10-Q 1 chra-930201810xq.htm 10-Q Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10‑Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-38523
Charah Solutions, Inc.
(Exact name of registrant as specified in its charter)
Delaware
82-4228671
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
12601 Plantside Dr.
Louisville, KY 40299
(Address of principal executive offices) (Zip Code)
(502) 245-1353
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x*
* The registrant became subject to such requirements on June 13, 2018 and has filed all reports required since that date.
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer ¨
 
 
 
Accelerated filer ¨
Non-accelerated filer x
 
 
 
Smaller reporting company ¨
Emerging growth company x
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ¨ No x
As of November 14, 2018, the registrant had 29,082,988 shares of common stock outstanding.
 




TABLE OF CONTENTS

Cautionary Note Regarding Forward-Looking Statements 
 
 
PART I - FINANCIAL INFORMATION 
Item 1. Financial Statements
Condensed Consolidated and Combined Balance Sheets of Charah Solutions, Inc. as of September 30, 2018 and December 31, 2017
Condensed Consolidated and Combined Statements of Income (Loss) for the Three Months Ended September 30, 2018 (Successor) and 2017 (Successor), for the Nine Months ended September 30, 2018 (Successor), and for the Periods from January 13, 2017 to September 30, 2017 (Successor), January 1, 2017 to January 12, 2017 (Predecessor)
Condensed Consolidated and Combined Statements of Members’ Equity and Stockholders' Equity for the Periods from December 31, 2016 through January 12, 2017 (Predecessor), January 13, 2017 through September 30, 2017 (Successor), and December 31, 2017 through September 30, 2018 (Successor)
Condensed Consolidated and Combined Statements of Cash Flows for the Nine-months Ended September 30, 2018 (Successor) and for the periods from January 13, 2017 to September 30, 2017 (Successor) and January 1, 2017 to January 12, 2017 (Predecessor)
Notes to Unaudited Condensed Consolidated and Combined Financial Statements 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 
Item 4. Controls and Procedures 
 
 
PART II - OTHER INFORMATION 
Item 1. Legal Proceedings 
Item 1A. Risk Factors 
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 
Item 5. Other Information
Item 6. Exhibits 
 
 
SIGNATURES 


i



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information in this Form 10‑Q (the “Quarterly Report”) includes “forward‑looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward‑looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward‑looking statements, although not all forward‑looking statements contain such identifying words. These forward‑looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward‑looking statements, you should keep in mind the risk factors and other cautionary statements included in the final prospectus dated June 13, 2018, as filed with the SEC on June 15, 2018 (the “Final Prospectus”). These forward‑looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.
Forward‑looking statements may include statements about:
our business strategy;
our operating cash flows, the availability of capital and our liquidity;
our future revenue, income and operating performance;
our ability to sustain and improve our utilization, revenues and margins;
our ability to maintain acceptable pricing for our services;
our future capital expenditures;
our ability to finance equipment, working capital and capital expenditures;
competition and government regulations;
our ability to obtain permits and governmental approvals;
pending legal or environmental matters or liabilities;
pending litigation involving Allied Power Management, LLC;
environmental hazards;
industrial accidents;
business or asset acquisitions;
general economic conditions;
credit markets;
our ability to successfully develop our research and technology capabilities and implement technological developments and enhancements;
uncertainty regarding our future operating results; and
plans, objectives, expectations and intentions contained in this Quarterly Report that are not historical.
We caution you that these forward‑looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, the risks described under “Risk Factors” in our Final Prospectus. Should one or more of the risks or uncertainties described occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward‑looking statements.
All forward‑looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward‑looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward‑looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report.

ii



PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements

CHARAH SOLUTIONS, INC.
Condensed Consolidated & Combined Balance Sheets
(dollars in thousands unless otherwise indicated)
(Unaudited)
 
 
September 30,
2018
 
December 31, 2017
 
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash
$
3,981

 
$
32,264

Trade accounts receivable
74,782

 
47,227

Receivable from affiliates
260

 
38

Costs and estimated earnings in excess of billings ("CIE")
62,549

 
7,959

Inventory
24,557

 
1,666

Prepaid expenses and other current assets
6,416

 
4,644

Total current assets
172,545

 
93,798

Property and equipment:
 
 
 
Plant, machinery and equipment
73,816

 
42,565

Structural fill site improvements
55,760

 
55,760

Vehicles
15,630

 
16,478

Office equipment
1,473

 
638

Buildings and leasehold improvements
285

 
240

Structural fill sites
7,110

 
7,110

Total property and equipment
154,074

 
122,791

Less accumulated depreciation and amortization
(57,231
)
 
(22,861
)
Property and equipment, net
96,843

 
99,930

Other assets:
 
 
 
Trade name, net
34,900

 
34,330

Customer relationship, net
66,523

 
71,032

Technology, net
2,026

 

Non-compete and other agreements, net
1,265

 

Other intangible assets, net
69

 
87

Goodwill
73,468

 
73,468

Other assets
2,659

 

Deferred tax asset
3,076

 

Equity method investments
5,389

 
5,006

Total assets
$
458,763

 
$
377,651

 
 
 
 
See notes to condensed consolidated & combined financial statements (Continued)

1



 
September 30,
2018
 
December 31, 2017
Liabilities and stockholders’ and members’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
19,928

 
$
15,247

Billings in excess of costs and estimated earnings ("BIE")
4,599

 
15,882

Notes payable, current maturities
20,766

 
19,996

Accrued payroll and bonuses
34,197

 
16,036

Asset retirement obligation
8,906

 
1,072

Purchase option liability, current portion
18,178

 
5,061

Accrued expenses
33,135

 
7,959

Other liabilities

 
198

Total current liabilities
139,709

 
81,451

Long-term liabilities:
 
 
 
Purchase option liability, less current portion

 
20,183

Contingent earnout liability
12,037

 

Line of credit
5,106

 

Notes payable, less current maturities
214,596

 
227,698

Total liabilities
371,448

 
329,332

Commitments and contingencies (see Note 11)

 

Stockholders’ and members’ equity
 
 
 
Retained earnings
4,946

 
18,316

Common Stock - Charah Solutions, Inc.—$0.01 par value; 200,000,000 shares authorized, 29,082,988 shares issued and outstanding
291

 

Additional paid in capital - Charah Solutions, Inc.
81,202

 

Members’ interest—Charah, LLC Series A, no par, 200,000,000 members’ interest authorized (104,109,890 issued and outstanding) as of December 31, 2017. Series B, no par, 100,000,000 members’ interest authorized (35,199,063 issued and outstanding) as of December 31, 2017

 
19,718

Members’ interest—Allied Power Management, LLC, Series A, no par, 200,000,000 members’ interest authorized (7,210,555 issued and outstanding) as of December 31, 2017. Series B, no par, 100,000,000 members’ interest authorized (2,437,855 issued and outstanding) as of December 31, 2017

 
9,687

Total stockholders’ and members’ equity
86,439

 
47,721

Non-controlling interest
876

 
598

Total equity
87,315

 
48,319

Total liabilities and equity
$
458,763

 
$
377,651

See notes to condensed consolidated & combined financial statements.

2



CHARAH SOLUTIONS, INC.
Condensed Consolidated & Combined Statements of Income (Loss)
(dollars in thousands except per share data)
(Unaudited)
 
 
Successor
 
Predecessor
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2018
 
Period from January 13, 2017 through September 30, 2017
 
Period from
January 1, 
2017 through
January 12,
2017
Revenue
$
186,002

 
$
118,911

 
$
537,254

 
$
252,280

 
$
9,130

Cost of sales
159,296

 
95,757

 
460,901

 
192,903

 
7,301

Gross profit
26,706

 
23,154

 
76,353

 
59,377

 
1,829

General and administrative expenses
32,625

 
19,942

 
65,944

 
33,921

 
3,170

Operating income (loss)
(5,919
)
 
3,212

 
10,409

 
25,456

 
(1,341
)
Interest expense
(17,034
)
 
(1,549
)
 
(26,708
)
 
(4,332
)
 
(4,181
)
Income from equity method investment
786

 
184

 
2,072

 
660

 
48

Income (loss) before income taxes
(22,167
)
 
1,847

 
(14,227
)
 
21,784

 
(5,474
)
Income tax expense (benefit)
(5,667
)
 

 
(2,761
)
 

 

Net income (loss)
(16,500
)
 
1,847

 
(11,466
)
 
21,784

 
(5,474
)
Less income attributable to non-controlling interest
895

 
790

 
1,904

 
1,862

 
54

Net income (loss) attributable to Charah Solutions, Inc.
$
(17,395
)
 
$
1,057

 
$
(13,370
)
 
$
19,922

 
$
(5,528
)
Basic earnings (losses) per share
$
(0.60
)
 
$
0.04

 
$
(0.52
)
 
$
0.84

 
N/A
Diluted earnings (losses) per share
$
(0.60
)
 
$
0.04

 
$
(0.52
)
 
$
0.81

 
N/A
Pro forma net income (loss) information (see Note 1):
 
 
 
 
 
 
 
 
Net income (loss) attributable to Charah Solutions, Inc. before provision for income taxes
$
(23,062
)
 
$
1,057

 
$
(16,131
)
 
$
19,922

 
$
(5,528
)
Pro forma provision for income taxes
(5,667
)
 
402

 
(4,358
)
 
7,570

 
(2,101
)
Pro forma net income (loss) attributable to Charah Solutions, Inc.
$
(17,395
)
 
$
655

 
$
(11,773
)
 
$
12,352

 
$
(3,427
)
See notes to condensed consolidated & combined financial statements.

3



CHARAH SOLUTIONS, INC.
Condensed Consolidated & Combined Statements of Stockholders’ and Members’ Equity
(dollars in thousands unless otherwise indicated)
(Unaudited)



 
 
Charah, LLC Members
 
Non-Controlling
Interest
 
Total
 
 
Voting Shares
 
Non-voting Shares
 
Retained
Earnings
(Accumulated
Deficit)
 
Total
 
 
 
Number
of
Shares
 
Common
Stock
 
Number
of
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Predecessor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
 
18,750

 
$
24

 
168,750

 
$
216

 
$
54

 
$
20,366

 
$
20,660

 
$
686

 
$
21,346

Net income (loss)
 

 

 

 

 

 
(5,528
)
 
(5,528
)
 
54

 
(5,474
)
Distributions
 

 

 

 

 

 
(20,660
)
 
(20,660
)
 

 
(20,660
)
Balance, January 12, 2017
 
18,750

 
$
24

 
168,750

 
$
216

 
$
54

 
$
(5,822
)
 
$
(5,528
)
 
$
740

 
$
(4,788
)



 
 
Charah, LLC and Allied Power Management, LLC
Combined
 
Non-Controlling
Interest
 
Total
 
 
Charah, 
LLC
Members’
Interest
 
Allied Power
Management, LLC
Members’ Interest
 
Retained
Earnings
 
Total
 
Successor
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 13, 2017
 
$

 
$

 
$

 
$

 
$
740

 
$
740

Net income
 

 

 
19,922

 
19,922

 
1,862

 
21,784

Issuance of original Series A member interests
 
116,418

 

 

 
116,418

 

 
116,418

Issuance of original Series B member interests
 
36,643

 

 

 
36,643

 

 
36,643

Issuance of Series A and B member interests
 
486

 
9,496

 

 
9,982

 

 
9,982

Share-based compensation - Series A and B interests
 
1,945

 
135

 

 
2,080

 

 
2,080

Share-based compensation -
Series C profits interests
 
226

 
38

 

 
264

 

 
264

Distributions
 
(16,085
)
 

 

 
(16,085
)
 
(1,764
)
 
(17,849
)
Balance, September 30, 2017
 
$
139,633

 
$
9,669

 
$
19,922

 
$
169,224

 
$
838

 
$
170,062


See notes to condensed consolidated & combined financial statements.








4



CHARAH SOLUTIONS, INC.
Condensed Consolidated & Combined Statements of Stockholders’ and Members’ Equity
(dollars in thousands unless otherwise indicated)
(Unaudited)


 
 
Charah Solutions, Inc.
 
 
Common Stock (Shares)
 
Common Stock (Amount)
 
Additional Paid In Capital
 
Charah, 
LLC
Members’
Interest
 
Allied Power
Management, 
LLC
Members’ Interest
 
Retained
Earnings
 
Total
 
Non-Controlling
Interest
 
Total
Successor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 

 
$

 
$

 
$
19,718

 
$
9,687

 
$
18,316

 
$
47,721

 
$
598

 
$
48,319

Net income (loss)
 

 

 

 

 

 
(13,370
)
 
(13,370
)
 
1,904

 
(11,466
)
Share based compensation expense
 

 

 

 
214

 

 

 
214

 

 
214

Distributions
 

 

 

 
(686
)
 

 

 
(686
)
 
(1,626
)
 
(2,312
)
Conversion from members' interest to common stock
 
23,436,398

 
234

 
28,699

 
(19,246
)
 
(9,687
)
 

 

 

 

Issuance of shares
 
5,294,117

 
53

 
59,188

 

 

 

 
59,241

 

 
59,241

Share based common stock issued
 
372,169

 
4

 
(4
)
 

 

 

 

 

 

Shares repurchased
 
(19,696
)
 

 

 

 

 

 

 

 

Share based compensation expense
 

 

 
2,235

 

 

 

 
2,235

 

 
2,235

Deferred offering costs
 

 

 
(8,916
)
 

 

 

 
(8,916
)
 

 
(8,916
)
Balance, September 30, 2018
 
29,082,988

 
$
291

 
$
81,202

 
$

 
$

 
$
4,946

 
$
86,439

 
$
876

 
$
87,315

See notes to condensed consolidated & combined financial statements.

5



CHARAH SOLUTIONS, INC.
Condensed Consolidated & Combined Statements of Cash Flows
(dollars in thousands unless otherwise indicated)
(Unaudited)
 
 
Successor
 
Predecessor
 
Nine Months Ended September 30, 2018
 
Period from January 13, 2017 through September 30, 2017
 
Period
from
January 1
2017,
through
January 12,
2017
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
(11,466
)
 
$
21,784

 
$
(5,474
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation and amortization
33,898

 
19,601

 
763

Amortization of debt issuance costs
11,460

 
555

 

Deferred income tax benefit
(3,076
)
 

 

Loss on sale of assets
749

 
458

 
123

Income from equity method investment
(2,072
)
 
(660
)
 
(48
)
Distributions received from equity investment
1,689

 
933

 

Non-cash share-based compensation
2,449

 
2,344

 

Payment related to deferred stock plan

 
(18,888
)
 

Gain on interest rate swap
(2,857
)
 

 

Increase (decrease) in cash due to changes in:
 
 
 
 
 
Trade accounts receivable
(21,706
)
 
(26,096
)
 
(3,977
)
Receivable from affiliates
(222
)
 
(77
)
 

Costs and estimated earnings in excess of billing
(54,590
)
 
(6,501
)
 
2,185

Inventory
(4,480
)
 
(635
)
 
278

Prepaid expenses and other current assets
(1,642
)
 
(2,707
)
 
71

Accounts payable
4,192

 
(135
)
 
4,380

Billings in excess of costs and estimated earnings
(11,283
)
 
11,813

 
6

Accrued payroll and bonuses
18,161

 
23,323

 
(318
)
Asset retirement obligation
7,834

 
199

 

Accrued expenses
22,458

 
5,514

 
(2,407
)
Net cash (used in) provided by operating activities
(10,504
)
 
30,825

 
(4,418
)
Cash flows from investing activities:
 
 
 
 
 
Proceeds from the sale of equipment
1,297

 
780

 

Purchases of property and equipment
(14,948
)
 
(7,591
)
 

Payments for business acquisitions, net of cash received
(19,983
)
 

 

Purchase of intangible assets
(31
)
 

 

Decrease in restricted cash

 
3,358

 

Net cash used in investing activities
(33,665
)
 
(3,453
)
 


6



 
Successor
 
Predecessor
 
Nine Months Ended September 30, 2018
 
Period from January 13, 2017 through September 30, 2017
 
Period
from
January 1
2017,
through
January 12,
2017
Cash flows from financing activities:
 
 
 
 
 
Net proceeds (payments) on line of credit
5,106

 
(43,801
)
 
4,605

Proceeds from long-term debt
214,330

 
153,578

 
298

Principal payments on long-term debt
(251,563
)
 
(137,005
)
 
(440
)
Payments of offering costs
(8,916
)
 

 

Proceeds from note payable to related party, net

 
25,230

 

Issuance of common stock
59,241

 

 

Distributions to non-controlling interest
(1,626
)
 
(1,764
)
 

Distributions to members
(686
)
 
(16,085
)
 

Net cash provided by (used in) financing activities
15,886

 
(19,847
)
 
4,463

Net (decrease) increase in cash
(28,283
)
 
7,525

 
45

Cash, beginning of period
32,264

 
1,046

 
1,001

Cash, end of period
$
3,981

 
$
8,571

 
$
1,046

Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid during the year for interest
$
19,244

 
$
5,959

 
$
104

Non-cash investing and financing transactions
During the nine months ended September 30, 2018 (Successor), the Company purchased $13,441 of equipment with seller provided financing.
During the period from January 1, 2017 through January 12, 2017 (Predecessor), the loan to related party of $7,865, receivables from affiliates of $883 and assets and liabilities related to the un-acquired business amounting to $11,912 were distributed to CEP Holdings, Inc. as non-cash distributions.
At January 12, 2017, Charah, LLC reflected a non-cash transaction to re-value its assets and liabilities resulting from Charah Management LLC completing 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 LLC.
 
See notes to condensed consolidated & combined financial statements.

7



CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements
(dollars in thousands except per share and unit data)
(Unaudited)
1. Nature of Business and Basis of Presentation
Organization
Charah Solutions, Inc. (“Charah Solutions” or the “Company”) 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 the initial public offering (the “IPO”). The Company completed its IPO on June 18, 2018. Charah Solutions is a holding company, the sole material assets of which consist of membership interests in Charah Management LLC, a Delaware limited liability company (“Charah Management”), and Allied Power Holdings, LLC, a Delaware limited liability company (“Allied Power Holdings”). Through the Company’s ownership of Charah Management and Allied Power Holdings, the Company owns 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 Charah Solutions operates its businesses. The historical financial data presented herein as of September 30, 2018 and for periods after the June 18, 2018 corporate reorganization is that of Charah and Allied on a consolidated basis, and on a combined basis for periods prior to the June 18, 2018 corporate reorganization described below. Allied was formed in May 2017 and did not commence operations until July 2017.
Corporate Reorganization
On June 18, 2018, pursuant to the terms of the reorganization transactions completed in connection with the IPO, (a) (i) Charah Holdings LP, a Delaware limited partnership (“Charah Holdings”) owned by Bernhard Capital Partners Management, LP and certain related affiliates (“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, (ii) CEP Holdings, Inc., a Delaware corporation owned by Charles 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, (iii) 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 (iv) 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, (b) each of Charah Management Holdings and Allied Management Holdings distributed the shares of common stock received by them pursuant to clause (a) to their respective members in accordance with the respective terms of their limited liability company agreements and (c) Charah Holdings distributed a portion of the shares of common stock it received in clause (a) 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 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 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 condensed consolidated and combined financial statements include the assets, liabilities, members’ equity, and results of operations of the Company and its consolidated subsidiaries. References to “Predecessor” in the financial statements refer to Charah. Charah is the predecessor for accounting purposes of Charah Solutions, which as described above, was formed in connection with the IPO.
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

8


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


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 our initial public offering, 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.
Basis for Presentation
The Company’s fiscal year ends December 31. The accompanying unaudited condensed consolidated and combined financial statements include the accounts of the Company and its consolidated subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated and combined financial statements have been prepared in accordance with rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included, which consist of normal recurring adjustments. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted. These unaudited condensed consolidated and combined financial statements should be read in conjunction with the annual audited combined financial statements and notes included in our final prospectus filed on June 15, 2018.
Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The core principle of ASU 2014-09 is to recognize revenues when a customer obtains control of a good or service, in an amount that reflects the consideration to which an entity is expected to be entitled for those goods or services. Additionally, the ASU will require enhanced qualitative and quantitative disclosures regarding customer contracts. The standard will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a full retrospective or modified retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 by one year. The updated standard will be effective for the year ending December 31, 2019. The Company is currently evaluating the effect that the new standard will have on the consolidated and combined financial statements.

To assess the impact of the standard, we are utilizing internal resources to lead the implementation effort and supplement them with external resources. The Company’s adoption activities are being performed over three phases: (i) assessment, (ii) design, and (iii) implementation using a cross-functional team that includes accounting, operational and information technology personnel.

Under ASU 2014-09, the Company’s contracts are being analyzed to determine whether the goods or services within each contract are distinct performance obligations.  Based on our work to date, we believe we have identified all material contract types and revenues that may be impacted by the ASU.  Generally, the Company believes the majority of its contracts will continue to be treated as a single unit of account because they contain only one performance obligation.  The Environmental Solutions segment contains long term contracts where the identification of performance obligations may result in timing differences of revenue recognition and capitalization of costs, as compared to the Company’s current use of the percentage-of-completion method.

The Company is in the process of analyzing the necessary changes to our systems, processes and internal controls in order to meet the ASU's revised reporting and disclosure requirements.

9


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


The Company will adopt the new standard using the modified retrospective application. This standard could have a significant impact on the Company’s consolidated financial statements and an administrative impact on our operations. The impact will depend on the magnitude of the items discussed above. The Company will continue to evaluate the impact of the ASU through the implementation phase.
In February 2016, the FASB issued ASU 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 twelve months or less). At the commencement date of the lease, the Company will recognize:  1) a lease liability for Company’s obligation to make payments under the lease agreement, measured on a discounted basis; and 2) 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. The 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 2018-11, which provided an additional (and optional) transition method that permits application of the updated standard at the adoption date with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The updated standard will be effective for the Company for the year ending December 31, 2020, with early adoption permitted.  The Company has not yet selected a transition method and is currently evaluating the effect that the new standard will have on its consolidated and combined financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This update 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. The guidance is effective for the Company for the year ending December 31, 2019. The Company is currently evaluating the effect that the new standard will have on the consolidated and combined financial statements.
In November 2016, the FASB issued ASU 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 the ASU, amounts generally described as restricted cash and restricted 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 statement of cash flows. ASU 2016-18 will be effective for the Company for the year ending December 31, 2019, with early adoption permitted. The Company is currently evaluating the effect that the new standard will have on the consolidated and combined financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 requires entities to use a screen test to determine when an integrated set of assets and activities is not a business or if the integrated set of assets and activities needs to be further evaluated against the framework. The Company adopted the new standard effective January 1, 2018 on a prospective basis. The new standard did not have a material impact on our condensed consolidated financial statements.     
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU simplifies the measurement of goodwill impairment by eliminating the requirement that an 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. The ASU also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. The Company will be required to adopt ASU 2017-04 as of January 1, 2020. ASU 2017-04 must be applied prospectively, with early adoption permitted. The Company is currently evaluating the effect that the new standard will have on its consolidated and combined financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. The Company adopted the new standard effective January 1, 2018 on a prospective basis. The new standard did not have a material impact on our condensed consolidated financial statements.     


10


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


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 September 30, 2018. 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 three and nine months ended September 30, 2018 reflect the impact of U.S. tax reform.
2. Business Combination
On January 13, 2017, Charah Management completed a transaction with BCP, a previously unrelated third party pursuant to which BCP acquired a 76% equity position in Charah Management. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair value at the date of acquisition, as summarized below.
By the application of “push-down” accounting, Charah’s assets and liabilities were accordingly adjusted to fair value.
Net working capital
$
26,704

Net operating assets/liabilities
9,679

Property, plant and equipment
107,876

Rail easement
110

Purchase option liability
(29,883
)
Trade name intangible assets
34,330

Customer relationship intangible assets
78,200

Goodwill
73,468

Total purchase price
$
300,484

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 805, Business Combinations. As of September 30, 2018, the allocation of purchase price for the acquisition is preliminary (as summarized below); fair value estimates of identifiable assets acquired and liabilities assumed are based on management’s estimates, judgments and assumptions and are subject to change until finalized. Goodwill, if any, will be allocated to the Environmental Solutions segment. The total amount of goodwill that is expected to be deductible for tax purposes is $1,180.
In November 2018, the $15,000 to be paid over time was reduced by $2,963. The allocation of purchase price for the acquisition has been reflected in the table above on a preliminary basis and will be updated in conjunction with this reduction in purchase price during the three months ended December 31, 2018.

11


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


Cash acquired
$
17

Net working capital, excluding cash
21,185

Property, plant and equipment
5,300

Trade name intangible assets
633

Customer relationship intangible assets
1,427

Technology
2,102

Non-compete and other agreements
1,373

Total purchase price
$
32,037

No revenue or earnings from the acquired business described above is included in the Statements of Income (Loss) for the 2017 periods. The actual revenue from the acquired business included in the Statements of Income (Loss) for the three and nine months ended September 30, 2018 was approximately $14,890 and $31,463, respectively. The actual earnings from the acquired business included in the Statements of Income (Loss) for the three and nine months ended September 30, 2018 was approximately $368 and $1,322, respectively.
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
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2018
 
Period from January 13, 2017 through September 30, 2017
 
Period from
January 1, 
2017 through
January 12,
2017
Pro forma revenue
$
186,002

 
$
138,993

 
$
554,077

 
$
305,998

 
$
11,158

Pro forma net income (loss) attributable to Charah Solutions, Inc.
(17,379
)
 
1,364

 
(12,568
)
 
20,443

 
(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, 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 and therefore will change when the final asset values and useful lives have been determined.
The pro forma results reflect elimination of $589 of direct acquisition costs that were incurred in the nine months ended September 30, 2018 (since for purposes of the pro forma presentation they have been reflected in 2017 instead of in 2018). For all 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.
3. Equity Method Investments
Charah has an investment in a company that provides ash management and remarketing services to the electric utility industry. Charah accounts for its investment under the equity method of accounting because Charah has significant influence over the financial and operating policies of the company. Charah had a receivable due from the equity method investment of $146 and $61 at September 30, 2018 and December 31, 2017, respectively.
 
Summarized balance sheet information of our equity method investment entity as of:
 

12


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


 
September 30,
2018
 
December 31,
2017
Current assets
$
2,943

 
$
1,946

Noncurrent assets
763

 
764

Total assets
$
3,706

 
$
2,710

Current liabilities
529

 
298

Equity of Charah
5,389

 
5,006

Equity of joint venture partner
(2,212
)
 
(2,594
)
Total liabilities and members' equity
$
3,706

 
$
2,710

Summarized financial performance of our equity method investment entity is as follows:
 
 
Successor
 
Predecessor
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2018
 
Period from January 13, 2017 through September 30, 2017
 
Period from
January 1
2017, through
January 12,
2017
Operating Data
 
 
 
 
 
 
 
 
 
Revenues
$
3,409

 
$
2,151

 
$
8,438

 
$
5,922

 
$
300

Net income
$
1,572

 
$
367

 
$
4,144

 
$
1,320

 
$
96

The Company’s share of net income
$
786

 
$
184

 
$
2,072

 
$
660

 
$
48

The following table reflects our proportional ownership activity in our investment account:
 
 
Successor
 
Predecessor
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2018
 
Period from January 13, 2017 through September 30, 2017
 
Period from
January 1
2017, through
January 12,
2017
 
 
 
 
Opening balance
$
5,354

 
$
5,115

 
$
5,006

 
$
5,289

 
$
5,241

Distributions
(751
)
 
(283
)
 
(1,689
)
 
(933
)
 

Share of net income
786

 
184

 
2,072

 
660

 
48

Closing balance
$
5,389

 
$
5,016

 
$
5,389

 
$
5,016

 
$
5,289

 


13


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


4. Intangible Assets
The Company’s intangible assets consist of the following as of:
 
 
September 30, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
$
78,200

 
$
13,033

 
$
65,167

Other - Rail easement
110

 
41

 
69

Trade name (indefinite lived)
34,330

 

 
34,330

Goodwill
73,468

 

 
73,468

 
186,108

 
13,074

 
173,034

Other - Patents acquired (Note 2)
2,133

 
107

 
2,026

Non-compete and other agreements acquired (Note 2)
1,373

 
108

 
1,265

Customer relationships acquired (Note 2)
1,427

 
71

 
1,356

Trade name acquired (Note 2)
633

 
63

 
570

Closing balance
$
191,674

 
$
13,423

 
$
178,251

 
 
 
 
 
 
 
December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
$
78,200

 
$
7,168

 
$
71,032

Rail easement
110

 
23

 
87

Trade name (indefinite lived)
34,330

 

 
34,330

Goodwill
73,468

 

 
73,468

Closing balance
$
186,108

 
$
7,191

 
$
178,917

Definite Lived Intangible Assets
As of September 30, 2018, and December 31, 2017, definite lived intangible assets include customer relationships, patents, non-compete and licensing agreements, trade name, 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 $2,135, $1,961, $6,232, $5,230 and $0 during the three months ended September 30, 2018 (Successor), the three months ended September 30, 2017 (Successor), the nine months ended September 30, 2018 (Successor), the period from January 13, 2017 through September 30, 2017 (Successor) and the period from January 1, 2017 through January 12, 2017 (Predecessor), respectively.

Definite Lived Intangible
Useful Life
Customer relationships
10 years
Patents
10 years
Non-compete agreement
2 years
Licensing agreements
15 years
Trade name
5 years
Rail easement
4.5 years


14


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


Goodwill and Indefinite Lived Intangible Assets
Goodwill represents the excess of the cost of an acquisition price over the fair value of acquired net assets, and such amounts are reported separately as goodwill on our condensed consolidated and combined balance sheets.
Indefinite lived intangible assets are not amortized, but instead are tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value.
 
We perform our impairment test effective October 31st of each year. Each quarter we evaluate if there are any indicators of impairment, and we determined there were no indicators of impairment at September 30, 2018 and 2017.
5. Credit Agreement
The Company had 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 (1) an adjusted London Inter-Bank Offered Rate ("LIBOR") plus a 2.00% borrowing margin, or (2) an alternative base rate plus a 1.00% borrowing margin. Customary fees were payable in respect of the Credit Facility and included (1) commitment fees in an annual amount equal to 0.50% of the daily unused portions of the Credit Facility, and (2) a 2.00% fee on outstanding letters of credit. The Credit Facility had a maturity date of October 25, 2022. There were no amounts drawn on the revolving credit facility as of December 31, 2017. The Credit Facility was terminated in September 2018 and all amounts outstanding were repaid.
In September 2018, the Company entered into a new syndicated credit agreement (the “Syndicated Credit Facility”) that includes a revolving loan not to exceed $50,000, a term loan of $205,000 (see also Note 6), and a commitment to loan up to $25,000 that expires in March 2020. All amounts loaned under the Syndicated Credit Facility mature in September 2023. The interest rates per annum applicable to the loans under the Syndicated Credit Facility are based on a fluctuating rate of interest measured by reference to, at the Company’s election, either (1) the LIBOR rate, or (2) an alternative base rate. Various margins are added to the interest rate selected by the Company based upon the Company’s consolidated net leverage ratio. Customary fees are payable in respect of the Syndicated Credit Facility and include (1) commitment fees (0.25% to 0.35%) for unused portions of the Syndicated Credit Facility, and (2) fees on outstanding letters of credit (1.30% to 2.10%). The loans are secured by essentially all assets of the Company. The loans are subject to certain financial covenants.
The revolving loan provides a principal amount of up to $50,000, reduced by outstanding letters of credit ($12,531 outstanding as of September 30, 2018). As of September 30, 2018, $5,106 was outstanding on the revolving loan.

6. Notes Payable
The following table summarizes the major components of debt at each balance sheet date and provides maturities and interest rate ranges for each major category as of September 30, 2018:
 

15


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


 
September 30,
2018
 
December 31, 2017
Various equipment notes entered into in November 2017, payable in monthly installments ranging from $5 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 $4,824 as of September 30, 2018 (Successor).
$
5,185

 
$
5,910

Various equipment notes entered into in 2018, payable in monthly installments ranging from $6 to $38 including interest ranging from 5.90% to 6.80%, maturing in March 2023 through May 2025. The notes are secured by equipment with a net book value of $12,297 as of September 30, 2018 (Successor).
12,704

 

In June 2018, the Company entered into a $12,000 convertible non-revolving credit note with a bank. The credit note will convert to a term loan on April 10, 2019, with a maturity date of April 10, 2024. Interest on borrowings prior to the conversion date is calculated using a floating rate equal to 2% in excess of LIBOR. At the conversion date, interest can be either calculated based on the aforementioned rate or at a fixed rate equal to 2% in excess of the 5-year Swap Rate in effect at the conversion date, based on the Company's preference.
5,896

 

A $10,000 equipment line with a bank, entered into during 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 note is secured by equipment with a net book value of $9,462 as of September 30, 2018 (Successor).
10,000

 
3,244

A credit agreement with a bank, entered into during October 2017, providing for a senior secured term loan B facility with an initial commitment of $250,000 (the Term Loan). The interest rates per annum applicable to the loans under the Term Loan were based on a fluctuating rate of interest measured by reference to, at the Company's election, either (1) LIBOR plus a 6.25% borrowing margin, or (2) an alternative base rate plus a 5.25% borrowing margin. The principal amount of the Term Loan amortized at a rate of 7.5% per annum with all remaining outstanding amounts under the Term Loan due on the Term Loan maturity date. A portion of the IPO proceeds was used to prepay scheduled principal payments which would otherwise have been required through June 2020. The Term Loan had a scheduled maturity date of October 25, 2024. The Term Loan was secured by substantially all the assets of the Company and was subject to certain financial covenants. The loan was repaid in full in September 2018.

 
250,000

A term loan entered into in September 2018 as part of the Syndicated Credit Facility (see also Note 5). The interest rate applicable to the term loan is based on a fluctuating rate of interest measured by reference to, at the Company’s election, either (1) the LIBOR rate, or (2) an alternative base rate (see also Note 5). Principal payments of $2,563 are required quarterly through September 2020, $3,844 through September 2022, and $5,125 through September 2023. The remaining outstanding amounts will be due in September 2023. The loan is secured by substantially all the assets of the Company. The loan is subject to certain financial covenants.
205,000

 

Total
238,785

 
259,154

Less debt issuance costs
(3,423
)
 
(11,460
)
 
235,362

 
247,694

Less current maturities
(20,766
)
 
(19,996
)
Notes payable due after one year
$
214,596

 
$
227,698


Included in interest expense in the condensed consolidated statements of income for the three and nine months ended September 30, 2018 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 issue costs and a $2.1 million prepayment penalty.
7. Interest Rate Swap
In order to manage interest rate risk in a cost-efficient manner, the Company entered into an interest rate swap during 2017 whereby the Company agreed to exchange with the counterparty, at specified intervals, the difference between fixed and

16


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


variable interest amounts calculated by reference to a notional amount. The interest rate swap is not designated for hedge accounting. The change in fair values of the interest rate swap are immediately recognized in earnings, within interest expense.
 
As of both September 30, 2018 and December 31, 2017, the notional amount of the interest rate swap was $150,000. A fair value asset of $2,659 was recorded in the condensed consolidated balance sheet within other assets as of September 30, 2018 (Successor) and a fair value liability of $198 was recorded in the balance sheet within other liabilities as of December 31, 2017 (Successor). The total amount of gain subtracted from interest expense for the three months ended September 30, 2018 (Successor), the three months ended September 30, 2017 (Successor), the nine months ended September 30, 2018 (Successor), the period from January 13, 2017 through September 30, 2017 (Successor), and the period from January 1, 2017 through January 12, 2017 (Predecessor) was $629, $0, $2,857, $0 and $0 respectively.
8. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts as of:
 
 
September 30,
2018
 
December 31,
2017
Costs incurred on uncompleted contracts
$
252,166

 
$
151,963

Estimated earnings
82,260

 
53,356

Total costs and earnings
334,426

 
205,319

Less billings to date
(276,476
)
 
(213,242
)
Costs and estimated earnings in excess of billings
$
57,950

 
$
(7,923
)
The net balance in process is classified on the condensed consolidated and combined balance sheets as of:
 
 
September 30,
2018
 
December 31,
2017
Costs and estimated earnings in excess of billings
$
62,549

 
$
7,959

Billings in excess of costs and estimated earnings
(4,599
)
 
(15,882
)
Net balance in process
$
57,950

 
$
(7,923
)
9. Distributions to Stockholders and Members
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 three months ended September 30, 2018 (Successor), the three months ended September 30, 2017 (Successor), the nine months ended September 30, 2018 (Successor), the period from January 13, 2017 through September 30, 2017 (Successor), and the period from January 1, 2017 through January 12, 2017 (Predecessor), the Company made distributions of $0, $587, $686, $16,085 and $20,660, respectively, a portion of which was used to pay for income taxes.
10. Stock/Unit Based Compensation
The Charah Management LLC Limited Liability Agreement provided for the issuance of up to 1,000 Series C interests ("Charah Series C Profits Interests"). In 2017, Charah Management adopted the Charah Series C Profits Interest Plan and issued 650 of such units to employees. 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 interest. The Charah Series C Profits Interest Plan is no longer in place following our corporate reorganization and related IPO. Charah Series C Profits Interests vested ratably in each of the first five anniversaries of their grant date with vesting accelerated upon a change of control. There were 540 Charah Series C Profits Interests unvested at June 18, 2018 and 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

17


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


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 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 Interest granted during 2017 was $3,198 per unit, resulting in $2,100 of total compensation costs, which was expected to vest over 5 years.
During the three months ended September 30, 2018 (Successor) and 2017 (Successor), $0 and $85, respectively, of compensation expense was recognized related to the Charah Series C Profits interests. During the nine months ended September 30, 2018 (Successor), the period from January 13, 2017 through September 30, 2017 (Successor) and the period from January 1, 2017 through January 12, 2017 (Predecessor) compensation expense of $214, $226 and $0, respectively, was recognized related to the Charah Series C Profits Interests.
The Allied Power Management LLC Limited Liability Agreement provided for the issuance of up to 1,000 Allied Series C profits interests (“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 related IPO. 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 interest. 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 average grant date fair value of the Allied Series C Profits Interest granted during 2017 was $69 per unit. No compensation expense was recognized during the three and nine months ended September 30, 2018 (Successor). For both the three months ended September 30, 2017 (Successor) and the period from January 13, 2017 through September 30, 2017 (Successor), $38 of compensation expense was recognized. No compensation expense was recognized during the period from January 1, 2017 through January 12, 2017 (Predecessor) related to 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, 1.9 million Charah Management LLC Series B Membership Interests and 0.1 million 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 three months ended September 30, 2017 (Successor) and the period from January 13, 2017 through September 30, 2017 (Successor) related to these Series B membership interest grants. No compensation expense was recognized during the three and nine months ended September 30, 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 1,215,956 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, 911,963 of the 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 a future date. In addition, 272,708 shares of common stock were issued under the 2018 Omnibus Incentive Plan (see further discussion below), of which 204,532 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 board of directors. The fair value of the awards is recognized over the required service period for each grant.
Upon the closing of the IPO, the board of directors of the Company adopted the 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,

18


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


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 3,006,582 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 44,198 shares under the 2018 Plan that vest over one year. The fair value of the awards was calculated as $12 per share, which will be recognized over the one-year vesting period. In August 2018, the Company issued 45,004 shares under the 2018 Plan that vest over 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.
During the three and nine months ended September 30, 2018 (Successor), $1,046 and $2,235, respectively, of compensation expense was recognized related to the shares issued in accordance with the Management Reorganization Consideration and the 2018 Plan. As of September 30, 2018, there was approximately $3,483 of total compensation expense, subject to changes in fair value as the performance targets are approved by the board of directors, related to unvested awards not yet recognized, which will be recognized in future periods in accordance with applicable vesting terms.
11. Commitments and Contingencies

In July 2017, APTIM Corp. sued Allied and certain of its employees and affiliated entities in the U.S. District Court for the Northern District of Illinois, alleging, among other things, misappropriation of alleged trade secrets and civil conspiracy. APTIM also alleged tortious interference with their contractual and business relations because Exelon, our customer whose business makes up 100% of our nuclear services revenues, ended their business relationship with APTIM and started a new business relationship with Allied. The litigation was indefinitely stayed on June 21, 2018 pending resolution of the arbitration discussed in the next paragraph which has overlapping issues with this litigation. The parties were engaged in discovery relevant to APTIM's motion for preliminary injunction, which was filed last July, before the stay was entered. APTIM has an unspecified claim for damages that may proceed if the stay is lifted. No schedule for that phase of the case, and no trial date, has been set. APTIM has not identified its alleged damages.

APTIM and its alleged predecessors in interest have also initiated judicial and arbitral proceedings in Louisiana against Dorsey Ron McCall, our Senior Vice President and Board Member. In June 2017, APTIM’s alleged predecessor, The Shaw Group, Inc., sued Mr. McCall in Louisiana state court, alleging breaches of his employment agreement. APTIM later filed a petition in the U.S. District Court for the Eastern District of Louisiana seeking to stay the state-court litigation and compel arbitration of the breach-of-contract claims, which the district court granted, permitting APTIM’s pending arbitration against Mr. McCall to proceed. Mr. McCall appealed that decision to the U.S. Court of Appeals for the Fifth Circuit, which affirmed the district court’s order. Mr. McCall filed a petition for rehearing en banc on May 1, 2018 and the Fifth Circuit directed APTIM to file a response to the petition by May 24, 2018. On May 31, 2018, the Fifth Circuit denied Mr. McCall’s petition. The matter has now proceeded to arbitration which has been set for March 11-22, 2019. McCall and APTIM each filed motions to dismiss certain claims asserted by the other. Each of those motions were denied on September 24, 2018 and October 24, 2018, respectively. The Company recently received an offer from APTIM to settle outstanding litigation, and is reviewing that proposal along with its insurance carrier.

We are party to a lawsuit filed against North Carolina by a certain 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 (“OAH”). If the OAH determines North Carolina exceeded its permitting authority with respect to either the original allowance or the “cut and prepare” portions of the permits or both, such decision, if ultimately upheld, could have an adverse effect on our operations and financial results.

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 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. 

19


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


The Plaintiffs have an unspecified claim for damages.  The collective action class claims have not been certified and the case is currently stayed pending a mediation that is currently set for November 26, 2018.

In addition to the above matters, we are from time to time party to various lawsuits, claims and other legal proceedings arising in the ordinary course of our business. While the outcome of such proceedings cannot be predicted with certainty, we do not expect them to have a material adverse impact on the Company.

Included in general and administrative expense in the condensed consolidated statement of income for the quarter ended September 30, 2018, and in accrued liabilities in the condensed consolidated balance sheet as of September 30, 2018, was approximately $20.0 million in accruals related to outstanding legal matters. We believe that the amounts accrued are sufficient to cover any liabilities arising from the proceedings with APTIM and all other 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.

12. Business Segment and Related Information
The Company has identified the following reportable segments, Environmental Solutions and Maintenance & Technical Services, as each met the quantitative threshold of generating revenues equal to or greater than 10 percent of the combined revenue of all operating segments.
Management evaluates the performance of each segment based on segment gross profit, which is calculated as revenues less cost of sales. For the three months ended September 30, 2018 (Successor), the three months ended September 30, 2017 (Successor), the nine months ended September 30, 2018 (Successor), the period from January 13, 2017 through September 30, 2017 (Successor) and the period January 1, 2017 through January 12, 2017 (Predecessor), there are no intersegment revenues 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.

20


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


Summarized financial information with respect to the reportable segments is as follows:
 
Successor
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
ES
 
M&TS
 
All
Other
 
Total
Revenue
$
103,848

 
$
82,154

 
$

 
$
186,002

Segment gross profit
19,852

 
6,854

 

 
26,706

Segment depreciation and amortization expense
13,050

 
1,720

 
1,993

 
16,763

Three Months Ended September 30, 2017
ES
 
M&TS
 
All
Other
 
Total
Revenue
$
65,930

 
$
52,981

 
$

 
$
118,911

Segment gross profit
18,683

 
4,471

 

 
23,154

Segment depreciation and amortization expense
6,128

 
624

 
50

 
6,802

Nine Months Ended September 30, 2018
ES
 
M&TS
 
All
Other
 
Total
Revenue
$
241,745

 
$
295,509

 
$

 
$
537,254

Segment gross profit
54,417

 
21,936

 

 
76,353

Segment depreciation and amortization expense
23,794

 
4,127

 
5,977

 
33,898

Expenditures for segment assets
7,165

 
7,761

 
22

 
14,948

Period from January 13, 2017 through September 30, 2017
ES
 
M&TS
 
All
Other
 
Total
Revenue
$
175,425

 
$
76,855

 
$

 
$
252,280

Segment gross profit
49,224

 
10,153

 

 
59,377

Segment depreciation and amortization expense
17,698

 
1,758

 
145

 
19,601

Expenditures for segment assets
3,485

 
4,089

 
17

 
7,591

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 September 30, 2018
ES
 
M&TS
 
All
Other
 
Total
Segment property and equipment, net
$
55,034

 
$
41,452

 
$
357

 
$
96,843

Segment goodwill
56,846

 
16,622

 

 
73,468

As of December 31, 2017
ES
 
M&TS
 
All
Other
 
Total
Segment property and equipment, net
$
75,764

 
$
23,725

 
$
441

 
$
99,930

Segment goodwill
56,846

 
16,622

 

 
73,468

 

21


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)






The following is a reconciliation of segment gross profit to net income (loss):
 
 
Successor
 
Predecessor
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2018
 
Period from January 13, 2017 through September 30, 2017
 
Period from
January 1,
2017
through
January 12,
2017
 
 
 
 
 
Segment gross profit
$
26,706

 
$
23,154

 
$
76,353

 
$
59,377

 
$
1,829

General and administrative expenses
(32,625
)
 
(19,942
)
 
(65,944
)
 
(33,921
)
 
(3,170
)
Interest expense
(17,034
)
 
(1,549
)
 
(26,708
)
 
(4,332
)
 
(4,181
)
Income from equity method investment
786

 
184

 
2,072

 
660

 
48

Income tax benefit
5,667

 

 
2,761

 

 

Net income (loss)
$
(16,500
)
 
$
1,847

 
$
(11,466
)
 
$
21,784

 
$
(5,474
)

The following is a reconciliation of segment assets to total assets:

 
As of September 30, 2018
 
As of December 31, 2017
Segment property and equipment, net
$
96,843

 
$
99,930

Segment goodwill
73,468

 
73,468

Non-segment assets
288,452

 
204,253

Total assets
$
458,763

 
$
377,651


13. Income Taxes
The Company is a "C" Corporation under the Internal Revenue Code of 1986, as amended, and, as a result, will be 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 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 $1,359 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 740, the tax effects have been recorded as a separate item of income tax expense.
In order to determine the tax provision related to operating income at the end of each interim period, the Company estimates the annual effective tax rate and applies that to its pre-tax earnings. The Company's pre-tax earnings for the period ended September 30, 2018 included only 13 days of operating income for June and all of the third quarter since this period was subject to corporate income taxes for which the Company is liable. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and judgments including, but not limited to, the expected operating income for the year, estimated permanent differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current

22


CHARAH SOLUTIONS, INC.
Notes to Condensed Consolidated & Combined Financial Statements, continued
(dollars in thousands except per share and unit data)
(Unaudited)


year. The accounting estimates used to compute the provision for income taxes may change as new events occur and additional information is obtained.
The Company’s effective tax rate, excluding discrete items, for the period June 18, 2018 through September 30, 2018 is 18.8%. This rate differs from the statutory rate of 21% for Federal income tax and 5.3% for the estimated state rate. This is primarily due to the impact of income attributable to non-controlling interest which is not subject to income tax at the Company level.
The Company’s income tax returns for the year ended December 31, 2018 will be its initial tax returns filed with the U.S. federal, state and local governments. The examination of prior period tax returns filed for partnerships contributed to the Company in the reorganization could impact the Company’s tax expense and tax balance sheet accounts. The Company acquired a foreign subsidiary at formation and the subsidiary is subject to examination for prior calendar years, however, the Company is not aware of any potential adjustments for prior years and any such adjustment should not be material to the financial statements.

14. Earnings (Losses) Per Share
Basic earnings (losses) per share is computed by dividing net income (loss) attributable to the Company's shareholders by the weighted average number of shares outstanding during the period. Diluted earnings (losses) per share reflects all potential dilutive ordinary shares outstanding during the period and is computed by dividing net income (loss) available to the Company's shareholders by the weighted average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding as dilutive securities. For the periods prior to the IPO, the average number of ordinary shares outstanding used to calculate basic and diluted earnings (losses) 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 three and nine months ended September 30, 2018, the inclusion of all potentially dilutive shares would be anti-dilutive. Therefore, dilutive shares (in thousands) of 1,181 and 959, respectively, were excluded from the computation of the weighted-average shares for diluted net loss per share for the three and nine months ended September 30, 2018.
Basic and diluted earnings (losses) per share is determined using the following information:
 
Successor
 
Predecessor
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2018
 
Period from January 13, 2017 through September 30, 2017
 
Period from
January 1,
2017
through
January 12,
2017
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to Charah Solutions, Inc.
$
(17,395
)
 
$
1,057

 
$
(13,370
)
 
$
19,922

 
$
(5,528
)
 
 
 
 
 
 
 
 
 
 
Denominator (in thousands):
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
29,083

 
23,710

 
25,777

 
23,710

 
N/A

Dilutive share-based awards

 
822

 

 
822

 
N/A

Total weighted average shares outstanding, including dilutive shares
29,083

 
24,532

 
25,777

 
24,532

 
N/A

 
 
 
 
 
 
 
 
 
 
Basic earnings (losses) per share
$
(0.60
)
 
$
0.04

 
$
(0.52
)
 
$
0.84

 
N/A

Diluted earnings (losses) per share
$
(0.60
)
 
$
0.04

 
$
(0.52
)
 
$
0.81

 
N/A


23



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the historical financial statements and related notes included in Part I, Item 1 of this report. This discussion contains “forward‑looking statements” reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward‑looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in this report. 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 in this report. We assume no obligation to update any of these forward‑looking statements.

Our Predecessor and Charah Solutions, Inc.
Charah Solutions, Inc. (“Charah Solutions” “Company,” “we,” “us,” or “our”) was formed in January 2018 and did not conduct any material business operations prior to the transactions described under “Initial Public Offering”. Our Predecessor consists of Charah Management LLC, a Delaware limited liability company (“Charah Management”) and Allied Power Holdings, LLC, a Delaware limited liability company (“Allied Power Holdings”) on a combined consolidated basis. In connection with the closing of our initial public offering (the "IPO"), and pursuant to the terms and conditions of the master reorganization agreement dated June 13, 2018, Charah Management and Allied Power Holdings became wholly owned subsidiaries of us.
Through our ownership of Charah Management and Allied Power Holdings, we own the outstanding equity interests in Charah, LLC, a Kentucky limited liability company (“Charah”), and Allied Power Management, LLC, a Delaware limited liability company (“Allied Power Management”), the subsidiaries through which we operate our businesses.

Overview
We were formed in January 2018 in connection with the IPO and to be a holding company for Charah Management and Allied Power Holdings. The historical financial data presented herein as of September 30, 2018 and for periods after the June 18, 2018 corporate reorganization is that of Charah and Allied on a consolidated basis, 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. The historical combined financial information of our Predecessor is not indicative of the results that may be expected in any future periods. For more information, please see the historical consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report.
We are a leading provider of mission-critical environmental and maintenance services to the power generation industry, enabling our customers to address challenges related to the remediation of ash ponds and landfills at open and closed power plant sites while continuously operating and providing necessary electric power to communities nationwide. We offer a suite of coal ash management and recycling, environmental remediation and outage 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 operate in over 20 states, resulting in an overall footprint and density in key markets that we believe is difficult to replicate.
We are an environmental remediation and maintenance company and 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 offerings. Remediation and compliance services are associated with our customers’ need for multiyear environmental improvement and sustainability initiatives, whether driven by proactive engagement by power generation customers, by regulatory requirements or by consumer expectations and standards. Byproduct sales support both our power generation customers’ desire to profitably recycle recurring and historic volumes of coal combustion residuals ("CCRs") and our ultimate end customers’ need for high-quality, cost-effective raw material substitutes.

24



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 management of coal ash for coal-fired power generation facilities. Nuclear services 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 was 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 (as defined below), and any remaining net proceeds were used to pay offering expenses or designated to be used 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:
Revenues;
Gross Profit;
Operating Income;
Adjusted EBITDA; and
Adjusted EBITDA Margin.
Revenues
We analyze our revenues by comparing actual revenues to our internal projections for a given period and to prior periods to assess our performance. We believe that revenues are a meaningful indicator of the demand and pricing for our services.
Gross Profit
We analyze our gross profit, which we define as revenues 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 revenues 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 true operating performance based on the historical 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. We define Adjusted EBITDA as net income before interest expense, depreciation and amortization, equity-based compensation and income taxes, elimination of certain legacy expenses, amounts from a non-acquired business line and transaction related expenses and other items. Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total revenues. See “Non-GAAP Measures” for more information and reconciliations of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.


25



Key Factors Affecting Our Business and Financial Statements
Ability to Capture New Contracts and Opportunities
Our ability to grow revenue and earnings is contingent 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 secure contract renewals. We also leverage the embedded long-term nature of our customer relationships to obtain insight into and capture new business opportunities across our platform.
Seasonality of Business
Based on historic trends, we expect our operating results to vary seasonally. Nuclear power generators perform turnaround and outages in the off-peak months where 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 consumption of energy, which may influence 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 within remediation and compliance services. 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 of time. As a result, our revenues from these projects can fluctuate over time. Some of our revenues from projects are recognized using percentage of completion accounting for GAAP purposes. This method of revenue recognition is determined by estimating the percentage of completion on a job and the ultimate estimated gross profit margin on the job. The timing of revenues recorded for financial reporting purposes may differ from actual billings to customers, sometimes resulting in costs and billing in excess of actual revenues. Because of the risks in estimating 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, in addition to the market forces and governmental regulations driving the need to dispose of coal ash in an environmentally sensitive manner. Pricing of byproduct sales is driven by supply and demand market dynamics, in addition to the chemical and physical properties of the ash. As demand increases for the end-products that use recycled coal-fired power generation waste byproducts (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 offerings. 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 a recessionary period given 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 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 and material 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 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 Revenues

26



The Environmental Solutions segment generates revenue through our remediation and compliance services, as well as byproduct sales offerings. Our remediation and compliance services offerings 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. Our platform of services is contracted for terms generally ranging from 18 months to five years, thereby reducing financial volatility. In excess of 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 sales of ash is recognized when it is delivered to the customer.
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 for coal-fired power generation facilities to fulfill an environmental service need of our customers in handling their waste byproducts. Our nuclear services operations, which goes to market under the Allied Power brand name, consists 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 between three to five years. Revenues are billed and paid during the periods of time work is being executed. Our nuclear services revenues tend to be seasonal and may experience significant increases during periods of shutdowns of generators. This combination of the maintenance and environmental-related services deepens customer connectivity and drives long-term relationships which we believe are critical for the renewal of existing contracts, winning incremental business from existing customers at new sites and adding new customers. Over the last five years, we have achieved an approximately 90% renewal rate for contracts in our fossil services offerings up for renewal.
Costs of Conducting Our Business
The principal expenses involved in conducting our business are labor and material costs, most of which is included in cost of goods sold. Expenses related to subcontracting and equipment are also key expenses in our business. Additionally, we have general and administrative expenses primarily comprised of sales, marketing and corporate administrative functions.
Factors Impacting the Comparability of Results of Operations
Public Company Costs
As a new public company, we expect to incur incremental recurring, and certain non-recurring costs related to our transition to a publicly traded and taxable corporation, including the costs of our initial public offering and the costs associated with the initial implementation of our Sarbanes-Oxley Section 404 internal control implementation and testing. We also 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 common stockholders, 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 (the “Code”), and, as a result, will be 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 LLC and Allied Power Holdings, LLC, 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.

Operations of Allied Power Management, LLC

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Allied was formed in May 2017 and did not commence operations until July 2017. Our results of operations for the year ended December 31, 2017 reflect the results of Allied only from the commencement of its operations in July 2017. As a result, our historical financial and operating information for the nine months ended September 30, 2018 may not be comparable to the historical financial and operating information for the nine months ended September 30, 2017.

Results of Operations
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
 
Three Months Ended
 
 
 
 
 
September 30,
 
Change
 
2018
 
2017
 
$
 
%
 
(in thousands)
 
 
 
 
Revenues:
 
 
 
 
 
 
 

Environmental Solutions
$
103,848

 
$
65,930

 
$
37,918

 
57.5
 %
Maintenance and Technical Services
82,154

 
52,981

 
29,173

 
55.1
 %
Total revenue
186,002

 
118,911

 
67,091

 
56.4
 %
Cost of sales
159,296

 
95,757

 
63,539

 
66.4
 %
Gross Profit:
 
 
 
 
 

 
 
Environmental Solutions
19,852

 
18,683

 
1,169

 
6.3
 %
Maintenance and Technical Services
6,854

 
4,471

 
2,383

 
53.3
 %
Total gross profit
26,706

 
23,154

 
3,552

 
15.3
 %
General and administrative expenses
32,625

 
19,942

 
12,683

 
63.6
 %
Operating income (loss)
(5,919
)
 
3,212

 
(9,131
)
 
(284.3
)%
Interest expense
(17,034
)
 
(1,549
)
 
15,485

 
999.7
 %
Income from equity method investment
786

 
184

 
602

 
327.2
 %
Income (loss) before taxes
(22,167
)
 
1,847

 
(24,014
)
 
(1,300.2
)%
Income tax benefit
(5,667
)
 

 
(5,667
)
 
100.0
 %
Net Income (loss)
(16,500
)
 
1,847

 
(18,347
)
 
(993.3
)%
Less income attributable to non-controlling interest
(895
)
 
(790
)
 
(105
)
 
13.3
 %
Net income (loss) attributable to Charah Solutions, Inc.
(17,395
)
 
1,057

 
(18,452
)
 
(1,745.7
)%
Adjusted EBITDA(1)
$
32,553

 
$
20,678

 
$
11,875

 
57.4
 %
Adjusted EBITDA margin(1)
17.5%
 
17.4%
 
0.1%
 
N/A

(1)
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 Measures” below.

Revenues. Revenues increased $67.1 million, or 56.4%, for the three months ended September 30, 2018 to $186.0 million from $118.9 million for the three months ended September 30, 2017. The increase in revenues by segment was as follows:
Environmental Solutions revenues. Environmental Solutions segment revenues increased $37.9 million, or 57.5%, for the three months ended September 30, 2018 to $103.8 million from $65.9 million for the three months ended September 30, 2017. The increase was primarily attributable to the addition of SCB Materials International that occurred in March 2018, in addition to a net overall increase in revenue from our remediation and compliance services offerings.
Maintenance and Technical Services revenues. Maintenance and Technical Services revenues increased $29.2 million, or 55.1%, for the three months ended September 30, 2018 to $82.2 million from $53.0 million for the three months ended September 30, 2017. The increase was primarily attributable to the addition of our nuclear services offerings, which did not have a full quarter of operations in the third quarter of 2017.

28



Gross Profit. Gross profit increased $3.6 million, or 15.3%, for the three months ended September 30, 2018 to $26.7 million from $23.2 million for the three months ended September 30, 2017. As a percentage of revenue, gross profit was 14.4% and 19.5% for the three months ended September 30, 2018 and 2017, respectively. The decrease in gross profit margin was primarily driven by the change in mix of projects, weather-related impacts and the acquisition of SCB Materials International, each of which relate to the Environmental Solutions segment. The increase in gross profit by segment was as follows:
Environmental Solutions gross profit. Gross profit for our Environmental Solutions segment increased $1.2 million, or 6.3%, for the three months ended September 30, 2018 to $19.9 million from $18.7 million for the three months ended September 30, 2017. The increase was primarily attributable to the increase in gross profit from our addition of SCB Materials International that occurred in March 2018.
Maintenance and Technical Services gross profit. Gross profit for our Maintenance and Technical Services segment increased $2.4 million, or 53.3%, for the three months ended September 30, 2018 to $6.9 million from $4.5 million for the three months ended September 30, 2017. The increase was primarily attributable to the addition of our nuclear services offerings, which did not have a full quarter of operations in the third quarter of 2017.
General & Administrative. General and administrative expense increased $12.7 million, or 63.6%, for the three months ended September 30, 2018 to $32.6 million from $19.9 million for the three months ended September 30, 2017. The increase was primarily attributable to additional general and administrative expenses associated with our nuclear services offerings, including non-recurring legal costs and accruals, as disclosed in our Adjusted EBITDA calculation included herein, in addition to increased expense due to the addition of SCB Materials International, partially offset by the reduction in non-recurring startup costs associated with our nuclear services offerings, as disclosed in our Adjusted EBITDA calculation included herein, and a reduction in stock-based compensation expense.
Interest Expense. Interest expense increased $15.5 million, or 999.7%, for the three months ended September 30, 2018 to $17.0 million from $1.5 million for the three months ended September 30, 2017. The increase was primarily attributable to $12.5 million of costs incurred in conjunction with the refinance of our debt, consisting of a $10.4 million non-cash write-off of debt issue costs and a $2.1 million prepayment penalty, in addition to an increase in our debt balances.
Income from Equity Method Investment. Income from equity method investment increased $0.6 million, or 327.2%, for the three months ended September 30, 2018 to $0.8 million from $0.2 million for the three months ended September 30, 2017. The increase was primarily attributable to a price increase of the products sold through this joint venture.
Net Income (loss). Net income (loss) decreased $18.3 million, or 993.3%, for the three months ended September 30, 2018 to $(16.5) million from $1.8 million for the three months ended September 30, 2017. The decrease was primarily attributable to increased interest expense and general and administrative expense as disclosed above, offset by an income tax benefit of $5.7 million and additional revenue and gross profit as disclosed above.
Adjusted EBITDA and Adjusted EBITDA margin. Adjusted EBITDA increased $11.9 million, or 57.4%, for the three months ended September 30, 2018 to $32.6 million from $20.7 million for the three months ended September 30, 2017, and our Adjusted EBITDA margin for the three months ended September 30, 2018 was 17.5%, an increase of 0.1% from 17.4% for the three months ended September 30, 2017. For a definition of Adjusted EBITDA and the calculation of Adjusted EBITDA margin, as well as a reconciliation to the most directly comparable GAAP measure, see “Non-GAAP Measures.”

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
The following table sets forth our Predecessor’s selected operating data for the nine months ended September 30, 2018 and 2017. The successor column below represents the combined financial information of Charah and Allied for the periods from January 13, 2017 through September 30, 2017 and the nine months ended September 30, 2018, while the predecessor columns below represent the financial information of Charah for the period from January 1, 2017 through January 12, 2017, each as reflected in our unaudited financial statements included elsewhere in this Quarterly Report. The predecessor and successor columns together represent our accounting Predecessor for purposes of this Quarterly Report. The dollar amount and percentage change information below reflects the difference between results in the nine months ended September 30, 2018 as compared to the combined results for the period from January 1, 2017 through January 12, 2017 and the period from January 13, 2017 through September 30, 2017.