| | | | | |
Other Assumptions: | |
Inflation rate | 2.50 | % |
Weighted average rate applicable to our long-term asset retirement obligations | 7.35 | % |
As part of the acquisition, the Company acquired certain plant, machinery and equipment and vehicles for which management committed to a plan to sell. Property and equipment of $505 that was initially classified as held for sale were sold to third parties as of September 30, 2022. The Company received proceeds of $1,565 and recorded a gain of $1,060 within gains on sales of real estate, property and equipment, net, in the Company's condensed consolidated statements of operations. The proceeds were recorded in cash flows from investing activities in the Company's condensed consolidated statements of cash flows. The amount of land, land improvements and structural fill sites acquired includes fair value estimates for real estate and scrap to be sold from the demolition of the coal power plant.
Restricted cash is exclusively used to fund initial costs related to the acquisition and the remaining balance will be used to fund a portion of the asset retirement obligations. Restricted cash is held and will be disbursed by an escrow agent. Funds will be released to the Company as asset retirement obligation costs are incurred and performance of remediation activities are certified by an authorized representative of GenOn.
Cheswick Generating Station Asset Acquisition
On April 6, 2022, the Company, through its wholly-owned special purpose vehicle subsidiaries, Cheswick Plant Environmental Redevelopment Group, LLC, Cheswick Lefever, LLC and Harwick Operating Company, LLC (collectively, “CPERG”), completed the full acquisition of the Cheswick Generating Station, the Lefever Ash Landfill and the Monarch Wastewater Treatment Facility (the "Cheswick Property") from GenOn and will begin environmental remediation and sustainable redevelopment of the Pennsylvania properties immediately. The Cheswick Generating Station ceased electrical generation operations on March 31, 2022.
As part of this agreement, the Company, through CPERG, has acquired properties consisting of:
▪The retired Cheswick Generating Station, a 565 MW coal-fired plant previously operated by GenOn, located in Springdale, PA. The 56-acre primary generating station site, along with an adjacent 27-acre parcel, consists of an operating rail line, a coal yard, bottom ash emergency and recycle ponds, waste ponds and a coal pile runoff pond, coal delivery equipment, and an ash handling parcel. CPERG will be responsible for the shutdown and decommissioning of the coal power plant, the remediation of the two ash ponds and performing all environmental remediation and redevelopment work at the site.
▪The Lefever Ash Landfill in Cheswick, PA. The 182-acre site, including the 50-acre landfill facility, provided disposal of coal combustion residuals (CCR) and residual waste from the Cheswick Generating Station. CPERG will be responsible for the closure design, remediation closure work and post-closure monitoring of the landfill.
▪The Monarch Wastewater Treatment Facility in Allegheny County, PA. CPERG will be responsible for management and compliance with all applicable environmental regulations.
In the process of accounting for this transaction, the basis of the land, property and equipment acquired was reduced to zero, resulting in an excess of financial assets over and above the purchase price. The Company recorded a deferred gain of $4,476, representing the difference between the fair value of the assets acquired and the consideration given (including transaction costs incurred). This deferred gain will be recognized ratably over the entire project as remediation costs are incurred in proportion to total estimated remediation costs.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
During the three and nine months ended September 30, 2022, the Company recognized $167 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 | $ | (30,179) | |
Direct transaction costs and accrued expenses | (684) | |
Total consideration and transaction costs incurred | $ | (30,863) | |
| |
Assets Acquired: | |
Cash | $ | 5,577 | |
Restricted cash | 29,762 | |
Total allocated value of assets acquired | $ | 35,339 | |
| |
Excess of fair value of assets acquired over total consideration – deferred gain | $ | (4,476) | |
A summary of the other assumptions included in the fair value measurement of the asset retirement obligations to be recognized upon closing of the APA consisted of the following:
| | | | | |
Other Assumptions: | |
Inflation rate | 2.50 | % |
Weighted average rate applicable to our long-term asset retirement obligations | 7.45 | % |
As part of the acquisition, the Company acquired certain plant, machinery and equipment and vehicles for which management committed to a plan to sell. The Company received proceeds and recorded a gain of $387 within gains on sales of real estate, property and equipment, net, in the Company's condensed consolidated statements of operations. The proceeds were recorded in cash flows from investing activities in the Company's condensed consolidated statements of cash flows.
Restricted cash is exclusively used to fund initial costs related to the acquisition and the remaining balance will be used to fund a portion of the asset retirement obligations. Restricted cash is held and will be disbursed by an escrow agent. Funds will be released to the Company as certain project milestones are met and performance of remediation activities are certified by an authorized representative of GenOn.
Gibbons Creek Asset Acquisition
In February 2021, the Company, through its GCERG subsidiary, closed on an Asset Purchase Agreement (the “APA” or the “Agreement”) with Texas Municipal Power Agency to acquire, remediate and redevelop the Gibbons Creek Steam Electric Station and Reservoir (the “Gibbons Creek Transaction”). As part of this Agreement, GCERG took ownership of the 6,166 acre area (collectively, the “Purchased Assets”), which includes the closed power station and adjacent property, the 3,500 acre reservoir, dam and floodway. GCERG assumed all environmental responsibilities and became responsible for decommissioning the coal power plant and performing all environmental remediation work for the site landfills and ash ponds. At closing of the APA, GCERG became liable for and expressly fully assumed any and all environmental liabilities and environmental compliance, as well as, without limitation, any remediation, investigation, management, mitigation, closure, maintenance, reporting, removal, disposal of and any other actions with respect to any hazardous substances at, on, in, under, or emanating from the Purchased Assets.
GCERG, at its discretion, is redeveloping the property in an environmentally conscious manner which the Company expects to expand economic activity and benefit the surrounding communities as well as restore the property to a state that will enable it to be put to its best potential use. The existing power plant has been demolished, and GCERG is working with the Texas Commission on Environmental Quality to complete all environmental remediation required for the property and then plans to redevelop the remediated property within all zoning restrictions. The redevelopment of the property is expected to be completed within 34 months from the date of acquisition.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
The assets acquired and liabilities assumed as recognized within the Company's condensed consolidated balance sheet upon closing on the APA consisted of the following:
| | | | | |
Consideration and direct transaction costs: | |
Asset retirement obligations | $ | (50,590) | |
Bond and insurance accrued expenses, net | (2,229) | |
Direct transaction costs | (2,336) | |
Total consideration and transaction costs incurred | $ | (55,155) | |
| |
Assets Acquired: | |
Cash | $ | 6,354 | |
Restricted cash | 28,546 | |
Water rights | 5,196 | |
Land, land improvements and structural fill sites | 14,385 | |
Plant, machinery and equipment | 610 | |
Vehicles | 64 | |
Total allocated value of assets acquired | $ | 55,155 | |
A summary of the other assumptions included in the fair value measurement of the asset retirement obligations to be recognized upon closing of the APA consisted of the following:
| | | | | |
Other Assumptions: | |
Inflation rate | 3.00 | % |
Weighted average rate applicable to our long-term asset retirement obligations | 4.50 | % |
Demolition costs will be capitalized as part of land, land improvements and structural fill sites as incurred as part of preparing the site for sale since, at the acquisition date, (i) we planned to demolish the existing structure as part of the redevelopment plan for the acquired property, (ii) demolition is expected to occur within a reasonable period of time after acquisition, and (iii) such expected costs will be incurred to make the land saleable to a third party.
As part of the acquisition, the Company acquired certain plant, machinery and equipment and vehicles for which management committed to a plan to sell. Property and equipment of $193 that was initially classified as held for sale was subsequently sold to third parties.
To date, the Company has completed the sale of nearly 80% of the real property acreage acquired through the Gibbons Creek Transaction. The sale of property included 4,860 acres of the 6,166-acre area, the 3,500-acre reservoir, dam and spillway. There were no sales of real property acreage for the three and nine months ended September 30, 2022 and 2021, respectively.
4. 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 | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Construction contracts | $ | 40,402 | | | $ | 48,176 | | | $ | 107,338 | | | $ | 99,828 | |
Byproduct services | 30,106 | | | 26,643 | | | 81,529 | | | 76,508 | |
Raw material sales | 11,032 | | | 9,342 | | | 35,834 | | | 23,450 | |
Total revenue | $ | 81,540 | | | $ | 84,161 | | | $ | 224,701 | | | $ | 199,786 | |
As of September 30, 2022, the Company had remaining performance obligations with an aggregate transaction price of $530,373 on construction contracts for which we recognize revenue over time. We expect to recognize approximately 10% of our remaining performance obligations as revenue during the remainder of 2022, 13% in 2023, 15% in 2024, and 62% 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 September 30, 2022. As of September 30, 2022, there were $354 of unapproved change orders associated with project scope changes included in determining the profit or loss on certain construction contracts, of which $0 were approved subsequent to quarter-end.
The Company did not have any foreign revenue for the three and nine months ended September 30, 2022 and 2021.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
5. Balance Sheet Items
Real estate, property and equipment, net
The following table shows the components of real estate, property and equipment, net:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Plant, machinery and equipment | $ | 65,370 | | | $ | 63,937 | |
Structural fill site improvements | 55,760 | | | 55,760 | |
Vehicles | 11,850 | | | 11,718 | |
Office equipment | 600 | | | 600 | |
Buildings and leasehold improvements | 267 | | | 267 | |
Land, land improvements and structural fill sites | 43,838 | | | 12,231 | |
Capital lease assets | 46,310 | | | 31,172 | |
Construction in progress | 616 | | | 1,522 | |
Total real estate, property and equipment | $ | 224,611 | | | $ | 177,207 | |
Less: accumulated depreciation | (118,532) | | | (106,734) | |
Real estate, property and equipment, net | $ | 106,079 | | | $ | 70,473 | |
Land, land improvements and structural fill sites include $5,870 of real property acquired in the Gibbons Creek Transaction that the Company is actively demolishing and for which depreciation expense is not being recorded. During the three and nine months ended September 30, 2022, the Company capitalized $192 and $1,802, respectively, of demolition costs and sold scrap with a cost basis of $348 and $2,304, respectively. During the three and nine months ended September 30, 2021, the Company capitalized $1,365 and $2,395, respectively, of demolition costs and sold scrap with a cost basis of $1,003 and $1,342, respectively.
Depreciation expense was $5,034 and $4,289 for the three months ended September 30, 2022 and 2021, respectively, and $14,477 and $12,657 for the nine months ended September 30, 2022 and 2021, respectively.
Capital leases
The following table shows the components of capital lease assets, net:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Capital lease assets | $ | 46,310 | | | $ | 31,172 | |
Less: accumulated depreciation | (10,305) | | | (3,606) | |
Capital lease assets, net | $ | 36,005 | | | $ | 27,566 | |
The Company's depreciation of capital lease assets is included within depreciation expense as disclosed above.
Sales-type lease
In March 2021, the Company amended an existing ground lease with a third party concerning one of the Company's structural fill assets with a 30-year term expiring on December 31, 2050. The lease includes multiple options that may be exercised at any time during the lease term for the lessee to purchase all or a portion of the premises as well as a put option (the “Put Option”) that provides the Company the option to require the lessee to purchase all of the premises at the end of the lease term.
In accordance with ASC 840, Leases, the Company considered whether this lease, as amended, met any of the following four criteria as part of classifying the lease at the amendment date: (a) the lease transfers ownership of the property to the lessee by the end of the lease term; (b) the lease contains a bargain purchase option; (c) the lease term is equal to 75 percent or more of the estimated economic life of the lease property; and (d) the present value of the minimum lease payments, excluding executory costs, equals or exceeds 90 percent of the excess of the fair value of the lease property to the lessor at lease inception. This lease was recorded as a sales-type capital lease due to the Put Option provision contained within the lease agreement that represents a transfer of ownership of the property by the end of the lease term. Additionally, the Company determined that collectability of the lease payments was reasonably assured and that there were not any significant uncertainties related to costs that it has yet to incur with respect to the lease.
At the amendment date of the lease, a discount rate of 3.9% implicit in the sales-type lease was used to calculate the present value of the minimum lease payments, which the Company recorded as a lease receivable. The Company recognized a gain of $5,568 within operating income in the accompanying unaudited condensed consolidated statements of operations for the nine months ended September 30, 2021.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
The following table reflects the classification of the lease receivable within our accompanying unaudited condensed consolidated balance sheet:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Lease receivable | $ | 5,875 | | | $ | 5,937 | |
Less: current portion in prepaid expenses and other current assets | (67) | | | (65) | |
Non-current portion in other assets | $ | 5,808 | | | $ | 5,872 | |
Asset Sale Agreement
In June 2021, the Company consummated an asset sale with an unrelated third party in which the Company assigned a lease agreement to the purchaser and sold certain grinding-related inventory and fixed assets for an aggregate sale price of $2,852. The Company received $1,250 in cash at closing, with the remaining portion to be paid over time on specified dates, with the final payment to be received 36 months from the closing date.
The Company determined that the note receivable included a significant financing component. As a result, the sale price and gain on sale were determined on a discounted cash flow basis.
The following table reflects the classification of the note receivable within our unaudited condensed consolidated balance sheet:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Note receivable | $ | 1,102 | | | $ | 1,352 | |
Less: current portion in prepaid expenses and other current assets | (500) | | | (500) | |
Non-current portion in other assets | $ | 602 | | | $ | 852 | |
Accrued liabilities
The following table shows the components of accrued liabilities:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Accrued expenses | $ | 19,815 | | | $ | 25,074 | |
Accrued interest | 2,362 | | | 2,008 | |
Accrued preferred stock dividends | 957 | | | 1,994 | |
Accrued payroll and bonuses | 2,220 | | | 7,798 | |
Accrued liabilities | $ | 25,354 | | | $ | 36,874 | |
6. Asset Retirement Obligations
As of September 30, 2022, 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 September 30, 2022 and December 31, 2021, the Company has accrued $76,772 and $42,413, respectively, for the asset retirement obligations (“ARO”).
The following table reflects the activity for our asset retirement obligations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Balance, beginning of period | $ | 83,729 | | | $ | 52,361 | | | $ | 42,413 | | | $ | 5,159 | |
Liabilities acquired | — | | | — | | | 64,479 | | | 50,590 | |
Liabilities settled | (8,408) | | | (1,805) | | | (28,291) | | | (5,980) | |
Accretion | 2,429 | | | 538 | | | 3,157 | | | 1,325 | |
Gain on ARO settlement | (978) | | | (1,127) | | | (4,986) | | | (1,127) | |
Balance, end of period | 76,772 | | | 49,967 | | | 76,772 | | | 49,967 | |
Less: current portion | (44,030) | | | (32,181) | | | (44,030) | | | (32,181) | |
Non-current portion | $ | 32,742 | | | $ | 17,786 | | | $ | 32,742 | | | $ | 17,786 | |
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
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 $1 and $4 for the three months ended September 30, 2022 and 2021, respectively, and $26 and $83 for the nine months ended September 30, 2022 and 2021. The Company had no receivables outstanding from ATC at September 30, 2022 and December 31, 2021. The Company had payables and accrued expenses, net of credit memos, due to ATC of $0 and $4 at September 30, 2022 and December 31, 2021, respectively.
As further discussed in Note 9, Long-term Debt, in August 2021, the Company completed an offering of $135,000, in the aggregate, of the Company’s 8.50% Senior Notes due 2026 (the “Notes”), which amount included the exercise by the underwriters of their option to purchase an additional $5,000 aggregate principal amount of Notes. B. Riley Securities, Inc. (“B. Riley”), a shareholder of the Company with board representation, served as the lead book-running manager and underwriter for this offering, purchasing a principal amount of $80,325 of the Notes. Fees paid to B. Riley related to this offering were $7,914. These fees were capitalized as debt issuance costs within notes payable, less current maturities in the accompanying unaudited condensed consolidated balance sheets and will be amortized prospectively through interest expense, net in the accompanying unaudited condensed consolidated statements of operations using the effective interest method through the maturity date of the Notes.
As further discussed in Note 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 11, Mezzanine Equity, in March 2020, the Company entered into an agreement with an investment fund affiliated with BCP to sell 26 shares of Preferred Stock.
As discussed in Note 17, Subsequent Events, on November 14, the Company entered into an investment agreement with BCP to sell 30 (thirty-thousand) shares of Series B Preferred Stock for gross proceeds of $30,000 and resulted in net proceeds to the Company of $28,800.
8. Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized but instead are tested for impairment annually or more often if events or changes in circumstances indicate that the fair value of the asset may have decreased below its carrying value. We perform our impairment test effective October 1st of each year and evaluate for impairment indicators between annual impairment tests, of which there were none. There was no goodwill activity during the nine months ended September 30, 2022.
Indefinite-Lived and Definite-Lived Intangible Assets
Our intangible assets, net include a trade name that is considered to have an indefinite life and customer relationships that are considered to have a definite life. Our customer relationships are amortized on a straight-line basis over their estimated useful lives of 10 years. The amortization expense of our definite-lived intangible assets was $1,974 for the three months ended September 30, 2022 and 2021 and $5,921 for the nine months ended September 30, 2022 and 2021.
In performing the evaluation for potential impairment indicators with respect to the Company's long-lived assets, including the trade name indefinite-lived intangible as of September 30, 2022, we considered the impact of the Company's recent operating results on forecasts of future cash flows attributable to such trade name. While the financial results in our near-term and terminal forecast periods remain relatively consistent with prior forecasts, we continue to analyze the rapidly changing regulatory and political environment and the potential impacts to our trade name from our existing revenue-generating activities and an expansion of our ERT offerings. We continue to assess strategic initiatives to maximize the potential in our existing backlog and pipeline of opportunities.
Changes resulting from the Company's strategic decisions and initiatives, the current economic environment and other external factors, including inflationary market pressures and supply chain disruption, could result in significant adverse changes to the Company’s assumptions related to the estimated fair value of the intangible asset that could lead to reduction in the fair value of our trade name. Any future impairment charges on our trade name indefinite-lived intangible asset could have a material adverse impact on the Company’s consolidated financial condition and results of operations.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
The Company’s intangible assets consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Definite-lived intangibles | | | | | | | | | | | |
Customer relationships | $ | 78,942 | | | $ | (44,648) | | | $ | 34,294 | | | $ | 78,942 | | | $ | (38,727) | | | $ | 40,215 | |
| | | | | | | | | | | |
Indefinite-lived intangibles | | | | | | | | | | | |
Charah trade name | | | | | 13,316 | | | | | | | 13,316 | |
| | | | | | | | | | | |
Total | | | | | $ | 47,610 | | | | | | | $ | 53,531 | |
9. Long-term Debt
Senior Notes
On August 25, 2021, the Company completed a public offering of $135,000, in the aggregate, of the Company’s Notes, which amount includes the exercise by the underwriters of their option to purchase an additional $5,000 aggregate principal amount of Notes.
The Notes were issued pursuant to the First Supplemental Indenture (the “First Supplemental Indenture”), dated as of August 25, 2021, between the Company and Wilmington Savings Fund Society, FSB, as trustee (the “Trustee”). The First Supplemental Indenture supplements the Indenture entered into by and between the Company and the Trustee, dated as of August 25, 2021 (the “Base Indenture” and, together with the First Supplemental Indenture, the “Indenture”).
The public offering price of the Notes was 100.0% of the principal amount. The Company received proceeds before payment of expenses and other fees of $135,000. The Company used the proceeds, along with cash from the sale of equity to B. Riley, to fully repay and terminate the Company’s Credit Facility, as defined below, with any remaining proceeds to be used for general corporate purposes, including funding future acquisitions and investments, repaying indebtedness, making capital expenditures and funding working capital.
The Notes bear interest at the rate of 8.50% per annum. Interest on the Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing October 31, 2021. The Notes will mature on August 31, 2026.
The Company may redeem the Notes for cash in whole or in part at any time (i) on or after August 31, 2023 and prior to August 31, 2024, at a price equal to 103% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after August 31, 2024 and prior to August 31, 2025, at a price equal to 102% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iii) on or after August 31, 2025 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Notes. If the Company is redeeming less than all of the Notes, the Trustee will select the Notes to be redeemed by such method as the Trustee deems fair and appropriate in accordance with methods generally used at the time of selection by fiduciaries in similar circumstances.
The Indenture also contains customary event of default and cure provisions. If an uncured default occurs and is continuing, the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes may declare the Notes to be immediately due and payable.
The Notes are senior unsecured obligations of the Company and rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness.
As a result of the issuance of the Notes, $12,116 of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the accompanying unaudited condensed consolidated statements of operations using the effective interest method through the maturity date of the Notes.
Asset-Based Lending Credit Agreement
On November 9, 2021, the Company entered into a new Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, the lenders party thereto and certain subsidiary guarantors named therein. The Credit Agreement provides for a 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
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
payable on the maturity date with such borrowings bearing interest that is payable (i) with respect to base rate loans, monthly and (ii) with respect to Eurodollar loans, the last day of each Interest Period (as defined below); provided that if any Interest Period for a Eurodollar loan exceeds three months, interest will be payable on the respective dates that fall every three months after the beginning of such Interest Period. Eurodollar Loans bear interest at a rate per annum equal to the Adjusted LIBOR for one, three or six months (the “Interest Period”), plus an applicable margin of 2.25%. Base rate loans bear interest at a rate per annum equal to the greatest of (i) the agent bank’s reference rate, (ii) the federal funds effective rate plus 50 basis points and (iii) the rate for one month Adjusted LIBOR loans plus 100 basis points, plus an applicable rate of 125 basis points. The Credit Agreement contains a provision for sustainability adjustments annually that will impact the applicable margin by between positive 0.05% and negative 0.05% based on the achievement, or lack thereof, of certain metrics agreed upon between JPMorgan and the Company and publicly reported through the Company’s annual non-financial sustainability report.
The Credit Agreement is guaranteed by certain of the Company’s subsidiaries and is secured by substantially all of the Company’s and such subsidiaries’ assets. The Credit Agreement contains customary restrictive covenants for asset-based loans that may limit the Company’s ability to, among other things: incur additional indebtedness, sell assets, make loans to others, make investments, enter into mergers, make certain restricted payments, incur liens, and engage in certain other transactions without the prior consent of the lenders.
A covenant testing period (“Covenant Testing Period”) is a period in which excess availability (which is defined in the Credit Agreement as the sum of availability and an amount up to $1,000) is less than the greater of (a) 12.5% of the lesser of the aggregate revolving commitments and the borrowing base, (b) the lesser of $7,500 and the PP&E Component as defined in the Credit Agreement, and (c) $3,500, for three consecutive business days. During a Covenant Testing Period, the Credit Agreement requires the Company to maintain a fixed charge coverage ratio as defined in the Credit Agreement, determined for any period of twelve (12) consecutive months ending on the last day of each fiscal quarter, of at least 1.00 to 1.00.
As of September 30, 2022, the Company has $8,800 drawn on the Credit Agreement. Outstanding letters of credit were $10,687 and $19,027 as of September 30, 2022 and December 31, 2021. As of September 30, 2022, all outstanding letters of credit were issued with JPMorgan.
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.
As of November 14, 2022, based on the undrawn letters of credit utilization of $10,687, borrowings of $8,800 under the Credit Agreement and applicable financial covenant requirements, springing covenants would become applicable if the Company were to borrow an additional $3,898 under the Credit Agreement. As of September 30, 2022, after taking into account the terms of the Credit Agreement Amendment, the Company would not have met the financial covenant had there been a Covenant Testing Period and the financial covenant had been in effect.
As a result of entering into the Credit Agreement, $1,443 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 September 30, 2022 and December 31, 2021 were $1,142 and $1,338, 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. Borrowings can be requested at any date before October 24, 2022. 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. 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
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
terminated in full. The Term Loan Agreement is secured by a lien on, and security interest in, substantially all of the Term Loan Borrower’s assets, including real property, and is guaranteed on an unsecured basis by the Company and Charah, LLC. Voluntary prepayments are permitted at any time, without premium or penalty.
The Term Loan Agreement contains certain customary representations and warranties and affirmative and negative covenants. The negative covenants include, subject to customary exceptions, limitations on indebtedness, investments and acquisitions, mergers and consolidations, restricted payments, transactions with affiliates, liens and dispositions. The Term Loan Agreement allows the Term Loan Borrower to make distributions to its equity holders with the proceeds of the loans made thereunder. The Term Loan Agreement contains customary events of default. If an event of default occurs and is continuing, the lenders may declare all loans to be immediately due and payable.
As of September 30, 2022, the Term Loan Borrower had borrowings of $16,000 under the Term Loan Agreement. On November 8, 2022, the Company elected to draw down the remaining $4,000 available under the Term Loan Agreement to fund operating activities.
As a result of entering into the Term Loan Agreement, $487 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.
Previous Credit Facility
On September 21, 2018, we entered into a credit agreement (the “Credit Facility”) by and among us, the lenders party thereto from time to time and Bank of America, N.A., as administrative agent (the “Administrative Agent”). The Credit Facility included:
•A revolving loan not to exceed $50,000 (the “Revolving Loan”);
•A term loan of $205,000 (the “Closing Date Term Loan”); and
•A commitment to loan up to a further $25,000 in term loans, which expired in March 2020 (the “Delayed Draw Commitment” and the term loans funded under such Delayed Draw Commitment, the “Delayed Draw Term Loan,” together with the Closing Date Term Loan, the “Term Loan”).
Pursuant to the terms of the Credit Facility and its related amendments, all amounts associated with the Revolving Loan and the Term Loan under the Credit Facility were set to mature in July 2022. The interest rates per annum applicable to the loans under the Credit Facility were based on a fluctuating rate of interest measured by reference to, at our election, either (i) the Eurodollar rate, currently LIBOR, or (ii) an alternative base rate. Various margins were added to the interest rate based upon our consolidated net leverage ratio (as defined in the Credit Facility). Customary fees were payable regarding the Credit Facility and included (i) commitment fees for the unused portions of the Credit Facility and (ii) fees on outstanding letters of credit. Amounts borrowed under the Credit Facility were secured by substantially all of the assets of the Company.
The Credit Facility contained various customary representations, warranties, restrictive covenants, certain affirmative covenants, including reporting requirements, and customary events of default.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
10. Notes Payable
The following table summarizes the major components of debt at each balance sheet date and provides maturities and interest rate ranges for each major category as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Various equipment notes entered into in November 2017, payable in monthly installments ranging from $6 to $24, including interest at 5.2%, maturing in December 2022 through December 2023. The notes are secured by equipment with a net book value of $96 as of September 30, 2022. | $ | 847 | | | $ | 1,748 | |
Various equipment notes entered into in 2018, payable in monthly installments ranging from $1 to $39, including interest ranging from 5.6% to 6.8%, maturing in March 2023 through May 2025. The notes are secured by equipment with a net book value of $3,948 as of September 30, 2022. | 4,364 | | | 5,952 | |
Various equipment notes entered into in 2019, payable in monthly installments ranging from $2 to $23, including interest ranging from 3.9% to 6.4%, maturing in April 2024 through December 2024. The notes are secured by equipment with a net book value of $1,603 as of September 30, 2022. | 1,973 | | | 2,633 | |
Various equipment notes entered into in 2020, payable in monthly installments ranging from $9 to $10, including interest of 5.4%, maturing in August 2025. The notes are secured by equipment with a net book value of $1,410 as of September 30, 2022. | 1,320 | | | 1,624 | |
Various equipment notes entered into in 2021, payable in monthly installments ranging from $3 to $9, including interest ranging from 4.0% to 6.5%, maturing in February 2026 through August 2026. The notes are secured by equipment with a net book value of $1,749 as of September 30, 2022. | 1,580 | | | 1,861 | |
An equipment note entered into in 2022 with a customer, payable in monthly installments of $68 with no interest component, maturing with a balloon payment of the remaining outstanding balance in April 2023. The note is secured by equipment with a net book value of $3,991 as of September 30, 2022. | 3,991 | | | — | |
Various commercial insurance premium financing agreements entered into in 2021, payable in monthly installments ranging from $24 to $117, including interest ranging from 3.0% to 3.9%, maturing in October 2021 through April 2022. | — | | | 467 | |
Various commercial insurance premium financing agreements entered into in 2022, payable in monthly installments ranging from $19 to $143, including interest ranging from 4.2% to 5.3%, maturing in November 2022 through June 2023. | 1,300 | | | — | |
A $10,000 equipment line with a bank, entered into in December 2017, secured by all equipment purchased with the proceeds of the loan. Interest is calculated on any outstanding amounts using a fixed rate of 4.5%. The equipment line converted to a term loan in September 2018 with a maturity date of June 22, 2023. The term loan is secured by equipment with a net book value of $1,012 as of September 30, 2022. | 1,541 | | | 3,387 | |
Senior Unsecured Notes, issued August 2021 (see Note 9). The Notes are senior unsecured obligations of the Company, bearing stated interest at 8.5%, and rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness. | 135,000 | | | 135,000 | |
Total | 151,916 | | | 152,672 | |
Less debt issuance costs, net | (10,473) | | | (11,444) | |
| 141,443 | | | 141,228 | |
Less current maturities | (12,108) | | | (7,567) | |
Notes payable due after one year | $ | 129,335 | | | $ | 133,661 | |
11. Mezzanine Equity
In March 2020, the Company entered into an agreement with an investment fund affiliated with BCP to sell 26 (twenty-six thousand) shares of Series A Preferred Stock, par value $0.01 per share (the “Preferred Stock”), with an initial aggregate liquidation preference of $26,000, net of a 3% Original Issue Discount (“OID”) of $780 for net proceeds of $25,220 in a private placement (the “Preferred Stock Offering”). Proceeds from the Preferred Stock Offering were used for liquidity and general corporate purposes. In connection with the issuance of the Preferred Stock, the Company incurred direct expenses of $966, including financial advisory fees, closing costs, legal expenses and other offering-related expenses. The Preferred Stock was initially recorded net of OID and direct expenses, which will be accreted through paid-in-capital as a deemed dividend from the date of issuance through the first possible known redemption date, March 16, 2023. As of September 30, 2022 and December 31, 2021, the Company had accrued dividends of $1,133 and $1,030, respectively,
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
associated with the Preferred Stock, which was recorded at a fair value of $957 and $1,994, respectively, using observable information for similar items and is classified as a level 2 fair value measurement.
Dividend Rights The Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights on the distribution of assets in any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Preferred Stock had an initial liquidation preference of $1 (one thousand dollars) per share.
The holders of the Preferred Stock are entitled to a cumulative dividend paid in cash at the rate of 10.0% per annum on the liquidation preference, payable on a quarterly basis. If we do not declare and pay a cash dividend to the holders of the 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 September 30, 2022, the liquidation preference of the Preferred Stock was $36,006.
Conversion Features The 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 September 30, 2022, the maximum number of common shares that could be required to be issued if converted is 12,999 (twelve million nine hundred ninety-nine thousand). The conversion rate is subject to the following customary anti-dilution and other adjustments:
•the issuance of common stock as a dividend or the subdivision, combination, or reclassification of common stock into a greater or lesser number of shares of common stock;
•the dividend, distribution or other issuance of rights, options or warrants to holders of common stock entitling them to subscribe for or purchase shares of common stock at a price per share that is less than the market value for such issuance;
•the issuance of a dividend or similar distribution in-kind, which can include shares of any class of capital stock, evidences of the Company’s indebtedness, assets or other property or securities, to holders of common stock;
•a transaction in which a subsidiary of the Company ceases to be a subsidiary of the Company as a result of the distribution of the equity interests of the subsidiary to the holders of the Company’s common stock; and
•the payment of a cash dividend to the holders of common stock.
On or after the three-year anniversary of the date of issuance, if the holders have not elected to convert all their shares of Preferred Stock, the Company may give 30 days’ notice to the holders giving the holders the option to choose, in their sole discretion, to have all outstanding shares of Preferred Stock converted into shares of common stock or redeemed in cash at the then applicable Redemption Price (as defined below). The Company may not issue this conversion notice unless (i) the average volume-weighted average price per share of the Company’s common stock during each of the 20 consecutive trading days before the conversion is greater than 120% of the conversion price; (ii) the Company’s common stock is listed on a national securities exchange; (iii) a registration statement for the re-sale of the common stock is then effective; and (iv) the Company is not then in possession of material non-public information as determined by Regulation FD promulgated under the Exchange Act.
The Preferred Stock and the associated dividend payable on March 31, 2020, did not generate a beneficial conversion feature (“BCF”) upon issuance as the fair value of the Company’s common stock was less than the conversion price. If a BCF is recognized, a reduction to paid-in capital and the Preferred Stock will be recorded and subsequently accreted through the first redemption date.
Additionally, the Company determined that the nature of the Preferred Stock was more akin to an equity instrument and that the economic characteristics and risks of the embedded conversion options were clearly and closely related to the Preferred Stock. As such, the conversion options were not required to be bifurcated from the host under ASC 815, Derivatives and Hedging.
Redemption Rights If the Company undergoes certain change of control transactions, the Company will be required to immediately make an offer to repurchase all of the then-outstanding shares of Preferred Stock for cash consideration per share equal to the greater of (i) 100% of the liquidation preference, 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 Preferred Stock.
On or after the three-year anniversary of the issuance of the Preferred Stock, the Company may redeem the Preferred Stock, in whole or in part, for an amount in cash equal to the greater of (i) the closing sale price of the common stock on the date the Company delivers such notice multiplied by the number of shares of common stock issuable upon conversion of the outstanding Preferred Stock and (ii) (x) if the redemption occurs before the fourth anniversary of the date of the closing, 103% of the liquidation preference, 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”).
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
On or after the seven-year anniversary of the date of issuance, the holders have the right, subject to applicable law, to require the Company to redeem the Preferred Stock, in whole or in part, into cash consideration equal to the liquidation preference, including all accrued and unpaid dividends, from any source of funds legally available for such purpose.
Since the redemption of the Preferred Stock is contingently or optionally redeemable and therefore not certain to occur, the Preferred Stock is not required to be classified as a liability under ASC 480, Distinguishing Liabilities from Equity. As the Preferred Stock is redeemable in certain circumstances at the option of the holder and is redeemable in certain circumstances upon the occurrence of an event that is not solely within our control, we have classified the Preferred Stock in mezzanine equity in the accompanying unaudited condensed consolidated balance sheets.
Liquidation Rights In the event of any liquidation, winding-up or dissolution of the Company, whether voluntary or involuntary, the holders of the Preferred Stock would receive an amount in cash equal to the greater of (i) 100% of the liquidation preference plus a Make-Whole Premium and (ii) the amount such holders would be entitled to receive at such time if the Preferred Stock were converted into Company common stock immediately before the liquidation event. The Make-Whole Premium is removed from the calculation for a liquidation event occurring after the third anniversary of the issuance date.
Voting Rights The holders of the Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis in addition to voting as a separate class as provided by applicable Delaware law and the Company’s organizational documents. The holders, acting exclusively and as a separate class, shall have the right to appoint either a non-voting observer to the Company’s Board of Directors or one director to the Company’s Board of Directors.
Registration Rights The holders of the Preferred Stock have certain customary registration rights with respect to the shares of common stock into which the Preferred Stock is converted, pursuant to the terms of a registration rights agreement.
12. Contract Assets and Liabilities
The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets, and contract liabilities on the accompanying unaudited condensed consolidated balance sheets.
Our contract assets are as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Costs and estimated earnings in excess of billings | $ | 17,555 | | | $ | 17,163 | |
Retainage | 9,438 | | | 9,681 | |
Total contract assets | $ | 26,993 | | | $ | 26,844 | |
Our contract liabilities are as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Billings in excess of costs and estimated earnings | $ | 4,053 | | | $ | 5,716 | |
Deferred revenue | 1,585 | | | 483 | |
Total contract liabilities | $ | 5,638 | | | $ | 6,199 | |
We recognized revenue of $57 and $5,886 for the three and nine months ended September 30, 2022 that was previously included in contract liabilities at December 31, 2021.
The Company's net position on uncompleted contracts is as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Costs incurred on uncompleted contracts | $ | 245,077 | | | $ | 227,195 | |
Estimated earnings | 15,360 | | | 22,331 | |
Total costs and estimated earnings | 260,437 | | | 249,526 | |
Less billings to date | (246,935) | | | (238,079) | |
Net balance in process | $ | 13,502 | | | $ | 11,447 | |
The net balance in process classified on the accompanying unaudited condensed consolidated balance sheets is as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Costs and estimated earnings in excess of billings | $ | 17,555 | | | $ | 17,163 | |
Billings in excess of costs and estimated earnings | (4,053) | | | (5,716) | |
Net balance in process | $ | 13,502 | | | $ | 11,447 | |
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
Anticipated losses on long-term contracts are recognized when such losses become evident. As of September 30, 2022 and December 31, 2021, accruals for anticipated losses on long-term contracts were $2 and $159, respectively.
13. Stock-Based Compensation
The Company adopted the Charah Solutions, Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”), pursuant to which employees, consultants, and directors of the Company and its affiliates, including named executive officers, are eligible to receive awards. The 2018 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock, dividend equivalents, other stock-based awards, substitute awards, annual incentive awards, and performance awards intended to align the interests of participants with those of Company's stockholders. The Company has reserved 5,007 shares of common stock for issuance under the 2018 Plan.
A summary of the Company’s non-vested share activity for the nine months ended September 30, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock | | Performance Stock | | Total |
| Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Grant Date Fair Value |
Balance as of December 31, 2021 | 885 | | | $ | 4.62 | | | 648 | | | $ | 4.24 | | | 1,533 | | | $ | 4.46 | |
Granted | 729 | | | 4.10 | | | 313 | | | 2.97 | | | 1,042 | | | 3.76 | |
Forfeited | (7) | | | 3.21 | | | (231) | | | 6.14 | | | (238) | | | 6.05 | |
Vested | (480) | | | 4.73 | | | — | | | — | | | (480) | | | 4.73 | |
Balance as of September 30, 2022 | 1,127 | | | $ | 4.24 | | | 730 | | | $ | 3.11 | | | 1,857 | | | $ | 3.79 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock | | Performance Stock | | Total |
| Weighted Average Remaining Contractual Terms (Years) | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual Terms (Years) | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual Terms (Years) | | Aggregate Intrinsic Value |
Balance as of December 31, 2021 | 0.88 | | $ | 4,072 | | | 1.26 | | $ | 2,979 | | | 1.04 | | $ | 7,051 | |
| | | | | | | | | | | |
Balance as of September 30, 2022 | 1.15 | | $ | 2,063 | | | 1.68 | | $ | 1,336 | | | 1.36 | | $ | 3,399 | |
Stock-based compensation expense related to the restricted stock issued was $664 and $550 during the three months ended September 30, 2022 and 2021, respectively and $1,813 and $1,308 for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, total unrecognized stock-based compensation expense related to non-vested awards of restricted stock, net of estimated forfeitures, was $2,943, and is expected to be recognized over a weighted-average period of 1.35 years. The total fair value of awards vested for the three and nine months ended September 30, 2022 was $0 and $2,018, respectively.
Stock-based compensation expense related to the performance stock issued was $169 and $219 during the three months ended September 30, 2022 and 2021, respectively and $559 and $459 for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, total unrecognized stock-based compensation expense related to non-vested awards of performance stock, net of estimated forfeitures, was $1,200, and is expected to be recognized over a weighted-average period of 2.02 years.
14. Commitments and Contingencies
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. For all such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. Although it is difficult to predict the ultimate outcome of these lawsuits, claims and proceedings, we do not believe that the ultimate disposition of any of these matters, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. We maintain liability insurance for certain risks that is subject to certain self-insurance limits.
We believe amounts previously recorded are sufficient to cover any liabilities arising from the proceedings with all outstanding legal claims. Except as reflected in such accruals, we are currently unable to estimate a range of reasonably possible loss or a range of reasonably possible loss in excess of the amount accrued for outstanding legal matters.
15. Income Taxes
The Company had income tax benefit of $77 for the three months ended September 30, 2022 and income tax expense of $203 for the three months ended September 30, 2021, and income tax expense of $342 and $432 for the nine months ended September 30, 2022 and 2021, respectively, due to current state income tax expense and adjustments to the valuation allowance on deferred tax assets.
The effective income tax rate for the nine months ended September 30, 2022 was negative 1.0% and includes the effect of the valuation allowance, state income taxes and nondeductible items. The effective income tax rate for the nine months ended September 30, 2022 was less than the federal and state statutory rates primarily due to changes in the valuation allowance, which had an impact of 24.8%.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
The Company’s income is subject to a federal statutory rate of 21.0% and an estimated state statutory rate of 4.3% 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 September 30, 2022, deferred tax liabilities, net of deferred tax assets, was $1,259. A valuation allowance has been recorded for the deferred tax assets as the Company has determined that it is not more likely than not that the tax benefits related to all the deferred tax assets will be realized. The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on its deferred tax assets.
16. Loss Per Share
Basic loss per share is computed by dividing net loss attributable to the Company’s stockholders by the weighted-average number of shares outstanding during the period. Diluted loss per share reflects all potentially dilutive ordinary shares outstanding during the period and is computed by dividing net loss attributable to the Company’s stockholders by the weighted-average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding as dilutive securities.
Basic and diluted loss per share is determined using the following information:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net loss attributable to Charah Solutions, Inc. | $ | (13,359) | | | $ | (1,677) | | | $ | (35,002) | | | $ | (7,130) | |
Deemed and imputed dividends on Series A Preferred Stock | (150) | | | (148) | | | (449) | | | (443) | |
Series A Preferred Stock dividends | (956) | | | (1,946) | | | (4,617) | | | (6,161) | |
Net loss attributable to common stockholders | $ | (14,465) | | | $ | (3,771) | | | $ | (40,068) | | | $ | (13,734) | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted average shares outstanding | 33,722 | | | 32,277 | | 33,592 | | | 30,955 |
Dilutive share-based awards | — | | | — | | | — | | | — | |
Total weighted average shares outstanding, including dilutive shares | 33,722 | | | 32,277 | | | 33,592 | | | 30,955 | |
| | | | | | | |
| | | | | | | |
Net loss attributable to common stockholders per common share | | | | | | | |
Basic | $ | (0.43) | | | $ | (0.12) | | | $ | (1.19) | | | $ | (0.44) | |
Diluted | $ | (0.43) | | | $ | (0.12) | | | $ | (1.19) | | | $ | (0.44) | |
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 and nine months ended September 30, 2022 and 2021, the inclusion of all potentially dilutive shares would be anti-dilutive. Therefore, dilutive shares of 14,640 and 12,379 were excluded from the computation of the weighted-average shares for diluted net loss per share for the three months ended September 30, 2022 and 2021, respectively and dilutive shares of 13,976 and 12,064 were excluded from the computation of the weighted-average shares for diluted net loss per share for the nine months ended September 30, 2022 and 2021, respectively.
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 | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Diluted earnings per share: | | | | | | | |
Anti-dilutive restricted and performance stock units | 2,046 | | | 1,298 | | | 1,772 | | | 1,325 | |
Anti-dilutive Series A Preferred Stock convertible into common stock | 12,594 | | | 11,081 | | | 12,204 | | | 10,739 | |
Potentially dilutive securities, excluded as anti-dilutive | 14,640 | | | 12,379 | | | 13,976 | | | 12,064 | |
17. Subsequent Events
Preferred Stock and Debt Conversion Investments
On November 14, 2022, the Company and an investment fund affiliated with BCP entered into (i) an agreement to sell 30 (thirty thousand) shares of Series B Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”), with an initial aggregate liquidation preference of $30,000, net of a 4% Original Issue Discount (“OID”) of $1,200 for net proceeds of $28,800 in a private placement (the “Preferred Stock Investment”), and (ii) a binding term sheet to convert the then-outstanding loans under the Term Loan Agreement into equity interests in the remaining real estate associated with our GCERG and CPERG subsidiaries (the “Debt Conversion Investment”). This real estate has a carrying value of $12,077 and is classified within real estate, property and equipment, net in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2022.
The Series B Preferred Stock shall rank senior to all classes or series of equity securities of the Company with respect to dividend rights and rights on liquidation. In the event of any liquidation or winding up of the Company, the holder of each share of the Series B Preferred Stock will receive in preference to the holders of the Company common stock a per share amount equal to the greater of (i) the stated value of the Series B Preferred Stock and (ii) the amount such holders would be entitled to receive at such time if the Preferred Stock were converted into Company common stock. Proceeds from the Preferred Stock Investment will be used for liquidity and general corporate purposes.
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 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.
CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements, continued
(in thousands, except per share data)
(Unaudited)
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 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.
Debt Conversion Investment: Under the binding terms of the Debt Conversion Investment, the Company, through its wholly-owned subsidiary Charah Environment Redevelopment Group ("CERG"), shall maintain responsibility for any abatement, investigation, clean-up, removal action, remedial action, restoration, repair, response action, corrective action, monitoring, sampling and analysis, installation, reclamation, closure, or post-closure in connection with the suspected, threatened or actual release of hazardous materials in connection with the environmental conditions or environmental compliance of GCERG or CPERG. Additionally, CERG shall indemnify and save and hold harmless the holders of the investment and its respective affiliates (including each of its and their respective officers, directors, employees, direct and indirect equity holders, agents, affiliates, representatives, successors and assigns) harmless from and against any and all losses suffered or incurred in connection with any liability arising out of or resulting from environmental conditions or environmental compliance associated with GCERG or CPERG.
CERG shall accept and retain and be responsible for, and pay, satisfy and discharge when due, any and all liabilities, whether arising before, on or after the date of the closing, and irrespective of whether such liabilities attached or accrue to GCERG or CPERG, CERG, or the holders in the first instance, relating to, resulting from or arising out of any environmental conditions or environmental compliance associated with GCERG or CPERG.
Reverse Stock Split
The Company's Board of Directors approved a one-for-ten reverse stock split on November 14, 2022, subject to shareholder approval, amongst other required notifications and approvals. Once this reverse stock split has been effectuated in the fourth quarter, we will update the financial statements and will recast prior periods for the change in outstanding shares.