 2022, 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, 2023 was negative 3.9 % and includes the effect of the valuation allowance, state income taxes and nondeductible items. The effective income tax rate for the three months ended March 31, 2023 was less than the federal and state statutory rates primarily due to changes in the valuation allowance, which had an impact of 28.1 %. The Company’s income is subject to a federal statutory rate of 21.0% and an estimated state statutory rate of 4.1 % before considering the valuation allowance.
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, 2023, deferred tax liabilities, net of deferred tax assets, was $894 . 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.
17. 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, | |||||||||||
| 2023 | 2022 | ||||||||||
| Numerator: | |||||||||||
| Net loss attributable to Charah Solutions, Inc. | $ | ( | $ | ( | |||||||
| Deemed and imputed dividends on Series A Preferred Stock | ( | ( | |||||||||
| Series A Preferred Stock dividends | ( | ( | |||||||||
| Net loss attributable to common stockholders | $ | ( | $ | ( | |||||||
| Denominator: | |||||||||||
| Weighted average shares outstanding | |||||||||||
| Dilutive share-based awards | |||||||||||
| Total weighted average shares outstanding, including dilutive shares | |||||||||||
| Net loss attributable to common stockholders per common share | |||||||||||
| Basic | $ | ( | $ | ( | |||||||
| Diluted | $ | ( | $ | ( | |||||||
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, 2023 and 2022, the inclusion of all potentially dilutive shares would be anti-dilutive. Therefore, dilutive shares of 3,221 and 1,311 were excluded from the computation of the weighted-average shares for diluted net loss per share for the three months ended March 31, 2023 and 2022, respectively.
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CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
A summary of securities excluded from the computation of diluted earnings per share is presented below:
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Diluted earnings per share: | |||||||||||
| Anti-dilutive restricted and performance stock units | |||||||||||
| Anti-dilutive Series A Preferred Stock convertible into common stock | |||||||||||
| Potentially dilutive securities, excluded as anti-dilutive | |||||||||||
Reverse Stock Split
On December 29, 2022, the Company effected a one-for-ten (1:10) reverse stock split of its common stock, par value $0.01 per share. The reverse stock split, which was authorized by its Board of Directors, was approved by Charah Solutions’ stockholders on November 23, 2022. The reverse stock split reduced the number of outstanding shares of the Company's common stock from 33,889 shares as of December 29, 2022, to 3,389 shares outstanding post-split. The primary purpose of the reverse stock split was to increase the per share market price of the Company’s common stock in an effort to maintain compliance with applicable NYSE continued listing standards with respect to the closing price of our common stock.
18. Subsequent Events
Agreement and Plan of Merger
On April 16, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Acquisition Parent 0423 Inc., a Delaware corporation (the “Parent”), and Acquisition Sub April 2023, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Parent (“Acquisition Sub”), pursuant to which, and subject to the terms and conditions therein, Acquisition Sub will be merged with and into the Company, with the Company continuing as the surviving corporation in the merger (the “Merger”). Following the consummation of the Merger, the Company will be a wholly owned subsidiary of Parent. Parent is a wholly owned subsidiary of investment funds affiliated with SER Capital Partners (“SER”), a private investment firm focused on sustainable investment.
Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.01 per share, of the Company issued and outstanding immediately prior to the Effective Time will be cancelled and each share will be converted into the right to receive $6.00 per share in cash, without interest (the “Common Per Share Merger Consideration”). In addition, at the Effective Time, each share of Series A Preferred Stock of the Company and Series B Preferred Stock of the Company that is issued and outstanding immediately prior to the Effective Time shall be purchased and redeemed by Parent pursuant to Section 8 of the Certificate of Designations of Series A Preferred Stock and Section 7 of the Certificate of Designations of Series B Preferred Stock in exchange for the Series A Redemption Price of $40,061 (as such term is defined in the Merger Agreement) or the Series B Redemption Price of $30,000 (as such term is defined in the Merger Agreement), respectively (the “Redemption”).
The parties to the Merger Agreement have made certain customary representations and warranties and have agreed to certain covenants. The Merger Agreement between Parent and the Company may be terminated by mutual consent of both parties or under certain conditions as detailed within the Merger Agreement.
The closing of the transactions contemplated by the Merger Agreement is subject to (i) receipt of the Requisite Stockholder Approval, (ii) consent from the FCC under section 310 of the Communications Act of 1934, and (iii) consent from JPMorgan Chase Bank, N.A. to the Merger and the Redemption, to the extent the Existing Debt Agreement (as such term is defined in the Merger Agreement) remains outstanding.
The Parent has obtained certain equity financing commitments pursuant to an equity commitment letter (the “Equity Commitment Letter”) for the purpose of financing the transactions contemplated by the Merger Agreement and paying related fees and expenses. Certain affiliates of SER Capital Partners (collectively, “Guarantors”) committed to contribute to Parent an equity contribution equal to $88,054 prior to or at the closing, on the terms and subject to the conditions set forth under those certain commitments.
On April 16, 2023, the Guarantors and the Company executed a guarantee (the “Guarantee”) in favor of the Company in which the Guarantors have guaranteed the due and punctual payment of any and all payment obligations of Parent and Acquisition Sub, including Parent’s and/or Acquisition Sub’s obligations to pay actual damages incurred as a result of any knowing or intentional breach of the Merger Agreement prior to the valid termination of the Merger Agreement.
In connection with the execution of the Merger Agreement, BCP, the Parent and the Company entered into a voting and support agreement (the “Letter Agreement”). Subject to the terms and conditions set forth in the Letter Agreement, BCP agreed, among other things, to vote their shares in favor of the adoption of the Merger Agreement, the Merger and the other transactions contemplated thereby, and against any agreement, transaction or proposal that relates to a competing proposal. The Letter Agreement also includes restrictions on the transfer of the Holder's shares and a waiver of appraisal rights. The Letter Agreement will terminate under certain circumstances as defined in the Letter Agreement.
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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, 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 a more limited scope.
On April 16, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Acquisition Parent 0423 Inc., a Delaware corporation (the “Parent”), and Acquisition Sub April 2023, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Parent (“Acquisition Sub”), pursuant to which, and subject to the terms and conditions therein, Acquisition Sub will be merged with and into the Company, with the Company continuing as the surviving corporation in the merger (the “Merger”). Following the consummation of the Merger, the Company will be a wholly owned subsidiary of Parent. Parent is a wholly owned subsidiary of investment funds affiliated with SER Capital Partners, a private investment firm focused on sustainable investment.
Overview
We are a leading national service provider of mission-critical environmental services and byproduct recycling to the power generation industry. We offer a suite of remediation and compliance services, byproduct services, raw material sales and Environmental Risk Transfer (“ERT”) services. We also design and implement solutions for complex environmental projects (such as coal ash pond closures) and facilitate coal ash recycling through byproduct marketing and other beneficial use services. We believe we are a partner of choice for the power generation industry due to our quality, safety, domain experience, and compliance record, all of which are key criteria for our customers. In 2022, we performed work at more than 40 coal-fired generation sites nationwide.
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.
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.
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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 and gains associated with ERT services less cost of sales, other operating expenses from ERT services, general and administrative expenses, and impairment expense, 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 interest expense, net, loss on extinguishment of debt, income taxes, depreciation and amortization, equity-based compensation, impairment expense (including inventory reserves) 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 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, consumer pressure and the industry’s increasing focus on environmental stewardship. Continued increases in
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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, maximizing the value of the assets and improving the environment. Our ERT services allow these partners to remove the environmental risk and insurance obligations and place control and oversight with a company specializing in these complex remediation and reclamation projects. We believe our broad set of service capabilities, track record of quality service and safety, exacting environmental standards, and a dependable and experienced labor force is a significant competitive advantage. Our work, mission and culture are directly aligned with meeting environmental, social, and governance 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 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.
Business Environment
We believe there are long-term growth opportunities within the industry in which we operate, and we continue to have a positive long-term outlook. We believe that with our full suite of service offerings, broad geographic reach, and technical and safety expertise, assuming completion of the Merger, we are well positioned to mitigate the risks and challenges in our industry while continuing to capitalize on opportunities and trends. The following represent the recent risks and challenges experienced by the Company.
Inflationary Market Pressures
We are experiencing the general impact of inflationary market pressures in our supply chain, labor and subcontractor markets. As a result of the tightening of the labor market, we continue to operate with disciplined hiring practices, but we believe our labor costs will remain high given our demand for labor in this environment. Further, we could continue to experience difficulties in securing pricing and the availability of certain equipment, materials and subcontractors.
While opportunities to bid on new projects and work continue to be comparable to prior year levels, we believe inflationary market pressures may impact our ability to secure backlog in the near term. Our customers are focused on cost containment to maintain allowable budgets and we continue to see projects on which we have submitted competitive bids being left unawarded from higher-than-expected cost proposals received.
Additionally, continued inflation may result in tightening of the credit markets, making access to funding, bonding, letters of credit or sureties more challenging, any of which could adversely impact our profitability and cash flow.
Competitive Labor Market.
As our continued success depends on our ability to attract and retain qualified personnel, we continue to compete to identify, hire and retain qualified employees in this labor market. We believe this labor competition trend is likely to continue, possibly to such a degree that demand for labor resources will outpace supply. Furthermore, the nature of our business as well as the markets in which our projects operate could result in shortages of qualified labor in those markets during periods of high demand. Our ability to capitalize on available opportunities is limited by our ability to employ, train and retain the necessary skilled personnel at acceptable labor costs. We continue to monitor our labor markets and do not currently believe the labor market environment will present a material risk to our profitability as we continue to retain and develop our workforce.
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Supply Chain Disruption.
We are experiencing supply chain disruptions in our end markets related to the following factors: (i) delays in receiving materials and equipment, and (ii) increased logistics costs resulting from a reduction in available rail cars and truck drivers as well as increases in imported raw materials from tax, tariffs and border controls.
Going Concern
The Company does not have sufficient cash on hand or available liquidity to repay the maturing credit agreement debt, including the outstanding letters of credit, as it becomes due within one year after the date that these unaudited condensed consolidated financial statements are issued. This condition, combined with the Company’s recurring losses, negative operating cash flows, and lack of available liquidity, raises substantial doubt about the Company’s ability to continue as a going concern. In response, the Company has entered into a definitive agreement to be acquired by SER Capital Partners, which management anticipates will bring necessary funding to support the ongoing operations of the Company, and has implemented certain cost saving strategies to preserve liquidity. See “—Liquidity and Capital Resources” below for more information.
These factors differ in their severity and impact to our financial situation, and we continue to monitor these supply chain disruptions, logistical challenges and general market conditions with respect to availability and costs of certain materials and equipment necessary for the performance of our business and the impact to our profitability and cash flow.
Results of Operations
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
| Three Months Ended | |||||||||||||||||||||||
| March 31, | Change | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Construction and service revenue | $ | 61,846 | $ | 54,858 | $ | 6,988 | 12.7 | % | |||||||||||||||
| Raw material sales | 9,067 | 11,193 | (2,126) | (19.0) | % | ||||||||||||||||||
| Total revenues | 70,913 | 66,051 | 4,862 | 7.4 | % | ||||||||||||||||||
| Construction and service cost of sales | (57,109) | (59,242) | 2,133 | (3.6) | % | ||||||||||||||||||
| Raw material cost of sales | (7,772) | (10,576) | 2,804 | (26.5) | % | ||||||||||||||||||
| Total cost of sales | (64,881) | (69,818) | 4,937 | (7.1) | % | ||||||||||||||||||
| Gross profit (loss) | 6,032 | (3,767) | 9,799 | 260.1 | % | ||||||||||||||||||
| General and administrative expenses | (6,234) | (8,952) | 2,718 | (30.4) | % | ||||||||||||||||||
| Gains on sales of real estate, property and equipment, net | 2,975 | 3,543 | (568) | (16.0) | % | ||||||||||||||||||
| (Loss) gain on ARO settlement | (41) | 2,451 | (2,492) | (101.7) | % | ||||||||||||||||||
| Other operating expenses from ERT services | (3,813) | (667) | (3,146) | 471.7 | % | ||||||||||||||||||
| Operating loss | (1,081) | (7,392) | 6,311 | 85.4 | % | ||||||||||||||||||
| Interest expense, net | (4,890) | (4,573) | (317) | 6.9 | % | ||||||||||||||||||
| Loss before income taxes | (5,971) | (11,965) | 5,994 | (50.1) | % | ||||||||||||||||||
| Income tax expense | (115) | (78) | (37) | 47.4 | % | ||||||||||||||||||
| Net loss | (6,086) | (12,043) | 5,957 | 49.5 | % | ||||||||||||||||||
| Less (loss) income attributable to non-controlling interest | — | (3) | 3 | 100.0 | % | ||||||||||||||||||
| Net loss attributable to Charah Solutions, Inc. | $ | (6,086) | $ | (12,040) | 5,954 | 49.5 | % | ||||||||||||||||
Construction and Service Revenue. Revenue increased $7.0 million, or 12.7%, to $61.8 million for the three months ended March 31, 2023 as compared to $54.9 million for the three months ended March 31, 2022, primarily driven by increases in byproduct services revenue of $4.6 million primarily from our two beneficial use projects and construction revenue of $2.4 million primarily from the timing of project progression on certain project work.
Raw Material Sales. Revenue decreased $2.1 million, or 19.0%, to $9.1 million for the three months ended March 31, 2023 as compared to $11.2 million for the three months ended March 31, 2022, primarily driven by a decrease in shipments.
Gross Profit. Gross profit increased $9.8 million, or 260.1%, to $6.0 million for the three months ended March 31, 2023 as compared to a $3.8 million gross loss for the three months ended March 31, 2022. As a percentage of revenue, gross profit was 9.8% and (6.9)% for the three months ended March 31, 2023 and 2022, respectively. The increase in gross profit and gross profit margin was directly affected by the absence of the certain legacy construction projects and an increase in gross profit on our beneficial use projects during the three months ended March 31, 2023, all of which were performed at a negative margin and contributed to the gross profit loss in 2022.
General and Administrative Expenses. General and administrative expenses decreased $2.7 million, or 30.4%, for the three months ended March 31, 2023 to $6.2 million as compared to $9.0 million for the three months ended March 31, 2022, primarily attributable to the lower amortization expense of $2.0 million resulting from the impairment of our trade name and customer relationship intangibles assets and
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a reduction-in-force and cost restructuring efforts that were implemented at the beginning of 2023. These drivers were partially offset by an increase in transaction-related costs and other items of $0.4 million.
Gains on Sales of Real Estate, Property and Equipment, Net. Gains on sales of real estate, property and equipment, net decreased $0.6 million, or 16.0%, to $3.0 million for the three months ended March 31, 2023 as compared to $3.5 million for the three months ended March 31, 2022, primarily due to the absence of scrap sales from the Gibbons Creek ERT project, partially offset by the commencement of scrap sales at the Avon Lake and Cheswick ERT projects.
(Loss) Gain on ARO Settlement. Gain on asset retirement obligation (“ARO”) settlement decreased $2.5 million, or (101.7)%, to a slight net loss for the three months ended March 31, 2023 as compared to a net gain of $2.5 million for the three months ended March 31, 2022 due to the lack of any gains on ARO settlements compared to the prior gains recognized on the Gibbons Creek ERT project.
Other Operating Expenses from ERT Services. Other operating expenses from ERT services increased $3.1 million, or 471.7%, to $3.8 million for the three months ended March 31, 2023 as compared to $0.7 million for the three months ended March 31, 2022, primarily driven by an increase in operating expenses resulting from the acquisition of the Avon Lake and Cheswick ERT projects, including the related accretion expense on the acquired AROs, and an increase in project management-related expenses for the achievement of certain projects-related milestones and profitability levels on the Gibbons Creek ERT project.
Interest Expense, Net. Interest expense, net increased $0.3 million, or 6.9%, to $4.9 million for the three months ended March 31, 2023 as compared to $4.6 million for the three months ended March 31, 2022 primarily attributable to higher debt balances.
Income Tax Expense. Income tax expense remained at $0.1 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, with a slight increase primarily due to limitations of the utilization of deferred tax assets against the reversal of deferred tax liabilities.
Net Loss. Net loss decreased $6.0 million, or 49.5%, to $6.1 million for the three months ended March 31, 2023 as compared to $12.0 million for the three months ended March 31, 2022.
Condensed Consolidated Balance Sheets
The following table is a summary of our overall financial position:
| March 31, 2023 | December 31, 2022 | Change | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Total assets | $ | 320,769 | $ | 338,543 | $ | (17,774) | |||||||||||
| Total liabilities | 365,800 | 378,252 | (12,452) | ||||||||||||||
| Mezzanine equity | 72,358 | 71,543 | 815 | ||||||||||||||
| Total equity | (117,389) | (111,252) | (6,137) | ||||||||||||||
Assets
Total assets decreased $17.8 million, primarily driven by:
▪$13.2 million in decreases of cash and restricted cash due to $19.8 million of cash and restricted cash used in operating activities, $3.2 million of cash and restricted cash provided by investing activities and $3.4 million of cash and restricted cash provided by financing activities;
▪$3.8 million in property and equipment depreciation expense during the three months ended March 31, 2023; and
▪$3.0 million in non-cash lease expense during the three months ended March 31, 2023.
Liabilities
Total liabilities decreased $12.5 million, primarily driven by:
▪$9.9 million in decreases in AROs primarily resulting from ARO settlements during the three months ended March 31, 2023, partially offset by interest accretion on AROs;
▪$5.1 million in principal payments on total long-term financing and finance lease obligations;
▪$3.9 million in decreases in accounts payable during the three months ended March 31, 2023 primarily driven by the timing of cost of sales activities and vendor payments; and
▪$3.5 million in decreases of operating lease liabilities.
These decreases were partially offset by:
▪ $8.5 million in proceeds from the Credit Agreement as discussed in Note 9. Long-term Debt.
Mezzanine Equity
Total mezzanine equity increased $0.8 million related to the paid in-kind dividends and accretion associated with the Series A Preferred Stock.
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Equity
Total equity decreased $6.1 million, primarily driven by the $6.1 million net loss and $0.8 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 debt and equity to an affiliate of the Company and availability under our asset-based lending credit agreement. Due to longer sales cycles, driven by the increase in the size, scope and complexity of remediation and compliance projects that we are bidding on, we have experienced contract initiation delays and project completion delays that have adversely affected our revenue, profitability and overall liquidity. Our long and complex projects require us to expend large sums of working capital, and delays in payment receipts, project commencement or project completion can adversely affect our financial position and the cash flows that typically fund our expenditures.
As discussed in Note 9, Long-Term Debt, on April 28, 2023, the Company entered into Consent and Amendment No. 3 to Credit Amendment ("Amendment No. 3") that, among other things, (i) provides consent to the Merger Agreement, subject to certain conditions, provided that the Merger occurs before October 16, 2023, is materially consistent with the terms of the Merger Agreement and related documents, and no event of default, as defined within the Credit Agreement, has occurred or will result from the acquisition; (ii) amends the definition of Progress Billings Cap Amount to be used in certain borrowing base certificates; (iii) amends the definition of the Applicable Rate; (iv) changes the maturity date from November 9, 2025 to January 31, 2024; and (v) consents to an extension of the deadline for certain financial deliverables for the fiscal year ended December 31, 2022. The Company does not have sufficient cash on hand or available liquidity to repay the maturing credit agreement debt, including the outstanding letters of credit, as it becomes due within one year after the date that these unaudited condensed consolidated financial statements are issued. This condition, combined with the Company’s recurring losses, negative operating cash flows, and lack of available liquidity, raises substantial doubt about the Company’s ability to continue as a going concern. In response, the Company has entered into a definitive agreement to be acquired by SER Capital Partners, which management anticipates will bring necessary funding to support the ongoing operations of the Company, and has implemented certain cost saving strategies to preserve liquidity. Additionally, the Company is currently pursuing a plan to refinance its Credit Agreement before the maturity date and other strategies to secure additional liquidity. However, these factors are subject to external conditions that are not within the Company’s control, and therefore, implementation of management’s plans cannot be deemed probable. As a result, management has concluded these plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Cash Flows
The following table sets forth our cash flow data:
| Three Months Ended | |||||||||||||||||
| March 31, | Change | ||||||||||||||||
| 2023 | 2022 | $ | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Net cash and restricted cash used in operating activities | $ | (19,794) | $ | (23,912) | $ | 4,118 | |||||||||||
| Net cash and restricted cash provided by investing activities | 3,174 | 969 | 2,205 | ||||||||||||||
| Net cash and restricted cash provided by (used in) financing activities | 3,373 | (2,993) | 6,366 | ||||||||||||||
| Net change in cash and restricted cash | $ | (13,247) | $ | (25,936) | $ | 12,689 | |||||||||||
Operating Activities
Net cash and restricted cash used in operating activities decreased $4.1 million to $19.8 million for the three months ended March 31, 2023 as compared to $23.9 million for the three months ended March 31, 2022. The change in cash flows from operating activities was primarily attributable to:
•a decrease in net loss of $6.0 million.
•an increase in non-working capital adjustments to net loss of $3.4 million, primarily due to decreases on the gains on sales of real estate, property and equipment and ARO settlements from the Gibbons Creek ERT project, partially offset by a decrease in amortization expense resulting from the impairment of our trade name and customer relationship intangible assets.
•a decrease in working capital adjustments of $5.2 million, primarily attributable to an increase in ARO spending from the commencement of operations on the Avon Lake and Cheswick ERT projects. contract assets and liabilities due to the timing of activities, milestone payments and cash activities, and accounts payable due to the timing of cost of sales activities and vendor payments.
Investing Activities
Net cash and restricted cash provided by investing activities increased $2.2 million to $3.2 million for the three months ended March 31, 2023 as compared to $1.0 million for the three months ended March 31, 2022. The changes in cash flows from investing activities were primarily driven by a decrease in demolition costs on the Gibbons Creek that were capitalized into real estate, property and equipment,
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net.
Financing Activities
Net cash and restricted cash provided by (used in) financing activities increased $6.4 million to net cash and restricted cash provided by financing activities of $3.4 million for the three months ended March 31, 2023 as compared to net cash and restricted cash used in financing activities of $3.0 million for the three months ended March 31, 2022. The change in cash flows from financing activities was primarily driven by $8.5 million in proceeds from the Credit Agreement as discussed in Note 9, Long-term Debt, partially offset by an increase of $0.9 million in principal payments on long-term debt and financing lease obligations.
Working Capital
Our working capital deficit, which we define as total current assets less total current liabilities, totaled $8.3 million at March 31, 2023 as compared to $4.7 million at December 31, 2022. This increase in the net working capital deficit for the three months ended March 31, 2023 was primarily due to:
•decreases in cash and cash equivalents from net cash used in operating activities, partially offset by cash provided by investing and financing activities; and
•an increase in the outstanding balances on the asset-based lending credit agreement.
These drivers were partially offset by:
•decreases in AROs primarily driven by settlements on AROs at the Gibbons Creek, Avon Lake and Cheswick ERT projects;
•decreases in accounts payable primarily driven by the timing of cost of sales activities and vendor payments; and
•decreases in finance lease obligations and notes payables due to principal payments on long-term debt financing and finance during the three months ended March 31, 2023.
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 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 being 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
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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 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, 2023 and December 31, 2022, the Company had $8.5 million and $0, respectively, drawn on the Credit Agreement. Outstanding letters of credit were $12.5 million and $10.7 million as of March 31, 2023 and December 31, 2022, respectively.
On August 15, 2022, the Company entered into Amendment No. 1 to the Credit Agreement (the “Credit Agreement Amendment”) with JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and certain subsidiary guarantors named therein. The Credit Agreement Amendment, among other things, permitted the Company (and certain of its subsidiaries) to execute the Term Loan Agreement and guarantee the Term Loan Agreement borrower’s obligations under the Term Loan Agreement. Additionally, the Credit Agreement Amendment permits the Company to include certain gains on ARO settlements and cash received for deferred gains from ERT projects in the calculation of the Company’s fixed charge coverage ratio under the Credit Agreement's financial covenant.
On November 14, 2022, the Company entered into Amendment No. 2 to the Credit Agreement (the “Second Credit Agreement Amendment”) with JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and certain subsidiary guarantors named therein. The Second Credit Agreement Amendment, among other things, changed the benchmark rate floor on such loans from the LIBO Rate to the Adjusted Term SOFR Rate, increased the revolver Term Benchmark spread from 2.25% to 2.75%, and modified the test for the Covenant Testing Period such that any excess borrowing base over the revolving commitment amount could reduce the threshold that triggers the covenant test up to $2.0 million. Additionally, the Second Credit Agreement Amendment permits the Company to include $15,000 of equity contributions in "EBITDA", as defined in the Second Credit Agreement Amendment, for the fourth quarter of 2022.
On April 28, 2023, the Company entered into Consent and Amendment No. 3 to Credit Amendment ("Amendment No. 3") that, among other things, (i) provides consent to the Merger Agreement, subject to certain conditions, provided that it occurs before October 16, 2023, is materially consistent with the terms of the Merger Agreement and related documents, and no event of default, as defined within the Credit Agreement, has occurred or will result from the acquisition; (ii) amends the definition of Progress Billings Cap Amount to be used in certain borrowing base certificates; (iii) amends the definition of the Applicable Rate; (iv) changes the maturity date from November 9, 2025 to January 31, 2024; and (v) consents to an extension of the deadline for certain financial deliverables for the fiscal year ended December 31, 2022.
As a result of entering into the Credit Agreement, $1.4 million of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the unaudited condensed consolidated Statements of Operations using the straight-line method through the maturity date of the Credit Agreement. Unamortized debt issuance costs as of March 31, 2023 and December 31, 2022 were $1.0 million and $1.1 million, respectively, and classified in other assets in the accompanying unaudited condensed consolidated balance sheets.
Term Loan Agreement
On August 15, 2022, the Company, through its GCERG subsidiary (the “Term Loan Borrower”), entered into a term loan agreement (the “Term Loan Agreement”) with Charah Preferred Stock Aggregator, LP, an affiliate of Bernhard Capital Partners Management, LP (“BCP”). As a result of unexpected operating losses, an increase in contract assets and accelerated cash outflows for remediation activities on an ERT project that led to a decrease in cash during the six months ended June 30, 2022, the Company sought additional financing options to
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fund ongoing operations and project level investment. The Term Loan Agreement was executed to provide additional liquidity for the Company and accelerate the timing of the Company's cash flows for anticipated sales of the GCERG real estate parcels. The Term Loan Agreement provides for a delayed-draw term loan in an aggregate principal amount of $20.0 million. The Term Loan Agreement is scheduled to mature on the earlier of the sale of the remaining GCERG real estate parcels or April 15, 2024. The Company elected to draw down the full borrowing capacity available under the Term Loan Agreement by November 8, 2022 through separate funding requests in order to fund operating activities. Borrowings under the Term Loan Agreement accrue interest at a percentage per annum equal to 12.0%, with interest payments due on the first business day of each calendar quarter following the effective date of the Term Loan Agreement and on the maturity date. The Term Loan Borrower agreed to pay a commitment fee equal to $1.0 million that is payable on the earliest of (i) April 15, 2024, (ii) the date on which the loans are redeemed in full and all commitments are terminated and (iii) the date on which all commitments are terminated in full. The Term Loan Agreement is secured by a lien on, and security interest in, substantially all of the Term Loan Borrower’s assets, including real property, and is guaranteed on an unsecured basis by the Company and Charah, LLC. Voluntary prepayments are permitted at any time, without premium or penalty.
The Term Loan Agreement contains certain customary representations and warranties and affirmative and negative covenants. The negative covenants include, subject to customary exceptions, limitations on indebtedness, investments and acquisitions, mergers and consolidations, restricted payments, transactions with affiliates, liens and dispositions. The Term Loan Agreement allows the Term Loan Borrower to make distributions to its equity holders with the proceeds of the loans made thereunder. The Term Loan Agreement contains customary events of default. If an event of default occurs and is continuing, the lenders may declare all loans to be immediately due and payable.
On April 16, 2023, the Company entered into Amendment No. 2 to the Term Loan Amendment that, among other things, (i) waives the mandatory prepayment provisions with respect to certain asset sale proceeds, (ii) joins certain subsidiaries of the Company as guarantors under Term Loan Agreement, and (iii) consents to an extension of the deadline for certain financial deliverables for the fiscal year ended December 31, 2022. In connection with the Term Loan Amendment, ALERG, Cheswick Lefever LLC and Cheswick Plant Environmental Redevelopment Group LLC (collectively, the “Grantors”) entered into a security agreement, dated as of April 16, 2023, with Charah Preferred Stock Aggregator, LP, an affiliate of BCP, as the secured party (the “Secured Party”), pursuant to which the Grantors granted liens over substantially all of their assets in favor of the Secured Party.
As a result of entering into the Term Loan Agreement, $0.6 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 Term Loan 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, 2023, we had $11.6 million of equipment notes outstanding. Each of the Equipment Financing Facilities includes non-financial covenants, and, as of March 31, 2023, 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 twenty-six thousand shares of Series A Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), for net proceeds of $25.2 million in a private placement (the “Series A Preferred Stock Offering”). The Series A 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 Series A Preferred Stock Offering were used for liquidity and general corporate purposes.
For more information related to the Series A Preferred Stock, see Note 12, Mezzanine Equity, to the accompanying unaudited condensed consolidated financial statements.
Series B Preferred Stock
On November 14, 2022, the Company entered into an agreement with an investment fund affiliated with BCP to sell thirty thousand shares of Series B Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”), with an initial aggregate liquidation preference of $30.0 million, net of a 4% OID of $1.2 million for net proceeds of $28.8 million in a private placement (the “Series B Preferred Stock Investment”). Proceeds from the Series B Preferred Stock Investment will be used for liquidity and general corporate purposes.
For more information related to the Series B Preferred Stock, see Note 12, Mezzanine Equity, to the accompanying unaudited condensed consolidated financial statements.
Reverse Stock Split
The Company effected a one-for-ten reverse stock split of its common stock on December 29, 2022.
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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 interest expense, net, loss on extinguishment of debt, income taxes, depreciation and amortization, equity-based compensation, impairment expense (including inventory reserves) 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, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net loss attributable to Charah Solutions, Inc. | $ | (6,086) | $ | (12,040) | |||||||
| Interest expense, net | 4,890 | 4,573 | |||||||||
| Income tax expense | 115 | 78 | |||||||||
| Depreciation and amortization | 3,836 | 6,571 | |||||||||
| Equity-based compensation | 752 | 791 | |||||||||
| Impairment expense | — | 380 | |||||||||
Transaction-related expenses and other items(1) | 433 | 7 | |||||||||
| Adjusted EBITDA | $ | 3,940 | $ | 360 | |||||||
Adjusted EBITDA margin(2) | 5.6 | % | 0.5 | % | |||||||
(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.
Contractual Obligations
As of March 31, 2023, 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, 2022 except as disclosed in the Liquidity and Capital Resources section of this Quarterly Report.
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, 2022.
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, 2022 for a discussion of recent accounting pronouncements.
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)
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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
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is processed, recorded, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer and Treasurer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer and Treasurer concluded, as of March 31, 2023, the disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting described below.
Notwithstanding the identified material weaknesses disclosed below, management, including our Chief Executive Officer and Chief Financial Officer and Treasurer, believes the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with U.S. GAAP.
Background
In December 2022, the Company was notified by a whistleblower that certain employees had engaged in improper spending activities at one of our project sites. In response, the Company conducted an internal investigation that substantiated the whistleblower's allegations. The Company engaged external legal counsel and a forensic accounting investigation team to thoroughly assess the extent of the fraudulent activities. Based on specific assumptions and limitations, we determined a range of probable, or potentially fraudulent, transactions believed to have been billed to a customer from 2018 through 2022. The investigation will continue to proceed through the legal process, which includes examining the extent of involvement of the customer or any third parties in contributory responsibility, evaluating the extent of insurance coverage available for reimbursement of the Company's losses, and collaborating with external law enforcement agencies to ascertain the full scope and magnitude of the overall fraudulent scheme. Management concluded that our system of internal control over financial reporting did not timely identify the fraudulent activities as part of the evaluation of the effectiveness of the internal controls. See Note 15, Commitments and Contingencies, for further discussion.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). The Company’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer and Treasurer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its financial statements for external reporting purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company’s internal control over financial reporting is based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO framework”). Our internal control over financial reporting system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, management evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 based on the criteria established in the COSO Framework. Based on this evaluation, management, with the participation of the Chief Executive Officer and Chief Financial Officer and Treasurer, concluded that, as of December 31, 2022, the Company’s internal control over financial reporting was not effective due to the material weaknesses described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, we identified the following control deficiencies which aggregated to a material weakness in control design: (i) lack of a sufficient number of trained resources with assigned responsibilities and accountability for the design and operation of internal controls over financial reporting; (ii) lack of formal and effective controls over certain financial statement account balances; (iii) lack of user profiles to ensure adequate restriction of users to perform only transactions that are consistent with their function; and (iv) lack of appropriate segregation of duties within the accounting and finance functions, including order to cash, process to pay and payroll business processes.
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Due to the lack of remediation of the previously disclosed material weakness, in combination with additional deficiencies identified by management in connection with preparation of the Annual Report on Form 10-K for the year ended December 31, 2022, management determined that, in the aggregate, there were additional material weaknesses in our internal control over financial reporting as of December 31, 2022, as follows:
▪Control Environment – We failed to remediate the previously disclosed deficiency related to a lack of sufficient number of trained resources with assigned responsibility and accountability for the design and operation of internal controls and reporting. Lack of trained resources contributed to a lack of control awareness and adequate diligence and expertise required to review accounting transactions. This material weakness increased the likelihood of a material misstatement occurring in the Company’s interim and annual financial statements not being prevented or detected.
▪Risk Assessment – We did not have an effective risk assessment process that defined clear financial reporting objectives, that identified and evaluated risks of misstatement due to errors over certain financial reporting processes, or that developed internal controls to mitigate those risks. The lack of an effective risk assessment process contributed to the Company not identifying the previously disclosed fraudulent activities in a timely manner.
▪Control Activities – Given the absence of proper segregation of duties within the accounting and finance functions including order to cash, process to pay, payroll business processes and information and communication, we failed to design control activities that address relevant risks as well as implement and perform effective controls at the level of precision required to identify all potential material errors. The material weaknesses of improper control design around accounting and financial reporting and failure of control operation of adequately designed controls, increased the likelihood of a material misstatement occurring in the Company’s interim and annual financial statements and not being prevented or detected.
▪Information and Communication – We failed to design and implement certain information and communication activities related to obtaining or generating and using relevant quality information to support the functioning of internal control. Specifically, within information technology controls (“GITCs”), there is a lack of segregation of duties controls within the information technology systems utilized by the Company in its financial reporting. The lack of segregation of duties within information technology systems increased the likelihood of a material misstatement occurring in the Company’s interim and annual financial statements and not being prevented or detected.
▪Monitoring – As a result of the material weaknesses described above, we failed to obtain the required resources, implement the required procedures and effectively monitor the internal control environment and allow the Company to respond timely.
Management's Remediation Plan
We are continuing to evaluate the material weaknesses discussed above and are in the process of executing the plans to remediate these material weaknesses. We expect our remediation plan to include, among other things:
▪Control Environment – (i) Investing in training and hiring personnel with appropriate expertise across the accounting and financial reporting function, (ii) continue communicating and emphasizing the importance of internal control across the Company, and (iii) continue involving and reporting regularly to the Company’s Audit Committee.
▪Risk Assessment – (i) Performing a rigorous scoping and risk assessment process to identify and analyze risk across the various levels of the Company; and (ii) identifying and analyzing risks.
▪Control Activities – (i) Enhancing the design of control activities to operate at a level of precision to identify all potential material errors; (ii) training control owners to improve the required retention of documentation evidencing their operation; (iii) implementing revised policies and procedures for corporate expenditures, including spending with corporate credit cards, and the associated approval of those expenditures, and (iv) designing and implementing policies and procedures to address segregation of duties and the risk of fraud.
▪Information and Communication – (i) Designing and implementing controls that review, approve, and periodically re-evaluate the user access privileges for all system users and the business purpose for allowing access for each authorized user to address segregation of duties in information technology systems; and (ii) developing and implementing mitigating control procedures to address areas where limitations exist within GITCs or fraud is more likely to occur.
▪Monitoring – (i) Developing a remediation plan with measurable action items and continuous assessment of progression until completion; and (ii) developing sustainable and measurable procedures to assess the internal control environment on an ongoing basis.
As we continue to evaluate and take actions to improve our internal control over financial reporting, we will further refine our remediation plan and take additional actions to address control deficiencies or modify certain of the remediation measures described above.
We are still in the process of designing, implementing, documenting, and testing the effectiveness of these processes, procedures and controls. Additional time is required to complete the implementation and to assess and ensure the sustainability of these procedures. We will continue to devote time and attention to these remedial efforts. However, the material weaknesses cannot be considered remediated until the applicable remedial controls are fully implemented, have operated for a sufficient period of time and management has concluded that these controls are operating effectively through testing.
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Changes in Internal Control Over Financial Reporting
Aside from the identification of the material weaknesses described above and the actions taken as described in Management’s Remediation Plan above to improve the Company’s internal control over financial reporting, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended March 31, 2023 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
From time to time, we are 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.
On June 15, 2023, a purported Company stockholder filed an action against the Company and its Board of Directors (the “Board”) captioned Wilson v. Charah Solutions, Inc., et al., No. 23-cv-00656, in the United States District Court for the District of Delaware (the “Wilson Action”). The plaintiff in the Wilson Action alleges that the Company and its Board violated federal securities laws, including Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated under the Exchange Act, by issuing a materially incomplete and misleading definitive proxy statement in connection with the Merger (as defined elsewhere herein). On June 16, 2023, another purported Company stockholder filed an action against the Company and its Board captioned Wilhelm v. Charah Solutions, Inc., et al., No. 23-cv-00661, in the United States District Court for the District of Delaware (the “Wilhelm Action”) and together with the Wilson Action, the “Actions”). The plaintiffs in the Wilhelm Action also allege that the Company and its Board violated federal securities laws, including Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated under the Exchange Act, by issuing a materially incomplete and misleading definitive proxy statement in connection with the Merger. The plaintiffs in each of the Actions seek, among other things, to enjoin the transactions contemplated by the Merger Agreement (as defined elsewhere herein) and an award of attorneys’ and expert fees and expenses. The Company believes that the allegations in the Actions are without merit. The Company has received demand letters containing similar allegations from other purported stockholders and additional lawsuits arising out of the Merger may also be filed in the future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities
During the three months ended March 31, 2023, there were no repurchases of our common stock.
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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. | |||||||
| † | Indicates a management contract or compensatory plan or arrangement. | |||||||
| †† | Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission on request. | |||||||
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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. | ||||||||
| June 30, 2023 | By: | /s/ Jonathan T. Batarseh | ||||||
| Name: | Jonathan T. Batarseh | |||||||
| Title: | President and Chief Executive Officer | |||||||
| (Principal Executive Officer) | ||||||||
| June 30, 2023 | By: | /s/ Joseph P. Skidmore | ||||||
| Name: | Joseph P. Skidmore | |||||||
| Title: | Chief Financial Officer and Treasurer | |||||||
| (Principal Financial Officer and Principal Accounting Officer) | ||||||||
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