Item 1A. Risk Factors
Risks Related to Our Business
A decline in the production of CCRs by our coal-fired utility industry customers due to environmental regulations or otherwise could negatively impact our profitability and hinder our growth.
Many of our services are dependent upon the production of CCRs by our coal-fired utility industry customers. The coal-fired utility industry is facing several new and pending initiatives by regulatory authorities seeking to address air and water pollution, GHG emissions, and management and disposal of CCRs. In recent years, federal and state environmental regulations have imposed more stringent requirements regarding the emission of air pollutants and other toxic chemicals, reduction of GHG emissions, and water quality impacts from coal operations. Adoption of more stringent regulations governing coal combustion, water discharges, or air emissions may decrease the amount of CCRs produced by our customers and, as a result, the demand for our services. Faced with the prospect of more stringent regulations, litigation by environmental groups, and the relatively low cost of natural gas, an increasing number of electric utilities are reducing their portfolio of coal-fired power plants. This reduction could increase if the ACE Rule, which could cause states to substitute electricity generation from higher-emitting coal plants to low-emitting coal and natural gas plants and zero-emitting renewable sources, is finalized by the EPA. See “Item 1. Business—Regulation.”
Increasingly strict requirements generally will increase the cost of doing business and may make burning coal less attractive for utilities. In recent years, multiple companies have announced plans to close coal-fired power plant units or plants, or dropped plans to open new plants, citing the cost of compliance with pending or new environmental regulations and the relatively low cost of natural gas. A reduction in the use of coal as fuel would cause a decline in the production and availability of CCRs, which would adversely affect our fossil services and byproduct sales offerings and result in reduced revenue. The outcome of these developments cannot be predicted but could have a material adverse effect on our business, results of operation, financial condition, and cash flows.
Our business, financial condition and results of operations depend on the award of new contracts and the timing of the performance of these contracts.
We derive our revenue from the performance of customer contracts which itself is dependent on new contract awards. Reductions in the number and amounts of new awards, delays in the timing of the awards, or potential cancellations of such awards as a result of economic conditions, material and equipment pricing, and availability or other factors could adversely impact our business, financial condition and results of operations. It is particularly difficult to predict whether or when we will be awarded large-scale projects as these contracts frequently involve a lengthy and complex bidding and selection process that is affected by market conditions as well as regulatory requirements. We have experienced difficulty in the timely award of new projects and may again in the future. Because we generate our revenue from such projects, our results of operations and cash flows can fluctuate significantly from quarter to quarter depending on the timing of our contract awards and the commencement and progress of work under awarded contracts. In addition, many of these contracts are subject to financing contingencies. As a result, we are subject to the risk that the customer will not be able to secure the necessary financing for a project to proceed. If we are unable to secure the awards of new contracts, our business, financial condition and results of operations will be adversely affected.
We may lose existing contracts through competitive bidding or early termination.
Many of our contracts are for a specified term and are or will be subject to competitive rebidding after the term for such contract expires. Although we intend to bid to extend expiring contracts, we may not always be successful. In addition, some or all of our customers may terminate their contracts with us prior to their scheduled expiration dates. If we are not able to replace lost revenue resulting from unsuccessful competitive bidding, early termination, or the renegotiation of existing contracts with other revenue within a reasonable period of time, our business, financial condition and results of operations could be adversely affected.
We could be precluded from entering into or maintaining permits or certain contracts if we are unable to obtain sufficient third-party financial assurance or adequate insurance coverage.
Our operations in our Environmental Solutions and Maintenance and Technical Services segments sometimes require us to obtain performance or surety bonds, letters of credit, or other means of financial assurance to secure our contractual performance. We currently obtain performance and surety bonds from multiple financial institutions; however, if we are unable to obtain financial assurance in the future in sufficient amounts from appropriately rated sureties or on acceptable terms, we could be precluded from entering into certain additional contracts or from obtaining or retaining landfill management or other contracts or operating permits. Any future difficulty in obtaining insurance could also impair our ability to secure future contracts conditioned upon having adequate insurance coverage.
Unsatisfactory service and safety performance may negatively affect our customer relationships and, to the extent we fail to retain existing customers or attract new customers, adversely impact our revenue.
Our ability to retain existing customers and attract new business is dependent on many factors, including our ability to demonstrate that we can reliably and safely operate our business in a manner that is consistent with our customers’ standards of service as well as applicable laws, rules, and permits, which are subject to change. Existing and potential customers consider the safety and service record of their third-party service providers to be of high importance in their decision to engage such providers. The power generation industry generally emphasizes safety and service over cost due to economic and reputational risk associated with operations at their facilities.
It is possible that we will experience multiple or particularly severe accidents in the future, causing our safety record to deteriorate. This may be more likely as we continue to grow, if we experience high employee turnover or a labor shortage or hire inexperienced personnel to support our staffing needs. If one or more accidents were to occur while we are providing services to our customers, or if we were unable to maintain the level of safety and service our customers require, the affected customer may seek to terminate or cancel our services and may be less likely to use our services in the future, which could adversely affect our business, financial condition and results of operations. Furthermore, our ability to attract new customers may be impaired if they view our safety or service record as unacceptable.
A substantial portion of our Maintenance and Technical Services segment consists of services to nuclear power plants. To the extent there is a decrease in the number of these plants, due to reduced investment, increased regulation, or otherwise, demand for our nuclear services offerings could decrease.
U.S. nuclear capacity and electricity generation are expected to decline due to continuing low natural gas prices and the rapid expansion of low-cost renewable energy and other new technologies in the United States, displacing more traditional sources of power, including nuclear power. Public support for nuclear power has also softened because of concerns about safety and environmental issues and new construction costs.
There are very few new nuclear plants and reactors under construction in the United States, and several nuclear reactors are undergoing decommissioning. In addition, changes in local, state and federal government subsidies and increased regulation could negatively impact the nuclear power industry. For instance, the U.S. Nuclear Regulatory Commission has broad authority under federal law to impose safety-related and other licensing requirements for the operation of nuclear generation facilities. Events at nuclear facilities or other events impacting the industry generally could lead to additional requirements and regulations on all nuclear generation facilities and could negatively impact the new construction of or continued generation from nuclear power facilities. A lower number of nuclear power facilities in operation and a corresponding decrease in related maintenance and construction budgets would have a material adverse effect on our business, financial condition, results of operation and cash flows.
The limitation or modification of the PAA indemnification authority and similar federal programs for nuclear and other potentially hazardous activities could adversely affect our business.
The PAA provides indemnification to the nuclear industry against liability arising from nuclear incidents at non-military facilities in the United States while still ensuring compensation for the general public. The Energy Policy Act of 2005 extended the period of coverage to include all nuclear power reactors issued construction permits through December 31, 2025. Because we provide services to the nuclear energy industry in the ongoing maintenance and modification of its nuclear energy plants, we are entitled to the indemnification protections under the PAA. Although the PAA’s indemnification provisions are broad, it does not apply to all liabilities that we might incur while performing services as a contractor.
If the contractor protection currently provided by the PAA is significantly modified, is not reapproved, does not receive an appropriation or does not extend to all of our services, our business, financial condition and results of operations could be adversely affected by either our clients’ refusal to retain us for potentially covered services or our inability to obtain commercially adequate insurance and indemnification, or we may be subject to potentially material liabilities in connection with the performance of our services.
Loss of a large customer may adversely affect our revenue and operating results.
For fiscal 2019 and 2018, each of Duke Energy Corporation and Exelon Corporation accounted for greater than 10% of our revenue. We will likely continue to derive a significant portion of our revenue from a relatively small number of customers in the future. If a major customer fails to pay us promptly or at all, our revenue would be negatively impacted and our operating results, financial condition and cash flows could be materially adversely affected. Additionally, if we were to lose any material customer, such loss would have a material adverse effect on our business and results of operations.
We and our customers operate in industries subject to significant environmental regulation, and compliance with changes in, or liabilities under, such regulations could add significantly to the costs of conducting business.
Our operations and the operations of our customers are subject to federal, state, and local environmental laws and regulations that, among other matters, impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage, and disposal of solid, hazardous, and radioactive waste materials, the remediation of releases of hazardous substances, and the reclamation of land. We and our customers have obtained various federal, state, and local environmental permits to conduct our operations and we must comply with these permits and processes and procedures that have been approved by regulatory authorities. Any failure to comply with these environmental requirements could give rise to sanctions, including, but not limited to: i) the cessation of all or part of our operations, ii) substantial fines and penalties, iii) environmental or reclamation liabilities, which liabilities may be strict and joint and several and iv) damages, including natural resource damages in connection with our sites, customer sites, or sites to which we sent wastes, including CCRs, and third-party claims. Moreover, changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly environmental requirements could require our customers or us to make significant expenditures to attain and maintain compliance. New regulations, any failure to comply with existing regulations, or environmental liabilities arising thereunder could have a material adverse effect on our business, results of operation, financial condition, and cash flows.
Success by environmental groups in convincing the EPA to restrict beneficial uses of CCRs, or to regulate CCRs as hazardous waste, may have an adverse effect on our business.
In April 2015, the EPA published the CCR Rule to regulate the disposal of CCRs, including fly ash and bottom ash generated at coal-fired power plants, as non-hazardous waste under Subtitle D of the RCRA and to distinguish beneficial use of CCRs from disposal, which became effective in October 2015. The CCR Rule establishes national minimum criteria for CCR landfills and impoundments consisting of location restrictions, design and operating criteria, groundwater monitoring and corrective action, closure requirements, post-closure care, recordkeeping and reporting and other requirements, and requires closure of facilities unable to comply with these criteria within five to seven years. The CCR Rule has increased the complexity and cost of managing and disposing of CCRs and the remediation of existing ash ponds and landfills. In addition, Congress passed the WIIN Act in December 2016, which, among other things, authorizes state permit programs to manage CCRs in lieu of the CCR Rule. The WIIN Act also gives the EPA the authority to regulate coal ash in states that choose not to implement state permitting programs and in states whose permitting programs are determined to be inadequate by the EPA. In July 2018, the EPA issued a final rule that would take further steps under the WIIN Act by granting states with approved CCR permit programs (or the EPA where it is the permitting authority) the ability to set certain alternative performance standards. The rule would also allow CCRs to be used during certain closure situations and address certain matters remanded to the EPA by the D.C. Circuit Court of Appeals in June 2016, including clarifying corrective action triggers and requirements, adding boron to the list of constituents triggering corrective action, determining the proper height of woody and grassy vegetation for slope protection, and modifying alternative closure procedures. In August 2018, the D.C. Circuit Court of Appeals vacated and remanded portions of the CCR Rule. In December 2019, the EPA addressed the deficiencies identified by the court and proposed amendments to change the closure deadline to August 31, 2020, but to allow certain extensions. The EPA has announced that it is planning additional amendments to the rule.
Some environmental groups continue to urge the EPA to restrict certain beneficial uses of CCRs, such as in concrete, road base, and soil stabilization, alleging contaminants may leach into the environment. The CCR Rule created a definition of “beneficial use” that includes uses in concrete and road base. Still changes in the definition could reduce the demand for fly ash and other CCRs which would have an adverse effect on our revenue. Moreover, if the EPA were to regulate CCRs as hazardous waste, we, together with CCR generators, could be subject to environmental cleanup, personal injury, and other possible claims and liabilities, which could result in significant additional costs. Any such changes in or new regulations or indemnity obligations could have a material adverse effect on our business, results of operation, financial condition, and cash flows.
We may be adversely affected by uncertainty in the global financial markets and the deterioration of the financial condition of our customers. If any of our customers suffer financial difficulties affecting their credit risk, our operating results could be negatively impacted.
Our future results of operations may be impacted by the uncertainty caused by an economic downturn, natural disaster, pandemic, volatility or deterioration in the capital markets or credit markets, inflation, deflation, or other adverse economic conditions that may negatively affect us or parties with whom we do business, resulting in a reduction in our customers’ spending and their nonpayment or inability to perform obligations owed to us, such as the failure of customers to honor their commitments. Additionally, downturns in U.S. construction could lower the demand for our byproduct sales offerings. Furthermore, uncertainty caused by the impact of the outbreak of the novel coronavirus ("COVID-19") has led to increased volatility in the markets in which we operate. The continuation of the COVID-19 pandemic or the occurrence of any of the foregoing events could lead to decreased revenue and limit our ability to execute on our business plan, which could adversely affect our business, financial condition and results of operations.
We also provide service to power generators. To the extent these entities suffer significant financial difficulties, they could be unable to pay amounts owed to us or to renew contracts with us on attractive terms. The inability of our customers, particularly larger customers, to pay us promptly or to pay increased rates could negatively affect our business, financial condition and results of operations. In addition, in the course of our business, we hold accounts receivable from our customers. In the event of the financial distress or bankruptcy of a customer, we could lose all or a portion of such outstanding accounts receivable associated with that customer. Further, if a customer was to enter into bankruptcy, it could also result in the cancellation of all or a portion of our service contracts with such customer at significant expense or loss of expected revenue to us.
Work stoppages, union negotiations, health crisis and other labor problems could adversely affect us.
A lengthy strike or other work stoppages at any of the facilities where we provide nuclear services could have a material adverse effect on us. From time to time, we are subject to unfair labor practice charges, complaints, and other legal administrative and arbitration proceedings initiated against us by unions, the National Labor Relations Board, or our employees, which could negatively impact our business and results of operations. Furthermore, additional groups of our employees may seek union representation in the future. Negotiating collective bargaining agreements could divert management attention, which could also adversely affect operating results. If we are unable to negotiate acceptable collective bargaining agreements with our unionized employees, we may be subject to labor disruptions, such as union-initiated work stoppages, including strikes. Pandemics including the recent outbreak of the COVID-19 or other crises could adversely impact our labor workforce for our Environmental Solutions and Maintenance and Technical Services operations. Labor is one of our highest costs and depending on the type and duration of any labor disruptions, our operating expenses could increase significantly, which could adversely affect our business, financial condition, results of operations and cash flows.
Increases in labor costs or our ability to find, employ and deploy technically skilled labor could impact our financial results.
Our continued success will depend on our ability to attract and retain qualified personnel. Additionally, we hire a significant percentage of our nuclear services employees on a short-term basis as a result of the seasonal (typically every 12 to 24 months) outage maintenance services we provide. We compete with other businesses in our markets for qualified employees. From time to time, the labor supply is tight in some of our markets. A shortage of qualified employees would require us to enhance our wage and benefits packages to compete more effectively for employees, to hire more expensive temporary employees or to contract for services with more expensive third-party vendors. Labor is one of our highest costs and relatively small increases in labor costs per employee could materially affect our cost structure. Our operating margins could suffer if we fail to attract and retain qualified employees, control our labor costs, or recover any increased labor costs through increased prices we charge for our services or otherwise offset such increases with cost savings in other areas.
Further, beginning in the first quarter of 2020, the spread of COVID-19 caused significant disruptions to worldwide business and market activity. In reaction, many businesses have instituted social distancing policies, including the closure of offices and worksites and deferring planned business activity. Because of the embedded presence of our on-site workforce, if COVID-19 or a similar outbreak of infectious disease were to prevent our workers from being deployed to the applicable work site, it may disrupt our service offerings, interrupt performance on our contracts with clients and negatively impact our business, financial condition and results of operations. COVID-19 or a similar outbreak of infectious disease may also lead to further tightening of the labor supply and lead to enhanced wage and benefit packages, as discussed above
Dependence on third-party subcontractors and equipment manufacturers could adversely affect our profits.
We rely on third-party subcontractors and equipment manufacturers to complete many of our projects. To the extent that we cannot engage subcontractors or acquire equipment or materials, or if the amount we are required to pay for these goods or services exceeds the amount we have estimated in bidding for fixed-price contracts, we could experience losses in the performance of these contracts. In addition, if a subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason including, but not limited to, the deterioration of its financial condition, we may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the expected profit or result in a loss on a project negatively impacting our business, financial condition and results of operations.
Our employees perform services that involve certain risks, including risks of accident, and a failure to maintain a safe work site could result in significant losses.
Safety is a primary focus of our business and is critical to our reputation. Our services can place our employees and others in challenging environments near large equipment, dangerous processes and highly toxic or caustic materials. Operations in our Environmental Solutions and Maintenance and Technical Services segments involve risks, such as truck accidents, equipment defects, malfunctions, and failures, and natural disasters, which could potentially result in releases of CCR materials, injury or death of employees and others, or a need to shut down or reduce operation of our customers’ facilities while remedial actions are undertaken. We are responsible for safety on the sites where we work and these risks expose us to potential liability for pollution
and other environmental damages, personal injury, loss of life, business interruption, and property damage or destruction. Unsafe work conditions also have the potential of increasing employee turnover, increasing costs, and raising our operating costs. If we fail to implement appropriate safety procedures and/or if our procedures fail, our employees or others may suffer injuries.
Although we maintain functional groups whose primary purpose is to implement effective health, safety, and environmental procedures throughout our company, the failure to comply with such procedures, client contracts, or applicable regulations could subject us to losses and liability and the potential loss of customers. If we were to incur substantial liabilities in excess of any applicable insurance, our business, results of operations, and financial condition could be adversely affected.
Our financial results may fluctuate from quarter to quarter due to seasonal weather patterns and other factors which may make it difficult to predict our future performance.
Consumption of energy is seasonal and any variation from normal weather patterns, including due to unseasonably cooler or warmer weather, can have a significant impact on energy demand. Our financial results may fluctuate seasonally as a result of the seasonal outage maintenance services we provide as part of our nuclear services offerings, along with a number of other factors, many of which are outside of our control. Additionally, adverse weather conditions, such as hurricanes, tropical storms, and severe cold weather, may interrupt or curtail our operations or our customers’ operations, and result in a loss of revenue and damage to our equipment and facilities, which may or may not be insured.
Our other service offerings are also subject to quarterly fluctuations from time to time. For these reasons, comparing our financial results on a period-to-period basis may not be meaningful, and our past results should not be relied on as an indication of our future performance. Our future quarterly and annual expenses as a percentage of our revenue may be significantly different from those we have recorded in the past or which we expect for the future. Our financial results in some quarters may fall below expectations. Changes in cost estimates relating to our services, which under percentage-of-completion accounting principles could lead to significant fluctuations in revenue or to changes in the timing of our recognition of revenue from such services, could cause our stock price to fall.
We operate in a highly competitive industry and may not be able to compete effectively with larger and better-capitalized companies.
While no specific company provides the range of services that we offer, the industries in which we operate are highly competitive and require substantial labor and capital resources. Some of the markets in which we compete or plan to compete are served by one or more large, national companies, as well as by regional and local companies of varying sizes and resources, some of which may have accumulated a substantial reputation in their markets. Some of our competitors may also be better capitalized than we are, have greater name recognition than we do, or be able to provide or be willing to bid their services at a lower price than we may be willing to offer. Our inability to compete effectively could hinder our growth or adversely impact our business, financial condition and results of operations.
We rely on technology in our business, and any technology disruption or delay in implementing new technology could adversely affect our business, financial condition, results of operation and cash flows.
We invest in new technology and processes to provide higher-margin offerings for our customers while limiting and managing our environmental risk. We also depend on digital technologies to process and record financial and operating data and we rely on sophisticated information technology systems and infrastructure to support our business, including process control technology. The failure of our technology initiatives and systems to perform as we anticipate or a delay in implementing new technology could adversely affect our business, financial condition, results of operations and cash flows. For example, within our byproduct sales offerings, which is part of our Environmental Solutions segment, the roll-out of our technology initiatives, including our MP618TM thermal beneficiation technology and our grinding technology, has been slower than previously anticipated, resulting in lower than expected contribution to operating results.
Additionally, if competitors implement new technologies before we do, allowing such competitors to provide lower-priced or enhanced services of superior quality compared to those we provide, this could have an adverse effect on our financial condition, results of operations and cash flows.
If we are unable to protect the confidentiality of our trade secrets fully, or if competitors are able to replicate our technology or services, we may suffer a loss in our competitive advantage or market share.
Though we do not have patents or patent applications relating to many of our key processes and technology, if we are not able to maintain the confidentiality of our trade secrets, or if our competitors replicate our technology or services, our competitive advantage would be diminished. Further, our competitors may develop or employ comparable technologies or processes.
In addition, third parties from time to time may initiate litigation against us by asserting that the conduct of our business infringes, misappropriates, or otherwise violates intellectual property rights. If we are sued for infringement and lose, we could
be required to pay substantial damages and/or be enjoined from using or selling the infringing products or technology. Any legal proceeding concerning intellectual property could be protracted and costly regardless of the merits of any claim, is inherently unpredictable, and could have a material adverse effect on our financial condition, irrespective of its outcome.
Additionally, we currently license certain third-party intellectual property in connection with our business, and the loss of any such license could adversely impact our financial condition and results of operations.
We may be unable to make attractive acquisitions or to integrate acquired businesses successfully, and any inability to do so may disrupt our business and hinder our ability to grow.
We may from time to time consider opportunities to acquire or make investments in other businesses and lines of business that could enhance our technical capabilities, complement our current services, or expand the breadth of our markets. The success of any completed acquisition will depend on our ability to integrate the acquired business into our existing operations effectively. The process of integrating acquired businesses may involve unforeseen difficulties or liabilities and may require a disproportionate amount of our managerial and financial resources. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. No assurance can be given that we will be able to identify suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms, or successfully acquire identified targets. Our failure to achieve consolidation savings, to integrate the acquired businesses and assets into our existing operations successfully, or to minimize any unforeseen operational difficulties or liabilities could have a material adverse effect on our business, financial condition and results of operations.
We are vulnerable to significant fluctuations in our liquidity or capital requirements that may vary substantially over time.
Our operations could require us to utilize large sums of working capital, sometimes on short notice and sometimes without assurance of recovery of the expenditures. Environmental liabilities could result in significant cash outflows, including those arising from various customer contracts and acquisition agreements, that require us to indemnify for certain environmental liabilities, litigation risks, unexpected costs or losses resulting from acquisitions, contract initiation or completion delays, political conditions, client payment problems and professional liability claims.
Restrictive covenants in our debt agreements may restrict our ability to pursue our business strategies. If we fail to comply with the restrictions and covenants in our debt agreements, there could be an event of default under the terms of such agreements, which could result in an acceleration of the amounts owed under such agreements.
Our debt agreements limit our ability to, among other things:
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incur indebtedness or contingent obligations;
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pay dividends or make distributions to our stockholders;
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repurchase or redeem our capital stock or subordinated indebtedness;
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enter into sale/leaseback transactions;
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incur restrictions on the ability of our subsidiaries to pay dividends or to make payments to us;
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enter into transactions with our stockholders and affiliates;
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sell and pledge assets; and
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acquire the assets of, or merge or consolidate with, other companies or transfer all or substantially all of our assets.
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These covenants may also impair our ability to engage in favorable business activities, acquire other businesses or lines of business and finance future operations or capital needs in furtherance of our business strategies. Moreover, the form or level of our indebtedness may prevent us from raising additional capital on attractive terms or obtaining additional financing if needed. A breach of any of these covenants would result in a default under the applicable agreement after any applicable grace periods. A default could result in acceleration of the indebtedness owed under such agreement which would have a material adverse effect on our business, financial condition and results of operations. If an acceleration occurs, it would likely accelerate all of our indebtedness under all of the instruments that govern our outstanding indebtedness through cross-default provisions and we would likely be unable to make all of the required payments to refinance such indebtedness. Even if new financing were available at that time, it might not be on terms that are acceptable to us.
Our borrowing levels and debt service obligations could adversely affect our financial condition and impair our ability to fulfill our obligations under our Revolving Loan, Term Loan and Delayed Draw Term Loan (each, as hereinafter defined).
At December 31, 2019, we had total outstanding indebtedness of approximately $204.6 million, $152.2 million of which relates to our Term Loan and Delayed Draw Term Loan. At December 31, 2019, we had outstanding borrowings of $19.0 million and letters of credit issued for our account of $12.0 million under our Revolving Loan. We dedicate a portion of our cash flow to debt service. If we do not ultimately have sufficient earnings to service our debt, we would need to refinance all or part of our existing debt, sell assets, borrow more money or issue securities, which we may not be able to do on commercially reasonable terms or at all.
The terms of our Term Loan and Revolving Loan include customary events of default and require us to maintain certain financial ratios and restrict our ability to incur additional indebtedness. A breach of our Term Loan and Revolving Loan, including any inability to comply with the required financial ratios, could result in a default. In the event of any default, the lenders thereunder would be entitled to accelerate the repayment of amounts outstanding, plus accrued and unpaid interest. Moreover, these lenders would have the option to terminate any obligation to make further extensions of credit under our Revolving Loan. In the event of a default under our Term Loan and Revolving Loan, the lenders thereunder could also proceed to foreclose against the assets securing such obligations. In the event of a foreclosure on all or substantially all of our assets, we may not be able to continue to operate as a going concern. Outstanding letters of credit issued under our revolving credit facility would need to be replaced with other forms of collateral. Cross defaults may also occur on other agreements including surety and lease agreements.
Our indebtedness could have significant consequences, including the following:
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requiring us to dedicate a substantial portion of our cash flows from operations to the repayment of debt, which reduces the cash available for other business purposes;
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limiting our ability to obtain additional financing and creating additional liens on our assets;
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limiting our flexibility in planning for, and reacting to, changes in our business;
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placing us at a competitive disadvantage if we are more leveraged than our competitors;
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limiting our ability to deduct our interest expense;
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making us more vulnerable to adverse economic and industry conditions; and
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restricting us from making additional investments or acquisitions by limiting our aggregate debt obligations.
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To the extent that we incur new debt in addition to our current debt levels, the leverage risks described above would increase.
The London Interbank Offered Rate ("LIBOR") calculation method may change and LIBOR is expected to be phased out after 2021.
On July 27, 2017, the U.K. Financial Conduct Authority (the "FCA") announced that after 2021, it would no longer require banks to submit rates for the calculation of LIBOR. In the meantime, actions by the FCA, other regulators, or law enforcement agencies may result in changes to the method by which LIBOR is calculated. Certain of the instruments governing our indebtedness calculate interest with reference to LIBOR. The discontinuation, reform or replacement of LIBOR or any other benchmark rates may have an unpredictable impact on contractual mechanics in the credit markets or disrupt the broader financial markets. Uncertainty as to the nature of such potential discontinuation, reform or replacement may negatively impact the cost of our variable rate debt.
These reforms may also result in new methods of calculating LIBOR to be established, or alternative reference rates to be established. For example, in the U.S., a group convened by the Federal Reserve Board and the Federal Reserve Bank of New York, called the Alternative Reference Rate Committee ("ARRC") and composed of a diverse set of private sector entities, has identified the Secured Overnight Financing Rate (or "SOFR") as its preferred alternative rate for the U.S. LIBOR. The Federal Reserve Bank of New York has begun publishing SOFR daily, and central banks in several other jurisdictions have also announced plans for alternative reference rates for other currencies. The potential consequences of these changes cannot be fully predicted and could have an adverse impact on the market value for LIBOR-linked debt agreements held by us and could adversely affect our financial condition and results of operations. Changes in market interest rates may influence our financing costs and could reduce our earnings and cash flows.
We are subject to cyber security risks and interruptions or failures in our information technology systems. A cyber incident could occur and result in information theft, data corruption, operational disruption, and/or financial loss.
We depend on digital technologies to process and record financial and operating data and we rely on sophisticated information technology systems and infrastructure to support our business, including process control technology. At the same time, cyber incidents, including deliberate attacks, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber-security threats. Our technologies, systems, and networks and those of our vendors, suppliers, and other business partners may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of proprietary and other information, or other disruption of business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Despite our considerable expenditures and efforts to secure our systems, our systems for protecting against cyber security risks may not be sufficient. As the sophistication of cyber incidents continues to evolve, we will likely be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents. Additionally, any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, cyber attacks, or other security breaches or similar events. The failure of any of our information technology systems may cause disruptions in our operations, which could adversely affect our revenue and profitability.
We may, in the normal course of business, be subject to judicial, administrative, or other third-party proceedings that could materially and adversely affect our reputation, business, financial condition, results of operations, and liquidity.
We have in the past been, and may in the future be, named as a defendant in lawsuits, claims, and other legal proceedings during the ordinary course of our business. In the future, individuals, citizens groups, trade associations, community groups, or environmental activists may bring actions against us in connection with our operations that could interrupt or limit the scope of our business. Many of these proceedings could raise difficult and complicated factual and legal issues and are subject to uncertainties and complexities. These proceedings may seek, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination, breach of contract, property damage, punitive damages, civil penalties, or other losses, consequential damages, or injunctive or declaratory relief. In addition, pursuant to our service agreements, we generally indemnify our customers for claims related to our conduct and the services we provide thereunder.
With respect to all such proceedings, we have and will when warranted in the future, accrue expenses in accordance with accounting principles generally accepted in the United States (“GAAP”). If such actions or indemnities are ultimately resolved unfavorably at amounts exceeding our accrued expenses, or at material amounts, the outcome could materially and adversely affect our reputation, business, financial condition, and results of operations. In addition, payments of significant amounts, even if reserved, could adversely affect our liquidity position.
We recognize revenue from construction contracts using the cost-to-cost input method; therefore, variations of actual results from our assumptions may reduce our profitability.
We recognize revenue from construction contracts using the cost-to-cost input method permitted under GAAP, under which we measure the percentage of revenue to be recognized in a given period by the percentage of costs incurred to date on the contract to the total estimated costs for the contract. The cost-to-cost input method therefore, relies on estimates of total expected contract costs. Contract revenue and total cost estimates are reviewed and revised on an ongoing basis as the work progresses. Adjustments arising from changes in the estimates of contracts revenue or costs are reflected in the fiscal period in which such estimates are revised. Estimates are based on management’s reasonable assumptions, judgment and experience, but are subject to the risks inherent in estimates, including unanticipated delays or technical complications. Variances in actual results from related estimates on a large project, or on several smaller projects, could be material to our results of operations. The full amount of an estimated loss on a contract is recognized in the period such a loss is identified. Such adjustments and accrued losses could result in reduced profitability, which could negatively impact our financial condition and results of operations.
Our balance sheet includes a significant amount of goodwill and intangible assets. A decline in the estimated fair value of a business unit or intangible asset could result in an asset impairment charge, which would be recorded as a noncash expense in our consolidated statement of operations.
Goodwill, tradenames, customer relationships and other identifiable intangible assets must be tested for impairment at least annually. The fair value of the goodwill assigned to a business unit could decline if projected revenue or cash flows were to be lower in the future due to the timing of new awards or other causes. If the carrying value of intangible assets or of goodwill were to exceed its fair value, the asset would be written down to its fair value, with the impairment loss recognized as a noncash charge in the consolidated statement of operations.
As of December 31, 2019, we had approximately $74.2 million of goodwill and $92.5 million of tradenames, customer relationships and other identifiable intangibles on our balance sheet, which together represent 47% of our total assets. No impairment
was identified in 2019. Changes in the future outlook of a business unit could result in an impairment loss, which could have a material adverse effect on our results of operations and financial condition.
Risks Related to Our Common Stock
The market price of our stock may be influenced by many factors, some of which are beyond our control.
These factors include the various risks described in this section as well as the following:
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•
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the failure of securities analysts to continue to cover our common stock or changes in financial estimates or recommendations by analysts;
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•
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announcements by us or our competitors of significant contracts, acquisitions, or capital commitments;
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•
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changes in market valuation or earnings of our competitors;
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•
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variations in quarterly operating results;
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•
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internal control failures;
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•
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availability of capital;
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•
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general economic conditions;
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•
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natural disasters and pandemics
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•
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future sales of our common stock; and
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•
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investor perception of us and the power generation industry.
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Additional factors that do not specifically relate to our company or the electric utility industry may also materially reduce the market price of our common stock, regardless of our operating performance.
The concentration of our capital stock will limit other stockholders’ ability to influence corporate matters.
Bernhard Capital Partners Management, LP and its affiliates (“BCP”) own approximately 52% of the total voting power of our outstanding shares of common stock and all of the outstanding Series A Preferred Stock (“Preferred Stock”), which is convertible at BCP's option at any time following the three-month anniversary of the issuance date into shares of common stock. As a result, BCP has the ability to exert substantial influence or actual control over our management and affairs and over most matters requiring action by our stockholders. The interests of BCP may not coincide with the interests of the other holders of our common stock. This concentration of ownership also may have the effect of delaying or preventing a change in control otherwise favored by our other stockholders, which could depress the market price of our common stock.
BCP and its respective affiliates are not limited in their ability to compete with us, and the corporate opportunity provisions in our amended and restated certificate of incorporation could enable BCP to benefit from corporate opportunities that might otherwise be available to us.
Our governing documents provide that BCP and its respective affiliates (including portfolio investments of BCP and its affiliates) are not restricted from owning assets or engaging in businesses that compete directly or indirectly with us. In particular, subject to the limitations of applicable law, our amended and restated certificate of incorporation, among other things:
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•
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permits BCP and its respective affiliates to conduct business that competes with us and to make investments in any kind of property in which we may make investments; and
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•
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provides that if BCP or its respective affiliates, or any employee, partner, member, manager, officer or director of BCP or its respective affiliates who is also one of our directors or officers, becomes aware of a potential business opportunity, transaction, or other matter, they will have no duty to communicate or offer that opportunity to us.
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BCP or its respective affiliates may become aware, from time to time, of certain business opportunities (such as acquisition opportunities) and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Furthermore, such businesses may choose to compete with us for these opportunities, possibly causing these opportunities to not be available to us or causing them to be more expensive for us to pursue. In addition, BCP and its respective affiliates may dispose of properties or other assets in the future, without any obligation
to offer us the opportunity to purchase any of those assets. As a result, our business or prospects may be negatively affected if attractive business opportunities are procured by such parties for their own benefit rather than for ours.
We have engaged in transactions with our affiliates and it is likely that we will do so in the future. The terms of such transactions and the resolution of any conflicts that may arise may not always be in our or our stockholders’ best interests.
We have engaged in transactions with affiliated companies in the past and it is likely that we will do so in the future. The terms of such transactions and the resolution of any conflicts that may arise may not always be as favorable as may be obtained with a third party.
Our amended and restated certificate of incorporation and amended and restated bylaws, as well as Delaware law, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock.
Our amended and restated certificate of incorporation authorizes our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders, including:
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•
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after BCP and its affiliates no longer collectively hold more than 35% of the voting power of our common stock, providing that all vacancies, including newly created directorships, may, except as otherwise required by law or, if applicable, the rights of holders of a series of preferred stock, only be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum (prior to such time, vacancies may also be filled by stockholders holding a majority of the outstanding shares entitled to vote);
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after BCP and its affiliates no longer collectively hold more than 35% of the voting power of our common stock, permitting any action by stockholders to be taken only at an annual meeting or special meeting rather than by a written consent of the stockholders, subject to the rights of any series of preferred stock concerning such rights;
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after BCP and its affiliates no longer collectively hold more than 35% of the voting power of our common stock, permitting our amended and restated certificate of incorporation and amended and restated bylaws to be amended by the affirmative vote of the holders of at least two-thirds of our then outstanding shares of stock entitled to vote thereon;
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after BCP and its affiliates no longer collectively hold more than 35% of the voting power of our common stock, permitting special meetings of our stockholders to be called only by our board of directors pursuant to a resolution adopted by the affirmative vote of a majority of the total number of authorized directors whether or not there exist any vacancies in previously authorized directorships (prior to such time, a special meeting may also be called at the request of stockholders holding a majority of the outstanding shares entitled to vote);
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after BCP and its affiliates no longer collectively hold more than 35% of the voting power of our common stock, requiring the affirmative vote of the holders of at least 75% in voting power of all then outstanding common stock entitled to vote generally in the election of directors, voting together as a single class, to remove any or all of the directors from office at any time, and directors will be removable only for “cause”;
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•
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dividing our board of directors into three classes of directors, with each class serving staggered three-year terms;
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•
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prohibiting cumulative voting in the election of directors;
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•
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establishing advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders; and
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•
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providing that the board of directors is expressly authorized to adopt, or to alter or repeal our amended and restated bylaws.
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Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees, or agents.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of
breach of a fiduciary duty owed by any of our directors, officers, employees, agents, or stockholders to us or our stockholders, (iii) any action asserting a claim against us or any director, officer, employee, or agent of ours arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our amended and restated certificate of incorporation or our amended and restated bylaws, or (iv) any action asserting a claim that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our amended and restated certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees, or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, or results of operations.
We do not intend to pay cash dividends on shares of our common stock, and our debt agreements place certain restrictions on our ability to do so. Consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
We do not plan to declare cash dividends on shares of our common stock in the foreseeable future. Additionally, our debt agreements place certain restrictions on our ability to pay cash dividends. Consequently, your only opportunity to achieve a return on your investment in us will be if you sell your common stock at a price higher than you paid for it. There is no guarantee that the price of our common stock that will prevail in the market will ever exceed the price that you paid for it.
Shares eligible for future sale may cause the market price of our common stock to drop significantly, even if our business is doing well.
The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
On March 16, 2020, we issued $26.0 million in Preferred Stock to BCP, the terms of which could adversely affect the voting power or value of our common stock.
We currently have 26,000 shares of Preferred Stock outstanding, which is convertible at BCP's option at any time following the three-month anniversary of the issuance date into shares of common stock with an initial conversion price of $2.77 per share. Dividends will be payable quarterly basis at a rate of 13% per annum, provided that we pay dividends in-kind through the issuance of additional shares to BCP. Our Preferred Stock gives BCP a superior right to our assets upon liquidation as compared to our common stock and could adversely impact the voting power or value of our common stock. For example, our preferred stock provides BCP the right to nominate one member of the Company's board of directors and the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences assigned to BCP could affect the residual value of the common stock.
Taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our common stock less attractive to investors.
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). An emerging growth company may take advantage of certain reduced reporting and other requirements that are otherwise applicable generally to public companies. Under these reduced disclosure requirements, emerging growth companies are not required to, among other things, comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, provide certain disclosures regarding executive compensation, hold stockholder advisory votes on executive compensation, or obtain stockholder approval of any golden parachute payments not previously approved. In addition, emerging growth companies have extended phase-in periods for the adoption of new or revised financial accounting standards.
We intend to take advantage of all of the reduced reporting requirements and exemptions, including the extended phase-in periods for 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. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. If we were to subsequently elect instead to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
Our election to use the longer phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the extended phase-in periods under Section 107 of the JOBS Act and who will comply with new or revised financial accounting standards. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our common stock price may be more volatile.
If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our common stock, or if our operating results do not meet their expectations, our stock price could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company adversely changes his or her recommendation with respect to our common stock or if our operating results do not meet their expectations, our stock price could decline.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
While many of our employees are embedded directly at our customers’ power generation facilities, we lease our corporate headquarters in Louisville, Kentucky and own and lease other facilities throughout the United States where we conduct business. Our facilities are utilized for operations in both of our reportable segments and include offices, equipment yards, mines, storage, and manufacturing facilities. As of December 31, 2019, we owned two of our facilities and leased the remainder. We believe that our existing facilities are sufficient for our current needs.
Item 3. Legal Proceedings
We are party to a lawsuit filed against North Carolina by an environmental advocacy group alleging that the issuance by the state of certain permits associated with our Brickhaven clay mine reclamation site exceeded the state’s power. Although the state’s authority to issue the bulk of the permits (i.e., the allowance to reclaim the original site with coal ash) was upheld, the portion of the permits that allows us to “cut and prepare” an additional portion of the site was held by the North Carolina Superior Court to exceed the relevant agency’s statutory authority. The North Carolina Superior Court’s decision was reversed and remanded back to the North Carolina Office of Administrative Hearing (“NCOAH”) due to the North Carolina Superior Court's having used an improper standard of review. While the NCOAH upheld the state’s authority to issue the bulk of the permits, it too held that a portion of the permits that allowed us to “cut and prepare” an additional portion of the site was in excess of the relevant agency’s authority. We have filed a petition for judicial review with the North Carolina Superior Court. All customer related work at the Brickhaven site has been completed.
Allied and its affiliate, Allied Power Resources, LLC, have been named in a collective action lawsuit filed in the U.S. District Court for the Northern District of Illinois, alleging violations of the Fair Labor Standards Act, and which includes related class claims alleging violations of the Illinois Minimum Wage Law and the Pennsylvania Minimum Wage Act for failure to pay overtime. This case is one of a series filed against companies in the oil, gas and energy industries in Illinois and Texas. The parties mediated this case in November 2018 and reached a settlement, which received conditional approval from the court. The parties are working on implementing the settlement terms and the plaintiffs in the case will submit a motion for final approval in June 2020 prior to the court’s scheduled hearing.
In addition to the above matters, we are from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. With respect to all such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. Although it is difficult to predict the outcome of these lawsuits, claims and proceedings, we do not believe that the ultimate disposition of any of these matters, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. We maintain liability insurance for certain risks that is subject to certain self-insurance limits.
Item 4. Mine Safety Disclosures
Not applicable.
Information About Our Executive Officers
The following information is provided with respect to each of the executive officers of the Company as of March 27, 2020.
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Name
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Age
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Positions with Charah Solutions
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Scott A. Sewell
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40
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President, Chief Executive Officer and Director
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Roger D. Shannon
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55
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Chief Financial Officer and Treasurer
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Dorsey “Ron” McCall
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72
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Senior Vice President and Director
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Scott A. Sewell—President, Chief Executive Officer and Director. Mr. Sewell has served as President and Chief Executive Officer of Charah Solutions and a member of our board of directors since January 2019. Before that, Mr. Sewell held several other leadership positions with Charah Solutions, including Chief Operating Officer from 2013 to January 2019, Senior Vice President of Operations from 2012 to 2013, Vice President of Operations from 2010 to 2012, and Operations Manager from 2008 to 2010. Before joining Charah Solutions, he worked for Bechtel Corporation from 2002 to 2007. He is a Six Sigma Yellow Belt and holds professional affiliations as a member of the Project Management Institute, the Association of Equipment Management Professionals and the International Erosion Control Association. Mr. Sewell holds a bachelor’s degree in international business from the College of Charleston in South Carolina.
Roger D. Shannon—Chief Financial Officer and Treasurer. Mr. Shannon has served as Chief Financial Officer and Treasurer of Charah Solutions since June 2019. Mr. Shannon previously served in various roles including CFO, Senior Vice President of Finance, Treasurer and Head of Corporate Development at ADTRAN, a publicly-traded provider of next-generation networking solutions. Mr. Shannon also served as CFO and Treasurer for Steel Technologies, plus a variety of senior finance roles at the Brown-Forman Corporation, British American Tobacco, and accounting positions at Vulcan Materials Company, Lexmark International and KPMG. Roger is a CPA and CFA and has a bachelor’s of science degree in accounting from Auburn University, and an MBA from the University of Georgia.
Dorsey “Ron” McCall—Senior Vice President and Director. Mr. McCall has served as Senior Vice President of Charah Solutions since 2018 and as Chief Executive Officer of Allied Power Management, LLC, a subsidiary of Charah Solutions, since he joined the Company in June 2017. Mr. McCall has also served as a member of our board of directors since January 2018. From January 2016 to June 2017, Mr. McCall worked as an independent consultant. Before that, Mr. McCall served as President of the Plant Services Division at Chicago Bridge & Iron Company N.V. (formerly The Shaw Group Inc.), a large engineering, procurement, and construction company acquired by McDermott International, Inc. in February 2018, from 2002 to January 2016 and Senior Vice President of Turner Industries’ Western Division for nearly 25 years. Mr. McCall has extensive knowledge in all aspects of project management, including nuclear outages, refinery turnarounds, and major construction and maintenance projects, both domestic and international. Mr. McCall received his bachelor’s degree in education from McNeese State University.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The shares of our common stock trade on the New York Stock Exchange under the symbol “CHRA.”
As of March 11, 2020, there were 1,180 stockholders of record of our common stock. We have not paid dividends on our common stock to date and do not intend to pay dividends in the foreseeable future. Our debt agreements place certain restrictions on our ability to pay cash dividends. We intend to retain earnings to finance the development and expansion of our business. Payment of common stock dividends in the future will depend upon our debt covenants, our ability to generate earnings, our need for capital, our investment opportunities and our overall financial condition, among other things.
Item 6. Selected Financial Data
The table below shows selected historical consolidated and combined financial information for the periods and as of the dates indicated. On January 13, 2017, Charah Management LLC, a Delaware limited liability company (“Charah Management”), completed a transaction with BCP, a previously unrelated third party, pursuant to which BCP acquired a 76% equity position of Charah Management. Our historical financial and operating information as of and for the periods after January 13, 2017 may not be comparable to the historical financial and operating information as of and for the periods ended on or before January 12, 2017. The successor columns below represent the consolidated financial information of Charah Solutions for the year ended December 31, 2019, the consolidated and combined financial information for the year ended December 31, 2018 and the combined financial information of Charah and Allied Power Management, LLC, a Delaware limited liability company (“Allied”), for the period from January 13, 2017 through December 31, 2017, as reflected in our audited financial statements included elsewhere herein. The predecessor columns below represent the financial information of Charah Solutions for the period from January 1, 2017 through January 12, 2017 as reflected in our audited financial statements included elsewhere herein and for the year ended December 31, 2016 as reflected in our audited financial statements not included elsewhere herein. This selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated and combined financial statements and the related notes included elsewhere herein.
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Successor
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Predecessor
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Year Ended December 31, 2019
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Year Ended December 31, 2018
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Period from January 13, 2017 through December 31, 2017
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Period from January 1, 2017 through January 12, 2017
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Year Ended December 31, 2016
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(in thousands, except per share data)
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Statement of Operations:
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Revenue:
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Environmental Solutions
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$
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180,396
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$
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343,105
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$
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232,581
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$
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7,451
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$
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218,051
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Maintenance and Technical Services
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374,472
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397,357
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188,658
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1,679
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47,017
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Total revenue
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554,868
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740,462
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421,239
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9,130
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265,068
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Cost of sales
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514,492
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642,734
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338,908
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7,301
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203,228
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Gross profit:
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Environmental Solutions
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11,486
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69,464
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64,433
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1,412
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51,282
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Maintenance and Technical Services
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28,890
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|
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28,264
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17,898
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|
|
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417
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10,558
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Total gross profit
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40,376
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97,728
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82,331
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1,829
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61,840
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General and administrative expenses
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60,870
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76,752
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48,495
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3,170
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35,170
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Operating (loss) income
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(20,494
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)
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20,976
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33,836
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(1,341
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)
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26,670
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Interest expense, net
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(16,835
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)
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(32,226
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)
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(14,146
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)
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(4,181
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)
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(6,244
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)
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Income from equity method investment
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2,295
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2,407
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816
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48
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2,703
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(Loss) income before income taxes
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(35,034
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)
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(8,843
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)
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20,506
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(5,474
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)
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23,129
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Income tax expense (benefit)
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4,190
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|
|
(2,427
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)
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|
—
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|
|
—
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—
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Net (loss) income
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(39,224
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)
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|
(6,416
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)
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|
20,506
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|
|
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(5,474
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)
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23,129
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Less income attributable to non-controlling interest(1)
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2,834
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|
|
2,486
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|
|
2,190
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|
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|
54
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|
|
2,198
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|
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Net (loss) income attributable to Charah Solutions, Inc.
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$
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(42,058
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)
|
|
$
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(8,902
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)
|
|
$
|
18,316
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|
|
|
$
|
(5,528
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)
|
|
$
|
20,931
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|
|
|
|
|
|
|
|
|
|
|
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|
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Basic (loss) earnings per share
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$
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(1.43
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)
|
|
$
|
(0.33
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)
|
|
$
|
0.77
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|
|
|
N/A
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|
|
N/A
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|
|
Diluted (loss) earnings per share
|
$
|
(1.43
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)
|
|
$
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(0.33
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)
|
|
$
|
0.75
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|
|
|
N/A
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|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net (loss) income information (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Charah Solutions, Inc. before provision for income taxes
|
$
|
(37,868
|
)
|
|
$
|
(11,329
|
)
|
|
$
|
18,316
|
|
|
|
$
|
(5,528
|
)
|
|
$
|
20,931
|
|
|
Pro forma provision for income taxes
|
4,190
|
|
|
(2,214
|
)
|
|
6,960
|
|
|
|
(2,101
|
)
|
|
7,954
|
|
|
Pro forma net (loss) income attributable to Charah Solutions, Inc.
|
$
|
(42,058
|
)
|
|
$
|
(9,115
|
)
|
|
$
|
11,356
|
|
|
|
$
|
(3,427
|
)
|
|
$
|
12,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) operating activities
|
$
|
68,653
|
|
|
$
|
(13,633
|
)
|
|
$
|
57,792
|
|
|
|
$
|
(4,418
|
)
|
|
$
|
8,351
|
|
|
Cash flows used in investing activities
|
(15,759
|
)
|
|
(40,368
|
)
|
|
(10,628
|
)
|
|
|
—
|
|
|
(15,885
|
)
|
|
Cash flows (used in) provided by financing activities
|
(53,666
|
)
|
|
28,637
|
|
|
(19,304
|
)
|
|
|
4,463
|
|
|
7,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(2)
|
18,140
|
|
|
$
|
98,772
|
|
|
$
|
76,430
|
|
|
|
$
|
(422
|
)
|
|
$
|
58,965
|
|
|
Adjusted EBITDA margin(2)
|
3.3
|
%
|
|
13.3
|
%
|
|
18.1
|
%
|
|
|
(4.6)
|
%
|
|
22.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (as of the end of the periods indicated):
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
355,756
|
|
|
$
|
458,901
|
|
|
$
|
377,651
|
|
|
|
|
|
|
|
Long-term debt
|
169,698
|
|
|
230,821
|
|
|
227,698
|
|
|
|
|
|
|
|
Total liabilities
|
302,483
|
|
|
365,511
|
|
|
329,332
|
|
|
|
|
|
|
|
Total equity
|
53,273
|
|
|
93,390
|
|
|
48,319
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Relates to one of our joint ventures.
|
|
|
|
|
(2)
|
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. For a definition of Adjusted EBITDA and Adjusted EBITDA margin, as well as a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “—Non-GAAP Financial Measures.”
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the historical financial statements and the related notes included in Part II Item 8. Financial Statements and Supplementary Data. The following Management Discussion and Analysis of Financial Condition and Results of Operations included in this report provides an analysis of our financial condition and results of operations and reasons for material changes therein for the year ended December 31, 2019 as compared to the year ended December 31, 2018 ("2018"). Discussion regarding our financial condition and results of operation for 2018 as compared to the year ended December 31, 2017 is included in Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for 2018 filed with the SEC on March 27, 2019. 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, regulatory changes, and other uncertainties, as well as those factors discussed below and elsewhere herein. Please read Cautionary Note Regarding Forward‑Looking Statements. Also, please read the risk factors and other cautionary statements described under “Item 1A. Risk Factors” included elsewhere herein. 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 formed as a Delaware corporation in January 2018 in anticipation of the IPO to be a holding company for Charah Management and Allied Power Holdings. We did not conduct any material business operations before the transactions described below under “—Initial Public Offering” other than certain activities related to the initial public offering (the “IPO”), which was completed on June 18, 2018. In connection with the closing of the IPO and pursuant to the terms and conditions of the master reorganization agreement dated June 13, 2018, Charah Management LLC, a Delaware limited liability company (“Charah Management”), and Allied Power Holdings, LLC, a Delaware limited liability company (“Allied Power Holdings”), became our wholly owned subsidiaries.
Through our ownership of Charah Management and Allied Power Holdings, we own the outstanding equity interests in Charah, LLC, a Delaware limited liability company (“Charah”) and Allied Power Management, LLC, a Delaware limited liability company (“Allied”), the subsidiaries through which we operate our businesses.
Overview
The historical financial data presented herein as of December 31, 2019 and for periods after the June 18, 2018 corporate reorganization is that of Charah Solutions, Inc. and its subsidiaries on a consolidated basis including Charah and Allied, and on a combined basis for periods prior to the June 18, 2018 corporate reorganization. Allied was formed in May 2017 and did not commence operations until July 2017.
We are a leading provider of mission-critical environmental and maintenance services to the power generation industry. We offer a suite of coal ash management and recycling, environmental remediation, and utility plant outage-related maintenance services. We also design and implement solutions for complex environmental projects (such as coal ash pond closures) and facilitate coal ash recycling through byproduct sales 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 2019, we performed work at more than 50 coal-fired and nuclear power generation sites nationwide.
We are an environmental remediation and maintenance company and we conduct our operations through two segments: Environmental Solutions and Maintenance and Technical Services.
Environmental Solutions. Our Environmental Solutions segment includes remediation and compliance services, as well as byproduct sales. Remediation and compliance services are associated with our customers’ need for multi-year environmental improvement and sustainability initiatives, whether driven by regulatory requirements, by power generation customers initiatives, by our proactive engagement or by consumer expectations and standards. Byproduct sales support 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 raw material substitutes.
Maintenance and Technical Services. Our Maintenance and Technical Services segment includes fossil services and, from and after May 2017 when Allied was created, nuclear services. Fossil services are the recurring and mission-critical management of coal ash and the routine maintenance, outage services and staffing solutions for coal-fired power generation facilities. Nuclear services, which we market under the Allied Power brand name, include routine maintenance, outage services, facility maintenance, and staffing solutions for nuclear power generation facilities. The Maintenance and Technical Services segment offerings are most closely associated with the ongoing operations of power plants, whether in the form of daily environmental management or required maintenance services (typically during planned outages).
Initial Public Offering
On June 18, 2018, we completed the IPO of 7,352,941 shares of the Company’s common stock, par value $0.01 per share. The net proceeds of the IPO to us prior to offering expenses were approximately $59.2 million. We used a portion of the IPO proceeds to pay off approximately $40.0 million of the borrowings outstanding under the Term Loan, and any remaining net proceeds were used to pay offering expenses or for general corporate purposes.
How We Evaluate Our Operations
We use a variety of financial and operational metrics to assess the performance of our operations, including:
|
|
|
|
•
|
Adjusted EBITDA Margin.
|
Revenue
We analyze our revenue by comparing actual revenue to our internal projections for a given period and to prior periods to assess our performance. We believe that revenue is a meaningful indicator of the demand and pricing for our services.
Gross Profit
We analyze our gross profit, which we define as revenue less cost of sales, to measure our financial performance. We believe gross profit is a meaningful metric because it provides insight on financial performance of our revenue streams without consideration of Company overhead. When analyzing gross profit, we compare actual gross profit to our internal projections for a given period and to prior periods to assess our performance.
Operating Income
We analyze our operating income, which we define as revenue less cost of sales and general and administrative expenses, to measure our financial performance. We believe operating income is a meaningful metric because it provides insight on profitability and operating performance based on the cost basis of our assets. We also compare operating income to our internal projections for a given period and to prior periods.
Adjusted EBITDA and Adjusted EBITDA Margin
We view Adjusted EBITDA and Adjusted EBITDA Margin, which are non-GAAP financial measures, as an important indicator 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) income before interest expense, income taxes, depreciation and amortization, equity-based compensation, non-recurring legal costs and expenses and start-up costs, the Brickhaven contract deemed termination revenue reversal and transaction-related expenses and other items. Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total revenue. See “—Non-GAAP Financial Measures” below for more information and a reconciliation of Adjusted EBITDA to net (loss) income, 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 into and to capture new business opportunities across our platform.
Seasonality of Business
Based on historical trends, we expect our operating results to vary seasonally. Nuclear power generators perform turnaround and outages in the off-peak months when demand is lower and generation capacity is less constrained. As a result, our nuclear services offerings may have higher revenue volume in the spring and fall months. Variations in normal weather patterns can also cause changes in the consumption of energy, which may influence the demand and timing of associated services for our fossil services offerings. 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. Our byproduct sales are also impacted during winter months when the utilization of cement and cement products is generally lower.
Project-Based Nature of Environmental Remediation Mandates
We believe there is a significant pipeline of coal ash ponds and landfills that will require remediation and/or closure in the future. Due to their scale and complexity, these environmental remediation projects are typically completed over longer periods. As a result, our revenue from these projects can fluctuate over time. Some of our revenue from projects is recognized over time using the cost-to-cost input method of accounting for GAAP purposes, based primarily on contract costs incurred to date compared to total estimated contract costs. This method is the most accurate measure of our contract performance because it depicts the company’s performance in transferring control of goods or services promised to customers according to a reasonable measure of progress toward complete satisfaction of the performance obligation. The timing of revenue recorded for financial reporting purposes may differ from actual billings to customers, sometimes resulting in costs and billing in excess of actual revenue. Because of the risks in estimating gross profit margins for long-term jobs, actual results may differ from these estimates.
Byproduct Recycling Market Dynamics
There is a growing demand for recycled coal ash across a variety of applications driven by market forces and governmental regulations creating the need to dispose of coal ash in an environmentally sensitive manner. Pricing of byproduct sales is 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 byproduct 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 is the result of not only regulatory requirements and consumer pressure, but also the industry’s increasing focus on environmental stewardship. Continued increases in spending on environmental liability management by our customers should result in increased demand for services across our platform
Cost Management and Capital Investment Efficiency
Our main operating costs consist of labor, material and equipment costs and equipment maintenance. We maintain a 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, which are typically associated with specific contract requirements. Furthermore, we strive to extend the useful life of our equipment through the application of a well-planned routine maintenance program.
How We Generate Revenue
The Environmental Solutions segment generates revenue through our remediation and compliance services, as well as our byproduct sales. Our remediation and compliance services primarily consist of designing, constructing, managing, remediating and closing ash ponds and landfills on customer-owned sites. Our byproduct sales offerings include the recycling of recurring and contracted volumes of coal-fired power generation waste byproducts, such as bottom ash, fly ash and gypsum byproduct, each of which can be used for various industrial purposes. More than 90% of our services work is structured as time and materials, 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.
The Maintenance and Technical Services segment generates revenue through our fossil services and nuclear services offerings. Maintenance and Technical Services segment offerings are most closely associated with the ongoing operations of power plants, whether in the form of daily environmental management or required maintenance services (typically during planned outages). Our fossil services offerings focus on recurring and mission-critical management of coal ash and routine maintenance, outage services and staffing solutions for coal-fired power generation facilities to fulfill the environmental service need of our customers in handling their waste byproducts. Over the last five years, our renewal rate for fossil services contracts has been approximately 90%. Our nuclear services operations, which we market under the Allied Power brand name, consist of a broad platform of mission-critical professional, technical and craft services spanning the entire asset life cycle of a nuclear power generator. The services are performed on the customer’s site and the contract terms typically range from three to five years. Revenue is billed and paid during the periods of time work is being executed. This combination of the maintenance and environmental-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.
Factors Impacting the Comparability of Results of Operations
Public Company Costs
We have incurred, and expect to continue to incur, incremental recurring and certain non-recurring costs related to our transition to a publicly-traded and taxable corporation, including the costs of the IPO and the costs associated with the initial implementation and testing of our Sarbanes-Oxley Section 404 internal controls. We also have incurred, and expect to incur, additional significant and recurring expenses as a publicly-traded company, including costs associated with the employment of additional personnel, compliance under the Exchange Act, annual and quarterly reports to security holders, registrar and transfer agent fees, national stock exchange fees, audit fees, incremental director and officer liability insurance costs, and director and officer compensation
Income Taxes
Charah Solutions is a “C” corporation under the Internal Revenue Code of 1986, as amended, and, as a result, is subject to U.S. federal, state and local income taxes. In connection with the IPO, Charah and Allied, which previously were flow-through entities for income tax purposes and were indirect subsidiaries of two partnerships, Charah Management and Allied Power Holdings, respectively, became indirect subsidiaries of Charah Solutions. Prior to the contribution, Charah and Allied passed through their taxable income to the owners of the partnerships for U.S. federal and other state and local income tax purposes and, thus, were not subject to U.S. federal income taxes or other state or local income taxes, except for franchise tax at the state level (at less than 1% of modified pre-tax earnings). Accordingly, the financial data attributable to Charah and Allied prior to the contribution on June 18, 2018 contains no provision for U.S. federal income taxes or income taxes in any state or locality other than franchise taxes.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The table below sets forth our selected operating data for the years ended December 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
Successor
|
2019
|
|
2018
|
|
$
|
|
%
|
|
|
(in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Environmental Solutions
|
$
|
180,396
|
|
|
$
|
343,105
|
|
|
$
|
(162,709
|
)
|
|
(47.4
|
)%
|
|
Maintenance and Technical Services
|
374,472
|
|
|
397,357
|
|
|
(22,885
|
)
|
|
(5.8
|
)%
|
|
Total revenue
|
554,868
|
|
|
740,462
|
|
|
(185,594
|
)
|
|
(25.1
|
)%
|
|
Cost of sales
|
514,492
|
|
|
642,734
|
|
|
(128,242
|
)
|
|
(20.0
|
)%
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
Environmental Solutions
|
11,486
|
|
|
69,464
|
|
|
(57,978
|
)
|
|
(83.5
|
)%
|
|
Maintenance and Technical Services
|
28,890
|
|
|
28,264
|
|
|
626
|
|
|
2.2
|
%
|
|
Total gross profit
|
40,376
|
|
|
97,728
|
|
|
(57,352
|
)
|
|
(58.7
|
)%
|
|
General and administrative expenses
|
60,870
|
|
|
76,752
|
|
|
(15,882
|
)
|
|
(20.7
|
)%
|
|
Operating (loss) income
|
(20,494
|
)
|
|
20,976
|
|
|
(41,470
|
)
|
|
(197.7
|
)%
|
|
Interest expense, net
|
(16,835
|
)
|
|
(32,226
|
)
|
|
15,391
|
|
|
(47.8
|
)%
|
|
Income from equity method investment
|
2,295
|
|
|
2,407
|
|
|
(112
|
)
|
|
(4.7
|
)%
|
|
Loss before taxes
|
(35,034
|
)
|
|
(8,843
|
)
|
|
(26,191
|
)
|
|
296.2
|
%
|
|
Income tax expense (benefit)
|
4,190
|
|
|
(2,427
|
)
|
|
6,617
|
|
|
(272.6
|
)%
|
|
Net loss
|
(39,224
|
)
|
|
(6,416
|
)
|
|
(32,808
|
)
|
|
511.3
|
%
|
|
Less income attributable to non-controlling interest
|
2,834
|
|
|
2,486
|
|
|
348
|
|
|
14.0
|
%
|
|
Net loss attributable to Charah Solutions, Inc.
|
$
|
(42,058
|
)
|
|
$
|
(8,902
|
)
|
|
$
|
(33,156
|
)
|
|
372.5
|
%
|
Overview of Financial Results
Delays in new work awards resulting from increased project scope and complexity, the $10.0 million revenue reversal associated with the Brickhaven contract payment (as discussed below) and unanticipated cost increases at three remediation sites led to our disappointing financial performance for the year ended December 31, 2019. As a result of long sales cycles, driven by the increase in the size, scope and complexity of remediation and compliance projects that we are bidding on, the volume of new awards in 2018 was not sufficient to offset the impact of projects completed during 2018 and 2019. The volume of new awards in 2019 on a project revenue basis, increased over those awarded in 2018. Due to project timing, however, the significant majority of revenue contributions from these new awards will be recognized in 2020 and beyond. As remediation and compliance projects have gotten larger and more complex, utility customers are seeking regulatory clarity as well as cost recovery through rate relief. Though this delay adversely impacted our 2019 results, we expect demand for our remediation and compliance services to grow as more than 1,000 ash ponds and landfills still require EPA-mandated closure or remediation.
On May 29, 2019, the ash remediation contract for our Brickhaven location was deemed terminated, consistent with our previously communicated expectations. Per the terms of the Brickhaven contract, the customer was obligated to pay us for the recovery of project development costs, expected site closure costs, and post-maintenance costs upon deemed termination. After negotiations with the customer, the amount of the recovered costs was $80 million and the payment of these costs was received during the year ended December 31, 2019.
We continue to believe our market opportunities remain strong and are growing as we have won approximately $583 million in new awards during the year ended December 31, 2019 as compared to $106 million in 2018. While the projects were awarded later than anticipated, as previously disclosed, our success rate in winning awards for the year ended December 31, 2019 on a project revenue basis was ahead of the year ended December 31, 2018. Compared to last year, projects awarded in 2018 were considerably smaller in size on the basis of revenue, which negatively impacted our financial results in 2019. We believe we are well-positioned to capture a significant portion of a large and growing addressable market, although the timing of future awards is difficult to determine. Furthermore, we believe recent regulatory developments in Illinois, Indiana, Kentucky, Missouri, North Carolina, Oklahoma, South Carolina and Virginia will have a positive impact on our business operations as states are becoming more prescriptive in their requirements to remediate ash ponds. Finally, customer interest in our MP618TM thermal beneficiation technology continues to be strong, and contracts with utility customers are currently under discussion.
Our primary sources of liquidity and capital resources are cash flows generated by operating activities and borrowings under the Credit Facility (as defined below). In part 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 experienced unexpected contract initiation delays and project completion delays, particularly in 2019, which have adversely affected our revenue and overall liquidity. Our lengthy and complex projects require us to expend large sums of working capital, and delays in payment receipts, project commencement or project completion can adversely affect our financial position and the cash flows that normally would fund our expenditures.
See “—Liquidity and Capital Resources-Our Debt Agreements—Existing Credit Facility” below for more information about the Credit Facility and the amendments thereto.
Revenue. Revenue decreased $185.6 million, or 25.1%, for the year ended December 31, 2019, to $554.9 million as compared to $740.5 million for the year ended December 31, 2018, driven primarily by a decrease in revenue in the Environmental Solutions segment. The change in revenue by segment was as follows:
Environmental Solutions Revenue. Environmental Solutions segment revenue decreased $162.7 million, or 47.4%, for the year ended December 31, 2019, to $180.4 million as compared to $343.1 million for the year ended December 31, 2018. The decrease in revenue was primarily attributable to remediation and compliance project completions including the completion of the Brickhaven project resulting from the deemed termination, the $10.0 million revenue reversal associated with the Brickhaven contract payment, and a decrease in the value of projects won in 2018, partially offset by an overall net increase in revenue from our byproduct sales.
Maintenance and Technical Services Revenue. Maintenance and Technical Services segment revenue decreased $22.9 million, or 5.8%, for the year ended December 31, 2019, to $374.5 million as compared to $397.4 million for the year ended December 31, 2018. The decrease in revenue was primarily attributable to the reduced scope of nuclear outages services and fewer outages in the year ended December 31, 2019, partially offset by an overall net increase in revenue from our fossil services offerings.
Gross Profit. Gross profit decreased $57.4 million, or 58.7%, for the year ended December 31, 2019 to $40.4 million as compared to $97.7 million for the year ended December 31, 2018, driven primarily by a decrease in revenue. As a percentage of revenue, gross profit was 7.3% and 13.2% for the year ended December 31, 2019 and 2018, respectively. The change in gross profit by segment was as follows:
Environmental Solutions Gross Profit. Gross profit for our Environmental Solutions segment decreased $58.0 million, or 83.5%, for the year ended December 31, 2019, to $11.5 million as compared to $69.5 million for the year ended December 31, 2018. The decrease in gross profit was primarily driven by remediation and compliance project completions, the $10.0 million revenue reversal associated with the deemed termination of the Brickhaven contract, adverse weather-related impacts and site-specific issues at three remediation sites which resulted in higher than expected costs.
Maintenance and Technical Services Gross Profit. Gross profit for our Maintenance and Technical Services segment increased $0.6 million, or 2.2%, for the year ended December 31, 2019, to $28.9 million as compared to $28.3 million for the year ended December 31, 2018. The increase in gross profit overall was primarily attributable to a net increase in gross profit from our fossil services offerings.
General and Administrative Expenses. General and administrative expenses decreased $15.9 million, or 20.7%, for the year ended December 31, 2019, to $60.9 million as compared to $76.8 million for the year ended December 31, 2018. The decrease was primarily attributable to a reduction in non-recurring legal costs and expenses, including $20.0 million in reserves incurred in the year ended December 31, 2018, related to legal proceedings during that period, non-recurring start-up costs and equity-based compensation, partially offset by increased expenses due to the acquisition of SCB Materials International, Inc. and affiliated entities (“SCB”) in March 2018, increased transaction-related expenses during the year ended December 31, 2019 associated with an amendment to the Credit Facility and a decrease in amortization expense during the year ended December 31, 2019 related to our purchase option liability.
Interest Expense, Net. Interest expense, net decreased $15.4 million, or 47.8%, for the year ended December 31, 2019, to $16.8 million as compared to $32.2 million for the year ended December 31, 2018. The decrease was primarily attributable to a favorable comparison as $12.5 million of costs were incurred in conjunction with the refinancing of our debt during the year ended December 31, 2018, consisting of a $10.4 million non-cash write-off of debt issuance costs and a $2.1 million prepayment penalty, and a reduction in the debt balances using cash received from the Brickhaven deemed termination payment received during the year ended December 31, 2019. These decreases were partially offset by an increase in the mark-to-market expense associated with the change in the fair value of our interest rate swap.
Income from Equity Method Investment. Income from equity method investment decreased $0.1 million, or 4.7%, for the year ended December 31, 2019, to $2.3 million as compared to $2.4 million for the year ended December 31, 2018. The slight decrease period-over-period was primarily attributable to a reduction in ash volumes generated by the utility and available for sale by us.
Income tax expense (benefit) Income tax expense increased by $6.6 million for the year ended December 31, 2019, to income tax expense of $4.2 million as compared to an income tax benefit of $2.4 million during the year ended December 31, 2018. Based on the available evidence as of December 31, 2019, we were not able to conclude it was more likely than not certain deferred tax assets will be realized. Therefore, a valuation allowance of $12.9 million was recorded against our deferred tax assets. The valuation allowance was partially offset by an income tax benefit associated with the increase in our loss before taxes.
Net Loss. Net loss increased $32.8 million for the year ended December 31, 2019, to a loss of $39.2 million as compared to $6.4 million for the year ended December 31, 2018. The increase was primarily attributable to lower gross profit resulting from lower revenue, and an increase in income tax expense, partially offset by the decrease in general and administrative expenses and interest expense, net as discussed above.
Consolidated Balance Sheet
The following table is a summary of our overall financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Change
|
|
|
2019
|
|
2018
|
|
$
|
|
|
(in thousands)
|
|
|
|
Total assets
|
$
|
355,756
|
|
|
$
|
458,901
|
|
|
$
|
(103,145
|
)
|
|
Total liabilities
|
302,483
|
|
|
365,511
|
|
|
(63,028
|
)
|
|
Total stockholders' equity
|
53,273
|
|
|
93,390
|
|
|
(40,117
|
)
|
Assets
Total assets decreased $103.1 million driven primarily by a decrease in contract assets from the $80.0 million Brickhaven deemed termination payment received during 2019, a $11.0 million decrease in inventory from improved inventory management, a $8.4 million decrease in intangible assets, net due to amortization, and a $3.6 million decrease in property and equipment, net as depreciation expense and disposal of assets exceeded new additions.
Liabilities
Total liabilities decreased $63.0 million driven by a $49.5 million net decrease in notes payable and amounts owed under the Revolving Loan (as defined below) as proceeds from the Brickhaven deemed termination payment were used to pay down our debt balances, a $10.9 million decrease in our asset retirement obligation associated with our maintenance and monitoring requirement payments and a $2.9 million decrease in our purchase option liability from amortization.
Stockholders' Equity
Total stockholders' equity decreased $40.1 million driven primarily by the $39.2 million net loss, a $0.4 million decrease as a result of the adoption of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, a decrease of $2.9 million related to distributions to our non-controlling interest, partially offset by an increase of $2.5 million in share-based compensation.
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash flows generated by operating activities and borrowings under the Credit Facility. In part 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 unexpected contract initiation delays and project completion delays which have adversely affected our revenue and overall liquidity. Our lengthy and complex projects require us to expend large sums of working capital, and delays in payment receipts, project commencement or project completion can adversely affect our financial position and the cash flows that normally would fund our expenditures.
As of December 31, 2019, we had total liquidity of approximately $28.9 million, comprised of $4.9 million of cash on hand, $19.0 million availability under the Revolving Loan and $5.0 million of delayed draw availability under the Term Loan.
Cash Flows
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
Successor
|
2019
|
|
2018
|
|
$
|
|
|
(in thousands)
|
|
Cash flows provided by (used in) operating activities
|
$
|
68,653
|
|
|
$
|
(13,633
|
)
|
|
$
|
82,286
|
|
|
Cash flows used in investing activities
|
(15,759
|
)
|
|
(40,368
|
)
|
|
$
|
24,609
|
|
|
Cash flows (used in) provided by financing activities
|
(53,666
|
)
|
|
28,637
|
|
|
$
|
(82,303
|
)
|
Operating Activities
Net cash provided by (used in) operating activities increased $82.3 million for the year ended December 31, 2019, to $68.7 million of net cash provided by operating activities as compared to $13.6 million of net cash used in operating activities for the year ended December 31, 2018. The change in cash flows provided by (used in) operating activities was primarily attributable to the $80.0 million Brickhaven deemed termination payment received during the year ended December 31, 2019, a decrease of $10.8 million in cash paid for interest due to the debt refinancing during the year ended December 31, 2018, a decrease in cash paid for income taxes during the year ended December 31, 2019 of $5 million and improvements in working capital items from the year-over-year change in inventory of $16.8 million. These decreases were partially offset by an increase in net loss of $33.2 million.
Investing Activities
Net cash used in investing activities decreased $24.6 million for the year ended December 31, 2019, to $15.8 million as compared to $40.4 million for the year ended December 31, 2018. The change in cash flows used in investing activities was primarily attributable to $20.0 million used for business acquisitions during the year ended December 31, 2018, net of cash received, and a decrease in capital expenditures, net of proceeds, of $4.6 million.
Financing Activities
Net cash (used in) provided by financing activities increased $82.3 million for the year ended December 31, 2019, to $54 million of net cash used in financing activities as compared to $28.6 million of net cash provided by financing activities for the year ended December 31, 2018. The change in cash flows (used in) provided by financing activities was primarily attributable to the $59.2 million in proceeds received during the year ended December 31, 2018 from the issuance of common stock resulting from our IPO. In addition, there was a net increase of $30.5 million in debt related payments during the year ended December 31, 2019. These decreases were partially offset by a $7.5 million reduction in debt and IPO related costs as $1.4 million was paid during the year ended December 31, 2019 as compared to $8.9 million paid during the year ended December 31, 2018.
Working Capital
Our working capital, which we define as total current assets less total current liabilities, totaled a working capital deficit of $16.1 million and working capital of $74.1 million as of December 31, 2019 and 2018, respectively. This decrease in net working capital for the year ended December 31, 2019 was primarily due to decreases in contract assets from the Brickhaven deemed termination, decreases in inventory resulting from the timing of activities between periods and improved inventory management and increases in notes payable, current maturities, related to the Third Amendment (as discussed below).
Our Debt Agreements
Former Credit Agreement
On October 25, 2017, we entered into a credit agreement (the “2017 Credit Agreement”) by and among us, the lenders party thereto from time to time and Regions Bank, as administrative agent. The 2017 Credit Agreement provided for a revolving credit facility (the “2017 Credit Facility”) with a principal amount of up to $45.0 million. The 2017 Credit Facility permitted extensions of credit up to the lesser of $45.0 million and a borrowing base that was calculated by us based upon a percentage of the value of our eligible accounts receivable and eligible inventory and approved by the administrative agent.
The interest rates per annum applicable to the loans under the 2017 Credit Facility were based on a fluctuating rate of interest measured by reference to, at our election, either (i) an adjusted London Inter-bank Offered Rate (“LIBOR”) plus a 2.00% borrowing margin or (ii) an alternative base rate plus a 1.00% borrowing margin. Customary fees were payable in respect of the 2017 Credit Facility and included (a) commitment fees in an amount equal to 0.50% of the daily unused portions of the 2017 Credit Facility and (b) a 2.00% fee on outstanding letters of credit. The 2017 Credit Facility contained various representations and warranties and restrictive covenants. If excess availability under the 2017 Credit Facility fell below the greater of 15% of the loan cap amount or $6.75 million, we were required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The 2017 Credit Facility did not otherwise contain financial maintenance covenants.
The 2017 Credit Facility had a scheduled maturity date of October 25, 2022; however, all amounts outstanding were repaid in September 2018 as a result of the refinancing discussed below.
Former CS Term Loan
On October 25, 2017, we entered into a credit agreement by and among us, the lenders party thereto from time to time and Credit Suisse AG, Cayman Islands Branch, as administrative agent, providing for a term loan (the “2017 CS Term Loan”) with an initial commitment of $250.0 million. The 2017 CS Term Loan provided that we had the right at any time to request incremental term loans up to the greater of (i) the excess, if any, of $25.0 million over the aggregate amount of all incremental 2017 Credit Facility commitments and incremental 2017 CS Term Loan commitments previously utilized and (ii) such other
amount so long as such amount at such time could be incurred without causing the pro forma consolidated secured leverage ratio (as defined in the credit agreement governing the 2017 CS Term Loan) to exceed 3.25 to 1.00.
The interest rates per annum applicable to the loans under the 2017 CS Term Loan were based on a fluctuating rate of interest measured by reference to, at our election, either (i) LIBOR plus a 6.25% borrowing margin or (ii) an alternative base rate plus a 5.25% borrowing margin. The 2017 CS Term Loan contained various customary representations and warranties and restrictive covenants. In addition, we were required to comply with a maximum senior secured net leverage ratio of 5.00 to 1.00 beginning March 31, 2018, decreasing to 4.50 to 1.00 as of March 31, 2019, and further decreasing to 4.00 to 1.00 as of March 31, 2020 and thereafter. The principal amount of the 2017 CS Term Loan amortized at a rate of 7.5% per annum with all remaining outstanding amounts under the 2017 CS Term Loan due on the 2017 CS Term Loan maturity date. We received net proceeds from the IPO of $59.2 million prior to deducting offering expenses. We used these net proceeds to pay offering expenses and to pay off $40.0 million of the borrowings outstanding under the 2017 CS Term Loan, which would otherwise have been required in June 2020.
The 2017 CS Term Loan had a scheduled maturity date of October 25, 2024; however, all amounts outstanding were repaid in September 2018 as a result of the refinancing discussed below.
Existing 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 includes:
|
|
|
|
•
|
A revolving loan not to exceed $50.0 million (the “Revolving Loan”);
|
|
|
|
|
•
|
A term loan of $205.0 million (the “Closing Date Term Loan”); and
|
|
|
|
|
•
|
A commitment to loan up to a further $25.0 million, which expires 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”).
|
After the Third Amendment all amounts associated with the Revolving Loan and the Term Loan under the Credit Facility will mature in July 2022, as discussed more fully below. The interest rates per annum applicable to the loans under the Credit Facility are 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 are added to the interest rate based upon our consolidated net leverage ratio (as defined in the Credit Facility). Customary fees are payable in respect of the Credit Facility and include (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 are secured by substantially all of the assets of the Company.
The Credit Facility contains various customary representations and warranties, and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of us and our restricted subsidiaries to grant liens, incur indebtedness (including guarantees), make investments, engage in mergers and acquisitions, make dispositions of assets, make restricted payments or change the nature of our or our subsidiaries' business. The Credit Facility contains financial covenants related to the consolidated net leverage ratio and the fixed charge coverage ratio (as defined in the Credit Facility), which have been modified as described below.
The Credit Facility also contains certain affirmative covenants, including reporting requirements, such as the delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
The Credit Facility includes customary events of default, including non-payment of principal, interest or fees as they come due, violation of covenants, inaccuracy of representations or warranties, cross-default to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control.
The Revolving Loan provides a principal amount of up to $50.0 million, reduced by outstanding letters of credit. As of December 31, 2019, $19.0 million was outstanding on the Revolving Loan and $12.0 million in letters of credit were outstanding.
But for Amendment No. 2 to Credit Agreement and Waiver (the “Second Amendment”), as of June 30, 2019, we would not have been in compliance with the requirement to maintain a consolidated net leverage ratio of 3.75 to 1.00 under the Credit Facility. On August 13, 2019, we entered into the Second Amendment, pursuant to which, among other things, the required lenders agreed to waive such non-compliance.
In addition, pursuant to the terms of the Second Amendment, the Credit Facility was amended to revise the required financial covenant ratios, which have been modified as described below. As consideration for these accommodations, we agreed that amounts borrowed pursuant to the Delayed Draw Commitment would not exceed $15.0 million at any one time outstanding
(without reducing the overall Delayed Draw Commitment amount). Further, the margin of interest charged on all outstanding loans was increased to 4.00% for loans based on LIBOR and 3.00% for loans based on the alternative base rate. The Second Amendment revised the amount of (i) the commitment fees to 0.35% at all times for the unused portions of the Credit Facility and (ii) fees on outstanding letters of credit to 3.35% at all times. The Second Amendment also added a requirement to make two additional scheduled prepayments of outstanding loans under the Credit Facility, including a payment of $50.0 million on or before September 13, 2019 and an additional payment of $40.0 million on or before March 31, 2020. The $50.0 million payment was made before September 13, 2019, using proceeds of the Brickhaven deemed termination payment.
The Second Amendment also included revisions to the restrictive covenants, including removing certain exceptions to the restrictions on our ability to make acquisitions, to make investments and to make dividends or other distributions. After giving effect to the Second Amendment, we will not be permitted to make any distributions or dividends to our stockholders without the consent of the required lenders.
After the end of our fiscal year, ended December 31, 2019, in March 2020, the Company entered into Amendment No. 3 to Credit Agreement (the “Third Amendment”).
Pursuant to the terms of the Third Amendment, the Credit Facility was amended to waive the mandatory $40.0 million prepayment due on or before March 31, 2020, and to revise the required financial covenant ratios such that, after giving effect to the Third Amendment, we are not required to comply with any financial covenants through December 30, 2020. After December 30, 2020, we will be required to comply with a maximum consolidated net leverage ratio of 6.50 to 1.00 from December 31, 2020 through June 29, 2021, decreasing to 6.00 to 1.00 from June 30, 2021 through December 30, 2021, and to 3.50 to 1.00 as of December 31, 2021 and thereafter. After giving effect to the Third Amendment, we will also be required to comply with a minimum fixed charge coverage ratio of 1.00 to 1.00 as of December 31, 2020, increasing to 1.20 to 1.00 as of March 31, 2021 and thereafter. In the event that we are unable to comply in the future with such financial covenants upon delivery of our financial statements pursuant to the terms of the Credit Facility, an Event of Default (as defined in the Credit Facility) will have occurred and the Administrative Agent can then, following a specified cure period, declare the unpaid principal amount of all outstanding loans, all interest accrued and unpaid thereon, and all other amounts payable to be immediately due and payable by the Company.
The Third Amendment increased the maximum amount available to be borrowed pursuant to the Delayed Draw Commitment from $15.0 million to $25.0 million, subject to certain quarterly amortization payments. The Third Amendment also included revisions to the restrictive covenants, including increasing the amount of indebtedness that the Company may incur in respect of certain capitalized leases from $50.0 million to $75.0 million.
Under the Third Amendment, the Company has agreed to make monthly amortization payments in respect of term loans beginning in April 2020, and to move the maturity date for all loans under the Credit Agreement to July 31, 2022 (the “Maturity Date”). In addition, if at any time after August 13, 2019, the outstanding principal amount of the Delayed Draw Term Loans exceeds $10.0 million, we will incur additional interest at a rate equal to 10.0% per annum on all daily average amounts exceeding $10.0 million payable at March 31, 2020 and the Maturity Date. Further, the Third Amendment requires mandatory prepayments of revolving loans with any cash held by the Company in excess of $10.0 million, which excludes the amount of proceeds received in respect of the Preferred Stock Offering (as defined below) to the extent such funds are used for liquidity and general corporate purposes. The Company has also agreed to an increase of four percent (4%) to the interest rate applicable to the Closing Date Term Loan that will be compounded monthly and paid in kind by adding such portion to the outstanding principal amount.
As a condition to entering into the Second Amendment, we are required to pay the Administrative Agent an amendment fee (the “Second Amendment Fee”) in an amount equal to 1.50% of the total credit exposure under the Credit Agreement, immediately prior to the effectiveness of the Second Amendment. Of the Second Amendment Fee, 0.50% was due and paid on October 15, 2019, and 1.00% of such Second Amendment Fee will become due and payable on August 16, 2020 if the facility has not been terminated on or prior to August 15, 2020. We are also required to pay the Administrative Agent an amendment fee associated with the Third Amendment (the “Third Amendment Fee”) in an amount equal to 0.20% of the total credit exposure under the Credit Agreement, immediately prior to the effectiveness of the Third Amendment, with such Third Amendment Fee being due and payable on June 30, 2020. Finally, we will also pay an additional fee with respect to the Third Amendment in the amount of $2.0 million with such fee being due and payable on the Maturity Date; provided that if the facility is terminated by December 31, 2020, 50% of this fee shall be waived.
As a condition to the Third Amendment, the Company entered into an agreement with an investment fund affiliated with Bernhard Capital Partners Management, LP ("BCP " or the “Holder”) to sell 26,000 shares of Series A Preferred Stock, par value $0.01 (the “Preferred Stock”) for approximately $25.2 million in a private placement (the “Preferred Stock Offering”). The Preferred Stock will have an initial liquidation preference of $1,000 per share and will pay 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’s intention is to pay dividends in kind for the foreseeable future. Proceeds from the Preferred Stock Offering will be used for liquidity and general corporate purposes.
Following the three-month anniversary of the date of issuance, the Preferred Stock may be converted at the option of the holders into shares of the Company’s common stock at a conversion price of $2.77 per share (the “Conversion Price”), which represents a 30% premium to the 20-day volume-weighted average price ended March 4, 2020. Following the third anniversary of the date of issuance, the Company may, subject to certain requirements, give notice to the holders of the Preferred Stock of the Company’s intent to mandatorily convert the Preferred Stock, and the holders of the Preferred Stock will have the option to either agree to such conversion or force the Company to redeem the Preferred Stock for cash. Following the seven-year anniversary of the date of issuance, the holders shall have the right, subject to applicable law, to require the Company at any time to redeem the Preferred Stock, in whole or in part, from any source of funds legally available for such purpose.
In connection with certain change of control transactions, the holders of the Preferred Stock will be entitled to cause the Company to repurchase the Preferred Stock for cash in an amount equal to the greater of (i) the liquidation preference plus accrued and unpaid dividends (plus, a make-whole premium equal to the net present value of dividend payments through the third anniversary of the issue date, for any transaction occurring prior to such date, subject to certain limitations) and (ii) the amount each holder would be entitled to receive if the Preferred Stock were converted prior to such transaction. The Company will have the right to redeem the Preferred Stock starting on the third anniversary of the issue date at the greater of (i) the closing sale price multiplied by the number of shares of common stock issuable upon conversion and (ii) certain premiums to the liquidation preference that will decrease each year following the third anniversary of the issuance date.
From April 5, 2020, until conversion, the holders of the Preferred Stock will vote together with Company’s common stock on an as-converted basis and will also have rights to vote on certain matters impacting the Preferred Stock. After April 5, 2020, the holders of the Preferred Stock will have the right to either elect one member to the Company’s board of directors or appoint one non-voting board observer.
Equipment Financing Facilities
We have entered into various equipment financing arrangements to finance the acquisition of certain equipment (the “Equipment Financing Facilities”). As of December 31, 2019, we had $36.3 million of equipment notes outstanding. Each of the Equipment Financing Facilities include non-financial covenants, and, as of December 31, 2019, we were in compliance with all such covenants.
Contractual and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments as of December 31, 2019 and reflects the waiver of the mandatory $40.0 million prepayment due on or before March 31, 2020 and the new payment terms noted in the Third Amendment:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
|
(in thousands)
|
|
Term Loan
|
$
|
152,187
|
|
|
$
|
18,647
|
|
|
$
|
15,448
|
|
|
$
|
118,092
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Revolving Loan
|
19,000
|
|
|
—
|
|
|
—
|
|
|
19,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Equipment Financing Facilities
|
36,319
|
|
|
15,720
|
|
|
6,108
|
|
|
6,424
|
|
|
5,217
|
|
|
2,472
|
|
|
378
|
|
|
Commercial insurance financing agreement
|
506
|
|
|
506
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Interest on Outstanding Loans
|
22,253
|
|
|
9,480
|
|
|
8,066
|
|
|
4,313
|
|
|
301
|
|
|
89
|
|
|
4
|
|
|
Operating Lease Obligations(1)
|
21,008
|
|
|
7,396
|
|
|
4,734
|
|
|
3,965
|
|
|
3,426
|
|
|
1,389
|
|
|
98
|
|
|
Credit Facility Amendment fees(2)
|
1,439
|
|
|
439
|
|
|
—
|
|
|
1,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Minimum Royalty and purchase obligations
|
54,634
|
|
|
9,948
|
|
|
11,721
|
|
|
11,821
|
|
|
11,196
|
|
|
9,218
|
|
|
730
|
|
|
Total(3)
|
$
|
307,346
|
|
|
$
|
62,136
|
|
|
$
|
46,077
|
|
|
$
|
164,615
|
|
|
$
|
20,140
|
|
|
$
|
13,168
|
|
|
$
|
1,210
|
|
|
|
|
|
(1)
|
We lease equipment and office facilities under non-cancellable operating leases.
|
|
|
|
|
(2)
|
Represents minimum fees required that are not contingent upon potential changes to the Maturity Date.
|
|
|
|
|
(3)
|
Contingent payments for acquisitions and the asset retirement obligation are not included in the table above because the timing of such payments is uncertain. There are no uncertain tax positions.
|
Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA and Adjusted EBITDA margin are not financial measures determined in accordance with GAAP.
We define Adjusted EBITDA as net (loss) income before interest expense, income taxes, depreciation and amortization, equity-based compensation, non-recurring legal costs and expenses and start-up costs, the Brickhaven contract deemed termination
revenue reversal, and transaction-related expenses and other items. Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total revenue.
We believe Adjusted EBITDA and Adjusted EBITDA margin are useful performance measures 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 exclude the items listed above from net (loss) income 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) income 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) income, our most directly comparable financial measure calculated and presented in accordance with GAAP, along with our Adjusted EBITDA margin.
The successor columns below represent the consolidated financial information of Charah Solutions for the years ended December 31, 2019 and 2018 and the combined financial information of Charah and Allied for the period from January 13, 2017 through December 31, 2017, and the predecessor column below represents the financial information of Charah for the period from January 1, 2017, through January 12, 2017, each as reflected in our audited financial statements included elsewhere herein.
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|
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|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
|
Period from January 13, 2017 through December 31, 2017
|
|
|
Period from January 1, 2017 through January 12, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Net (loss) income attributable to Charah Solutions, Inc.
|
$
|
(42,058
|
)
|
|
$
|
(8,902
|
)
|
|
$
|
18,316
|
|
|
|
$
|
(5,528
|
)
|
|
Interest expense, net
|
16,835
|
|
|
32,226
|
|
|
14,146
|
|
|
|
4,181
|
|
|
Income tax expense (benefit)
|
4,190
|
|
|
(2,427
|
)
|
|
—
|
|
|
|
—
|
|
|
Depreciation and amortization
|
23,437
|
|
|
42,308
|
|
|
25,719
|
|
|
|
763
|
|
|
Elimination of certain non-recurring legal costs and expenses(1)
|
(2,231
|
)
|
|
25,428
|
|
|
8,650
|
|
|
|
—
|
|
|
Elimination of certain non-recurring start-up costs(2)
|
—
|
|
|
1,480
|
|
|
6,167
|
|
|
|
—
|
|
|
Equity-based compensation
|
2,513
|
|
|
4,127
|
|
|
2,429
|
|
|
|
—
|
|
|
Brickhaven contract deemed termination revenue reversal
|
10,000
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Transaction related expenses and other items(3)
|
5,454
|
|
|
4,532
|
|
|
1,003
|
|
|
|
162
|
|
|
Adjusted EBITDA
|
$
|
18,140
|
|
|
$
|
98,772
|
|
|
$
|
76,430
|
|
|
|
$
|
(422
|
)
|
|
Adjusted EBITDA margin(4)
|
3.3%
|
|
13.3%
|
|
18.1%
|
|
|
(4.6)%
|
|
|
|
|
(1)
|
Represents non-recurring legal costs and expenses, which amounts are not representative of those that we historically incur in the ordinary course of our business. Negative amounts represent insurance recoveries related to these matters.
|
|
|
|
|
(2)
|
Represents non-recurring start-up costs associated with the start-up of Allied and our nuclear services offerings, including the setup of financial operations systems and modules, pre-contract expenses to obtain initial contracts, and the hiring of operational staff. Because these costs are associated with the initial setup of the Allied business to initiate the operations involved in our nuclear services offerings, these costs are non-recurring in the normal course of our business.
|
|
|
|
|
(3)
|
Represents SCB transaction expenses, executive severance costs, IPO-related costs, expenses associated with the Amendment to the Credit Facility and other miscellaneous items.
|
|
|
|
|
(4)
|
Adjusted EBITDA margin is a non-GAAP financial measure that represents the ratio of Adjusted EBITDA to total revenue. We use Adjusted EBITDA margin to measure the success of our businesses in managing our cost base and improving profitability.
|
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. In connection with preparing our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expense, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends and other factors that management believes to be relevant at the time we prepare our consolidated and combined financial statements. On a regular basis, management reviews the accounting policies, assumptions, estimates, and judgments to ensure that our consolidated combined financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ materially from our assumptions and estimates.
Our significant accounting policies are described in Note 2 to our consolidated and combined financial statements included herein. Our critical accounting policies are described below to provide a better understanding of our estimates and assumptions about future events that affect the amounts reported in the consolidated and combined financial statements and accompanying notes. Significant accounting estimates are important to the representation of our financial position and results of operations and involve our most difficult, subjective or complex judgments. We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances through the date of the issuance of our financial statements.
Revenue
We adopted Accounting Standards Codification Topic 606: Revenue from Contracts with Customers ("ASC 606") on January 1, 2019. Accordingly, we revised our accounting policy on revenue recognition from the policy provided in the notes to our consolidated and combined financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. Our revised accounting policy on revenue recognition is provided in Note 2 to our consolidated and combined financial statements for the year ended December 31, 2019 contained herein.
To determine revenue recognition for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate a combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. Contracts are considered to have a single performance obligation if the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts primarily because we provide a service that involves multiple inter-related and integrated tasks to achieve the completion of a specific, single project. For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation using our best estimate of the stand-alone selling price of each distinct good or service in the contract.
For sales and service contracts where we have the right to consideration from the customer in an amount that corresponds directly with the value received by the customer based on our performance to date, revenue is recognized at a point in time when services are performed and contractually billable. Certain service contracts contain provisions dictating fluctuating rates per unit for the certain services in which the rates are not directly related to changes in the Company’s effort to perform under the contract. We recognize revenue based on the stand-alone selling price per unit for such contracts, calculated as the average rate per unit over the term of those contractual rates. This creates a contract asset or liability for the difference between the revenue recognized and the amount billed to the customer.
Under the typical payment terms of our services contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, at periodic intervals (e.g., weekly, biweekly or monthly).
We recognize revenue over time, as performance obligations are satisfied, for substantially all of our construction contracts due to the continuous transfer of control to the customer. For most of our construction contracts, the customer contracts with us to provide a service that involves multiple inter-related and integrated tasks to achieve the completion of a specific, single project and are therefore accounted for as a single performance obligation. We recognize revenue using the cost-to-cost input method, based primarily on contract costs incurred to date compared to total estimated contract costs. This method is the most accurate measure of our contract performance because it depicts the company’s performance in transferring control of goods or services promised to customers according to a reasonable measure of progress toward complete satisfaction of the performance obligation.
Contract costs include all direct material, labor and subcontractor costs and indirect costs related to contract performance. For costs incurred that do not relate directly to transferring a service to the customer, they are excluded from the input method used to recognize revenue. Project mobilization costs are generally charged to the project as incurred when they are an integrated part of the performance obligation being transferred to the client. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client.
It is common for our contracts to contain contract provisions that give rise to variable consideration such as unpriced change orders or volume discounts that may either increase or decrease the transaction price. We estimate the amount of variable consideration at the expected value or most likely amount, depending on which is determined to be more predictive of the amount to which the Company will be entitled. Variable consideration is included in the transaction price when it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include such amounts in the transaction price are based largely on our assessment of legal enforceability, anticipated performance, industry business practices, and any other information (historical, current or forecasted) that is reasonably available to us. Variable consideration associated with unapproved change orders is included in the transaction price only to the extent of costs incurred.
We provide limited warranties to customers for work performed under our contracts. Such warranties are not sold separately, provide assurance that the services comply with the agreed-upon specifications and legal requirements and do not provide customers with a service in addition to assurance of compliance with agreed-upon specifications. Accordingly, these types of warranties are not considered to be separate performance obligations. Historically, warranty claims have not resulted in material costs incurred by the Company.
Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. As a significant change in one or more of these estimates could affect the profitability of our contracts, we routinely review and update our contract-related estimates through a disciplined project review process in which management reviews the progress and execution of our performance obligations and the estimated costs at completion. As part of this process, management reviews information including, but not limited to, outstanding contract matters, progress towards completion, program schedule and the associated changes in estimates of revenue and costs. Management must make assumptions and estimates regarding the availability and productivity of labor, the complexity of the work to be performed, the availability and cost of materials, the performance of subcontractors, and the availability and timing of funding from the customer, along with other risks inherent in performing services under all contracts where we recognize revenue over-time using the cost-to-cost method.
We recognize changes in contract estimates on a cumulative catch-up basis in the period in which the changes are identified. Such changes in contract estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in prior periods. Changes in contract estimates may also result in the reversal of previously recognized revenue if the current estimate differs from the previous estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the period it is identified.
Contracts are often modified to account for changes in contract specifications and requirements. Most of our contract modifications are for goods or services that are not distinct from existing contracts due to the significant integration provided in the context of the contract and are accounted for as if they were part of the original contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. We account for contract modifications when the modification results in the promise to deliver additional goods or services that are distinct and the increase in the price of the contract is for the same amount as the stand-alone selling price of the additional goods or services included in the modification.
We evaluate our contracts whether we are acting as the principal or as the agent when providing services, which we consider in determining if revenue should be reported on a gross or net basis. We determine the Company to be a principal if we control the specified service before that service is transferred to a customer.
Billing practices are governed by the contract terms of each project based upon costs incurred, the achievement of milestones or predetermined schedules. Billings do not necessarily correlate with revenue recognized over time using the cost-to-cost input method. Contract assets include unbilled amounts typically resulting from revenue under long-term contracts when the revenue recognized exceeds the amount billed to the customer. Contract liabilities consist of advance payments and billings in excess of revenue recognized as well as deferred revenue.
Contract assets also include retainage, which represents amounts withheld by our clients from billings pursuant to provisions in the contracts and may not be paid to us until the completion of specific tasks or the completion of the project and, in some instances, for even longer periods.
Our contract assets and liabilities are reported in a gross position on a contract-by-contract basis at the end of each reporting period. We include in current assets and liabilities contract assets and liabilities, which may extend beyond one year.
Goodwill
Goodwill represents the cost of an acquisition purchase price over the fair value of acquired net assets, and such amounts are reported separately as goodwill on our consolidated and combined balance sheets. Our total goodwill resulted from the
application of “push-down” accounting associated with BCP’s January 2017 acquisition of a controlling equity position in Charah Management and the acquisition of certain assets and liabilities of SCB.
Goodwill is not amortized, but instead is tested for impairment at least annually, as of October 1st of each year, or more often if events or circumstances indicate that goodwill might be impaired. Goodwill is tested at the reporting unit level. We may elect to perform a qualitative assessment for our reporting units to determine whether it is more likely than not that the fair value of the reporting unit is greater than its carrying value. If a qualitative assessment is not performed, or if as a result of a qualitative assessment it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, then the reporting unit’s fair value is compared to its carrying value. Fair value is typically estimated using an income approach based on discounted cash flows. However, when appropriate, we may also use a market approach. The income approach is based on the long-term projected future cash flows of the reporting units. We discount the estimated cash flows to present value using a weighted average cost of capital that considers factors such as market assumptions, the timing of the cash flows, and the risks inherent in those cash flows. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting units’ expected long-term performance considering the economic and market conditions that generally affect our business. The market approach estimates fair value by measuring the aggregate market value of publicly traded companies with similar characteristics to our business as a multiple of their reported earnings. We then apply that multiple to the reporting units’ earnings to estimate their fair values. We believe that this approach may also be appropriate in certain circumstances because it provides a fair value estimate using valuation inputs from entities with operations and economic characteristics comparable to our reporting units. Fair value is computed using several factors, including projected future operating results, economic projections, anticipated future cash flows, comparable marketplace data, and the cost of capital. There are inherent uncertainties related to these factors and to our judgment in applying them in our analysis. However, we believe our methodology for estimating the fair value of our reporting units is reasonable. If the carrying value of a reporting unit exceeds its fair value, goodwill is written down to its implied fair value.
The Company performed quantitative assessments of its Environmental Solutions and Maintenance and Technical Services reporting units as of October 1, 2019. The Environmental Solutions and Maintenance and Technical Services reporting units' fair values, as calculated, were approximately 6.8% and 143.3%, respectively, greater than their book values as of October 1, 2019.
The valuation used to test goodwill for impairment is dependent upon a number of significant estimates and assumptions, including macroeconomic conditions, growth rates, competitive activities, cost containment, margin expansion and the Company's business plans. We believe these estimates and assumptions are reasonable. However, future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill, including discount and tax rates or future cash flow projections, could result in significantly different estimates of the fair values. As a result of these factors and the related cushion as of the date of the previous annual impairment test, goodwill for the Environmental Solutions reporting unit is more susceptible to impairment risk.
The most significant assumptions utilized in the determination of the estimated fair value of the Environmental Solutions reporting unit are the net sales and earnings growth rates (including residual growth rates) and the discount rate. The residual growth rate represents the rate at which the reporting unit is expected to grow beyond the shorter-term business planning period. The residual growth rate utilized in our fair value estimate is consistent with the reporting unit operating plans and approximates expected long-term category market growth rates and inflation. The discount rate, which is consistent with a weighted average cost of capital that is likely to be expected by a market participant, is based upon industry required rates of return, including consideration of both debt and equity components of the capital structure. Our discount rate may be impacted by adverse changes in the macroeconomic environment, volatility in the equity and debt markets or other factors.
While management can and has implemented strategies to address these events, changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that would trigger future impairment charges of the reporting unit's goodwill balance. The table below provides a sensitivity analysis for the Environmental Solutions reporting unit, utilizing reasonably possible changes in the assumptions for the shorter-term revenue and residual growth rates and the discount rate, to demonstrate the potential impacts to the estimated fair values. The table below provides, in isolation, the estimated fair value impacts related to (i) a 50-basis point increase to the discount rate assumption and (ii) a 50-basis point decrease to our shorter-term revenue and residual growth rates assumptions, both of which would result in impairment charges.
|
|
|
|
|
|
|
|
|
|
|
Approximate Percent Decrease in Estimated Fair Value
|
|
|
+50 bps Discount Rate
|
|
-50 bps Growth Rate
|
|
Environmental Solutions reporting unit
|
7.1
|
%
|
|
7.3
|
%
|
Deferred Taxes, Valuation Allowance
As discussed in Note 18 to our consolidated and combined financial statements, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in our consolidated and combined financial statements or tax returns. We record a valuation allowance to reduce certain deferred tax assets to amounts that are more-likely-than-not to be realized. We evaluate the realizability of our deferred tax assets by assessing the valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include our forecast of future taxable income exclusive of reversing temporary differences and carryforwards, future reversals of existing taxable temporary differences and available tax planning strategies that could be implemented to realize the net deferred tax assets.
Based on the available evidence as of December 31, 2019, we were not able to conclude it is more likely than not certain deferred tax assets will be realized. Therefore, a valuation allowance of $12.9 million was recorded against our deferred tax assets. We will continue to evaluate the need for a valuation allowance on our deferred tax assets in future periods.
Recent Accounting Pronouncements
Please see Note 2, “Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements” and “Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” to our historical consolidated and combined financial statements as of and for the years ended December 31, 2019 and 2018, included elsewhere herein, for a discussion of recent accounting pronouncements.
Under the JOBS Act, we meet the definition of an “emerging growth company,” which allows us to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. We intend to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107(b) of the JOBS Act until we are no longer an emerging growth company.
Item 7A. Quantitative and Qualitative Disclosure About Market Risks
Market risk is the risk of loss arising from adverse changes in market rates and prices. Currently, our market risks relate to potential changes in the fair value of our long-term debt due to fluctuations in applicable market interest rates. Going forward our market risk exposure generally will be limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes.
Interest Rate Risk
As of December 31, 2019, we had $152.2 million of debt outstanding under the Term Loan and $19.0 million of outstanding borrowings under the Revolving Loan, with an interest rate of 5.8%. A 1.0% increase or decrease in the interest rate would increase or decrease interest expense by approximately $1.7 million per year assuming a consistent debt balance. We currently have an interest rate cap in place with respect to outstanding indebtedness under our Term Loan that provides a ceiling on three-month LIBOR at 2.5% for a notional amount of $150.0 million. A fair value liability of $1.1 million was recorded with respect to our interest rate cap in the consolidated balance sheet within other liabilities as of December 31, 2019 and a fair value asset of $0.9 million was recorded in the consolidated balance sheet within other assets as of December 31, 2018.
Credit Risk
While we are exposed to credit risk in the event of non-performance by counterparties, the majority of our customers are investment-grade companies and we do not anticipate non-performance. We mitigate the associated credit risk by performing credit evaluations and monitoring the payment patterns of our customers.
Off-Balance Sheet Arrangements
We currently have no material off-balance sheet arrangements except for operating leases as referenced in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Item 8. Financial Statements and Supplementary Data
Our consolidated and combined financial statements and the related notes begin on page F-1 herein.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Annual Report. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective.
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 (Principal Executive Officer) and Chief Financial Officer and Treasurer (Principal Financial Officer) 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.
The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of the Company’s assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on its financial statements.
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.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 based on the framework established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company’s internal control over financial reporting as of December 31, 2019 was effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm due to an exemption for emerging growth companies under the JOBS Act.
Changes in 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(e) of the Exchange Act that occurred during the quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Notes to Consolidated & Combined Financial Statements
(dollars in thousands except per share and unit data)
1. Nature of Business and Basis of Presentation
Organization
During 2016, Charah, Inc. converted from an S corporation to a limited liability company and changed its name to Charah, LLC, a Delaware limited liability company (“Charah”). In December 2016, Charah became a wholly owned subsidiary of CEP Holdings, Inc. In January 2017, Charah became a wholly-owned subsidiary of Charah Sole Member LLC, which itself is a wholly-owned subsidiary of Charah Management LLC, a Delaware limited liability company (“Charah Management”). Charah Management was a wholly-owned subsidiary of CEP Holdings, Inc.
On January 13, 2017, Charah Management completed a transaction with Bernhard Capital Partners Management, LP ("BCP"), a previously unrelated third party, pursuant to which BCP acquired a 76% equity position of Charah Management ("the BCP transaction"). Allied Power Management, LLC, a Delaware limited liability company (“Allied”), was formed and became a wholly-owned subsidiary of Allied Power Holdings, LLC, a Delaware limited liability company (“Allied Power Holdings”), in May 2017. In July 2017, Allied became a wholly-owned subsidiary of Allied Power Sole Member, LLC, which itself is a wholly-owned subsidiary of Allied Power Holdings. Allied Power Holdings has been under common control with Charah Management since April 2017.
Charah Solutions, Inc. and subsidiaries (“Charah Solutions,” the “Company,” “we,” “us,” or “our”) was formed as a Delaware corporation in January 2018 and did not conduct any material business operations prior to the transactions described below other than certain activities related to its initial public offering, which was completed on June 18, 2018 (the “IPO”). Charah Solutions is a holding company, the sole material assets of which consist of membership interests in Charah Management and Allied Power Holdings. Through the Company’s ownership of Charah Management and Allied Power Holdings, the Company owns the outstanding equity interests in Charah and Allied, the subsidiaries through which Charah Solutions operates its businesses. The historical financial data presented herein as of December 31, 2019 and for periods after June 18, 2018 corporate reorganization is that of Charah and Allied on a consolidated basis, and on a combined basis for periods prior to June 18, 2018 corporate reorganization described below.
References to “Successor” relate to the financial position and results of operations of Charah Solutions on a consolidated and combined basis for the years ended December 31, 2019 and 2018, Charah and Allied Power Management on a combined basis for the period including and after January 13, 2017, and references to “Predecessor” relate to the financial position and results of operations of Charah for the period through January 12, 2017.
Corporate Reorganization
On June 18, 2018, pursuant to the terms of the reorganization transactions completed in connection with the IPO, (i) (a) Charah Holdings LP, a Delaware limited partnership (“Charah Holdings”) owned by BCP, contributed all of its interests in Charah Management and Allied Power Holdings to the Company in exchange for 17,514,745 shares of common stock, (b) CEP Holdings, Inc., a Delaware corporation owned by Charles E. Price and certain affiliates (“CEP Holdings”), contributed all of its interests in Charah Management and Allied Power Holdings to the Company in exchange for 4,605,465 shares of common stock, (c) Charah Management Holdings LLC, a Delaware limited liability company (“Charah Management Holdings”), contributed all of its interests in Charah Management and Allied Power Holdings to the Company in exchange for 907,113 shares of common stock, and (d) Allied Management Holdings, LLC, a Delaware limited liability company (“Allied Management Holdings”), contributed all of its interests in Charah Management and Allied Power Holdings to the Company in exchange for 409,075 shares of common stock, (ii) each of Charah Management Holdings and Allied Management Holdings distributed the shares of common stock received by them pursuant to clause (i) to their respective members in accordance with the respective terms of their limited liability company agreements and (iii) Charah Holdings distributed a portion of the shares of common stock it received in clause (i) above to certain direct and indirect blocker entities which ultimately merged into the Company, with the Company surviving, and affiliates of BCP received shares of common stock as consideration in the mergers.
Description of Business Operations
The Company provides mission-critical environmental and maintenance services 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 coal ash management and recycling, environmental remediation, and outage maintenance services. The Company also designs and implements solutions for complex environmental projects (such as coal ash pond closures) and facilitates coal
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
ash recycling through byproduct sales and other beneficial use services. The Company has corporate offices in Kentucky, North Carolina, and Louisiana, and principally operates in the eastern and mid-central United States.
The accompanying consolidated and combined financial statements include the assets, liabilities, stockholders’ equity, members’ equity, and results of operations of the Company and its consolidated subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Under the Jumpstart Our Business Startups Act (the “JOBS Act”), the Company meets the definition of an “emerging growth company,” which allows the Company to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. The Company intends to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act until the Company is no longer an emerging growth company. Among other things, we are not required to provide an auditor attestation report on the assessment of the internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002 and our disclosure obligations regarding executive compensation may be reduced. We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the IPO, or December 31, 2023. However, if certain events occur prior to 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 prior to the end of such five-year period.
Business Segments
The Company operates in two business segments:
Environmental Solutions (ES). The Environmental Solutions segment includes remediation and compliance services, as well as byproduct sales. Remediation and compliance services are associated with our customers’ need for multi-year environmental improvement and sustainability initiatives, whether driven by regulatory requirements, by power generation customer initiatives, by our proactive engagement or by consumer expectations and standards. Byproduct sales support both our power generation customers’ desire to recycle their recurring and legacy volumes of coal combustion residuals ("CCRs") commonly known as coal ash and ultimate end customers’ need for high-quality, cost-effective raw material substitutes.
Maintenance and Technical Services (M&TS). The Maintenance and Technical Services segment includes fossil services and nuclear services. Fossil services are the recurring and mission-critical management of coal ash and the routine maintenance, outage services and staffing solutions for coal-fired power generation facilities. Nuclear services, which we market under the Allied Power brand name, include routine maintenance, outage services, facility maintenance, and staffing solutions for nuclear power generation facilities.
Unaudited Pro Forma Income Information
The unaudited pro forma income information gives effect to the corporate reorganization that occurred in connection with the closing of the IPO and the resulting legal entity of Charah Solutions, which is incorporated as a “C” Corporation. Prior to the corporate reorganization, the holding companies for Charah and Allied were limited liability companies and generally not subject to income taxes. The pro forma net income, therefore, includes an adjustment for income tax expense as if the holding companies for Charah and Allied had been “C” Corporations for all periods presented at an assumed combined federal, state and local effective income tax rate of 38% for the year ended December 31, 2017, and 25% for the periods from January 1, 2018 through June 17, 2018, plus the actual tax expense for the period from June 18, 2018 through December 31, 2018, excluding the tax related to the corporate reorganization. These rates approximate the calculated statutory tax rate for each period. The tax rate in the preceding sentence for the year ended December 31, 2017 does not reflect the impact of U.S. tax reform, which reduces the federal U.S. statutory tax rate from 35% to 21%, effective in 2018. The tax rates mentioned for the year ended December 31, 2018 reflect the impact of U.S. tax reform.
2. Summary of Significant Accounting Policies
Management’s Use of Estimates
The preparation of consolidated and combined financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions, in particular estimates of legal reserves, costs to complete contracts in process, contract modifications and unapproved change orders, that affect the reported amounts in the consolidated and combined financial statements and accompanying notes. Actual results could differ from those estimates.
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
Balance Sheet Classification
The Company includes in current assets and liabilities contract assets, contract liabilities and retainage amounts payable, which may extend beyond one year. One year is used as the basis for classifying all other assets and liabilities.
Cash
The Company maintains cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash.
Restricted Cash
We are required to maintain non-interest bearing escrow accounts associated with our non-revolving credit note with a bank and associated with one of our insurance policies. As of December 31, 2019, these accounts held $1,215.
Previously, Charah was required to establish an escrow account for the post-closure care costs related to the structural fill sites. The post-closure care costs are also covered by financial guarantee and performance bonds. During the period from January 13, 2017 to December 31, 2017 (Successor), the requirement to maintain the escrow account was removed and the cash was returned to Charah.
Trade Accounts Receivable, Net
Trade accounts receivable, net consist of amounts due from customers. An allowance for doubtful accounts is recorded to the extent it is probable that a portion of a particular account will not be collected. Management determines the allowance for doubtful accounts by evaluating individual customer receivables and considering a customer’s financial condition, credit history, and the current economic conditions. An allowance for doubtful accounts of $146 and $0 was included in trade accounts receivable, net as of December 31, 2019 (Successor) and 2018 (Successor), respectively.
Trade accounts receivable balances are considered past due based upon contract or invoice terms and are charged off when deemed uncollectible. The Company does not charge interest on customer accounts and generally does not require collateral on sales and services during the normal course of business. The Company has the right to file liens on the owner’s property with regards to certain construction contracts.
Inventory
Inventories, mainly comprising ash for resale, are valued using the first-in, first-out (“FIFO”) method. Inventories are stated at the lower of cost or net realizable value.
Property and Equipment
Property and equipment are stated at cost. Construction-in-progress represents costs incurred on the construction of assets that have not been completed or placed in service as of the end of the year. Depreciation is provided principally by the straight-line method over the estimated useful lives of the assets as follows:
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|
|
|
|
|
|
|
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Plant, machinery and equipment
|
|
2 - 15 years
|
|
Vehicles
|
|
2 - 10 years
|
|
Office equipment
|
|
2 - 10 years
|
|
Buildings and leasehold improvements
|
|
5 - 40 years
|
Repair and maintenance costs are expensed as incurred and expenditures for improvements are capitalized.
Structural Fill Sites
Cost Basis of Structural Fill Sites, Associated Site Improvement Costs, and Related Asset Retirement Obligation (ARO)
Prior to the BCP transaction (see Note 1), the acquisition cost of the structural fill sites was capitalized. As a result of the BCP transaction, the fair value of the site improvements related to the structural fill sites was recognized. The site improvement costs relate to items such as directly related engineering, liner material and installation, leachate collection systems, environmental monitoring equipment, on-site road and rail construction, and other infrastructure costs. The structural fill sites are a part of the Company’s Environmental Solutions segment.
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
Following is a description of our asset retirement activities and our related accounting:
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|
|
|
•
|
Final capping and closure involve the installation of drainage and compacted soil layers and topsoil over areas where total airspace capacity has been consumed. Asset retirement obligations are recorded on a units-of-consumption basis as airspace is consumed. The liability is based on estimates of the discounted cash flows.
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|
|
|
|
•
|
Post closure involves the maintenance and monitoring of the structural fill sites. Generally, we are required to maintain and monitor the structural fill sites for a 30-year period. These maintenance and monitoring costs are recorded as an asset retirement obligation as airspace is consumed over the life of the structural fill sites. Post-closure obligations are recorded over the life of the structural fill sites on a units-of-consumption basis as airspace is consumed, based on estimates of the discounted cash flows associated with performing post-closure activities.
|
We develop our estimates of these obligations using input from our operations personnel. Our estimates are based on our interpretation of current requirements and proposed regulatory changes and are intended to approximate fair value. Absent quoted market prices, the estimate of fair value is based on the best available information, including the results of present value techniques. We use professional engineering judgment and estimated prices paid for similar work to determine the fair value of these obligations. We are required to recognize these obligations at market prices whether we plan to contract with third parties or perform the work ourselves. In those instances where we perform the work with internal resources, the incremental profit margin realized will be recognized as a component of operating income when the work is completed.
Once we have determined the final capping, closure, and post-closure costs, we inflate those costs to the expected time of payment and discount those expected future costs back to present value. During the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), the period from January 13, 2017 through December 31, 2017 (Successor), and the period from January 1, 2017 through January 12, 2017 (Predecessor), we inflated these costs in current dollars until the expected time of payment using an inflation rate of 3.0%. We discounted these costs to present value using the credit-adjusted, risk-free rate effective at the time an obligation is 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. As a result, the credit-adjusted, risk-free discount rate used to calculate the present value of an obligation is specific to each individual asset retirement obligation. The weighted average rate applicable to our long-term asset retirement obligations at December 31, 2019 was approximately 5.25%.
We record the estimated fair value of final capping, closure, and post-closure liabilities for our structural fill sites based on the capacity consumed through the current period. Because these obligations are measured at estimated fair value using present value techniques, changes in the estimated cost or timing of future final capping, closure, and post-closure activities could result in a material change in these liabilities, related assets, and results of operations. We assess the appropriateness of the estimates used to develop our recorded balances annually, or more often if conditions warrant.
Changes in inflation rates or the estimated costs, timing, or extent of future final capping, closure, and post-closure activities typically result in both (i) a current adjustment to the recorded liability and structural fill site asset, and (ii) a change in liability and asset amounts to be recorded prospectively over the remaining permitted airspace. Any changes related to the capitalized and future cost of the structural fill assets are then recognized in accordance with our amortization policy, which would generally result in amortization expense being recognized prospectively over the remaining capacity of the permitted airspace. Changes in such estimates associated with airspace that has been fully utilized results in an adjustment to the recorded liability and landfill assets with an immediate corresponding adjustment to landfill airspace amortization expense.
Depreciation of Structural Fill Sites and Site Improvements
The depreciable basis of a structural fill site includes amounts previously expended and capitalized and projected asset retirement costs related to final capping, closure, and post-closure activities.
The value of the structural fill sites to the Company diminishes in direct correlation to the amount of airspace used for ash deposits. Depreciation is recorded on a units-of-consumption basis, applying expense as a rate per ton. The rate per ton is calculated by dividing the depreciable basis of the structural fill site by the number of tons expected to be placed into the structural fill sites. Our engineers, in consultation with third-party engineering consultants and surveyors, are responsible for determining remaining permitted airspace at our structural fill sites. The remaining permitted airspace is determined by comparing the existing structural fill sites topography to the expected final structural fill sites topography.
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
Once the remaining permitted airspace is determined in cubic yards, an airspace utilization factor (“AUF”) is established to calculate the remaining permitted capacity in tons. The AUF is established using the measured density obtained from previous surveys and is then adjusted to account for current and future expected compaction rates. The initial selection of the AUF is subject to a subsequent multi-level review by our engineering group, and the AUF used is reviewed on a periodic basis and revised as necessary.
After determining the costs and remaining permitted capacity at each of our structural fill sites, we determine the per ton rates that will be expensed as ash is received and deposited at the structural fill sites by dividing the costs by the corresponding number of tons. These rates per ton are updated annually, or more often, as significant facts change.
It is possible that actual results, including the amount of costs incurred, the timing of final capping, closure, and post-closure activities, or our airspace utilization, could ultimately turn out to be significantly different from our estimates and assumptions. To the extent that such estimates, or related assumptions, prove to be significantly different than actual results, lower profitability may be experienced due to higher depreciation rates or higher expenses; or higher profitability may result if the opposite occurs. Most significantly, if it is determined that expansion capacity should no longer be considered in calculating the recoverability of a structural fill site asset, we may be required to recognize an asset impairment or to incur significantly higher depreciation expense.
Depreciation for the structural fill sites and site improvements for the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), the period from January 13, 2017 through December 31, 2017 (Successor), and the period from January 1, 2017 through January 12, 2017 (Predecessor), and the year ended December 31, 2016 (Predecessor) was $4,190, $33,956, $17,603, and $90, respectively.
The Company commenced closure of our structural fill sites during the year ended December 31, 2019. The remaining capacity of the active structural fill site at December, 31, 2018 (Successor), December 31, 2017 (Successor), and January 12, 2017 (Predecessor) was 5.0 million tons (41%), 6.2 million tons (52%), and 9.2 million tons (77%), respectively.
Equity Method Investment
In January 2016, Charah organized a joint venture with VHSC Holdings, LLC, an unrelated third party. Charah has a 50% interest in the joint venture, which is accounted for by the equity method.
Goodwill and Indefinite Lived Intangible Assets
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired in a business combination. Our goodwill included in the consolidated balance sheets as of December 31, 2019 and 2018 was $74,213. Our intangible assets in the consolidated balance sheets as of December 31, 2019 and 2018 include a $34,330 trade name that is considered to have an indefinite life.
Goodwill and indefinite-lived intangible assets are not amortized, but instead are tested for impairment at least annually or more often if events or changes in circumstances indicate that the fair value of the asset may have decreased below its carrying value. Goodwill is tested at the reporting unit level. We may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value is greater than its carrying value. If a qualitative assessment is not performed, or if as a result of a qualitative assessment it is not more likely than not that the fair value exceeds its carrying value, then the fair value is compared to its carrying value. Fair value is typically estimated using an income approach based on discounted cash flows. However, when appropriate, we may also use a market approach. The income approach is based on the long-term projected future cash flows of the asset and reporting units. We discount the estimated cash flows to present value using a weighted average cost of capital that considers factors such as market assumptions, the timing of the cash flows, and the risks inherent in those cash flows. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting units’ expected long-term performance considering the economic and market conditions that generally affect our business. The market approach estimates fair value by measuring the aggregate market value of publicly traded companies with similar characteristics to our business as a multiple of their reported earnings. We then apply that multiple to the reporting units’ earnings to estimate their fair values. We believe that this approach may also be appropriate in certain circumstances because it provides a fair value estimate using valuation inputs from entities with operations and economic characteristics comparable to our reporting units. Fair value is computed using several factors, including projected future operating results, economic projections, anticipated future cash flows, comparable marketplace data, and the cost of capital. There are inherent uncertainties related to these factors and to our judgment in applying them in our analysis. However, we believe our methodology for estimating the fair value of our reporting units and the trade name is reasonable. If the carrying value exceeds its fair value, the asset is written down to its implied fair value.
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
We evaluate the indefinite-lived trade name each reporting period to determine whether events and circumstances continue to support an indefinite useful life.
We perform our annual impairment test as of October 1st of each year. During the years ended December 31, 2019 and 2018, we performed a quantitative assessment and determined there was no impairment. For the period between the impairment testing date and year-end, there were no indicators of impairment. If actual future results are not consistent with our assumptions and estimates, we may be required to record impairment charges in the future.
Definite Lived Intangible Assets
As of December 31, 2019 (Successor) and 2018 (Successor), definite lived intangible assets include customer relationships, technology, non-compete and other agreements, SCB trade name (Note 5), and a rail easement. These assets are amortized on a straight-line basis over their estimated useful lives as shown in the table below.
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|
|
|
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Definite Lived Intangible
|
Useful Life
|
|
Customer relationships
|
10 years
|
|
Technology
|
10 years
|
|
Non-compete agreement
|
2 years
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|
SCB trade name
|
5 years
|
|
Rail easement
|
2 years
|
Purchase Option Liability
In the BCP transaction, Charah recorded the fair value of a bargain purchase liability for an option held by a customer and a third party for the structural fill sites. The purchase option liability is calculated as the difference between the estimated fair value of the structural fill sites at the date of the BCP transactions (see Note 1) and the option price to be paid by the customer or third party. The purchase options are exercisable after completion of work at the structural fill sites. The bargain purchase option is amortized over the structural fill sites’ estimated useful lives. The following table reflects activity related to the bargain purchase liability:
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|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Balance, beginning of period (Successor)
|
$
|
10,017
|
|
|
$
|
25,244
|
|
|
Amortization expense
|
(2,907
|
)
|
|
(15,227
|
)
|
|
Balance, end of period (Successor)
|
$
|
7,110
|
|
|
$
|
10,017
|
|
Fair Value Disclosure
Long-term debt bears interest at variable rates and book value approximates fair value, and is considered to be level 2 in the fair value hierarchy. The interest rate swap (within other liabilities at December 31, 2019 and within other assets at December 31, 2018) is considered to be level 2 in the fair value hierarchy. The Company did not have any recurring or non-recurring level 3 fair value measurements as of December 31, 2019 (Successor) or 2018 (Successor) other than the application of business combination accounting as described in Note 5 and the application of stock-based compensation accounting as described in Note 13. There have been no transfers between levels of the fair value hierarchy during the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), the period from January 13, 2017 through December 31, 2017 (Successor), or the period from January 1, 2017 through January 12, 2017 (Predecessor).
Debt Issuance Costs
Debt issuance costs associated with our various credit agreements are amortized as interest expense over the term of the applicable agreement. Debt issuance costs are presented as a direct deduction from the carrying amount of the related liability.
Freight Costs
Freight costs charged to customers are included in revenue. Costs incurred by the Company for freight are included in cost of sales.
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
Income Taxes
Charah Solutions is a “C” Corporation under the Internal Revenue Code of 1986, as amended (the “Code”), and, as a result, is subject to U.S. federal, state and local income taxes. In connection with the IPO, predecessor flow-through entities for income tax purposes were contributed to the Company by their owners and became indirect subsidiaries of the Company. Prior to the contribution to the Company and its conversion to a taxable corporation, the predecessor entities passed through their taxable income to their owners for U.S. federal, state, and local income tax purposes, and thus these entities were not subject to such income taxes, except for franchise tax at the state level (at less than 1% of modified pre-tax earnings). Accordingly, the financial data attributable to the predecessor entities prior to the contribution on June 18, 2018 contains no provision for U.S. federal income taxes or income taxes in any state or locality, other than franchise taxes.
As of June 18, 2018, the Company became subject to U.S. federal, state and local income taxes, and as a result of the conversion, and in accordance with Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, the Company established a beginning net deferred tax liability of $1.5 million and recognized a corresponding amount of income tax expense.
Income taxes are accounted for in accordance with ASC Topic 740. Income tax expense, or benefit, is calculated using the asset and liability method under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
The Company assesses its deferred tax assets each quarter to determine whether the assets are more likely than not (probability of more than 50%) realizable under ASC Topic 740. The Company is required to record a valuation allowance for any portion of the tax assets that, based on the assessment, are not more likely than not realizable. The assessment considers, among other things, earnings in prior periods, forecasts of future taxable income, statutory carryforward periods, and tax planning strategies, to the extent feasible. The realization of deferred tax assets depends in large part on the generation of future taxable income during the periods in which the differences become deductible. The value of the deferred tax assets will also depend on applicable income tax rates. Judgment is required in determining the future tax consequences of events that have been recognized in the financial statements. Differences between anticipated and actual outcomes of these future tax consequences could have material impact on the financial statements. Changes in existing tax laws and tax rates also affect actual tax results and the valuation of deferred tax assets over time.
Stock/Share-Based Compensation Plans
In the year ended December 31, 2017, Charah Management and Allied Power Management each issued certain Series C member interests to employees. Additionally, certain employees of Allied Power Management were granted Series B member interests in both Charah Management and Allied Power Management.
The unvested Series C Profits Interests at June 18, 2018 were canceled as a result of the corporate reorganization that occurred upon the closing of the IPO. In connection with the corporate reorganization that occurred upon the closing of the IPO, the Series C Profits Interests were replaced by shares that are subject to time-based vesting conditions, as well as performance vesting conditions. The Company has issued further shares under the Charah Solutions, Inc. 2018 Omnibus Incentive Plan subject to time-based and performance vesting conditions.
The Company accounts for its stock/share-based compensation plans as equity-classified plans, in accordance with the fair value recognition provisions of ASC Topic 718, Compensation-Stock Compensation. The Company utilizes the Black-Scholes model, which requires the input of subjective assumptions. These assumptions include estimating (i) the volatility of the common stock price over the expected term, (ii) the expected term, and (iii) expected dividends. Where the vesting of the stock is also based upon performance measures, management determines the likelihood of meeting such measures. Changes in the subjective assumptions can materially affect the estimate of the fair value of stock-based compensation and consequently, the related amounts recognized on the consolidated and combined statements of operations.
Stock-based compensation expense is recognized in general and administrative expenses.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), which provides a five-step framework to determine when and how revenue is recognized. We adopted ASC 606 on January 1, 2019, using the modified-retrospective method. Our financial
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
results for reporting periods beginning January 1, 2019 are presented under the new accounting standard, while financial results for prior periods will continue to be reported in accordance with our historical accounting policy.
Revenue is measured based on the amount of consideration specified in a contract with a customer. Revenue is recognized when our performance obligations under the terms of the contract are satisfied which generally occurs with the transfer of control of the goods or services to the customer.
Contract Combination
To determine revenue recognition for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate a combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. Contracts are considered to have a single performance obligation if the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts primarily because we provide a service that involves multiple inter-related and integrated tasks to achieve the completion of a specific, single project. For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation using our best estimate of the stand-alone selling price of each distinct good or service in the contract.
Sales and Services Contracts
For sales and service contracts where we have the right to consideration from the customer in an amount that corresponds directly with the value received by the customer based on our performance to date, revenue is recognized at a point in time when services are performed and contractually billable. Certain service contracts contain provisions dictating fluctuating rates per unit for the certain services in which the rates are not directly related to changes in the Company’s effort to perform under the contract. We recognize revenue based on the stand-alone selling price per unit for such contracts, calculated as the average rate per unit over the term of those contractual rates. This creates a contract asset or liability for the difference between the revenue recognized and the amount billed to the customer.
Under the typical payment terms of our services contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, at periodic intervals (e.g., weekly, biweekly or monthly).
Construction Contracts
We recognize revenue over time, as performance obligations are satisfied, for substantially all of our construction contracts due to the continuous transfer of control to the customer. For most of our construction contracts, the customer contracts with us to provide a service that involves multiple inter-related and integrated tasks to achieve the completion of a specific, single project and are therefore accounted for as a single performance obligation. We recognize revenue using the cost-to-cost input method, based primarily on contract costs incurred to date compared to total estimated contract costs. This method is the most accurate measure of our contract performance because it depicts the company’s performance in transferring control of goods or services promised to customers according to a reasonable measure of progress toward complete satisfaction of the performance obligation.
Contract costs include all direct material, labor and subcontractor costs and indirect costs related to contract performance. For costs incurred that do not relate directly to transferring a service to the customer, they are excluded from the input method used to recognize revenue. Project mobilization costs are generally charged to the project as incurred when they are an integrated part of the performance obligation being transferred to the client. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client.
The payment terms of our construction contracts from time to time require the customer to make advance payments as well as interim payments as work progresses. The advance payment generally is not considered a significant financing component as we expect to recognize those amounts in revenue within a year of receipt as work progresses on the related performance obligation.
Variable Consideration
It is common for our contracts to contain contract provisions that give rise to variable consideration such as unpriced change orders or volume discounts that may either increase or decrease the transaction price. We estimate the amount of variable consideration at the expected value or most likely amount, depending on which is determined to be more predictive of the amount to which the Company will be entitled. Variable consideration is included in the transaction price when it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
resolved. Our estimates of variable consideration and determination of whether to include such amounts in the transaction price are based largely on our assessment of legal enforceability, anticipated performance, industry business practices, and any other information (historical, current or forecasted) that is reasonably available to us. Variable consideration associated with unapproved change orders is included in the transaction price only to the extent of costs incurred.
We provide limited warranties to customers for work performed under our contracts. Such warranties are not sold separately, provide assurance that the services comply with the agreed-upon specifications and legal requirements and do not provide customers with a service in addition to assurance of compliance with agreed-upon specifications. Accordingly, these types of warranties are not considered to be separate performance obligations. Historically, warranty claims have not resulted in material costs incurred.
Contract Estimates and Modifications
Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. As a significant change in one or more of these estimates could affect the profitability of our contracts, we routinely review and update our contract-related estimates through a disciplined project review process in which management reviews the progress and execution of our performance obligations and the estimated costs at completion. As part of this process, management reviews information including, but not limited to, outstanding contract matters, progress towards completion, program schedule and the associated changes in estimates of revenue and costs. Management must make assumptions and estimates regarding the availability and productivity of labor, the complexity of the work to be performed, the availability and cost of materials, the performance of subcontractors, and the availability and timing of funding from the customer, along with other risks inherent in performing services under all contracts where we recognize revenue over-time using the cost-to-cost method.
We recognize changes in contract estimates on a cumulative catch-up basis in the period in which the changes are identified. Such changes in contract estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in prior periods. Changes in contract estimates may also result in the reversal of previously recognized revenue if the current estimate differs from the previous estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the period it is identified.
Contracts are often modified to account for changes in contract specifications and requirements. Most of our contract modifications are for goods or services that are not distinct from existing contracts due to the significant integration provided in the context of the contract and are accounted for as if they were part of the original contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. We account for contract modifications when the modification results in the promise to deliver additional goods or services that are distinct and the increase in the price of the contract is for the same amount as the stand-alone selling price of the additional goods or services included in the modification.
We evaluate our contracts whether we are acting as the principal or as the agent when providing services, which we consider in determining if revenue should be reported on a gross or net basis. We determine the Company to be a principal if we control the specified service before that service is transferred to a customer.
Contract Assets and Liabilities
Billing practices are governed by the contract terms of each project based upon costs incurred, achievement of the milestones or predetermined schedules. Billings do not necessarily correlate with revenue recognized over time using the cost-to-cost input method. Contract assets include unbilled amounts typically resulting from revenue under long-term contracts when the revenue recognized exceeds the amount billed to the customer. Contract liabilities consist of billings in excess of revenue recognized as well as deferred revenue.
Contract assets also include retainage, which represents amounts withheld by our clients from billings pursuant to provisions in the contracts and may not be paid to us until the completion of specific tasks or the completion of the project and, in some instances, for even longer periods.
Our contract assets and liabilities are reported in a gross position on a contract-by-contract basis at the end of each reporting period. We include in current assets and liabilities contract assets and liabilities, which may extend beyond one year.
Practical Expedients and Exemptions
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
Upon the adoption of ASC 606, we adopted the practical expedient in which we do not adjust the contract price for the effects of a significant financing component if the company expects, at contract inception, that the period between when the company transfers a service to a customer and when the customer pays for that service will be one year or less.
Impact of ASC 606 Adoption
We recognized the cumulative effect of initially applying ASC 606 as an adjustment to retained earnings in the balance sheet as of January 1, 2019 as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Adjustments due to
|
|
Balance at
|
|
|
December 31, 2018
|
|
ASC 606
|
|
January 1, 2019
|
|
Assets
|
|
|
|
|
|
|
Trade accounts receivable, net
|
$
|
60,742
|
|
|
$
|
(405
|
)
|
|
$
|
60,337
|
|
|
Contract assets
|
86,710
|
|
|
405
|
|
|
87,115
|
|
|
Deferred tax assets
|
2,747
|
|
|
117
|
|
|
2,864
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Deferred revenue
|
—
|
|
|
(475
|
)
|
|
(475
|
)
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Retained earnings (losses)
|
$
|
9,414
|
|
|
$
|
(358
|
)
|
|
$
|
9,056
|
|
The adoption of ASC 606 had no impact on cash provided by or used in operating, investing, or financing activities on our accompanying consolidated statement of cash flows and no impact on our consolidated statement of comprehensive income. The impact of adoption on our consolidated balance sheet and statement of operations for the year ended December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances Without
|
|
Effect of Change
|
|
|
As Reported
|
|
Adoption of ASC 606
|
|
Higher / (Lower)
|
|
Assets
|
|
|
|
|
|
|
Accounts receivable, net
|
$
|
50,570
|
|
|
$
|
51,955
|
|
|
$
|
(1,385
|
)
|
|
Contract assets
|
20,641
|
|
|
19,256
|
|
|
1,385
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Deferred revenue
|
505
|
|
|
—
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Retained losses
|
$
|
(33,002
|
)
|
|
$
|
(33,390
|
)
|
|
$
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances Without
|
|
Effect of Change
|
|
|
As Reported
|
|
Adoption of ASC 606
|
|
Higher / (Lower)
|
|
Statement of Operations
|
|
|
|
|
|
|
Revenue
|
$
|
554,868
|
|
|
$
|
554,898
|
|
|
$
|
(30
|
)
|
|
Loss before income taxes
|
(35,034
|
)
|
|
(35,064
|
)
|
|
30
|
|
|
Net loss
|
$
|
(39,224
|
)
|
|
$
|
(39,254
|
)
|
|
$
|
30
|
|
The impact of adoption on our current year financial results and our opening balance sheet was to recognize revenue based on the stand-alone selling price per unit for service contracts containing provisions for fluctuating rates per unit for the services in which the rates are not directly related to changes in the Company’s effort to perform under the contract.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230). This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Upon adopting this ASU, amounts generally described as restricted cash or restricted
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statement of cash flows. ASU No. 2016-18 is effective for the Company for interim and annual periods beginning after December 15, 2018. The Company adopted ASU No. 2016-18 effective January 1, 2019, with retrospective application to our consolidated and combined statements of cash flows so that the consolidated and combined statements of cash flows present a reconciliation of the changes in cash and cash equivalents and restricted cash. As a result of this retrospective adoption, the amount of cash used in investing activities for the period from January 13, 2017 to December 31, 2017 increased by $3,358 and the amount of cash and cash equivalents previously presented in the consolidated and combined statements of cash flows increased by $3,358 to reflect the inclusion of restricted cash in the amount reported for changes in cash, cash equivalents and restricted cash as of the beginning and end of the period for the period from January 1, 2017 through January 12, 2017 and as of the beginning of the period for the period from January 13, 2017 through December 31, 2017.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This ASU addresses specific cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and proceeds from the settlement of insurance claims. This ASU is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company adopted this standard effective January 1, 2019, noting the effect that the adoption of this ASU on our consolidated and combined financial statements is immaterial.
Reclassifications
Certain reclassifications have been made to the consolidated balance sheets of prior periods and the accompanying notes to conform to the current period presentation, including the change in presentation of contract assets and liabilities upon adoption of ASC 606 and restricted cash in the consolidated statements of cash flows upon adoption of ASU No. 2016-18 as described above.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), requiring all leases to be recognized on the balance sheet as a right-of-use asset and a lease liability, unless the lease is a short-term lease (generally a lease with a term of 12 months or less). At the commencement date of the lease, the Company will recognize: (i) a lease liability for the Company’s obligation to make payments under the lease agreement, measured on a discounted basis; and (ii) a right-of-use asset that represents the Company’s right to use, or control the use of, the specified asset for the lease term. This ASU originally required recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective transition method. In July 2018, the FASB issued ASU No. 2018-11, which provided an additional (and optional) transition method that permits application of this ASU at the adoption date with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In 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, 2021, and interim periods within the fiscal year ending December 31, 2022, with early adoption permitted. The Company has not yet selected a transition method and is currently evaluating the effect that the adoption of this ASU will have on its consolidated and combined financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets. The amendments contained in this ASU will be applied through a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2018, the FASB issued ASU No. 2018-19, which amended the effective date of ASU No. 2016-13 and clarified that receivables arising from operating leases are not within the scope of Subtopic 326-20. In October 2019, the FASB delayed the effective date of this ASU, extending the effective date for non-public business entities and making the ASU effective for the Company for the fiscal year ending December 31, 2023, and interim periods therein, with early adoption permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated and combined financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the measurement of goodwill impairment by eliminating the requirement that an
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
entity compute the implied fair value of goodwill based on the fair values of its assets and liabilities to measure impairment. Instead, goodwill impairment will be measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. This ASU also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. In October 2019, the FASB delayed the effective date for implementation of ASU No.2017-04. The Company will be required to adopt ASU No. 2017-04 for annual and any interim impairment tests for the periods beginning on January 1, 2023. ASU No. 2017-04 must be applied prospectively, with early adoption permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The ASU will be effective for annual reporting periods beginning after December 15, 2021 and interim periods in fiscal years beginning after December 15, 2022 and early adoption is permitted. The Company is still assessing the impact of ASU No. 2019-12 on its consolidated and combined financial statements.
3. Revenue
We disaggregate our revenue from customers by type of service as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
|
Period from January 13, 2017 through December 31, 2017
|
|
|
Period from January 1, 2017 through January 12, 2017
|
|
Environmental Services
|
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
97,814
|
|
|
$
|
80,851
|
|
|
$
|
22,865
|
|
|
|
$
|
885
|
|
|
Construction contracts
|
80,968
|
|
|
255,410
|
|
|
196,833
|
|
|
|
6,377
|
|
|
Services
|
1,614
|
|
|
6,844
|
|
|
12,883
|
|
|
|
189
|
|
|
Total Environmental Services
|
180,396
|
|
|
343,105
|
|
|
232,581
|
|
|
|
7,451
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance and Technical Services
|
|
|
|
|
|
|
|
|
|
Services
|
374,472
|
|
|
397,357
|
|
|
188,658
|
|
|
|
1,679
|
|
|
Total Maintenance and Technical Services
|
374,472
|
|
|
397,357
|
|
|
188,658
|
|
|
|
1,679
|
|
|
Total revenue
|
$
|
554,868
|
|
|
$
|
740,462
|
|
|
$
|
421,239
|
|
|
|
$
|
9,130
|
|
On December 31, 2019, we had $54,918 of the transaction price allocated to remaining performance obligations. We expect to recognize approximately 93% of our remaining performance obligations as revenue within one year and 7% in year two. 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 December 31, 2019.
As of December 31, 2019, we included unapproved change orders associated with project scope changes of $8,254 in determining the profit or loss on certain construction contracts. These change orders were approved subsequent to year-end.
4. Balance Sheet Items
Allowance for doubtful accounts
The following table presents the changes in the allowance for doubtful accounts:
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Balance, beginning of period (Successor)
|
$
|
—
|
|
|
$
|
—
|
|
|
Add: provision
|
146
|
|
|
—
|
|
|
Less: deduction and other adjustments
|
—
|
|
|
—
|
|
|
Balance, end of period (Successor)
|
$
|
146
|
|
|
$
|
—
|
|
Property and equipment, net
The following table shows the components of property and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Plant, machinery and equipment
|
$
|
75,578
|
|
|
$
|
74,896
|
|
|
Structural fill site improvements
|
55,760
|
|
|
55,760
|
|
|
Vehicles
|
19,163
|
|
|
17,407
|
|
|
Office equipment
|
2,741
|
|
|
1,623
|
|
|
Buildings and leasehold improvements
|
262
|
|
|
262
|
|
|
Structural fill sites
|
7,110
|
|
|
7,110
|
|
|
Construction in progress
|
12,324
|
|
|
3,488
|
|
|
Total property and equipment
|
$
|
172,938
|
|
|
$
|
160,546
|
|
|
Less: accumulated depreciation
|
(87,644
|
)
|
|
(71,605
|
)
|
|
Property and equipment, net
|
$
|
85,294
|
|
|
$
|
88,941
|
|
Depreciation expense for the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), the period from January 13, 2017 through December 31, 2017 (Successor), and the period from January 1, 2017 through January 12, 2017 (Predecessor) was $17,944, $49,231, $22,404, and $763, respectively. During the fourth quarter of the year ended December 31, 2019, the Company re-assessed the useful life estimates of certain assets adjusted to fair value through the application of "push-down" accounting in conjunction with the transaction on January 13, 2017 in which BCP acquired a 76% equity position in Charah Management. These assets are depreciated through cost of sales. The Company accounted for this as a change in estimate that was applied prospectively, effective as of October 1, 2019. This change in depreciable lives resulted in a decrease in the useful lives for these assets and an increase of $941 in depreciation expense during the year ended December 31, 2019 and will result in an increase of $3,763 and $2,763 in depreciation expense during the years ending December 31, 2020 and 2021, respectively, and a reduction of $7,466 for all years thereafter.
Accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Accrued expenses
|
$
|
20,456
|
|
|
$
|
22,473
|
|
|
Accrued payroll and bonuses
|
13,273
|
|
|
15,480
|
|
|
Accrued interest
|
1,761
|
|
|
—
|
|
|
Accrued liabilities
|
$
|
35,490
|
|
|
$
|
37,953
|
|
Asset Retirement Obligations
The Company owns and operates two structural fill sites that will have continuing maintenance and monitoring requirements subsequent to their closure. As of December 31, 2019 (Successor) and 2018 (Successor), the Company has accrued $15,131 and $26,065, respectively, for the asset retirement obligation.
The following table reflects the activity for the asset retirement obligation:
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Balance, beginning of period
|
$
|
26,065
|
|
|
$
|
1,072
|
|
|
Liabilities incurred
|
1,017
|
|
|
24,673
|
|
|
Liabilities settled
|
(13,391
|
)
|
|
—
|
|
|
Accretion
|
1,126
|
|
|
320
|
|
|
Revision in estimate
|
314
|
|
|
—
|
|
|
Balance, end of period
|
15,131
|
|
|
26,065
|
|
|
Less: current portion
|
(9,944
|
)
|
|
(14,704
|
)
|
|
Non-current portion
|
$
|
5,187
|
|
|
$
|
11,361
|
|
5. Business Combination
On March 30, 2018, Charah Management completed a transaction with SCB Materials International, Inc. and affiliated entities (“SCB”), a previously unrelated third party, pursuant to which Charah acquired certain assets and liabilities of SCB for a purchase price of $35,000, with $20,000 paid at closing and $15,000 to be paid over time in conjunction with certain performance metrics. The contract also contained various mechanisms for a working capital true-up. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. As of December 31, 2019 (Successor), the allocation of purchase price was finalized (as summarized below); fair value estimates of identifiable assets acquired and liabilities assumed are based on management’s estimates, judgments and assumptions. Goodwill was allocated to the Environmental Solutions segment. The total amount of goodwill that is expected to be deductible for tax purposes is $2,025.
In November 2018, the $15,000 to be paid over time was reduced by $3,300. The present value of the future payments, using a discount rate of 2.50% was determined to be $11,014. The Company expects the future payments to occur in 2021 and beyond. The allocation of purchase price for the acquisition has been reflected in the table below.
|
|
|
|
|
|
|
|
Cash acquired
|
$
|
17
|
|
|
Net working capital, excluding cash
|
21,255
|
|
|
Property, plant and equipment
|
5,300
|
|
|
Trade name intangible assets
|
694
|
|
|
Customer relationship intangible assets
|
742
|
|
|
Technology
|
1,972
|
|
|
Non-compete and other agreements
|
289
|
|
|
Goodwill
|
745
|
|
|
Total purchase price
|
$
|
31,014
|
|
From the date of acquisition, revenue of $45,828 and earnings $1,609 from the acquired business were included in the consolidated and combined statements of operations for the year ended December 31, 2018 (Successor).
The following unaudited information presents the pro forma consolidated revenue and net income for the periods indicated as if the acquisition had been included in the consolidated results of operations beginning January 1, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Year Ended December 31, 2018
|
|
Period from January 13, 2017 through December 31, 2017
|
|
|
Period from January 1, 2017 through January 12, 2017
|
|
Pro forma revenue
|
$
|
757,285
|
|
|
$
|
496,687
|
|
|
|
$
|
11,158
|
|
|
Pro forma net (loss) income attributable to Charah Solutions, Inc.
|
$
|
(7,972
|
)
|
|
$
|
18,877
|
|
|
|
$
|
(5,447
|
)
|
The above unaudited pro forma results have been calculated by combining the historical results of the Company and the acquired business as if the acquisition had occurred as of the beginning of the fiscal year prior to the acquisition date, and then adjusting the income tax provisions as if they had been calculated on the resulting consolidated and combined results. The pro forma results include estimates for additional depreciation related to the fair value of property, plant and equipment and intangible asset amortization.
The pro forma results reflect elimination of $682 of direct acquisition costs that were incurred in the year ended December 31, 2018 (since for purposes of the pro forma presentation they have been reflected in 2017 instead of in 2018). For all
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
periods presented, historical depreciation and amortization expense of the acquired business was adjusted to reflect the acquisition date fair value amounts of the related tangible and intangible assets. No other material pro forma adjustments were deemed necessary, either to conform the acquisition to the Company’s accounting policies or for any other situation. The pro forma information is not necessarily indicative of the results that would have been achieved had the transactions occurred on the date indicated or that may be achieved in the future.
6. Equity Method Investments
The Company has an investment in a company that provides ash management and remarketing services to the electric utility industry. The Company accounts for its investment under the equity method of accounting because we have significant influence over the financial and operating policies of the company. The Company had a receivable due from the equity method investment of $96 and $108 at December 31, 2019 and 2018, respectively.
Summarized balance sheet information of our equity method investment entity as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Current assets
|
$
|
2,482
|
|
|
$
|
2,619
|
|
|
Noncurrent assets
|
395
|
|
|
508
|
|
|
Total assets
|
$
|
2,877
|
|
|
$
|
3,127
|
|
|
Current liabilities
|
321
|
|
|
607
|
|
|
Equity of Charah
|
5,078
|
|
|
5,060
|
|
|
Equity of joint venture partner
|
(2,522
|
)
|
|
(2,540
|
)
|
|
Total liabilities and members’ equity
|
$
|
2,877
|
|
|
$
|
3,127
|
|
Summarized financial performance of our equity method investment entity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
|
Period from January 13, 2017 through December 31, 2017
|
|
|
Period from January 1, 2017 through January 12, 2017
|
|
Operating Data
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
9,354
|
|
|
$
|
11,076
|
|
|
$
|
7,573
|
|
|
|
$
|
300
|
|
|
Net income
|
$
|
4,590
|
|
|
$
|
4,813
|
|
|
$
|
1,632
|
|
|
|
$
|
96
|
|
|
The Company’s share of net income
|
$
|
2,295
|
|
|
$
|
2,407
|
|
|
$
|
816
|
|
|
|
$
|
48
|
|
The following table reflects our proportional ownership activity in our investment account:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
|
Period from January 13, 2017 through December 31, 2017
|
|
|
Period from January 1, 2017 through January 12, 2017
|
|
Opening balance
|
$
|
5,060
|
|
|
$
|
5,006
|
|
|
$
|
5,289
|
|
|
|
$
|
5,241
|
|
|
Distributions
|
(2,277
|
)
|
|
(2,353
|
)
|
|
(1,099
|
)
|
|
|
—
|
|
|
Share of net income
|
2,295
|
|
|
2,407
|
|
|
816
|
|
|
|
48
|
|
|
Closing balance
|
$
|
5,078
|
|
|
$
|
5,060
|
|
|
$
|
5,006
|
|
|
|
$
|
5,289
|
|
7. Distributions to Stockholders, Receivable from Affiliates, and Related Party Transactions
Prior to the Company’s June 18, 2018 corporate reorganization, the Company made certain distributions to stockholders and members to cover their tax liabilities. During the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), the period from January 13, 2017 through December 31, 2017 (Successor), and the period from January 1, 2017
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
through January 12, 2017 (Predecessor), the Company made distributions of $0, $686, $136,085, and $20,660, respectively, a portion of which was used to pay for income taxes. As of December 31, 2019 (Successor) and 2018 (Successor), the receivable from affiliates associated with these distributions were $294 and $759, respectively.
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 $184, $0, $0, and $0 during the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), for the period from January 13, 2017 through December 31, 2017 (Successor), and the period from January 1, 2017 through January 12, 2017 (Predecessor). The Company had no receivables outstanding from ATC at December 31, 2019 (Successor) and 2018 (Successor). The Company had payables and accrued expenses, net of credit memos, due to ATC of $62 and $0 at December 31, 2019 (Successor) and 2018 (Successor), respectively.
Brown & Root Industrial Services, LLC (“B&R”), an entity 50% owned by BCP, our majority stockholder, provided subcontracted construction services at one of our remediation and compliance service sites. Expenses to B&R were $1,565, $19,401, $98, and $0 during the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), for the period from January 13, 2017 through December 31, 2017 (Successor), and the period from January 1, 2017 through January 12, 2017 (Predecessor). The Company had no receivables outstanding from B&R at December 31, 2019 (Successor) and 2018 (Successor). The Company had payables and accrued liabilities, net of credit memos, due to B&R of $254 and $4,919 at December 31, 2019 (Successor) and 2018 (Successor), respectively.
The Company rented their corporate office through October 2019 and rents housing at work sites and a condo from Price Real Estate, LLC (“Price Real Estate”), an entity owned by a stockholder of the Company. The lease for the corporate office was a triple net lease requiring monthly payments of $38. Other property is rented on a month-to-month basis. Rental expense associated with Price Real Estate of $391, $459, $438, and $15 was incurred during the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), for the period from January 13, 2017 through December 31, 2017 (Successor), for the period from January 1, 2017 through January 12, 2017 (Predecessor), respectively. The Company had a receivable due from Price Real Estate of $0 at December 31, 2019 (Successor) and 2018 (Successor). The Company had a payable due to Price Real Estate of $2 and $0 at December 31, 2019 (Successor) and 2018 (Successor), respectively.
PriceFlight, LLC (“PriceFlight”), an entity owned by a stockholder of the Company, provides flight services to the Company. Expenses to PriceFlight for flight services amounted to $85, $1,208, $685, and $21 during the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), for the period from January 13, 2017 through December 31, 2017 (Successor), and for the period from January 1, 2017 through January 12, 2017 (Predecessor), respectively.
Management determined that Price Real Estate and PriceFlight are variable interest entities. The Company has variable interests in them through the common ownership and contractual agreements discussed above. The Company is not considered to be the primary beneficiary. Management considers the likelihood to be remote that the Company will be required to make future funds available to Price Real Estate and PriceFlight. However, were the Company required to make funds available the maximum exposure to the Company would be any excess of the debt obligations of Price Real Estate and PriceFlight over the fair value of their respective assets.
As further discussed in Note 9, in March 2020, the Company entered into an agreement with an investment fund affiliated with BCP to sell 26,000 shares of Preferred Stock.
8. Goodwill and Intangible Assets
The Company’s goodwill and intangible assets consist of the following as of:
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Definite-lived intangibles
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
78,942
|
|
|
$
|
(22,938
|
)
|
|
$
|
78,942
|
|
|
$
|
(15,044
|
)
|
|
Technology
|
2,003
|
|
|
(351
|
)
|
|
2,003
|
|
|
(150
|
)
|
|
Non-compete and other agreements
|
289
|
|
|
(253
|
)
|
|
289
|
|
|
(109
|
)
|
|
SCB trade name
|
694
|
|
|
(243
|
)
|
|
694
|
|
|
(104
|
)
|
|
Rail easement
|
110
|
|
|
(110
|
)
|
|
110
|
|
|
(88
|
)
|
|
Total
|
$
|
82,038
|
|
|
$
|
(23,895
|
)
|
|
$
|
82,038
|
|
|
$
|
(15,495
|
)
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangibles
|
|
|
|
|
|
|
|
|
|
Charah trade name
|
$
|
34,330
|
|
|
|
|
$
|
34,330
|
|
|
|
|
Goodwill
|
74,213
|
|
|
|
|
74,213
|
|
|
|
|
Total
|
$
|
108,543
|
|
|
|
|
|
$
|
108,543
|
|
|
|
As of December 31, 2019 and 2018, definite-lived intangible assets included customer relationships, technology, non-compete and other agreements, SCB trade name (see Note 5) and a rail easement. These assets are amortized on a straight-line basis over their estimated useful lives as shown in the table below. Amortization expense was $8,400, $8,304, $7,191, and $0 for the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), the period from January 13, 2017 through December 31, 2017 (Successor), and the period from January 1, 2017 through January 12, 2017 (Predecessor), respectively.
As of December 31, 2019, the total estimated amortization expense of the Company’s definite-lived intangible assets for each of the next five years and thereafter is as follows:
|
|
|
|
|
|
|
|
For the Year Ending December 31,
|
|
|
2020
|
$
|
8,269
|
|
|
2021
|
8,233
|
|
|
2022
|
8,233
|
|
|
2023
|
8,129
|
|
|
2024
|
8,095
|
|
|
Thereafter
|
17,184
|
|
|
Total
|
$
|
58,143
|
|
9. Credit Agreement
In January 2017, Charah entered into a $110,000 revolving credit facility (the “Charah Revolving Credit Facility”) with a bank with a maturity date of January 13, 2022. The agreement also provided for additional borrowings starting at $38,000 that reduced to $0 as of December 31, 2017. Interest was calculated using the London Inter-bank Offered Rate ("LIBOR") rate plus the Applicable Rate (as defined in the Charah Revolving Credit Facility). The Applicable Rate was based upon the consolidated leverage ratio and ranged from 1.75% to 3.50%. If certain stipulated criteria were met, the outstanding principal and accrued interest on the credit facility could be prepaid without penalty. The debt was repaid in full in October 2017.
In January 2017, Charah also entered into a $13,000 equipment line scheduled to term out every six months or once the maximum borrowings had been reached. The debt was repaid in full in October 2017.
In August 2017, Allied entered into a $20,000 revolving credit facility (the “Allied Revolving Credit Facility”) with a bank, with its immediate parent company, its subsidiaries, and Charah serving as guarantors. Availability under the Allied Revolving Credit Facility was limited to a borrowing base. Interest was calculated using the LIBOR rate plus the Applicable Margin (as defined in the Allied Revolving Credit Facility). Based on the consolidated leverage ratio, the Applicable Rate (as defined in the Allied Revolving Credit Facility) ranged from 1.50% to 3.00%. The agreement was set to mature on August 17, 2019. A total of $6,000 was borrowed against the revolving credit facility in September 2017. The debt was repaid in full in October 2017.
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
In October 2017, Charah entered into a credit agreement with a bank providing for a revolving credit facility (the “Credit Facility”) with a principal amount of up to $45,000. 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 the Company’s election, either (i) an adjusted LIBOR plus a 2.00% borrowing margin, or (ii) an alternative base rate plus a 1.00% borrowing margin. Customary fees were payable in respect of the Credit Facility and included (i) commitment fees in an annual amount equal to 0.50% of the daily unused portions of the Credit Facility, and (ii) a 2.00% fee on outstanding letters of credit. The Credit Facility had a maturity date of October 25, 2022. The Credit Facility was terminated in September 2018 and all amounts outstanding thereunder were repaid.
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 includes:
|
|
|
|
•
|
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 expires 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”).
|
After the Third Amendment all amounts associated with the Revolving Loan and the Term Loan under the Credit Facility will mature in July 2022 as discussed more fully below. The interest rates per annum applicable to the loans under the Credit Facility are based on a fluctuating rate of interest measured by reference to, at our election, either (i) the Eurodollar rate, currently the London Inter-bank Offered Rate (“LIBOR”), or (ii) an alternative base rate. Various margins are added to the interest rate based upon our consolidated net leverage ratio (as defined in the Credit Facility). Customary fees are payable in respect of the Credit Facility and include (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 are secured by substantially all of the assets of the Company.
The Credit Facility contains various customary representations and warranties, and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of us and our restricted subsidiaries to grant liens, incur indebtedness (including guarantees), make investments, engage in mergers and acquisitions, make dispositions of assets, make restricted payments or change the nature of our or our subsidiaries' business. The Credit Facility contains financial covenants related to the consolidated net leverage ratio and the fixed charge coverage ratio (as defined in the Credit Facility), which have been modified as described below.
The Credit Facility also contains certain affirmative covenants, including reporting requirements, such as the delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
The Credit Facility includes customary events of default, including non-payment of principal, interest or fees as they come due, violation of covenants, inaccuracy of representations or warranties, cross-default to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control.
The Revolving Loan provides a principal amount of up to $50,000, reduced by outstanding letters of credit. As of December 31, 2019 (Successor), $19,000 was outstanding on the Revolving Loan and $11,980 in letters of credit were outstanding.
But for Amendment No. 2 to Credit Agreement and Waiver (the “Second Amendment”), as of June 30, 2019, we would not have been in compliance with the requirement to maintain a consolidated net leverage ratio of 3.75 to 1.00 under the Credit Facility. On August 13, 2019, we entered into the Second Amendment, pursuant to which, among other things, the required lenders agreed to waive such non-compliance.
In addition, pursuant to the terms of the Second Amendment, the Credit Facility was amended to revise the required financial covenant ratios, which have been modified as described below. As consideration for these accommodations, we agreed that amounts borrowed pursuant to the Delayed Draw Commitment would not exceed $15,000 at any one time outstanding (without reducing the overall Delayed Draw Commitment amount). Further, the margin of interest charged on all outstanding loans was increased to 4.00% for loans based on LIBOR and 3.00% for loans based on the alternative base rate. The Second Amendment revised the amount of (i) the commitment fees to 0.35% at all times for the unused portions of the Credit Facility and (ii) fees on outstanding letters of credit to 3.35% at all times. The Second Amendment also added a requirement to make two additional
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
scheduled prepayments of outstanding loans under the Credit Facility, including a payment of $50,000 on or before September 13, 2019 and an additional payment of $40,000 on or before March 31, 2020. The $50,000 payment was made before September 13, 2019, using proceeds of the Brickhaven deemed termination payment.
The Second Amendment also included revisions to the restrictive covenants, including removing certain exceptions to the restrictions on our ability to make acquisitions, to make investments and to make dividends or other distributions. After giving effect to the Second Amendment, we will not be permitted to make any distributions or dividends to our stockholders without the consent of the required lenders.
After the end of our fiscal year ended, December 31, 2019, in March 2020, the Company entered into Amendment No. 3 to Credit Agreement (the “Third Amendment”).
Pursuant to the terms of the Third Amendment, the Credit Facility was amended to waive the mandatory $40,000 prepayment due on or before March 31, 2020, and to revise the required financial covenant ratios such that, after giving effect to the Third Amendment, we are not required to comply with any financial covenants through December 30, 2020. After December 30, 2020, we will be required to comply with a maximum consolidated net leverage ratio of 6.50 to 1.00 from December 31, 2020 through June 29, 2021, decreasing to 6.00 to 1.00 from June 30, 2021 through December 30, 2021, and to 3.50 to 1.00 as of December 31, 2021 and thereafter. After giving effect to the Third Amendment, we will also be required to comply with a minimum fixed charge coverage ratio of 1.00 to 1.00 as of December 31, 2020, increasing to 1.20 to 1.00 as of March 31, 2021 and thereafter. In the event that we are unable to comply in the future with such financial covenants upon delivery of our financial statements pursuant to the terms of the Credit Facility, an Event of Default (as defined in the Credit Facility) will have occurred and the Administrative Agent can then, following a specified cure period, declare the unpaid principal amount of all outstanding loans, all interest accrued and unpaid thereon, and all other amounts payable to be immediately due and payable by the Company.
The Third Amendment increased the maximum amount available to be borrowed pursuant to the Delayed Draw Commitment from $15,000 to $25,000, subject to certain quarterly amortization payments. The Third Amendment also included revisions to the restrictive covenants, including increasing the amount of indebtedness that the Company may incur in respect of certain capitalized leases from $50,000 to $75,000.
Under the Third Amendment, the Company has agreed to make monthly amortization payments in respect of term loans beginning in April 2020, and to move the maturity date for all loans under the Credit Agreement to July 31, 2022 (the “Maturity Date”). In addition, if at any time after August 13, 2019, the outstanding principal amount of the Delayed Draw Term Loans exceeds $10,000, we will incur additional interest at a rate equal to 10.0% per annum on all daily average amounts exceeding $10,000 payable at March 31, 2020 and the Maturity Date. Further, the Third Amendment requires mandatory prepayments of revolving loans with any cash held by the Company in excess of $10,000, which excludes the amount of proceeds received in respect of the Preferred Stock Offering (as defined below) to the extent such funds are used for liquidity and general corporate purposes. The Company has also agreed to an increase of four percent (4%) to the interest rate applicable to the Closing Date Term Loan that will be compounded monthly and paid in kind by adding such portion to the outstanding principal amount.
As a condition to entering into the Second Amendment, we are required to pay the Administrative Agent an amendment fee (the “Second Amendment Fee”) in an amount equal to 1.50% of the total credit exposure under the Credit Agreement, immediately prior to the effectiveness of the Second Amendment. Of the Second Amendment Fee, 0.50% was due and paid on October 15, 2019 and 1.00% of such Second Amendment Fee will become due and payable on August 16, 2020 if the facility has not been terminated on or prior to August 15, 2020. We are also required to pay the Administrative Agent an amendment fee associated with the Third Amendment (the “Third Amendment Fee”) in an amount equal to 0.20% of the total credit exposure under the Credit Agreement, immediately prior to the effectiveness of the Third Amendment, with such Third Amendment Fee being due and payable on June 30, 2020. Finally, we will pay an additional fee with respect to the Third Amendment in the amount of $2,000 with such fee being due and payable on the Maturity Date; provided that if the facility is terminated by December 31, 2020, 50% of this fee shall be waived.
As a condition to the Third Amendment, the Company entered into an agreement with an investment fund affiliated with BCP (the “Holder”) to sell 26,000 shares of Series A Preferred Stock, par value $0.01(the “Preferred Stock”) for approximately $25,220 in a private placement (the “Preferred Stock Offering”). The Preferred Stock will have an initial liquidation preference of $1 (one thousand dollars) per share and will pay a dividend 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’s intention is to pay dividends in kind for the foreseeable future. Proceeds from the Preferred Stock Offering will be used for liquidity and general corporate purposes.
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
Following the three-month anniversary of the date of issuance, the Preferred Stock may be converted at the option of the holders into shares of the Company’s common stock at a conversion price of $2.77 per share (the “Conversion Price”), which represents a 30% premium to the 20-day volume-weighted average price ended March 4, 2020. Following the third anniversary of the date of issuance, the Company may, subject to certain requirements, give notice to the holders of the Preferred Stock of the Company’s intent to mandatorily convert the Preferred Stock, and the holders of the Preferred Stock will have the option to either agree to such conversion or force the Company to redeem the Preferred Stock for cash. Following the seven-year anniversary of the date of issuance, the holders of the Preferred Stock shall have the right, subject to applicable law, to require the Company at any time to redeem the Preferred Stock, in whole or in part, from any source of funds legally available for such purpose.
In connection with certain change of control transactions, the holders of the Preferred Stock will be entitled to cause the Company to repurchase the Preferred Stock for cash in an amount equal to the greater of (i) the liquidation preference plus accrued and unpaid dividends (plus, a make-whole premium equal to the net present value of dividend payments through the third anniversary of the issue date, for any transaction occurring prior to such date, subject to certain limitations) and (ii) the amount each holder would be entitled to receive if the Preferred Stock were converted prior to such transaction. The Company will have the right to redeem the Preferred Stock starting on the third anniversary of the issue date at the greater of (i) the closing sale price multiplied by the number of shares of common stock issuable upon conversion and (ii) certain premiums to the liquidation preference that will decrease each year following the third anniversary of the issuance date.
From April 5, 2020, until conversion, the holders of the Preferred Stock will vote together with Company’s common stock on an as-converted basis and will also have rights to vote on certain matters impacting the Preferred Stock. After April 5, 2020, the holders of the Preferred Stock will have the right to either elect one member to the Company’s board of directors or appoint one non-voting board observer.
10. Notes Payable
The following table summarizes the significant components of debt at each balance sheet date and provides maturities and interest rate ranges for each major category as of December 31, 2019 and 2018:
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Successor
|
2019
|
|
2018
|
|
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 $3,341 as of December 31, 2019.
|
$
|
3,937
|
|
|
$
|
4,949
|
|
|
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 $9,768 as of December 31, 2019.
|
10,429
|
|
|
12,293
|
|
|
Various equipment notes entered into in 2019, payable in monthly installments ranging from $2 to $23, including interest ranging from 3.9% to 6.4%, maturing in April 2021 through December 2024. The notes are secured by equipment with a net book value of $4,340 as of December 31, 2019.
|
4,333
|
|
|
—
|
|
|
In June 2018, the Company entered into a $12,000 non-revolving credit note with a bank. The credit note converted to a term loan on April 10, 2019 and was amended in November and December 2019. Pursuant to the terms of the amendment, this loan was amended to require a maturity date of December 31, 2020 and interest on borrowings to be calculated at a fixed rate per annum equal to 5.9%. The note is secured by equipment with a net book value of $8,291 as of December 31, 2019.
|
9,900
|
|
|
8,299
|
|
|
In July 2019, the Company entered into a commercial insurance premium financing agreement, payable in monthly installments of $169, including interest of 4.4%, maturing in March 2020.
|
506
|
|
|
—
|
|
|
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 $6,666 as of December 31, 2019.
|
7,719
|
|
|
9,563
|
|
|
Pursuant to the terms of the Third Amendment, the Closing Date Term Loan and the Delayed Draw Term Loan entered into in September 2018 as part of the Syndicated Credit Facility (see also Note 9), maturing July 2022. The interest rate applicable to the Closing Date Term Loan and the Delayed Draw Term Loan is based on a fluctuating rate of interest measured by reference to, at the Company’s election, either (i) the Eurodollar rate, currently the LIBOR rate, or (ii) an alternative base rate. With respect to the Closing Date Term Loan, principal payments required are $2,563 in March 2020, $854 monthly from April 2020 through September 2020, $1,153 monthly from October 2020 through December 2020, $1,280 monthly from January 2021 through December 2021, and $1,500 monthly thereafter. With respect to the Delayed Draw Term Loan, principal payments required are $2,500 in June 2020 and $833 quarterly from July 2020 through March, 2021. Beginning in April 2021, the then outstanding principal balance of the Delayed Draw Term Loans will be payable in sixteen equal installments monthly thereafter. The term loan is secured by substantially all the assets of the Company and is subject to certain financial covenants.
|
152,188
|
|
|
202,438
|
|
|
Total
|
189,012
|
|
|
237,542
|
|
|
Less debt issuance costs
|
(3,441
|
)
|
|
(3,252
|
)
|
|
|
185,571
|
|
|
234,290
|
|
|
Less current maturities
|
(34,873
|
)
|
|
(23,268
|
)
|
|
Notes payable due after one year
|
$
|
150,698
|
|
|
$
|
211,022
|
|
Included in interest expense, net in the consolidated statements of operations for the year ended December 31, 2018 (Successor) was $12.5 million of costs incurred in conjunction with the refinance of our term loan, consisting of a $10.4 million non-cash write-off of debt issuance costs and a $2.1 million prepayment penalty.
In January 2017, Charah entered into a $14,000 term note, payable to a bank in quarterly principal payments of $811 through July 2021 at which point all outstanding principal, accrued interest, and fees would have been due. Interest was calculated using the LIBOR rate plus the Applicable Rate. This note was repaid in full in October 2017.
In January 2017, Charah entered into a $42,000 equipment loan split into eight notes with payoff terms between 24 and 60 months with seven having an interest rate of 5.25% and one having an interest rate of 4.83%. The notes were repaid in full in October 2017.
Future maturities of notes payable at December 31 are as follows and reflects the waiver of the mandatory $40,000 prepayment due on or before March 31, 2020 and the new payment terms noted in the Third Amendment:
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
|
|
|
|
|
|
|
|
For the Year Ending December 31,
|
|
|
2020
|
$
|
34,873
|
|
|
2021
|
21,556
|
|
|
2022
|
124,516
|
|
|
2023
|
5,217
|
|
|
2024
|
2,472
|
|
|
Thereafter
|
378
|
|
|
Total
|
$
|
189,012
|
|
11. Interest Rate Swap
To manage interest rate risk in a cost-efficient manner, the Company entered into an interest rate swap in December 2017 whereby the Company agreed to exchange with the counterparty, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to a notional amount. The interest rate swap is not designated for hedge accounting. The change in fair value of the interest rate swap is immediately recognized in earnings, within interest expense, net.
As of both December 31, 2019 and 2018, the notional amount of the interest rate swap was $150,000. A fair value liability of $1,116 was recorded in the combined balance sheet within other liabilities as of December 31, 2019 and a fair value asset of $891 was recorded in the consolidated balance sheet within other assets as of December 31, 2018. The total amount of loss added to interest expense, net for year ended December 31, 2019 (Successor) and the period from January 13, 2017 through December 31, 2017 (Successor) was $2,007 and $198, respectively. The total amount of gain subtracted from interest expense, net for the year ended December 31, 2018 (Successor) was $1,089. There was no impact in the period from January 1, 2017 through January 12, 2017 (Predecessor).
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 consolidated balance sheets.
Our contract assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Costs and estimated earnings in excess of billings
|
$
|
19,256
|
|
|
$
|
86,710
|
|
|
Retainage
|
1,385
|
|
|
—
|
|
|
Total contract assets
|
$
|
20,641
|
|
|
$
|
86,710
|
|
The decrease in costs and estimated earnings in excess of billings in 2019 was primarily attributable to the early completion of the significant Brickhaven ash remediation contract, which accelerated revenue and expenses related to this contract into 2018, and the collection of the related billings in 2019. This decrease was offset by the reclassification of retainage receivable from account receivables, net to contract assets due to the adoption of ASC 606.
Our contract liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Deferred revenue
|
$
|
505
|
|
|
$
|
—
|
|
|
Billings in excess of costs and estimated earnings
|
77
|
|
|
1,352
|
|
|
Total contract liabilities
|
$
|
582
|
|
|
$
|
1,352
|
|
The decrease in contract liabilities was primarily related to normal business operations offset by the impact of the adoption of ASC 606.
We recognized revenue of $1,352 for the year ended December 31, 2019 that was previously included in the contract liability balance at December 31, 2018.
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
Costs and estimated earnings on uncompleted contracts as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Costs incurred on uncompleted contracts
|
$
|
65,343
|
|
|
$
|
314,700
|
|
|
Estimated earnings
|
9,618
|
|
|
96,176
|
|
|
Total costs and earnings
|
74,961
|
|
|
410,876
|
|
|
Less billings to date
|
(55,782
|
)
|
|
(325,518
|
)
|
|
Costs and estimated earnings in excess of billings
|
$
|
19,179
|
|
|
$
|
85,358
|
|
The net balance in process is classified on the consolidated balance sheets as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Costs and estimated earnings in excess of billings
|
$
|
19,256
|
|
|
$
|
86,710
|
|
|
Billings in excess of costs and estimated earnings
|
(77
|
)
|
|
(1,352
|
)
|
|
Net balance in process
|
$
|
19,179
|
|
|
$
|
85,358
|
|
Anticipated losses on long-term contracts are recognized when such losses become evident. As of December 31, 2019 and 2018, accruals for anticipated losses on long-term contracts were $322 and $677, respectively.
13. Stock/Unit-Based Compensation
Effective January 1, 2009, Charah established the Plan, whereby certain key employees were issued units that settle in shares of non-voting common stock upon the occurrence of certain specified events. Units issued under the Plan were classified as liabilities, due to a call option which allowed Charah to repurchase the non-voting common stock immediately after settlement of the units for an amount other than the fair value of the non-voting common stock. Compensation cost was recognized for issued units based upon the fair value of the units at the end of each reporting period and the percentage of requisite service rendered by the employees holding the units.
The Plan was terminated in December 2016 and all units became 100% vested and were converted into shares of non-voting common stock that did not continue past the date of the investment by BCP on January 13, 2017.
Units of the Plan had a value based on the value of one share of Charah’s non-voting common stock. Participant units vested at the rate of 20% per year of service and become fully vested and non-forfeitable after the completion of five years of service from the issuance of the units. Benefits under the Plan were settled in shares of non-voting common stock, based upon the ratio of one unit’s value to the value of one share of non-voting common stock as of the date of issuance of the unit. Participants were required to enter into a shareholder agreement which restricted the transfer of units and non-voting common stock issued under the Plan.
At inception of the Plan, 63 units were authorized. During 2016, Charah issued 10 units. In December 2016, all units became 100% vested. The 53 units issued and vested were converted into 49,860 shares of non-voting common stock based on the ratio described above. The 50 shares of non-voting common stock were valued at $34,554, based on the purchase price associated with the transaction with BCP in January 2017, of which in 2016 Charah paid $15,666, and the remaining $18,888 was recorded as a current liability at December 31, 2016 (Predecessor). Charah paid the remaining $18,888 in January 2017.
The Limited Liability Company Agreement for Charah Management provided for the issuance of up to 1 Series C profits interests (the “Charah Series C Profits Interests”). In 2017, Charah Management adopted the Charah Series C Profits Interest Plan and issued 1 of such units to employees. The Charah Series C Profits Interests participated in distributions to Charah members based on specified rates of return being realized to the Charah Series A and Charah Series B membership interests. The Charah Series C Profits Interest Plan is no longer in place following our corporate reorganization and the IPO. The Charah Series C Profits Interests would have vested ratably in each of the first five anniversaries of their grant date with vesting accelerated upon a change of control. There were 1 Charah Series C Profits Interests unvested at June 18, 2018, which were canceled as a result of the corporate reorganization that occurred upon the closing of the IPO (see further discussion below). The Charah Series C Profits Interests were valued based upon a contingent claims analysis to allocate the total implied equity value as of the valuation date amongst the
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
various equity securities classes, with breakpoints estimated considering relative seniority, liquidation preferences, and conversion features. An assumed volatility of 30% based upon a comparable public company analysis was used in the determination of fair value. The weighted–average grant date fair value of the Charah Series C Profits Interests granted during 2017 was $3,198 per unit, resulting in $2,100 of total compensation costs, which was expected to vest over five years.
During the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), the period from January 13, 2017 through December 31, 2017 (Successor), and the period from January 1, 2017 through January 12, 2017 (Predecessor), compensation expense of $0, $214, $311, and $0, respectively, was recognized related to the Charah Series C Profits Interests.
The Limited Liability Company Agreement for Allied provided for the issuance of up to 1,000 Allied Series C profits interests (the “Allied Series C Profits Interests”). In 2017, Allied adopted the Allied Series C Profits Interest Plan and issued 550 of such units to employees. The Allied Series C Profits Interest Plan is no longer in place following our corporate reorganization and the IPO. The Allied Series C Profits Interests participated in distributions to Allied members based upon specified rates of return being realized to the Allied Series A and Allied Series B membership interests. The Allied Series C Profits Interests vested immediately upon grant. The Allied Series C Profits Interests were valued based upon a contingent claims analysis to allocate the total implied equity value as of the valuation date amongst the various equity securities classes, with breakpoints estimated considering relative seniority, liquidation preferences, and conversion features. An assumed volatility of 32.5% based upon a comparable public company analysis was used in the determination of fair value. The weighted average grant date fair value of the Allied Series C Profits Interests granted during 2017 was $69 per unit. During the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), the period from January 13, 2017 through December 31, 2017 (Successor), and the period from January 1, 2017 through January 12, 2017 (Predecessor), compensation expense of $0, $0, $38, and $0, respectively, was recognized related to the Allied Series C Profits Interests.
In conjunction with the funding of the investment in Allied Power Holdings in July 2017, select individuals, including members of the management team at Allied, were given the opportunity to invest in, via an aggregator entity, Allied Management Holdings, alongside, and on the same basis as, the existing investment group. In exchange for their investment, common equity interests (Series B) in both Allied Power Holdings and Charah Management were issued. For those members of management, 1,900 Charah Management LLC Series B Membership Interests and 100 Allied Power Management LLC Series B Membership Interests were granted as a deemed contribution and a portion was invested via a cash contribution. All rights under these membership interests were fully vested at the time of the grant. There was $2,080 of compensation expense recorded in the period from January 13, 2017 through December 31, 2017 (Successor) related to these Series B membership interest grants. No compensation expense was recognized during the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor) and the period from January 1, 2017 through January 12, 2017 (Predecessor).
In connection with the corporate reorganization that occurred upon the closing of the IPO, the holders of Charah Series C Profits Interests and Allied Series C Profits Interests received 1,216 shares of common stock (the “Management Reorganization Consideration”) in exchange for the contribution to the Company of their Charah Series C Profits Interests and Allied Series C Profits Interests. Of these shares, 304 vested immediately and 912 shares are subject to time-based vesting conditions, as well as performance vesting conditions, based on specified EBITDA targets and achievement of certain safety metrics, which will be determined at future dates. In addition, 273 shares of common stock were issued under the Charah Solutions, Inc. 2018 Omnibus Incentive Plan (see further discussion below). Of these shares, 68 shares vested immediately and 205 shares are subject to the same time-based vesting conditions and performance vesting conditions as the shares issued in accordance with the Management Reorganization Consideration. The fair value of the awards was calculated initially as $12 per share, and will be updated thereafter for changes at each reporting period until the performance targets are approved by the Company’s board of directors. The fair value of the awards is recognized over the required service period for each grant. As of December 31, 2019 (Successor), 501 of the shares subject to time-based and performance vesting conditions were vested.
Upon the closing of the IPO, the board of directors of 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 stockholders. The Company has reserved 3,007 shares of common stock for issuance under the 2018 Plan, and all future equity awards described above will be issued pursuant to the 2018 Plan. In June 2018, the Company issued 44 shares under the 2018 Plan that vest after one year. The fair value of the awards was calculated as $12 per share, which will be recognized over the one-year
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
vesting period. In August 2018, the Company issued 45 shares under the 2018 Plan that vest after one year. The fair value of the awards was calculated as $7.67 per share, which will be recognized over the one-year vesting period. As of December 31, 2019 (Successor), 68 of the shares were vested and 21 had been forfeited.
During the year ended December 31, 2019 (Successor), the Company granted 769 restricted stock units (“RSUs”) under the 2018 Plan that are time-based. Of these RSUs, 2 vested immediately, 128 vest after one year, 550 vest in equal installments over three years, and 89 vest in equal installments over four years. The fair value of these RSUs is based on the market price of the Company's shares on the grant date. As of December 31, 2019, 2 of the shares were vested. During the year ended December 31, 2019, we also granted 331 performance share units (“PSUs”) under the 2018 Plan that cliff vest after three years. The vesting of these PSUs is dependent upon the Company’s achievement of certain stock price metrics. The fair value of the PSUs was determined using a binomial lattice model based upon the grant date stock price, a risk-free interest rate of 2.29% based upon the U.S. Treasury yield curve in effect at the time of the grants, and an assumed volatility rate of 30% based upon a comparable public company analysis. As of December 31, 2019, none of the shares were vested.
A summary of the Company’s non-vested share activity for the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Weighted Average Remaining Contractual Terms (Years)
|
|
Aggregate Intrinsic Value
|
|
Outstanding as of December 31, 2018
|
|
1,199
|
|
|
$
|
11.84
|
|
|
0.77
|
|
10,009
|
|
|
Granted
|
|
1,100
|
|
|
5.90
|
|
|
|
|
|
|
Forfeited
|
|
(308
|
)
|
|
9.83
|
|
|
|
|
|
|
Vested
|
|
(570
|
)
|
|
10.47
|
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
|
1,421
|
|
|
$
|
6.72
|
|
|
1.26
|
|
$
|
3,464
|
|
During the year ended December 31, 2019 (Successor) and December 31, 2018 (Successor), $2,513 and $3,913 of compensation expense was recognized related to the shares issued in accordance with the Management Reorganization Consideration and the 2018 Plan. As of December 31, 2019 (Successor), total unrecognized stock-based compensation expense related to non-vested awards, net of estimated forfeitures, was approximately $3,377, and is expected to be recognized over a weighted-average period of approximately 1.74 years. The total fair value of awards vested was $5,969 for the year ended December 31, 2019 (Successor).
14. Defined Contribution Retirement Plan
Charah and Ash Management Services (“AMS”) provide a defined contribution employee benefit plan (the “Charah and AMS 401(k) Plan”) qualified under Section 401(k) of the Code to employees who have completed 90 days of service and have attained age 18. Participants may contribute up to the lesser of 90% of eligible compensation or the maximum allowed under the Code. Charah and AMS make safe harbor contributions to participant accounts equal to 3% of the participant’s annual compensation, commencing the quarter after the employee completes one year of service. Charah and AMS may also make discretionary contributions, and the contributions may vary from year to year, for employees who have met one year of employment. Participants are immediately vested in their elective contributions and safe harbor contributions. Participants are vested in discretionary contributions after completing six years of service. During the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), the period from January 13, 2017 through December 31, 2017 (Successor), and the period from January 1, 2017 through January 12, 2017 (Predecessor), Charah and AMS contributed $1,014, $932, $861, and $29, respectively to the Charah and AMS 401(k) Plan.
Allied provides a defined contribution employee benefit plan (the “Allied 401(k) Plan”) qualified under Section 401(k) of the Code to employees who have completed one year of eligibility service and have attained age 21, commencing the quarter following the anniversary of one year of eligibility service. Participants may contribute up to the lesser of 100% of eligible compensation or the maximum allowed under the Code. Allied makes safe harbor contributions to participant accounts equal to (i) 100% of the employee contributions that are not in excess of 3% of employee compensation, plus (ii) 50% of the amount of the employee contributions that exceed 3% of employee compensation but that do not exceed 5% of employee compensation, commencing with an employee’s eligibility for participation in the plan. Allied may also make discretionary matching contributions. Participants are immediately vested in their elective contributions and safe harbor contributions as well as the discretionary matching
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
contributions. During the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), and for the period from June 1, 2017 (inception) through December 31, 2017, Allied contributed $760, $770, and $258, respectively, to the Allied 401(k) Plan.
15. Commitments and Contingencies
We are party to a lawsuit filed against North Carolina by an environmental advocacy group alleging that the issuance by the state of certain permits associated with our Brickhaven clay mine reclamation site exceeded the state’s power. Although the state’s authority to issue the bulk of the permits (i.e., the allowance to reclaim the original site with coal ash) was upheld, the portion of the permits that allows us to “cut and prepare” an additional portion of the site was held by the North Carolina Superior Court to exceed the relevant agency’s statutory authority. The North Carolina Superior Court’s decision was reversed and remanded back to the North Carolina Office of Administrative Hearing (“NCOAH”) due to the North Carolina Superior Court's having used an improper standard of review. While the NCOAH upheld the state’s authority to issue the bulk of the permits, it too held that a portion of the permits that allowed us to “cut and prepare” an additional portion of the site was in excess of the relevant agency’s authority. We have filed a petition for judicial review with the North Carolina Superior Court. All customer related work at the Brickhaven site has been completed.
Allied and its affiliate, Allied Power Resources, LLC, have been named in a collective action lawsuit filed in the U.S. District Court for the Northern District of Illinois, alleging violations of the Fair Labor Standards Act, and which includes related class claims alleging violations of the Illinois Minimum Wage Law and the Pennsylvania Minimum Wage Act for failure to pay overtime. This case is one of a series filed against companies in the oil, gas and energy industries in Illinois and Texas. The parties mediated this case in November 2018 and reached a settlement, which received conditional approval from the court. The parties are working on implementing the settlement terms and the plaintiffs in the case will submit a motion for final approval in June 2020 prior to the court’s scheduled hearing.
In addition to the above matters, we are from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. With respect to all such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. Although it is difficult to predict the ultimate outcome of these lawsuits, claims and proceedings, we do not believe that the ultimate disposition of any of these matters, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. We maintain liability insurance for certain risks that is subject to certain self-insurance limits.
Included in general and administrative expense in the consolidated statements of operations for the year ended December 31, 2018 (Successor) was approximately $20.0 million related to legal settlements. 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.
16. Multiemployer Pension Plan
AMS contributes to union-sponsored multiemployer retirement defined benefit pension plans (the “multiemployer plans”) under the terms of collective bargaining agreements that cover its union-represented employees. The risks of participating in the multiemployer plans are different from single-employer plans in the following aspects:
|
|
|
|
•
|
Assets contributed to the multiemployer plans by one employer may be used to provide benefits to employees of other participating employers.
|
|
|
|
|
•
|
If a participating employer stops contributing to the multiemployer plans, the unfunded obligations of the multiemployer plans may be borne by the remaining participating employers.
|
|
|
|
|
•
|
If AMS chooses to stop participating in the multiemployer plans, AMS may be required to pay the multiemployer plans an amount based on the underfunded status of the multiemployer plans, referred to as a withdrawal liability.
|
The primary multiemployer plan to which AMS made contributions for the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), the period from January 13, 2017 through December 31, 2017 (Successor), the period from January 1, 2017 through January 12, 2017 (Predecessor), and the year ended December 31, 2016 (Predecessor), is outlined in the table below. The “EIN/Pension Plan Number” column provides the Employer Identification Number (“EIN”). The most recent Pension Protection Act zone status available in 2018 is for the respective multiemployer plan’s year-end within those
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
years, unless otherwise noted. The zone status is based on information that AMS received from the multiemployer plans and is certified by the respective multiemployer plan’s actuary. Among other factors, multiemployer plans in the red zone (critical) are generally less than 65% funded, multiemployer plans in the yellow zone (endangered) are less than 80% funded, and multiemployer plans in the green zone (neither critical and declining, critical, or endangered) are at least 80% funded. The “FIP/RP Status Pending/Implemented” column indicates multiemployer plans for which a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented. The last column lists the expiration dates of the collective bargaining agreements to which the multiemployer plans are subject.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
|
Year ended December 31, 2018
|
|
Period from January 13, 2017 through December 31, 2017
|
|
|
Period from January 1, 2017 through January 12, 2017
|
|
|
|
|
|
Pension Fund
|
|
EIN/Pension
Plan Number
|
|
Pension Protection
Act Zone
Status
|
|
FIP/RP Status
Pending/
Implemented
|
|
Contributions
to Funds by
AMS
|
|
Contributions
to Funds by
AMS
|
|
Contributions
to Funds by
AMS
|
|
|
Contributions
to Funds by
AMS
|
|
Surcharge
Imposed
|
|
Expiration
Date of Collective
Bargaining
Agreement
|
|
Central states, southeast and southwest areas pension plan
|
|
36-6044243
|
|
Red - Critical and declining
|
|
Progress under FIP or RP
|
|
$
|
47
|
|
|
$
|
34
|
|
|
$
|
59
|
|
|
|
$
|
—
|
|
|
No
|
|
Continuous with notice period by either party
|
|
Employer Teamsters Locals 175 & 505 pension trust fund
|
|
55-6021850
|
|
Red - Critical
|
|
Progress under FIP or RP
|
|
$
|
112
|
|
|
$
|
92
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
Yes
|
|
2021
|
17. Business Segment and Related Information
The Company has identified two reportable segments, Environmental Solutions and Maintenance and Technical Services, as each met the quantitative threshold of generating revenue equal to or greater than 10% of the combined revenue of all operating segments.
The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. Management evaluates the performance of each segment based on segment gross profit, which is calculated as revenue less cost of sales. For the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), the period from January 13, 2017 through December 31, 2017 (Successor), and the period from January 1, 2017 through January 12, 2017 (Predecessor), there were no inter-segment revenue or other intersegment transactions. Segment assets are also evaluated by management based on each segment’s investment in property and equipment. Assets (other than property and equipment and goodwill) are not allocated to segments.
Summarized financial information with respect to the reportable segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
ES
|
|
M&TS
|
|
All Other
|
|
Total
|
|
Revenue
|
$
|
180,396
|
|
|
$
|
374,472
|
|
|
$
|
—
|
|
|
$
|
554,868
|
|
|
Segment gross profit
|
11,486
|
|
|
28,890
|
|
|
—
|
|
|
40,376
|
|
|
Segment depreciation and amortization expense
|
6,924
|
|
|
8,566
|
|
|
7,947
|
|
|
23,437
|
|
|
Expenditures for segment assets
|
10,072
|
|
|
7,999
|
|
|
—
|
|
|
18,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
ES
|
|
M&TS
|
|
All Other
|
|
Total
|
|
Revenue
|
$
|
343,105
|
|
|
$
|
397,357
|
|
|
$
|
—
|
|
|
$
|
740,462
|
|
|
Segment gross profit
|
69,464
|
|
|
28,264
|
|
|
—
|
|
|
$
|
97,728
|
|
|
Segment depreciation and amortization expense
|
27,943
|
|
|
6,394
|
|
|
7,971
|
|
|
$
|
42,308
|
|
|
Expenditures for segment assets
|
11,728
|
|
|
10,284
|
|
|
24
|
|
|
$
|
22,036
|
|
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from January 13, 2017 through December 31, 2017
|
ES
|
|
M&TS
|
|
All Other
|
|
Total
|
|
Revenue
|
$
|
232,581
|
|
|
$
|
188,658
|
|
|
$
|
—
|
|
|
$
|
421,239
|
|
|
Segment gross profit
|
64,433
|
|
|
17,898
|
|
|
—
|
|
|
82,331
|
|
|
Segment depreciation and amortization expense
|
23,169
|
|
|
2,361
|
|
|
189
|
|
|
25,719
|
|
|
Expenditures for segment assets
|
6,107
|
|
|
6,583
|
|
|
—
|
|
|
12,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Period from January 1, 2017 through January 12, 2017
|
ES
|
|
M&TS
|
|
All Other
|
|
Total
|
|
Revenue
|
$
|
7,451
|
|
|
$
|
1,679
|
|
|
$
|
—
|
|
|
$
|
9,130
|
|
|
Segment gross profit
|
1,412
|
|
|
417
|
|
|
—
|
|
|
1,829
|
|
|
Segment depreciation and amortization expense
|
688
|
|
|
70
|
|
|
5
|
|
|
763
|
|
|
Expenditures for segment assets
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
ES
|
|
M&TS
|
|
All Other
|
|
Total
|
|
Segment property and equipment, net
|
$
|
47,856
|
|
|
$
|
37,251
|
|
|
$
|
187
|
|
|
$
|
85,294
|
|
|
Segment goodwill
|
57,591
|
|
|
16,622
|
|
|
—
|
|
|
$
|
74,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
ES
|
|
M&TS
|
|
All Other
|
|
Total
|
|
Segment property and equipment, net
|
$
|
47,467
|
|
|
$
|
41,155
|
|
|
$
|
319
|
|
|
$
|
88,941
|
|
|
Segment goodwill
|
57,591
|
|
|
16,622
|
|
|
—
|
|
|
$
|
74,213
|
|
The following is a reconciliation of segment gross profit to net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
|
Period from January 13, 2017 through December 31, 2017
|
|
|
Period from January 1, 2017 through January 12, 2017
|
|
Segment gross profit
|
$
|
40,376
|
|
|
$
|
97,728
|
|
|
$
|
82,331
|
|
|
|
$
|
1,829
|
|
|
General and administrative expenses
|
(60,870
|
)
|
|
(76,752
|
)
|
|
(48,495
|
)
|
|
|
(3,170
|
)
|
|
Interest expense, net
|
(16,835
|
)
|
|
(32,226
|
)
|
|
(14,146
|
)
|
|
|
(4,181
|
)
|
|
Income from equity method investment
|
2,295
|
|
|
2,407
|
|
|
816
|
|
|
|
48
|
|
|
Income tax expense (benefit)
|
4,190
|
|
|
(2,427
|
)
|
|
—
|
|
|
|
—
|
|
|
Net (loss) income
|
$
|
(39,224
|
)
|
|
$
|
(6,416
|
)
|
|
$
|
20,506
|
|
|
|
$
|
(5,474
|
)
|
The following is a reconciliation of segment assets to total assets as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Segment property and equipment, net
|
$
|
85,294
|
|
|
$
|
88,941
|
|
|
Segment goodwill
|
74,213
|
|
|
74,213
|
|
|
Non-segment assets
|
196,249
|
|
|
295,747
|
|
|
Total assets
|
$
|
355,756
|
|
|
$
|
458,901
|
|
18. Income Taxes
The Company is a “C” Corporation under the Code and, as a result, is subject to U.S. federal, state, and local income taxes. The Company’s subsidiaries previously operated as partnerships for income tax purposes. Prior to the contribution of assets and liabilities to the Company on June 18, 2018, the subsidiaries passed through their taxable income to their owners for U.S federal and other state and local income tax purposes and, thus, the subsidiaries were not subject to U.S. federal income taxes or
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
other state or local income taxes, except for franchise tax at the state level. Accordingly, the financial data attributable prior to the contribution on June 18, 2018 contains no provision for U.S. federal income taxes or income taxes in any state or locality other than franchise taxes.
The Company has determined its opening balance for deferred income tax assets and liabilities to be a net deferred tax liability of $1,508 based on the future tax effects of temporary differences between the financial statement value and tax basis of assets and liabilities contributed to the Company upon conversion as a taxable corporation on June 18, 2018. In accordance with ASC Topic 740, the tax effects have been recorded as a separate item of income tax expense.
The components of the provision for income taxes for the year ended December 31, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
Current income tax (benefit) expense:
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
(169
|
)
|
|
568
|
|
|
|
(169
|
)
|
|
568
|
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
Federal
|
2,389
|
|
|
(1,279
|
)
|
|
State
|
1,970
|
|
|
(1,716
|
)
|
|
|
4,359
|
|
|
(2,995
|
)
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
$
|
4,190
|
|
|
$
|
(2,427
|
)
|
Pre-tax book loss for the period June 18, 2018 to December 31, 2018 (Successor) was $16,588 including income attributable to non-controlling interest of $1,627, which is not subject to income tax at the Company level. The Company’s effective income tax rate on consolidated book income for the period is 14.6%. The Company’s foreign subsidiary’s book income was insignificant and there was no current or deferred foreign income tax expense for the year ended December 31, 2018 (Successor).
A reconciliation of income tax expense (benefit) based on the federal statutory income tax rate of 21% to the actual income tax benefit for the year ended December 31, 2019 and 2018 (Successor) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
Income tax benefit at the federal statutory rate (21%)
|
$
|
(7,357
|
)
|
|
$
|
(1,857
|
)
|
|
State income tax expense (benefit), net of federal tax benefit
|
1,369
|
|
|
(907
|
)
|
|
Income tax expense upon conversion to corporation
|
—
|
|
|
1,818
|
|
|
Non-controlling interest
|
(595
|
)
|
|
(522
|
)
|
|
Stock compensation
|
78
|
|
|
374
|
|
|
Income prior to conversion
|
—
|
|
|
(1,446
|
)
|
|
Valuation allowance
|
10,368
|
|
|
—
|
|
|
Other
|
327
|
|
|
113
|
|
|
Expense (benefit) from income taxes
|
$
|
4,190
|
|
|
$
|
(2,427
|
)
|
The Company accounts for income taxes in accordance with ASC Topic 740, which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax basis of assets and liabilities existing at each balance sheet date using enacted tax rates for the years in which taxes are expected to be paid or recovered.
The components of the Company’s deferred tax assets and liabilities as of December 31, 2019 and 2018 (Successor) are as follows:
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
Loss carryovers
|
$
|
13,780
|
|
|
$
|
850
|
|
|
Asset retirement obligation
|
3,810
|
|
|
6,489
|
|
|
Other accrued expenses and reserves
|
3,789
|
|
|
2,636
|
|
|
Purchase option liability
|
1,790
|
|
|
2,494
|
|
|
Accrued bonus
|
722
|
|
|
1,622
|
|
|
Deferred tax assets
|
23,891
|
|
|
14,091
|
|
|
Valuation allowance
|
(12,908
|
)
|
|
—
|
|
|
Net deferred tax asset
|
10,983
|
|
|
14,091
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Fixed assets, including land
|
10,434
|
|
|
9,641
|
|
|
Intangible assets
|
1,492
|
|
|
818
|
|
|
Prepaid expenses
|
549
|
|
|
885
|
|
|
Deferred tax liabilities
|
12,475
|
|
|
11,344
|
|
|
Net deferred tax (liability) asset
|
$
|
(1,492
|
)
|
|
$
|
2,747
|
|
The Company has net operating loss carryforwards of approximately $41,000 for federal income tax purposes and an interest expense carryover of $13,000 as of December 31, 2019. Both net operating loss and interest expense carryovers have unlimited carryover periods. Net operating losses for state tax purposes vary by state due mainly to apportionment.
Net deferred tax liabilities were $1,492 at December 31, 2019 and net deferred tax assets were $2,747 at December 31, 2018. We consider both positive and negative evidence when measuring the need for a valuation allowance. The weight given to the evidence is commensurate with the extent to which it may be objectively verified. Current and cumulative financial reporting results are a source of objectively verifiable evidence. We give operating results during the most recent three-year period a significant weight in our analysis. We typically only consider forecasts of future profitability when positive cumulative operating results exist in the most recent three-year period. We perform scheduling exercises to determine if sufficient taxable income of the appropriate character exists in the periods required in order to realize our deferred tax assets with limited lives prior to their expiration. Realization of net operating losses and other carryforwards is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods, which involves business plans, planning opportunities and expectations about future outcomes.
Furthermore, we consider tax planning strategies available to accelerate taxable amounts if required to utilize expiring deferred tax assets. A valuation allowance is not required to the extent that, in our judgment, positive evidence exists with a magnitude and duration sufficient to result in a conclusion that it is more likely than not that our deferred tax assets will be realized. A valuation allowance is recorded if it is more likely than not that a portion of our deferred tax assets will not be realized. We evaluate both the positive and negative evidence in determining the need for a valuation allowance on our deferred tax assets.
Based on the available evidence as of December 31, 2019, we were not able to conclude it was more likely than not certain deferred tax assets will be realized. Therefore, a valuation allowance of $12,908 was recorded against our deferred tax assets. We will continue to evaluate the need for a valuation allowance on our deferred tax assets in future periods.
The Company classifies any interest and penalties related to income taxes assessed as part of income tax expense. The Company has concluded that there are no significant uncertain tax positions requiring recognition in the financial statements, nor has the Company been assessed interest or penalties by any major tax jurisdiction to any open tax periods.
The Company’s income tax returns for the year ended December 31, 2018 (Successor) have been timely filed with the U.S. federal, state and local governments. The statute of limitations is open for the federal income tax return and certain state returns through October 15, 2022 and for most of the remaining state returns through October 15, 2023. The examination of prior period tax returns filed for partnerships, the interests of which were contributed to the Company in the reorganization, could impact the Company’s tax expense and balance sheet tax accounts.
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
The Company acquired a foreign subsidiary at reorganization, and the subsidiary is subject to examination in its local country for 2018 and prior calendar years. The Company is not aware of any potential adjustments for 2018 or prior years and any potential adjustment is not expected to be material to the financial statements.
19. Operating Leases
The Company leases buildings, vehicles and equipment under various non-cancellable agreements classified as operating leases, which expire through December 2026 and require various minimum annual rentals.
Future minimum lease payments are as follows:
|
|
|
|
|
|
|
|
For the Year Ending December 31,
|
Operating Leases
|
|
|
2020
|
$
|
7,396
|
|
|
2021
|
4,734
|
|
|
2022
|
3,965
|
|
|
2023
|
3,426
|
|
|
2024
|
1,389
|
|
|
Thereafter
|
98
|
|
|
Total
|
$
|
21,008
|
|
The total rent expense, excluding the related party leases (see Note 7), included in the consolidated and combined statements of operations for the year ended December 31, 2019 (Successor), the year ended December 31, 2018 (Successor), the period from January 13, 2017 through December 31, 2017 (Successor), and the period from January 1, 2017 through January 12, 2017 (Predecessor) was $19,549, $6,150, $5,574, and $179, respectively.
20. Members’ Equity
During 2016, 50 shares of non-voting common stock were issued in accordance with the Deferred Stock Plan (see Note 13).
Charah, LLC’s voting and non-voting shares at January 12, 2017 (Predecessor) were cancelled in connection with the BCP transaction and Series A and Series B members’ interests were issued. Charah, LLC had 200,000 Series A members’ interests authorized, of which 104,110 were issued and outstanding as of December 31, 2017 (Successor). The Series A members’ interests were issued between January 13, 2017 and December 31, 2017 (Successor) in connection with the BCP transaction in exchange for BCP’s investment of $104,100. Charah, LLC had 100,000 Series B members’ interests authorized, of which 35,199 were issued and outstanding as of December 31, 2017. The Series B members’ interests were issued between January 13, 2017 and December 31, 2017 (Successor) in connection with the BCP transaction in exchange for an investment of $32,800 from members of Charah, LLC’s management and $2,400 with the formation of Allied Power Management, LLC, as described below. Series A and Series B both participated in distributions.
Allied Power Management, LLC had 200,000 Series A members’ interests authorized, of which 7,211 were issued and outstanding as of December 31, 2017 (Successor). The Series A members’ interests were issued between January 13, 2017 and December 31, 2017 (Successor) in exchange for an investment of $7,200. Allied Power Management, LLC had 100,000 Series B members’ interests authorized, of which 2,438 were issued and outstanding as of December 31, 2017 (Successor). The Series B members’ interests were issued between January 13, 2017 and December 31, 2017 (Successor). The Series B members’ interests were issued in connection with the formation of Allied Power Management, LLC in exchange for an investment of $2,400 by the existing members of Charah, LLC and members of Allied Power Management, LLC, with the purpose of creating common ownership of the two entities. Series A and Series B both participated in distributions.
Upon the IPO, the Series A and Series B shares were exchanged for shares in Charah Solutions (see Note 1).
21. (Loss) Earnings Per Share
Basic (loss) earnings per share is computed by dividing net (loss) income attributable to the Company’s stockholders by the weighted average number of shares outstanding during the period. Diluted (loss) earnings per share reflects all potential dilutive ordinary shares outstanding during the period and is computed by dividing net (loss) income available to the Company’s stockholders by the weighted average number of shares outstanding during the period increased by the number of additional shares that would
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
have been outstanding as dilutive securities. For the periods prior to the IPO, the average number of ordinary shares outstanding used to calculate basic and diluted (loss) earnings per share was based on the ordinary shares that were outstanding at the time of the IPO.
As a result of the net loss per share for the years ended December 31, 2019 (Successor) and 2018 (Successor), the inclusion of all potentially dilutive shares would be anti-dilutive. Therefore, dilutive shares (in thousands) of 1,329 and 1,020 were excluded from the computation of the weighted average shares for diluted net loss per share for the years ended December 31, 2019 (Successor) and 2018 (Successor), respectively.
Basic and diluted (loss) earnings per share is determined using the following information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
|
Period from January 13, 2017 through December 31, 2017
|
|
|
Period from January 1, 2017 through January 12, 2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Charah Solutions, Inc.
|
$
|
(42,058
|
)
|
|
$
|
(8,902
|
)
|
|
$
|
18,316
|
|
|
|
$
|
(5,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (in thousands):
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
29,495
|
|
|
26,610
|
|
|
23,710
|
|
|
|
N/A
|
|
|
Dilutive share-based awards
|
—
|
|
|
—
|
|
|
822
|
|
|
|
N/A
|
|
|
Total weighted average shares outstanding, including dilutive shares
|
29,495
|
|
|
26,610
|
|
|
24,532
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
$
|
(1.43
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
0.77
|
|
|
|
N/A
|
|
|
Diluted (loss) earnings per share
|
$
|
(1.43
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
0.75
|
|
|
|
N/A
|
|
22. Major Customers
The Company derived approximately 52% and 12% of its consolidated revenue from two customers during the year ended December 31, 2019 (Successor), approximately 46% and 35% of its consolidated and combined revenue from two customers during the year ended December 31, 2018 (Successor), approximately 32% and 49% from two customers during the period from January 13, 2017 through December 31, 2017 (Successor), and approximately 68% from one customer during the period from January 1, 2017 through January 12, 2017 (Predecessor). Accounts receivable from the two customers at December 31, 2019 (Successor) and 2018 (Successor) were $12,009 and $35,106, respectively.
23. Quarterly Financial Data (Unaudited)
The following table summarizes the unaudited quarterly results of operations for the year ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
2019
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
163,258
|
|
|
$
|
120,936
|
|
|
$
|
121,113
|
|
|
$
|
149,561
|
|
|
Operating income (loss)
|
1,394
|
|
|
(19,465
|
)
|
|
(237
|
)
|
|
(2,186
|
)
|
|
Net loss attributable to Charah Solutions, Inc.
|
(2,819
|
)
|
|
(18,026
|
)
|
|
(3,313
|
)
|
|
(17,900
|
)
|
|
Basic loss per share
|
(0.10
|
)
|
|
(0.61
|
)
|
|
(0.11
|
)
|
|
(0.60
|
)
|
|
Diluted loss per share
|
(0.10
|
)
|
|
(0.61
|
)
|
|
(0.11
|
)
|
|
(0.60
|
)
|
CHARAH SOLUTIONS, INC.
Notes to Consolidated & Combined Financial Statements, continued
(amounts in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
2018
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
155,529
|
|
|
$
|
195,723
|
|
|
$
|
186,002
|
|
|
$
|
203,208
|
|
|
Operating income (loss)
|
4,717
|
|
|
11,612
|
|
|
(5,919
|
)
|
|
10,566
|
|
|
Net income (loss) attributable to Charah Solutions, Inc.
|
806
|
|
|
3,220
|
|
|
(17,395
|
)
|
|
4,467
|
|
|
Basic earnings (loss) per share
|
0.03
|
|
|
0.13
|
|
|
(0.60
|
)
|
|
0.15
|
|
|
Diluted earnings (loss) per share
|
0.03
|
|
|
0.13
|
|
|
(0.60
|
)
|
|
0.15
|
|
Basic and diluted (loss) earnings per common share for each of the quarters presented above is based on the respective weighted average number of common and dilutive potential common shares outstanding for each quarter, and the sum of the quarters may not necessarily be equal to the full year basic and diluted earnings per common share amounts.
Schedule II. Valuation and Qualifying Accounts
The table below presents valuation and qualifying accounts: